SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Quarter Ended 1-8668
March 31, 1995 Commission File Number
___________________________
FINGERHUT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1396490
(State of Incorporation) (I.R.S. Employer Identification No.)
4400 Baker Road, Minnetonka, Minnesota 55343
(Address of principal executive offices)
(612) 932-3100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
As of May 2, 1995, 45,799,336 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
FINGERHUT COMPANIES, INC.
FORM 10-Q
March 31, 1995
TABLE OF CONTENTS
Part I - Financial Information Page
Item 1. Financial Statements
Consolidated Statements of Earnings (Unaudited) -
thirteen weeks ended March 31, 1995
and April 1, 1994..................................... 3
Consolidated Statements of Financial Position
(Unaudited) - March 31, 1995, April 1, 1994 and
December 30, 1994 .................................... 4
Consolidated Statements of Cash Flows (Unaudited) -
thirteen weeks ended March 31, 1995 and
April 1, 1994..........................................5
Condensed Notes to Consolidated Financial
Statements (Unaudited)................................ 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition..................... 9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K ..................... 14
Signatures..................................................... 15
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except share and per share data)
(Unaudited)
Thirteen Weeks Ended
March 31, April 1,
1995 1994
Revenues:
Net sales $ 365,365 $ 324,681
Finance income, net 43,665 37,463
409,030 362,144
Costs and expenses:
Product cost 178,330 160,389
Administrative and selling expenses 150,922 133,768
Provision for uncollectible accounts 46,866 38,673
Discount on sale of accounts receivable 17,521 6,922
Interest expense, net 5,817 6,990
399,456 346,742
Earnings before taxes 9,574 15,402
Provision for income taxes 3,390 5,429
Net earnings $ 6,184 $ 9,973
Earnings per share $ .13 $ .20
Dividends per share $ .04 $ .04
Weighted average shares outstanding 48,456,450 50,760,001
See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands of dollars)
(Unaudited)
March 31, April 1, December 30,
1995 1994 1994
ASSETS
Current assets:
Cash and cash equivalents $ 19,697 $ 50,896 $ 85,382
Customer accounts receivable, net 331,637 335,547 351,605
Inventories, net 175,342 147,662 159,048
Promotional material 86,064 72,042 59,477
Deferred and other income taxes 108,272 67,228 116,755
Other 21,009 13,547 19,645
Total current assets 742,021 686,922 791,912
Property and equipment, net 240,586 191,086 226,385
Excess of cost over fair value of
net assets acquired, net 44,283 45,473 44,321
Customer lists, net 12,569 13,879 12,601
Other assets 20,795 16,053 22,714
$1,060,254 $ 953,413 $1,097,933
LIABILITIES
Current liabilities:
Accounts payable $ 161,802 $ 129,304 $ 156,121
Accrued payroll and
employee benefits 23,968 21,454 39,891
Other accrued liabilities 58,007 52,919 55,595
Accrued unusual charges 12,406 - 29,358
Short-term debt 23,000 - -
Current portion of long-term debt 269 319 336
Current income taxes payable - - 42,327
Total current liabilities 279,452 203,996 323,628
Long-term debt, less current portion 246,509 246,777 246,516
Deferred income taxes 21,616 15,107 21,762
Other non-current liabilities 6,539 5,084 5,077
554,116 470,964 596,983
STOCKHOLDERS' EQUITY
Preferred stock - - -
Common stock 458 463 456
Additional paid-in capital 256,734 256,918 253,926
Earnings reinvested 248,946 225,068 246,568
Total stockholders' equity 506,138 482,449 500,950
$1,060,254 $ 953,413 $1,097,933
See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Thirteen Weeks Ended
March 31, April 1,
1995 1994
Cash flows from operating activities:
Net earnings $ 6,184 $ 9,973
Adjustments to reconcile net earnings to
net cash used by operating activities:
Depreciation and amortization 9,908 8,422
Change in assets and liabilities, excluding
the effects of business divestitures:
Customer accounts receivable, net 19,968 20,204
Inventories, net (16,294) 4,367
Promotional material and other current assets (24,885) (15,457)
Accounts payable 5,681 5,377
Accrued payroll and employee benefits (15,923) (17,023)
Accrued liabilities (9,845) (6,266)
Current income taxes payable (41,205) (26,395)
Deferred and other income taxes 8,337 4,142
Other (349) (3,950)
Net cash used by operating activities (58,423) (16,606)
Cash flows from investing activities:
Additions to property and equipment (23,375) (8,122)
Proceeds from business divestitures - 11,555
Net cash (used) provided by investing activities (23,375) 3,433
Cash flows from financing activities:
Repayments of long-term debt (74) (69)
Revolving credit facility 23,000 -
Issuance of common stock 2,877 965
Repurchase of common stock (7,862) -
Cash dividends paid (1,828) (1,849)
Net cash provided (used) by financing activities 16,113 (953)
Net decrease in cash and cash equivalents (65,685) (14,126)
Cash and cash equivalents at beginning of period 85,382 65,022
Cash and cash equivalents at end of period $ 19,697 $ 50,896
Supplemental noncash investing and financing activities:
Tax benefit from exercise of non-qualified
stock options $ 1,122 $ 971
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 3,770 $ 3,166
Cash paid during the period for income taxes $ 36,238 $ 27,638
Included in cash and cash equivalents were liquid investments with original
maturities of fifteen days or less.
