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
June 28, 1996 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 August 7, 1996, 46,492,489 shares of the Registrant's Common Stock, $.01
par value, were outstanding.
FINGERHUT COMPANIES, INC.
FORM 10-Q
June 28, 1996
TABLE OF CONTENTS
Part I - Financial Information Page
Item 1. Financial Statements
Consolidated Statements of Earnings (Unaudited) -
thirteen weeks and twenty-six weeks ended
June 28, 1996 and June 30, 1995........................ 3
Consolidated Statements of Financial Position
(Unaudited) - June 28, 1996, June 30, 1995 and
December 29, 1995 ..................................... 4
Consolidated Statements of Cash Flows (Unaudited) -
twenty-six weeks ended June 28, 1996 and
June 30, 1995.......................................... 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 ...................... 22
Signatures...................................................... 23
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except share and per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
Revenues:
Net sales $ 368,381 $ 408,698 $ 703,226 $ 773,813
Finance income and
other revenues 81,209 62,615 154,596 106,459
449,590 471,313 857,822 880,272
Costs and expenses:
Product cost 190,470 205,676 359,832 384,006
Administrative and
selling expenses 171,119 176,571 334,714 327,476
Provision for
uncollectible accounts 61,261 56,307 117,607 103,173
Discount on sale of
accounts receivable 16,128 17,166 30,936 34,687
Interest expense, net 7,248 6,622 14,585 12,385
446,226 462,342 857,674 861,727
Earnings before
income taxes 3,364 8,971 148 18,545
Provision for income
taxes 1,219 3,177 54 6,567
Net earnings $ 2,145 $ 5,794 $ 94 $ 11,978
Earnings per share $ .04 $ .12 $ .00 $ .25
Dividends $ .04 $ .04 $ .08 $ .08
Weighted average 48,820,545 48,186,409 48,703,782 48,321,429
shares
See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands of dollars)
(Unaudited)
June 28, June 30, December 29,
1996 1995 1995
ASSETS
Current assets:
Cash and cash equivalents $ 44,125 $ 26,987 $ 66,109
Customer accounts receivable, net 426,591 376,924 464,176
Inventories, net 143,730 151,446 156,352
Promotional material 72,278 77,198 80,357
Deferred income taxes 122,163 106,299 131,035
Other 21,049 20,162 23,542
Total current assets 829,936 759,016 921,571
Property and equipment, net 288,256 266,725 279,455
Excess of cost over fair value of
net assets acquired, net 44,064 44,066 44,047
Customer lists, net 11,201 12,397 11,201
Other assets 24,716 26,146 24,803
$1,198,173 $1,108,350 $1,281,077
LIABILITIES
Current liabilities:
Accounts payable $ 155,128 $ 146,046 $ 185,475
Accrued payroll and employee benefits 21,062 22,396 39,872
Other accrued liabilities 64,251 57,510 70,879
Accrued unusual charges 1,333 10,105 2,458
Revolving credit facility 201,000 85,000 115,000
Current portion of long-term debt 35,099 201 100,099
Current income taxes payable - 852 42,380
Total current liabilities 477,873 322,110 556,163
Long-term debt, less current portion 146,511 246,460 146,564
Deferred income taxes 22,414 21,409 23,096
Other non-current liabilities 7,527 7,815 7,764
654,325 597,794 733,587
STOCKHOLDERS' EQUITY
Preferred stock - - -
Common stock 462 458 459
Additional paid-in capital 263,808 257,190 258,917
Unearned compensation (2,894) - -
Earnings reinvested 282,472 252,908 288,114
Total stockholders' equity 543,848 510,556 547,490
$1,198,173 $1,108,350 $1,281,077
See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Twenty-Six Weeks Ended
June 28, June 30,
1996 1995
Cash flows from operating activities:
Net earnings $ 94 $ 11,978
Adjustments to reconcile net earnings to
net cash used by operating activities:
Depreciation and amortization 24,497 20,956
Amortization of unearned compensation 1,896 -
Change in operating assets and liabilities:
Customer accounts receivable, net 37,585 (25,319)
Inventories, net 12,622 7,602
Promotional material and other current assets 10,572 (15,151)
Accounts payable (30,347) (10,075)
Accrued payroll and employee benefits (18,810) (17,495)
Accrued liabilities (7,753) (12,643)
Current income taxes payable (43,751) (40,337)
Deferred and other income taxes 9,802 10,103
Other (1,473) (5,912)
Net cash used by operating activities (5,066) (76,293)
Cash flows from investing activities:
Additions to property and equipment (31,992) (58,706)
Net cash used by investing activities (31,992) (58,706)
