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
September 26, 1997 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 November 5, 1997, 46,279,513 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
FINGERHUT COMPANIES, INC.
FORM 10-Q
September 26, 1997
TABLE OF CONTENTS
Part I - Financial Information Page
Item 1. Financial Statements
Consolidated Statements of Earnings (Unaudited) -
thirteen weeks and thirty-nine weeks ended
September 26, 1997 and September 27, 1996.............. 3
Consolidated Statements of Financial Position
(Unaudited) - September 26, 1997 and December 27, 1996. 4
Consolidated Statements of Cash Flows (Unaudited) -
thirty-nine weeks ended September 26, 1997 and
September 27, 1996..................................... 5
Condensed Notes to Consolidated Financial
Statements (Unaudited)................................. 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .....................10
Part II - Other Information
Item 1. Legal Proceedings.......................................21
Item 5. Other Matters...........................................21
Item 6. Exhibits and Reports on Form 8-K .......................21
Signatures.......................................................22
<TABLE>
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of dollars, except share and per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
Revenues:
<S> <C> <C> <C> <C>
Net sales $ 323,774 $ 346,444 $ 954,037 $1,034,832
Finance income and
other securitization
income, net 79,267 37,447 195,233 93,112
------- ------- ---------- ----------
403,041 383,891 1,149,270 1,127,944
Costs and expenses:
Product cost 158,781 175,675 482,513 535,507
Administrative and
selling expenses 179,486 159,234 501,066 474,066
Provision for uncol-
lectible accounts 32,063 28,418 90,691 83,074
Interest expense, net 8,758 7,134 25,842 21,719
-------- -------- --------- ----------
379,088 370,461 1,100,112 1,114,366
Earnings before income
taxes and minority
interest 23,953 13,430 49,158 13,578
Provision for income
taxes 9,174 4,865 18,838 4,919
------- ------ -------- --------
Net earnings before
minority interest 14,779 8,565 30,320 8,659
Minority interest (1,786) - (4,857) -
-------- --------- ---------- --------
Net earnings $ 12,993 $ 8,565 $ 25,463 $ 8,659
========== ========== ========== ==========
Earnings per share $ .26 $ .18 $ .52 $ .18
Dividends $ .04 $ .04 $ .12 $ .12
Weighted average shares 49,848,481 48,624,018 49,119,663 48,680,145
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands of dollars)
(Unaudited)
<TABLE>
September 26, December 27,
1997 1996
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 77,943 $ 61,003
Customer accounts receivable, net 662,887 596,560
Inventories, net 173,179 127,735
Promotional material 91,145 60,871
Deferred income taxes 165,011 166,879
Other 9,789 12,815
---------- ---------
Total current assets 1,179,954 1,025,863
Property and equipment, net 272,310 285,182
Excess of cost over fair value of
net assets acquired, net 81,502 42,601
Customer lists, net 9,767 9,801
Other assets 16,642 26,251
---------- ----------
$1,560,175 $1,389,698
========== ==========
LIABILITIES
Current liabilities:
Accounts payable $ 173,220 $ 164,557
Accrued payroll and employee benefits 34,489 46,723
Other accrued liabilities 68,110 78,239
Revolving credit facility 202,000 73,000
Other payables due to credit card
securitizations, net 107,102 36,619
Current portion of long-term debt 25,084 84
Current income taxes payable 18,228 60,721
--------- --------
Total current liabilities 628,233 459,943
Long-term debt, less current portion 246,435 271,481
Deferred income taxes 22,327 21,744
Other non-current liabilities 8,069 7,692
--------- --------
905,064 760,860
Minority interest 28,229 23,437
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 462 462
Additional paid-in capital 291,445 288,793
Unearned compensation (863) (1,856)
Earnings reinvested 335,838 318,002
--------- --------
Total stockholders' equity 626,882 605,401
$1,560,175 $1,389,698
========== ==========
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
Thirty-Nine Weeks Ended
Sept. 26, Sept. 27,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 25,463 $ 8,659
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation and amortization 39,524 37,431
Amortization of unearned compensation 993 2,409
Minority interest in earnings 4,792 -
Change in assets and liabilities:
Customer accounts receivable, net and
other payables due to credit card
securitizations, net 4,156 65,203
Inventories, net (45,444) (53,665)