See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
1. Consolidated financial statements
The consolidated financial statements of Fingerhut Companies, Inc. (the
"Company") reflect the financial position and results of operations of
the Company and its wholly owned subsidiaries.
The consolidated financial statements as of March 31, 1995 and
April 1, 1994, and for the thirteen weeks ended March 31, 1995 and April
1, 1994, included herein are unaudited and have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. The interim financial statements reflect all adjustments
(consisting of normal recurring accruals) that are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1994 Annual Report to Shareholders and
incorporated by reference in the Company's annual report on Form 10-K
filed with the Securities and Exchange Commission. The results of
operations for the interim period should not be considered indicative of
the results to be expected for the entire year.
Reclassifications have been made to prior periods' consolidated financial
statements whenever necessary to conform to the current period's
presentation.
2. Earnings per share of common stock and common stock equivalents
Earnings per share was computed by dividing net earnings by the weighted
average shares of common stock and common stock equivalents outstanding
during the periods. The dilutive effect of the potential exercise of
outstanding options to purchase shares of common stock was calculated
using the treasury stock method.
3. Unusual Charges
In 1994, the Company recorded charges relating to the cancellation of its
proposed 24-hour cable television shopping channel, substantially scaling
back USA Direct, as well as provisions for corporate streamlining.
A summary of the change in the Company's reserve for unusual charges is
as follows:
Accrued Accrued
unusual unusual
charges at charges at
Dec. 30, Reserves Reserve March 31,
(In thousands of dollars) 1994 Utilized Adjustments 1995
Product costs $ 5,253 $( 100) $( 1,895) $ 3,258
Administrative and
selling expenses 20,771 (12,309) ( 675) 7,787
Provision for
uncollectible accounts 3,334 ( 73) ( 1,900) 1,361
$29,358 $(12,482) $( 4,470) 12,406
4. Sale of accounts receivable
The Receivables Transfer Agreement was replaced with the Fingerhut Master
Trust (the "Trust")in June 1994. Under the Trust, Fingerhut sold a
greater percentage of its receivables, which had the effect of increasing
the proceeds received by the Company as of March 31, 1995. The proceeds
from the sale of accounts receivable were $1.010 billion, $767.0 million
and $1.096 billion as of March 31, 1995, April 1, 1994 and December 30,
1994, respectively. The Company's retained interest in the Trust was
approximately $178.4 million and $184.2 million as of March 31, 1995 and
December 30, 1994, respectively. The holdback under the Receivables
Transfer Agreement, which represented the Company's interest under that
agreement, was approximately $228.0 million as of April 1, 1994.
In December 1994, the Company entered into interest rate cap agreements
to hedge its economic exposure to increasing interest rates from floating
rate certificates issued by the Fingerhut Master Trust for the sale of
accounts receivable. The premium paid for these cap agreements is being
amortized to "Discount on sale of accounts receivable" where the economic
exposure to rising interest rates exists, not interest expense as
previously noted in the Company's 1994 Annual Report.