Cash flows from financing activities:
Repayments of long-term debt (65,053) (191)
Revolving credit facility 86,000 85,000
Issuance of common stock 1,255 3,317
Repurchase of common stock (3,428) (7,862)
Cash dividends paid (3,700) (3,660)
Net cash provided by financing activities 15,074 76,604
Net decrease in cash and cash equivalents (21,984) (58,395)
Cash and cash equivalents at beginning of period 66,109 85,382
Cash and cash equivalents at end of period $ 44,125 $ 26,987
Supplemental noncash investing and financing activities:
Tax benefit from exercise of non-qualified
stock options $ 241 $ 1,138
Issuance of restricted stock $ 4,790 $ -
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 20,401 $ 13,351
Cash paid during the period for income taxes $ 34,140 $ 36,853
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 June 28, 1996 and June
30, 1995, and for the thirteen and twenty-six weeks ended June 28,
1996 and June 30, 1995, 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 1995 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
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. Customer accounts receivable, net
Customer accounts receivable, net of amounts sold, consisted of the
following:
(In thousands of dollars) June 28, June 30, December 29,
1996 1995 1995
Customer installment
receivables $ 449,435 $ 447,873 $ 511,174
Reserve for uncollectible
accounts, net of anticipated
recoveries (102,810) (85,963) (105,048)
Reserve for returns
and exchanges (10,627) (12,140) (13,442)
Other reserves (18,449) (16,748) (20,192)
Net collectible amount 317,549 333,022 372,492
Unearned finance income (21,706) (18,523) (24,885)
Customer installment
receivables, net $ 295,843 $ 314,499 $ 347,607
Credit card and other
receivables 138,688 64,869 122,567
Reserve for uncollectible
accounts (5,303) (2,263) (5,300)
Other reserves (2,637) (181) (698)
Credit card and other
receivables, net 130,748 62,425 116,569
Total customer accounts
receivable, net $ 426,591 $ 376,924 $ 464,176
4. Stockholders' equity
During the twenty-six week period ended June 28, 1996, 101,050 shares
of common stock were issued related to the exercise of employee stock
options and 53,642 shares of common stock were issued under the
Fingerhut Companies, Inc. Employee Stock Purchase Plan. The Company
also repurchased at prevailing market prices 249,800 shares of its
common stock for an aggregate of $3.4 million. The total shares of
common stock outstanding as of June 28, 1996 was 46,209,461.
In February 1996, 368,746 shares of restricted stock were issued
under the Fingerhut Companies, Inc. 1995 Long-Term Incentive and
Stock Option Plan to certain key members of management. Twenty-five
percent of the shares vested on March 31, 1996 and, subject to
continued employment, 25% vests on March 31, 1997 with the remaining
50% vesting on August 31, 1998. The unearned portion of the awards
is being amortized as compensation expense on a straight-line basis
over the related vesting period. Compensation expense totaled
$611,069 and $2,623,511 for the thirteen and twenty-six week periods
ended June 28, 1996, respectively, which included tax assistance
payments made by the Company with respect to the first 25% of the
awards that vested.
5. Executive retirement plan
On February 14, 1996, the Company adopted a Supplemental Executive
Retirement Plan (the "SERP") that covers officers or other senior
management employees of the Company selected for participation by the
Compensation Committee. Under the SERP, the Company will pay a
benefit to a participant whose employment relationship with the
Company is completely severed either (a) at or after age 65 with five
years of service or (b) at or after age 55, if the participant has
five years of service and the sum of the participant's age and years
of service equals at least 70.
6. Dissolution of joint venture
On June 5, 1996, the Company reached an agreement with Montgomery
Ward & Co., Incorporated to withdraw as a partner in the Montgomery
Ward Direct L.P. joint venture. In connection with this transaction,
the Company recorded a pretax charge for the quarter of $.8 million.
7. Subsequent events
On July 18, 1996, the Company declared a cash dividend in the amount
of $.04 per share, aggregating approximately $1.8 million, payable on
August 16, 1996, to the shareholders of record as of the close of
business on August 5, 1996.