Promotional material and other current assets (27,248) (15,910)
Accounts payable 8,663 13,281
Accrued payroll and employee benefits (12,234) (14,095)
Accrued liabilities (10,129) (11,183)
Current income taxes payable (41,709) (30,494)
Deferred income taxes 2,451 1,439
Other (33,304) (6,613)
------- -------
Net cash used by operating activities (84,026) (3,538)
Cash flows from investing activities:
Additions to property and equipment (22,389) (41,464)
------- -------
Net cash used by investing activities (22,389) (41,464)
Cash flows from financing activities:
Proceeds from long-term debt - 125,000
Repayments of long-term debt (46) (100,053)
Revolving credit facility 129,000 5,000
Issuance of common stock 3,322 1,609
Repurchase of common stock (3,385) (4,536)
Cash dividends paid (5,536) (5,547)
-------- --------
Net cash provided by financing activities 123,355 21,473
Net increase/(decrease) in cash and cash
equivalents 16,940 (23,529)
Cash and cash equivalents at beginning of period 61,003 66,109
-------- ---------
Cash and cash equivalents at end of period $ 77,943 $ 42,580
========== ==========
Supplemental noncash investing and financing activities:
Tax benefit from exercise of non-qualified
stock options, disqualified dispositions of
Employee Stock Purchase Plan Shares, and
vesting of restricted stock $ 784 $ 282
Issuance of restricted stock $ - $ 4,790
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 28,927 $ 28,627
Cash paid during the period for income taxes $ 58,262 $ 34,162
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.
</TABLE>
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 and majority owned
subsidiaries, after elimination of all material intercompany
transactions and balances. Minority interest represents minority
stockholders' 17 percent share of the equity in Metris Companies Inc.
("Metris").
The consolidated financial statements as of September 26, 1997 and
September 27, 1996, and for the thirteen and thirty-nine weeks ended
September 26, 1997 and September 27, 1996, 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 1996 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.
During the first quarter of 1997, the Company implemented Statement
of Financial Accounting Standards No. 125 (FAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." FAS 125 did not have a material effect on the
consolidated financial statements.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (FAS 128), "Earnings Per Share." This Statement is
effective for financial statements issued for periods ending after
December 15, 1997 and supersedes APB Opinion No. 15, "Earnings Per
Share." The Statement replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement as well as
requires companies to restate prior-period EPS for all periods in
which an income statement is presented.
The Company has reviewed this Statement and notes that it will affect
the computation and presentation of EPS. However, the Company has
not completed all of the detailed computations and analysis necessary
to determine the definitive impact on prior-period EPS as well as the
calculation of EPS going forward. The Company intends to adopt this
Statement prospectively, in the fourth quarter of 1997, as early
application is not permitted.
2. Reclassifications
Certain expenses, which were previously classified as "Discount on
sale of accounts receivable", have been reclassified as a reduction
of "Finance income and other securitization income, net." This
reclassification totaled $18.6 million for the thirteen weeks ended
September 27, 1996, and $49.5 million for the respective thirty-nine
week period. In addition, that portion of the "Provision for
uncollectible accounts" relating to accounts receivable sold have
been reclassed and netted with "Finance income and other
securitization income, net." This reclassification totaled $35.2
million for the thirteen weeks ended September 27, 1996, and $98.2
million for the respective thirty-nine week period. Lastly,
collection costs associated with the receivables sold were
reclassified out of "Administrative and selling expenses" and netted
with "Finance income and other securitization income, net." This
reclassification totaled $4.2 million for the thirteen weeks ended
September 27, 1996, and $9.2 million for the respective thirty-nine
week period. These reclassifications, in addition to certain balance
sheet reclassifications, were made in order to present the accounting
for securitizations consistently between the Company's two segments.