5. Customer accounts receivable, net
Customer accounts receivable, net consisted of the following:
(In thousands of dollars) March 31, April 1, December 30,
1995 1994 1994
Due from customers $ 457,855 $ 469,987 $ 484,158
Reserve for uncollectible
accounts, net of anticipated
recoveries (80,760) (76,187) (81,271)
Reserve for returns
and exchanges (11,790) (14,701) (14,889)
Other reserves (15,670) (19,354) (17,223)
Net collectible amount 349,635 359,745 370,775
Unearned finance income (17,998) (24,198) (19,170)
Customer accounts
receivable, net $ 331,637 $ 335,547 $ 351,605
6. Revolving credit facility
Interest expense related to the revolving credit facility for the
thirteen week periods ended March 31, 1995 and April 1, 1994 was $464
thousand and $25 thousand, respectively. The average outstanding
balances during such periods were $22.8 million and $1.7 million,
respectively, and the average annual interest rate for the 1995 and 1994
periods were 8.2% and 6.0%, respectively.
7. Stockholders' equity
During the thirteen week period ended March 31, 1995, 373,299 shares of
common stock were issued related to the exercise of employee stock
options and 30,866 shares of common stock were issued under the Fingerhut
Companies, Inc. Employee Stock Purchase Plan. The Company also
repurchased at prevailing market prices 214,100 shares of its common
stock for an aggregate of $3.2 million. The total shares of common stock
outstanding as of March 31, 1995 was 45,762,968.
8. Subsequent events
On April 20, 1995, the Company declared a cash dividend in the amount of
$.04 per share, aggregating approximately $1.8 million, payable on May
25, 1995, to the shareholders of record as of the close of business on
May 4, 1995.
In April 1995, the Company issued 33,168 shares of common stock under the
Fingerhut Companies, Inc. Employee Stock Purchase Plan and 3,200 shares
related to the exercise of employee stock options.
In April 1995, the Company signed a letter of intent to sell certain
assets of Figi's Inc. The agreement is subject to purchaser due
diligence and other closing conditions. The Company can give no
assurances to the closing of this transaction.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
THIRTEEN WEEKS ENDED
MARCH 31, 1995 AND APRIL 1, 1994
Results of Operations
The business maintained relatively flat operating income in the first
quarter of 1995 versus the comparable quarter in 1994, as a result of
increased mailings and savings from cost reduction measures. This was
achieved in spite of substantial increases in paper and postage rates,
increased provisions for uncollectible accounts, lower customer response
rates, as well as losses in Montgomery Ward Direct primarily caused by
paper and postage increases; and even after excluding a $4.5 million
favorable impact from the recovery of reserves established for unusual
charges in the fourth quarter of 1994.
Net sales for the current 13 week period were $365.4 million compared to
net sales of $324.7 million for the related period in 1994, an increase of
13%, or 10% excluding Figi's which was not consolidated in last year's
first quarter. Fingerhut Corporation ("Fingerhut"), the
Company's core business, had first quarter net sales of $326.8 million
compared to $304.4 million in the same period in 1994, an increase of 7%.
Net sales from Fingerhut's existing customer list increased 8% to $263.4
million. Net sales from Fingerhut's new customer acquisition programs
increased 5% to $63.4 million. Both increases were primarily due to
additional mailings and higher average order size, partially offset by
lower response rates. Other net sales were $38.5 million compared to $20.3
million for the same period in 1994. The increase was the result of
Figi's, which was not consolidated in 1994, and sales from infomercials
first aired in 1994. In March 1995, the Company entered into a strategic
alliance with Guthy-Renker Corporation, a producer of infomercials. The
Company will account for the results of the alliance's new infomercials
using the equity method of accounting. Sales related to these infomercials
will not appear as consolidated net sales of the Company.
Net finance income for the current 13 week period increased 17% to $43.7
million from $37.5 million in the comparable 1994 period due to increased
sales from Fingerhut's existing customers and the effect of lengthened
payment plans.
Product cost for the current 13 week period was 48.8% of net sales, or
$178.3 million, compared to 49.4% of net sales, or $160.4 million, during
the comparable prior year period. The reduction as a percent of net sales
was due to a small improvement in product margins and the recovery of $1.9
million in reserves established for unusual charges in the fourth quarter
of 1994.