In July 1996, the Company issued 25,085 shares of common stock under
the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 4,450
shares related to the exercise of employee stock options. The
Company also repurchased at prevailing market prices 61,000 shares of
its common stock for an aggregate of $.8 million.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
THIRTEEN AND TWENTY-SIX WEEKS ENDED
JUNE 28, 1996 AND JUNE 30, 1995
Results of Operations
Second Quarter
Direct-to-the-Consumer Marketing Segment
Net sales for the current 13-week period were $363.6 million compared to
net sales of $404.7 million for the related period in 1995, a decrease of
10%. Fingerhut Corporation ("Fingerhut"), the segment's primary business,
generated second quarter net sales of $356.8 million compared to $377.7
million in the same period in 1995, a decrease of 6%. Net sales from
Fingerhut's new customer acquisition programs increased 1% to $77.8
million. The impact of reduced mailings was offset by higher sales per
mailing and higher average order size. Net sales from Fingerhut's
existing customer list declined 7% to $279.0 million primarily due to an
approximately 20% planned reduction in mailings, partially offset by a
higher average order size and higher sales per mailing.
Finance income and other revenues for the current 13-week period increased
1% to $54.8 million from $54.5 million in the comparable 1995 period. The
slight increase (on a lower sales base) was primarily the result of the
effect of lengthened payment plans.
Product cost for the current 13-week period was 52.0% of net sales, or
$189.1 million, compared to 50.5% of net sales, or $204.4 million, during
the comparable prior-year period. The increase as a percent of net sales
was primarily due to margin reductions in the core catalog business, which
began during the second half of fiscal year 1995, as a result of offering
lower retail prices on selected products to improve the customer value
package. In addition, margins were reduced due to a shift in sales mix to
lower margin product categories.
Administrative and selling expenses for the current 13-week period were
$148.2 million, or 40.8% of net sales, compared to $166.1 million, or
41.0% of net sales, in the comparable prior-year period. The higher sales
per mailing on Fingerhut's core catalog business produced lower selling
expenses as a percentage of net sales, which offset the impact of higher
paper and depreciation costs, as well as an increase in compensation
expense and customer allowances.
The provision for uncollectible accounts for the second quarter of 1996
was $62.9 million, or 17.3% of net sales, compared to $55.9 million, or
13.8% of net sales, for the same prior-year period. Provision rates
for the current 13-week period were comparable to those applied in the
fourth quarter of 1995. The Company continues to record provisions
commensurate with the higher level of risk recognized during the latter
part of the prior fiscal year. In addition, sales to new customers, which
carry higher reserve requirements, represented a higher proportion of
retail sales in the second quarter of 1996 versus the comparable prior-
year period. Management believes that the reserves continue to be
adequate to cover future estimated losses.
Discount on sale of accounts receivable for the 13-week period ended June
28, 1996 was $16.1 million compared to $17.2 million for the comparable
period in 1995. The decrease resulted primarily from lower interest rates
as a result of interest rate swap transactions the Company entered into in
June and July 1995, as well as lower amortization expense due to the
expiration of an interest rate cap agreement in December 1995. These
decreases were partially offset by an increase in the amount of accounts
receivable sold.
Net interest expense for the current 13-week period was $6.8 million
compared to $6.4 million in the second quarter of 1995. The increase was
primarily due to the higher utilization of the revolving credit agreement
used to fund general corporate purposes.
The effective consolidated tax rate, which includes both the Direct-to-the-
Consumer Marketing and Financial Services Segments, for the second quarter
of 1996 was 36.2% compared with 35.4% in the comparable prior-year period.
As a result of the items discussed above, the Direct-to-the-Consumer
Marketing Segment incurred a net loss for the 13-week period ended June
28, 1996 of $2.9 million, or $(.06) per share, compared to second quarter
1995 net earnings of $6.0 million, or $.12 per share.
Financial Services Segment
General
The Company's Financial Services Segment is a direct marketer and provider
of consumer credit products, extended service plans and other fee-based
products and services to moderate income consumers and to businesses that
serve the moderate income consumer market. Currently, the segment
operates three core business lines: 1) consumer credit products, which
presently consists of credit card lending through various MasterCard
credit card products issued by Direct Merchants Credit Card Bank, National
Association ("Direct Merchants Bank"), 2) extended service plans
(warranties) which includes sales of extended service plans to the
Company's customers, and 3) other fee-based products and services which
presently includes third-party insurance offerings, membership clubs, card
registration and debt waiver programs.
The segment generates interest and other income through finance charges
assessed on outstanding credit card loans, credit card fees, including
annual membership, interchange income, and other revenues from sales of
fee-based products and service to its customer base, in addition to
revenues from the sales of extended service plans to the retail customers
of the Direct-to-the-Consumer Marketing Segment. The segment's primary
expenses are the costs of funding its assets, provisions for loan losses
and operating expenses, including employee compensation, account
solicitation and marketing expenses, and third party data processing and
servicing expenses. The segment's profitability is affected by credit
card account and loan growth, interest spreads on loans, credit card
activity, warrantable product sales penetration for extended service plans
sold to the Company's customers, credit quality (delinquencies and charge-
offs), the level of solicitation and promotional (marketing) expenses, and
servicing and other administrative costs.