All prior-period financial information has been restated to conform
with the current period's presentation, and the reclassifications had
no effect on net earnings.
3. Derivative Financial Instruments Held or Issued for Purposes Other
Than Trading
The Company enters into interest rate cap and swap agreements to
hedge its economic exposure to fluctuating interest rates associated
with the floating rate certificates issued by the Fingerhut Master
Trust and the Metris Master Trust. If a derivative financial
instrument or the instrument it is hedging is sold or terminated, the
Company will recognize a gain or loss resulting from the transaction
in the period the derivative is sold or terminated. The Company has
not sold or terminated any derivative financial instruments.
4. 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.
5. Customer accounts receivable, net
Customer accounts receivable, net of amounts sold, consisted of the
following:
(In thousands of dollars) September 26, December 27,
1997 1996
Customer receivables (Retail) $ 454,690 $ 560,931
Reserve for uncollectible accounts,
net of anticipated recoveries (81,408) (117,296)
Reserve for returns and exchanges (12,655) (13,319)
Other reserves (19,918) (19,820)
---------- ----------
Net collectible amount 340,709 410,496
Unearned finance income (22,170) (23,969)
---------- ----------
Customer receivables, net $ 318,539 $ 386,527
---------- ----------
Credit card and other receivables (Metris),
net 368,195 222,862
Reserve for uncollectible accounts,
net of anticipated recoveries (23,847) (12,829)
---------- ----------
Credit card and other receivables, net 344,348 210,033
Total customer accounts receivable, net $ 662,887 $ 596,560
========== ==========
Certain balance sheet reclassifications were made during the current
period in order to present the accounting for securitizations
consistently between the Company's two segments. As a result,
certain December 27, 1996 balance sheet items related to Metris'
credit card securitizations were reclassified. Specifically, $49.2
million was reclassified from Credit card and other receivables, net
to "Other payables due to credit card securitizations, net" ($46.6
million), "Other accrued liabilities" ($2.5 million) and "Other
current assets" ($.1 million).
During the quarter, the Retail segment accelerated its efforts to
move customers from an installment-based lending program to revolving
charge accounts. By the end of the quarter, approximately 100,000
customer accounts had been converted. It is the intention of the
Company to continue this practice over the coming years until
substantially all of its customer accounts have been converted to
revolving charge.
6. Stockholders' equity
During the thirty-nine week period ended September 26, 1997, 258,511
shares of common stock were issued related to the exercise of
employee stock options and 44,080 shares of common stock were issued
under the Fingerhut Companies, Inc. Employee Stock Purchase Plan.
The Company also repurchased at prevailing market prices 231,900
shares of its common stock for an aggregate of $3.4 million. The
total shares of common stock outstanding as of September 26, 1997 was
46,224,153.
7. Subsequent events
On October 16, 1997, the Company declared a cash dividend in the
amount of $.04 per share, aggregating approximately $1.8 million,
payable on November 13, 1997, to the shareholders of record as of the
close of business on October 30, 1997.
In October 1997, the Company issued 11,079 shares of common stock
under the Fingerhut Companies, Inc. Employee Stock Purchase Plan and
25,774 shares related to the exercise of employee stock options.