Administrative and selling expenses for the current 13 week period were
$150.9 million, or 41.3% of net sales, compared to $133.8 million, or 41.2%
of net sales, in the comparable prior year period. As a percentage of net
sales, costs were higher as a result of price increases for paper and
postage, lower response rates from the existing customer list and new
customer acquisition programs, and losses associated with the Montgomery
Ward Direct joint venture, all of which were substantially offset by lower
expenses primarily due to our cost reduction program.
The provision for uncollectible accounts for the first quarter of 1995 was
$46.9 million, or 12.8% of net sales, compared to $38.7 million, or 11.9% of
net sales, for the same period in the prior year. The increase in the
provision as a percent of net sales was due to added provisions resulting
from increased delinquencies experienced during the first quarter related to
receivables generated in 1994. In addition, the provision was reduced as a
result of a favorable impact from the recovery of $1.9 million in reserves
established for unusual charges in the fourth quarter of 1994. Management
believes that reserves are adequate; however, should the higher level of
delinquencies continue, additional provisions may be necessary.
Discount on sale of accounts receivable for the 13 week period ended March
31, 1995 was $17.5 million compared to $6.9 million for the comparable
period in 1994. The increase resulted primarily from the increase in short-
term interest rates during 1994, and expense relating to interest rate cap
agreements entered into in December 1994, as well as an increase in the
amount of accounts receivable sold due to an increase in sales from
Fingerhut's existing customers and the replacement of the Receivables
Transfer Agreement with the Fingerhut Master Trust.
Net interest expense for the current 13 week period was $5.8 million
compared to $7.0 million in the first quarter of 1994 primarily due to the
favorable impact from the expiration of interest rate swap agreements in
June 1994.
The effective tax rate for the first quarter of 1995 was 35.4% compared
with 35.2% in the comparable prior year period.
As a result of the items discussed above, net earnings for the thirteen week
period ended March 31, 1995 were $6.2 million, or $.13 per share, compared to
first quarter 1994 net earnings of $10.0 million, or $.20 per share.
Liquidity and Capital Resources
The Company funds its operations through internally generated funds, the sale
of accounts receivable pursuant to the Fingerhut Master Trust, borrowings
under the Revolving Credit Facility and issuance of long-term debt and common
stock.
The Receivables Transfer Agreement was replaced with the Fingerhut Master
Trust in June 1994 (See note 4 of the Condensed Notes to Consolidated
Financial Statements). Under the Fingerhut Master Trust, Fingerhut sold a
greater percentage of its receivables, which had the effect of increasing the
proceeds received by the Company as of March 31, 1995. The proceeds received
as of March 31, 1995 and December 30, 1994 were $1.010 billion and $l.096
billion, respectively, compared with $767.0 million as of April 1, 1994 and
$829.0 million as of December 31, 1993.
The Revolving Credit Facility provides for aggregate commitments of $400.0
million, which includes the issuance of up to $200.0 million in letters of
credit. The commitment expires in October 1999. As of March 31, 1995, the
Company had an outstanding revolving credit balance of $23.0 million and
outstanding letters of credit of $5.8 million. As of April 1, 1994, the
Company had no borrowings under the Revolving Credit Facility but had
outstanding letters of credit of $34.4 million. Additional outstanding open
letters of credit under a separate agreement aggregated $30.7 million at March
31, 1995.
The Company had an aggregate amount of fixed rate notes outstanding of $245.0
million as of March 31, 1995 and April 1, 1994.
The Company used $58.4 million of cash for operations during the thirteen week
period ended March 31, 1995, compared with $16.6 million for the related
period in 1994. This net $41.8 million increase in cash used for operations
resulted from increased working capital requirements. The most significant
item affecting the increase in working capital was a change in inventory. The
change in inventory from a $4.4 million source of cash in 1994 to a $16.3
million use of cash in 1995 resulted from increases in inventory primarily due
to higher purchases reflecting planned increases in future sales.
The $26.8 million increase in net cash used by investing activities was the
result of increased capital expenditures related to the facility additions
discussed below and proceeds received in 1994 from businesses divested at the
end of 1993.