The Financial Services Segment records its income on a calendar quarter
basis, instead of under the Company's fiscal year basis. The difference
between the Company's fiscal year and the segment's calendar basis
reporting was not material to the consolidated financial statements of the
Company for any of the periods reported. Consequently, period-end
references for the Financial Services Segment reflects its calendar year
versus the fiscal year of the Company.
The following segment information was based on management's best estimate
of the revenues and expenses, and assets and liabilities which will
comprise the Financial Services Segment at the initiation of the
anticipated public transaction. This information will be subject to
change based on any changes in the Financial Services Segment's capital,
asset and income structure in connection with the public transaction.
Results of Operations
Net income for the three months ended June 30, 1996 was $5.0 million, or
$.10 per share, compared to a loss of $.2 million, or $.00 per share, for
the comparable prior-year period. The increase in net income was largely
attributable to the growth in average managed credit card loans for the
quarter from $84.7 million at June 30, 1995 to $872.6 million at June 30,
1996. In addition, the segment experienced a 25% increase in extended
service plan revenues and a $10.6 million increase in other fee-based
products and services revenues. These increases were partially offset by
a $1.0 million increase in credit card account and other product
solicitation and marketing expenses.
First Half
Direct-to-the-Consumer Marketing Segment
Net sales for the 26-week period ended June 28, 1996 were $693.6 million
compared to $766.1 million for the corresponding period in 1995, a
decrease of 9%. Fingerhut had first half net sales of $673.2 million
compared to $700.6 million in the same period in 1995, a decrease of 4%.
Net sales from Fingerhut's new customer acquisition programs increased 6%
to $149.6 million. The impact of reduced mailings was more than offset by
higher sales per mailing and higher average order size. Net sales from
Fingerhut's existing customer list declined 7% to $523.6 million primarily
due to a planned reduction in mailings, partially offset by a higher
average order size and higher sales per mailing.
Finance income and other revenues for the first half of 1996 was $103.7
million compared to $98.0 million for the same period in 1995. The
increase (on a lower sales base) was primarily due to the effect of
lengthened payment plans.
Product cost for the 26-week period ended June 28, 1996 was 51.5% of net
sales, or $357.2 million, compared to 49.8% of net sales, or $381.7
million, during the comparable prior-year period. The increase as a
percent of net sales was primarily due to margin reductions, which began
during the second half of fiscal year 1995, as a result of offering lower
retail prices on selected products to improve the customer value package.
In addition, margins were reduced due to a shift in sales mix to lower
margin product categories.
Administrative and selling expenses for the first half of 1996 were $296.2
million, or 42.7% of net sales, compared to $314.1 million, or 41.0% of
net sales, in the comparable prior-year period. The higher sales per
mailing on Fingerhut's core catalog business produced lower selling
expenses as a percentage of net sales, which partially offset the impact
of higher paper and depreciation costs, as well as an increase in
compensation expense and customer allowances.
The provision for uncollectible accounts for the first half of 1996 was
$114.4 million, or 16.5% of net sales, compared to $102.8 million, or
13.4% of net sales, in the comparable prior-year period. Provision rates
for the current 26-week period were comparable to those applied in the
fourth quarter of 1995. The Company continues to record provisions
commensurate with the higher level of risk recognized during the latter
part of the prior fiscal year. The increase as a percent of net sales was
also impacted by an increase in new customer acquisitions, which have
higher reserve requirements.
Discount on sale of accounts receivable for the 26-week period ended June
28, 1996 was $30.9 million compared to $34.7 million for the comparable
period in 1995. The decrease resulted primarily from the lower interest
rates as a result of interest rate swap transactions the Company entered
into in June and July 1995, as well as lower amortization expense due to
the expiration of an interest rate cap agreement in December 1995. These
decreases were partially offset by an increase in the amount of accounts
receivable sold.
Net interest expense for the first half of 1996 was $12.9 million compared
to $12.7 million in the comparable prior-year period. The increase was
primarily due to the higher utilization of the revolving credit agreement
used to fund general corporate purposes.
The effective consolidated tax rate, which includes both the Direct-to-the-
Consumer Marketing and Financial Services Segments, for the first 26 weeks
of 1996 was 36.5% compared with 35.4% in the first half of the prior-year.
As a result of the items discussed above, the Direct-to-the-Consumer
Marketing Segment incurred a net loss for the 26-week period ended June
28, 1996 of $8.8 million, or $(.18) per share, compared to first half 1995
net earnings of $11.8 million, or $.25 per share.