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
THIRTEEN AND THIRTY-NINE WEEKS ENDED
SEPTEMBER 26, 1997 AND SEPTEMBER 27, 1996
RETAIL SEGMENT
STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
Revenues:
Net sales $ 322,837 $ 342,492 $ 953,393 $1,025,868
Finance income and
other securitization
income/(expense), net 2,212 (1,569) 5,701 3,220
---------- ---------- ---------- ----------
325,049 340,923 959,094 1,029,088
Costs and expenses:
Product cost 158,753 175,108 482,475 534,273
Administrative and
selling expenses 131,639 132,021 389,563 413,075
Provision for uncol-
lectible accounts 20,957 23,035 62,102 72,518
Interest expense, net 6,881 6,763 21,315 19,540
---------- ---------- ---------- ----------
318,230 336,927 955,455 1,039,406
Earnings (loss) before
income taxes 6,819 3,996 3,639 (10,318)
Provision for income
tax expense (benefit) 2,577 1,233 1,313 (4,281)
---------- ---------- ---------- ----------
Net earnings (loss) $ 4,242 $ 2,763 $ 2,326 $ (6,037)
========== ========== ========== ==========
Earnings (loss) per
share $ .09 $ .06 $ .05 $ (.12)
RETAIL SEGMENT
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
Fingerhut Key Statistics:
Sales per mailing -
existing customer list $ 3.09 $ 3.34 $ 2.99 $ 3.22
Cost per new customer $ 10.87 $ 14.64 $ 13.66 $ 15.63
Mailings (in 000's)
New customers 30,254 25,889 98,315 120,689
Existing customers 77,174 80,965 230,469 224,789
Active customer list
(in 000's) 4,442 4,918 4,442 4,918
Contribution margin per
existing customer $ 20 $ 20 $ 56 $ 50
Reserves for bad debt
as a percent of total
managed receivables 16.7% 17.4% 16.7% 17.4%
Reserves for bad debt
as a percent of
accounts 29 days plus
delinquent 67% 63% 67% 63%
Segment Key Statistics: (in 000's)
Capital expenditures $ 7,534 $ 8,779 $ 15,919 $ 38,795
Depreciation $ 11,446 $ 11,450 $ 34,125 $ 33,976
RETAIL SEGMENT
STATEMENTS OF OPERATIONS (Managed Basis*)
(In thousands of dollars, except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
Revenues:
Net sales $ 322,837 $ 342,492 $ 953,393 $1,025,868
Finance income and
other revenues 54,576 56,417 156,237 160,137
---------- ---------- ---------- ----------
377,413 398,909 1,109,630 1,186,005
Costs and expenses:
Product cost 158,753 175,108 482,475 534,273
Administrative and
selling expenses 134,838 136,228 397,767 422,326
Provision for uncol-
lectible accounts 55,450 58,228 159,211 170,662
Discount on sale of
accounts receivable 14,672 18,586 45,223 49,522
Interest expense, net 6,881 6,763 21,315 19,540
---------- --------- ---------- ----------
370,594 394,913 1,105,991 1,196,323
Earnings (loss) before
income taxes 6,819 3,996 3,639 (10,318)
Provision for income
tax expense (benefit) 2,577 1,233 1,313 (4,281)
---------- --------- ---------- ----------
Net earnings (loss) $ 4,242 $ 2,763 $ 2,326 $ (6,037)
Earnings (loss) per
share $ .09 $ .06 $ .05 $ (.12)
* Presented in format consistent with prior periods.
Results of Operations - Retail Segment
Third Quarter
Net sales for the current 13-week period were $322.8 million compared to
net sales of $342.5 million for the related period in 1996, a decrease of
6 percent. Fingerhut Corporation ("Fingerhut"), the Company's core
business in this segment, had third quarter net sales of $317.1 million
compared to $337.5 million in the same period in 1996, a decrease of 6
percent. Net sales from Fingerhut's new customer acquisition programs
increased 28 percent to $56.5 million. This increase was the result of
Fingerhut moving mailings to new customers out of the first and second
quarters and into the more productive third and fourth quarters. As a
result, mailings to new customers increased 17 percent from last year's
third quarter. Net sales from Fingerhut's existing customer list totaled
$260.6 million, which was a 11 percent decrease from the third quarter of
1996. The decrease was due to the impact of lower mailings to Fingerhut's
existing customer list in addition to lower response rates during the
quarter.