Three separate facility additions were approved by the Company's Board of
Directors in 1994. The $20.0 million 547,000 square-foot warehouse and
distribution facility expansion in St. Cloud, Minnesota became operational
during the fourth quarter of 1994. Spending through March 31, 1995 on the St.
Cloud expansion was $19.7 million. Construction on a western distribution
center in Spanish Fork, Utah began in the third quarter of 1994. Spending
through March 31, 1995 was $24.0 million. This one million square-foot
facility is projected to cost approximately $60.0 million and to be fully
operational in early to mid 1996. The Company also broke ground in the third
quarter of 1994 on a $23.0 million data and technology center in Plymouth,
Minnesota, which is anticipated to be open in the second quarter of 1995.
Spending through March 31, 1995 was $11.3 million.
The owner of certain office and warehouse facilities exercised its right to
require the Company to repurchase those facilities in 1995 for approximately
$14.9 million. The Company anticipates completing the purchase on or before
September 29, 1995.
During the first quarter the Company rolled out its planned MasterCard
solicitation through Direct Merchants Credit Card Bank, N.A. (the "Bank"), a
wholly owned subsidiary. The Company plans to issue approximately 400,000
credit card accounts by year end. As of May 10, 1995, approximately 303,000
accounts have been issued cards and outstanding receivables totaled $66.9
million. The Company currently finances these receivables by using available
cash and borrowings under its Revolving Credit Facility. The Company is in
discussion with various parties with respect to the establishment of a new
master trust, similar in structure to the Fingerhut Master Trust, which will
purchase the Bank's receivables in the future. The Company expects to have
the new master trust established by the end of the second quarter of 1995.
During 1994, the Company announced that its Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's common stock that may
be made from time to time at prevailing prices in the open market or by block
purchase and may be discontinued at any time. The purchases will be made
within certain restrictions relating to volume, price and timing in order to
minimize the impact of the purchase on the market for the Company's stock.
During the first quarter, the Company repurchased at prevailing market prices
214,100 shares of its common stock for an aggregate of $3.2 million.
On April 20, 1995, the Company declared a cash dividend of $.04 per share, or
an aggregate of $1.8 million, payable on May 25, 1995, to the shareholders of
record as of the close of business on May 4, 1995.
In April 1995, the Company issued 33,168 shares of common stock under the
Fingerhut Companies, Inc. Employee Stock Purchase Plan and 3,200 shares
related to the exercise of employee stock options.
The Company believes it will have sufficient funds available to meet current
and anticipated commitments.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FINGERHUT COMPANIES, INC.
Date: May 11, 1995 By:
/s/ Michael A. Qualen
Michael A. Qualen
Acting Chief Financial Officer
(Principal Financial Officer)
Date: May 11, 1995 By:
/s/ Thomas C. Vogt
Thomas C. Vogt
Corporate Controller
(Principal Accounting Officer)
Exhibit 11
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands of dollars, except per share data)
Unaudited
Thirteen Weeks Ended
March 31, April 1,
1995 1994
Primary
Net earnings (a) $ 6,184 $ 9,973
Weighted average shares of
common stock outstanding 45,699,556 46,230,124
Common stock equivalents 2,756,894 4,529,877
Weighted average shares of
common stock and common
stock equivalents (b) 48,456,450 50,760,001
Primary earnings per share
of common stock and common
stock equivalents (a/b) $ .13 $ .20
Fully diluted
Net earnings (c) $ 6,184 $ 9,973
Weighted average shares of
common stock outstanding 45,699,556 46,230,124
Common stock equivalents 2,756,894 4,653,898
Weighted average shares of
common stock and common
stock equivalents (d) 48,456,450 50,884,022
Fully diluted earnings per
share of common stock and
common stock equivalents
(c/d) $ .13 $ .20
Common stock equivalents for primary earnings per share are computed
by the treasury stock method using the average market price.
Common stock equivalents for quarterly fully diluted earnings per
share are computed by the treasury stock method using the ending
market price, average market price for the last month or the average
of the fully diluted monthly amounts used in the quarter, whichever
is higher.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's Consolidated Financial Statements for the thirteen week period
ended March 31, 1995 and is qualified in its entirety by reference to such
financial statements.
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<PERIOD-END> MAR-31-1995
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<ALLOWANCES> 126,218
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