Financial Services Segment
Net income for the six months ended June 30, 1996 was $8.9 million, or
$.18 per share, compared to $.2 million, or $.00 per share, for the
comparable prior-year period. The increase in net income was largely
attributable to the continued growth in managed credit card loans
through the first six months of 1996. At June 30, 1996, managed credit
card loans outstanding had reached $1.068 billion from $190 million at
June 30, 1995, an increase of $878 million. Extended service plan
revenues for the first half of 1996 were $8.6 million, an increase of
29% over the comparable prior-year period. In addition, other
fee-based products and services revenues increased by $10.6 million to
$12.1 million over the $1.5 million recorded in the first six months
of 1996. Increases in credit card account and other product
solicitation and marketing expenses, employee compensation, third
party customer service, and data processing services and
communications expenses of $7.1 million, $7.0 million, $3.4 million
and $4.4 million, respectively, and increases in other operating
expenses of $6.1 million over the comparable period in 1995, partially
offset the gains noted above. These increased expenses primarily
reflect the increase in marketing costs incurred in maintaining
existing and establishing new customer relationships for the segment's
products and services, and the increase in the cost of operations
associated with the growth in the segment's businesses.
Managed Loan Portfolio Data and Analysis and Securitization
Securitizations affect the classification of revenues and expenses in the
income statement, therefore, it is management's practice to review and
analyze its financial performance on a "managed loan" portfolio basis as
if the loans sold and securitized were still held in the loan portfolio,
in addition to analyzing and reviewing its results of operations as
reported under generally accepted accounting principles. Specifically,
the effect of securitization is to remove credit card loans sold with
limited recourse from the balance sheet and record a gain on sale for the
difference between the carrying value of the loans and the adjusted sales
proceeds. The adjusted sales proceeds are based on a present value
estimate of future cash flows to be received over the life of the loans,
net of certain funding and servicing costs. The resulting gain is reduced
by establishing a reserve for estimated loan losses over the life of the
related loans under the limited recourse provisions. As these estimates
are influenced by factors outside of the segment's control, there is
uncertainty inherent in these estimates, making it reasonably possible
that these estimates could change in the near term.
During the "revolving period" of the securitization, changes in these
estimates, and income generated by additional cash flows from new loans
which are sold to the trust on a continual basis to replenish the
investors' interest in the loans that have been repaid by the credit
cardholders, are made as an adjustment to the previously recorded gain.
Consequently, for securitized credit card loans, amounts that would have
been recorded as interest income, interest expense, fee income and
provision for loan losses are instead recorded as net securitization
income. Net securitization income is included in the consolidated
statements of earnings as "Finance income and other revenues."
The following table provides selected balance sheet and other information
as of and for the quarters ended June 30, 1996, December 31, 1995, and
June 30, 1995, on a managed basis, as well as a summary of the effects of
credit card securitizations on selected line items of the Company's
consolidated statements of earnings for the three months ended June 30,
1996 and 1995, and the three months ended March 31, 1996. Note that the
Financial Services Segment did not have any credit card loans outstanding
as of March 31, 1995, therefore, comparisons to the first quarter of 1995
are generally deemed not relevant.
Balance Sheet and Other Statistics
(In thousands of dollars, except percentages)
Three months ended
6/30/96 12/31/95 6/30/95
Managed credit card loans $1,068,018 $543,619 $190,069
As a percentage of managed loans:
Total loans 30 days or more
delinquent 3.37% 3.95% 0.17%
Managed loan loss reserves 4.15% 4.09% 1.49%
Annualized net loan charge-
offs as a percentage of average
managed loans outstanding 5.33% 3.17% 0.00%
Three months ended
6/30/96 3/31/96 12/31/95
Effects of credit card
securitizations on:
Finance income and other
revenues $39,810 $18,875 $15,235
Administrative and selling
expenses ($1,907) ($1,760) ($1,703)
Provision for uncollectible
accounts ($27,037) ($10,163) ($8,787)
Interest expense, net ($10,866) ($6,952) ($4,745)
With respect to the above information on the effects of credit card
securitizations, the above amounts represent the amounts on each
respective line item of the Company's consolidated statements of earnings
that would have been higher had the securitized loans remained on the
balance sheet.