Finance income and other securitization income (expense), net, for the
quarter was $2.2 million, compared to $(1.6) million in the third quarter
of 1996. This increase was primarily due to the timing of sales within
the third quarter as well as reduced finance charge allowances resulting
from Fingerhut's cost reduction program.
Product cost for the current 13-week period was 49.2 percent of net sales,
or $158.8 million, compared to 51.1 percent of net sales, or $175.1
million, during the comparable prior-year period. The decrease as a
percent of net sales was primarily the result of Fingerhut's continued
actions to reduce merchandise costs and expenses related to returns.
Margin improvements were achieved in the following categories: domestics,
jewelry, home accessories, leisure, electronics and hardware.
Administrative and selling expenses for the current 13-week period were
$131.6 million, or 40.8 percent of net sales, compared to $132.0 million,
or 38.5 percent of net sales, in the comparable prior-year period.
Tighter cost controls and the impact of lower paper costs resulted in
favorable expense levels, while lower sales per mailing on sales to
Fingerhut's existing customer list contributed to the increase as a
percent of net sales.
The provision for uncollectible accounts relating to receivables sold are
included in "Finance income and other securitization income (expense),
net." The provision for uncollectible accounts on a "managed" basis for
the current 13-week period was 17.2 percent of net sales, compared to 17.0
percent of net sales for the third quarter of 1996. Delinquencies were
reduced year-over-year as a result of tightening credit criteria and
accelerating collection activities. At the end of the third quarter,
balances 29 days or more delinquent as a percent of managed receivables
stood at 25.0 percent, down from 27.6 percent at the end of the prior-year
third quarter.
Net interest expense for the current 13-week period was $6.9 million,
which is consistent with $6.8 million in the third quarter of 1996.
The effective consolidated tax rate, which includes both the Retail
Segment and Metris, for the third quarter of 1997 was 38.3 percent
compared to 36.2 percent in the comparable prior-year period. The rate
increase quarter over quarter was driven by the increase in Metris profits
having an applied tax rate of 38.5%.
As a result of the items discussed above, the Retail Segment generated net
earnings of $4.2 million, or $0.09 per share, compared to a third quarter
1996 net earnings of $2.8 million, or $0.06 per share.
Thirty-Nine week period
Net sales for the 39-week period ended September 26, 1997 were $953.4
million compared to $1,025.9 million for the corresponding period in 1996,
a decrease of 7 percent. Fingerhut had year to date net sales of $927.0
million compared to $1,000.5 million in the same period in 1996, a
decrease of 7 percent. Net sales from Fingerhut's new customer
acquisition programs decreased 12 percent to $168.3 million, which was
primarily due to the shift of mailings from the first half to the more
productive second half of the year. Net sales from Fingerhut's existing
customer list declined 6 percent to $758.7 million, primarily the result
of lower response rates during the period.
Finance income and other securitization income (expense), net, for the first
thirty-nine weeks of 1997 was $5.7 million, compared to $3.2 million for the
same period in 1996. This increase was primarily the result of reduced
finance charge allowances resulting from Fingerhut's cost reduction program.
Product cost for the current 39-week period was 50.6 percent of net sales,
or $482.5 million, compared to 52.1 percent of net sales, or $534.3
million, during the comparable prior-year period. The decrease as a
percent of net sales was primarily the result of Fingerhut's continued
actions to reduce costs and consolidate vendors.
Administrative and selling expenses for the first thirty-nine weeks of
1997 were $389.6 million, or 40.9 percent of net sales, compared to $413.1
million, or 40.3 percent of net sales, in the comparable prior-year
period. Tighter cost controls and the impact of lower paper costs were
more than offset by the lower sales per mailing on sales to Fingerhut's
existing customer list, resulting in the slight increase as a percent of
net sales.
The provision for uncollectible accounts on a "managed" basis for the
first thirty-nine weeks of 1997 was 16.7 percent of net sales, compared to
16.6 percent of net sales in the comparable prior-year period. The
Company continues to focus on reducing bad debt through the tightening of
its credit criteria as well as the acceleration of collection programs.