Interest Margin and Interest Rate Sensitivity
Net interest margin on a managed basis was 13.8% and 13.2% for the six
months ended June 30, 1996 and 1995, respectively. The Financial
Services Segment has primarily utilized variable rate funding in its
credit card securitization transactions and in its short-term
borrowings, or has swapped fixed rates on such transactions back to a
variable rate basis. Consequently, the net interest margin percentage
has not varied materially between 1996 and 1995, for the periods
reflected above, even though overall interest rates have declined
during 1996 from their levels during the comparable periods in 1995.
Managed Non-Interest Income and Non-Interest Expenses
Total non-interest income for the Financial Services Segment for the
second quarter of 1996 was $27.9 million, compared to $12.1 million for the
comparable prior-year period. Non-interest income for the first six
months of 1996 was $53.2 million, compared to $16.1 million in 1995. The
primary reason for the large increase over the prior year was due to
income generated from the growth in average managed loans, which grew from
an average of $42.6 million for the six months ended June 30, 1995 ($84.7
million for the second quarter) to $741.2 million for the six months ended
June 30, 1996 ($872.6 million average for the second quarter), and growth
in income from extended service plan and other fee-based products and
services revenues as previously noted.
Total non-interest expenses for the second quarter of 1996 were $25.4
million, compared to $12.7 million for the comparable prior-year period.
Non-interest expense for the first six months of 1996 was $44.4 million,
compared to $16.4 million in 1995. The growth in non-interest expenses
primarily reflects the Company's expansion of its business development
activities. Most notably, credit card account and other product
solicitation and marketing expenses increased 76.3% to $16.5 million for the
six months ended June 30, 1996. For the second quarter, these expenses
increased 14.7% to $8.9 million compared to the second quarter of 1995.
These increases were the result of new credit card solicitation programs
implemented during the first six months of 1996, with the
objective of leveraging the knowledge gained in the Company's earlier
credit card campaigns, and increasing the number of credit card accounts
and loans outstanding. Additionally, increased solicitation costs were
incurred in efforts to increase the penetration of extended service plans
on warrantable products sold by Fingerhut.
Asset Quality
The Financial Services Segment's delinquency and net loan charge-off rates
at any point in time reflect, among other factors, the credit risk of the
credit card loans, the average age of the segment's various credit card
account portfolios, the success of the segment's collection and recovery
efforts and general economic conditions.
The managed 30 days or more past due delinquency rate was 3.37% at June
30, 1996, compared to 0.17% at June 30, 1995, 3.95% at December 31, 1995,
and 3.78% at March 31, 1996. The segment believes the decrease in
delinquency compared to the prior two quarters reflects a reduction in
delinquency trends generally from its internalization of all collections
functions during the first quarter of 1996. The managed annualized net
loan charge-off rate was 5.33%, 5.75% and 3.17% for the quarters ended
June 30, 1996, March 31, 1996, and December 31, 1995, respectively (the
segment did not incur net loan charge-offs during the first six months
ended June 30, 1995). The segment believes that this rate will continue
to fluctuate but generally rise over the next twelve to eighteen months
until the initial credit card account portfolios begin to pass their peak
loss levels. Additionally, consistent with the credit card industry, the
Company has recently experienced a rise in bankruptcy filings. This
industry trend, if it continues at its present pace into the second half
of 1996, could also lengthen the peak loss period before net charge-offs
tend to stabilize with the overall maturation of the portfolio. The
segment plans to continue to focus its resources on more stringent credit
underwriting standards for new accounts in the second half of 1996, and
further improve collection and post charge-off recovery efforts to
minimize increased losses from these negative trends.
Allowance and provision for loan losses
The reserve for loan losses is maintained for on-balance sheet loans and
retained interests in loans securitized. For securitized loans,
anticipated losses and related recourse reserves are reflected in the
calculations of net securitization income. Provisions for loan losses are
made in amounts sufficient to maintain the allowance at a level estimated
to be sufficient to absorb probable future losses of principal and earned
interest, net of recoveries, inherent in the existing on-balance sheet
loan portfolio. In evaluating the adequacy of the allowance for loan
losses, the Company takes into consideration several factors including:
historical charge-off and recovery activity by loan portfolio; recent
delinquency and collection trends by loan portfolio; current economic
conditions and the impact such conditions might have on borrowers' ability
to repay; the risk characteristics of the portfolios and other factors
that management believes to be appropriate. The provision for loan losses
on a managed basis totaled $42.5 million for the first half of 1996 ($27.5
million in the second quarter), up from $2.8 million for the six months
ended June 30, 1996 (all of which was incurred in the second quarter).
Total managed credit card loan loss reserves stood at 4.15% of total
managed credit card loans, or $44.3 million at June 30, 1996, up from
$22.2 million, or 4.09% of managed credit card loans at December 29, 1995,
and up from $2.8 million or 1.49% of managed loans at June 30, 1995.
Management believes that the allowance for loan losses on both an owned
and a managed basis is adequate to cover anticipated losses in the loan
portfolio under current conditions. However, there can be no assurance as
to the future credit losses that may be incurred in connection with the
Company's loan portfolio, nor can there be any assurance that the loan
loss allowance that has been established by the Company will be sufficient
to absorb such future loan losses. Management will continue to monitor
the allowance for loan losses and make additional provisions to the
allowance as it deems appropriate and necessary given the circumstances.
Liquidity and Capital Resources (Consolidated)
The Company funds its operations through internally generated funds, the
sale of accounts receivable pursuant to the Fingerhut Master Trust and the
Fingerhut Financial Services Master Trust, borrowings under the Revolving
Credit Facility and issuance of long-term debt and common stock.
The proceeds received as of June 28, 1996 and December 29, 1995 from the
sale of Fingerhut accounts receivable were $1.092 billion and $1.254
billion, respectively, compared with $1.003 billion as of June 30, 1995
and $1.096 billion as of December 30, 1994. Net proceeds received from
the sale of MasterCard receivables were $932.8 million as of June 28, 1996
and $445.3 million as of December 29, 1995, of which $16.1 million and
$25.8 million, respectively, was deposited in an investor reserve account
held by the trustee of the FFS Master Trust for the benefit of the Trust's
certificateholders. Net proceeds received from the sale of MasterCard
receivables were $136.9 million as of June 30, 1995, of which $8.4 million
was deposited in an investor reserve account.
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 June 28, 1996, the
Company had an outstanding revolving credit balance of $201.0 million and
outstanding letters of credit of $5.2 million. As of June 30, 1995, the
Company had an outstanding revolving credit balance of $85.0 million and
outstanding letters of credit of $5.8 million. Additional outstanding
open letters of credit under a separate agreement aggregated $37.3 million
and $44.0 million at June 28, 1996 and June 30, 1995, respectively.
The Company had an aggregate amount of fixed rate notes outstanding of
$180.0 million and $245.0 million as of June 28, 1996 and June 30, 1995,
respectively. A total of $35.0 million of the notes mature in August
1996. The Company intends to refinance the maturing long-term debt in the
second half of 1996. In addition, the Fingerhut Master Trust Series 1994-
1 certificates enter into amortization periods beginning in December 1996.
The Company believes the Fingerhut Master Trust will be able to issue a
new series of certificates to replace the amortizing certificates.
The Company used $5.1 million of cash for operations during the 26-week
period ended June 28, 1996, compared with $76.3 million for the related
period in 1995. This net $71.2 million decrease in cash used for
operations resulted from decreased working capital requirements, partially
offset by the $11.9 million decrease in net earnings. The most
significant items affecting working capital were decreases in customer
accounts receivable, promotional material and other current assets, and
accounts payable. The change in customer accounts receivable from a $25.3
million use of cash in 1995 to a $37.6 million source of cash in 1996
resulted primarily from the decrease in net sales due to the Company's
strategy to reduce mailings. The change in promotional material and other
current assets from a $15.2 million use of cash in 1995 to a $10.6 million
source of cash in 1996 was due to lower inventory levels as a result of
the planned reduction in mailings. The above factors were partially
offset by a decrease in accounts payable, which was due to a reduction in
inventory purchases as well as lower promotional material levels.
Net cash used by investing activities for the 26-week period ended June
28, 1996 was $32.0 million, compared to $58.7 million for the comparable
period in 1995. The lower level of spending in 1996 was primarily due to
a significant reduction in capital expenditures relating to the western
distribution center in Spanish Fork, Utah, as well as the data and
technology center in Plymouth, Minnesota, which opened in the second
quarter of 1995.
The $61.5 million decrease in net cash provided by financing activities
was due primarily to $65.0 million of fixed rate notes which matured in
June 1996.
During 1994, the Company's 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 are 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
common stock. No purchases were made during the first quarter ended March
29, 1996. During the second quarter of 1996, the Company repurchased at
prevailing market prices 249,800 shares of its common stock for an
aggregate of $3.4 million. Total purchases to date were 1,271,300 shares
for an aggregate of $20.0 million.
On July 18, 1996, the Company declared a cash dividend of $.04 per share,
or an aggregate of $1.8 million, payable on August 16, 1996, to the
shareholders of record as of the close of business on August 5, 1996.
In July 1996, the Company issued 25,085 shares of common stock under the
Fingerhut Companies, Inc. Employee Stock Purchase Plan and 4,450 shares
related to the exercise of employee stock options. The Company also
repurchased at prevailing market prices 61,000 shares of its common stock
for an aggregate of $.8 million.
The Company believes it will have sufficient funds available to meet
current and future commitments.
Forward Looking Statements
Fingerhut Companies, Inc. (the "Company"), or persons acting on behalf of
the Company, or outside reviewers retained by the Company making
statements on behalf of the Company, or underwriters, from time to time
make, in writing or orally, "forward-looking statements" as defined under
the Private Securities Litigation Reform Act of 1995 (the "Act"). When
used in conjunction with an identified forward-looking statement, this
Cautionary Statement is for the purpose of qualifying for the "safe
harbor" provisions of the Act and is intended to be a readily available
written document that contains factors which could cause results to differ
materially from such forward-looking statements. These factors are in
addition to any other cautionary statements, written or oral, which may be
made or referred to in connection with any such forward-looking statement.
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company. Reference to this
Cautionary Statement in the context of a forward-looking statement or
statements shall be deemed to be a statement that any or more of the
following factors may cause actual results to differ materially from those
in such forward-looking statement or statements.
These forward looking statements involve risks and uncertainties,
including but not limited to the following: interest rates may increase
more than is currently anticipated; customer response rates may not
continue to increase, or may decrease; additional reserves may be required
for bad debts, returns and allowances; product margins may decrease; paper
prices may not fall, or may increase; postage and shipping rates may
increase; the collective bargaining agreement for union employees at the
registrant's Tennessee facility may result in increased labor or benefits
costs; the performance of the financial markets and the demand for and
market acceptance of the Direct Merchants Credit Card Bank, National
Association credit card and related financial products may deteriorate;
changes in general economic conditions may affect consumer spending and
payment practices.
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: August 12, 1996 By: /s/ Peter G. Michielutti
Peter G. Michielutti
Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1996 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 Twenty-six Weeks Ended
June 28, June 30, June 28, June 30,
1996 1995 1996 1995
Primary
Net earnings (a) $ 2,145 $ 5,794 $ 94 $ 11,978
========== ========== ========== ==========
Weighted average shares
of common stock
outstanding 46,334,885 45,797,745 46,246,928 45,748,650
Common stock equivalents 2,485,660 2,388,664 2,456,854 2,572,779
---------- ---------- ---------- ----------
Weighted average shares of
common stock and common
stock equivalents 48,820,545 48,186,409 48,703,782 48,321,429
========== ========== ========== ==========
Primary earnings per share
of common stock and common
stock equivalents (a/b) $ .04 $ .12 $ .00 $ .25
========== ========== ========== ==========
Fully diluted
Net earnings (c) $ 2,145 $ 5,794 $ 94 $ 11,978
Weighted average shares ========== ========== ========== ==========
of common stock
outstanding 46,334,885 45,797,745 46,246,928 45,748,650
Common stock
equivalents 2,810,177 2,473,542 2,705,618 2,777,403
---------- ---------- ---------- ----------
Weighted average shares of
common stock and common
stock equivalents (d) 49,145,062 48,271,287 48,952,546 48,526,053
========== ========== ========== ==========
Fully diluted earnings per
share of common stock and
common stock equivalents
(c/d) $ .04 $ .12 $ .00 $ .25
========== ========== ========== ==========
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.
Common stock equivalents for year-to-date fully diluted earnings
per share are computed by the treasury stock method using the
ending market price or the average of the fully diluted monthly
amounts used in the period, which ever is higher.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Fingerhut Companies, Inc. for the 26-week
fiscal period ended June 28, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> DEC-30-1995
<PERIOD-END> JUN-28-1996
<CASH> 44,125
<SECURITIES> 0
<RECEIVABLES> 588,123
<ALLOWANCES> 161,532
<INVENTORY> 143,730
<CURRENT-ASSETS> 829,936
<PP&E> 440,643
<DEPRECIATION> 152,387
<TOTAL-ASSETS> 1,198,173
<CURRENT-LIABILITIES> 477,873
<BONDS> 146,511
0
0
<COMMON> 462
<OTHER-SE> 543,386
<TOTAL-LIABILITY-AND-EQUITY> 1,198,173
<SALES> 703,226
<TOTAL-REVENUES> 857,822
<CGS> 359,832
<TOTAL-COSTS> 812,153
<OTHER-EXPENSES> 30,936
<LOSS-PROVISION> 117,607
<INTEREST-EXPENSE> 14,585
<INCOME-PRETAX> 148
<INCOME-TAX> 54
<INCOME-CONTINUING> 94
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