Net interest expense for the first thirty-nine weeks of 1997 was $21.3
million compared to $19.5 million in the comparable prior-year period.
The increase was primarily due to the higher borrowings under the
Revolving Credit Facilities as well as lower interest capitalization
relating to fixed asset projects.
The effective consolidated tax rate, which includes both the Retail and
Financial Services Segments, for the first 39 weeks of 1997 was 38.3
percent compared with 36.2 percent in the comparable period of the prior-
year. The rate increase year over year was driven by the increase in
Metris profits which have an applied tax rate of 38.5%.
The improvement in earnings year over year reflects a 13% lower cost per
new customer. In addition, the reduced sales per mailing on the existing
customer list was influenced by tighter mailing criteria which eliminated
higher response customers with a propensity for bad debt. Consequently,
profit per order has improved year over year. As a result of the items
discussed above, the Retail Segment generated net earnings for the 39-week
period ended September 26, 1997 of $2.3 million, or $.05 per share,
compared to a net loss of $6.0 million, or $(.12) per share in the
comparable period of 1996.
METRIS COMPANIES INC.
STATEMENTS OF EARNINGS
(In thousands of dollars, except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
Revenues:
Net sales $ 1,746 $ 5,535 $ 4,171 $ 15,131
Finance income and
other securitization
income, net 77,055 39,016 189,532 89,892
---------- ---------- ---------- ----------
78,801 44,551 193,703 105,023
Costs and expenses:
Product cost 28 1,769 38 4,393
Administrative and
selling expenses 48,656 27,594 115,030 63,999
Provision for uncol-
lectible accounts 11,106 5,383 28,589 10,556
Interest expense, net 1,877 371 4,527 2,179
---------- ---------- ---------- ----------
61,667 35,117 148,184 81,127
Earnings before income
taxes and minority
interest 17,134 9,434 45,519 23,896
Provision for income
taxes 6,597 3,632 17,525 9,200
Net earnings before
minority interest 10,537 5,802 27,994 14,696
Minority interest (1,786) - (4,857) -
---------- ---------- ---------- ----------
Net earnings $ 8,751 $ 5,802 $ 23,137 $ 14,696
Earnings per share $ .18 $ .12 $ .47 $ .30
Key Statistics:
Managed net charge-off
ratio 8.7% 5.7% 8.7% 5.6%
Period-end managed
loans (in 000's) $2,683,877 $1,276,687 $2,683,877 $1,276,687
Total accounts (in 000's) 1,802 1,117 1,802 1,117
Managed loan loss
reserves (in 000's) $ 190,626 $ 70,635 $ 190,626 $ 70,635
Managed delinquency ratio 6.4% 5.2% 6.4% 5.2%
Reserves as a percent of
30-day plus receivables 112% 107% 112% 107%
Results of Operations - Financial Services Segment (Metris Companies Inc.)
Third Quarter
Metris contributed net income for the quarter ended September 30, 1997 of
$8.8 million, or $.18 per share, up from $5.8 million, or $.12 per share,
for the third quarter of 1996. The 51 percent increase in net income is
the result of an increase in net interest income and other operating
income partially offset by increases in the provision for loan losses and
other operating expenses. Metris' managed credit card loan portfolio
increased 26 percent, or $559 million, during the third quarter bringing
the portfolio to $2.7 billion at September 30, 1997. Also during the
quarter, Metris added approximately 273,000 new accounts to end the
quarter with over 1.8 million credit card accounts.
Year to Date
Metris contributed net income for the nine months ended September 30, 1997
of $23.1 million, or $.47 per share, compared to $14.7 million, or $.30
per share, for the comparable prior-year period. Year to date, Metris'
charge volume was approximately $1.7 billion, a 42 percent increase over
the same period in 1996. Managed credit card fees, interchange and other
related credit card income was $106.9 million compared to $55.6 million
for the comparable period last year.
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
Metris Master Trust, borrowings under the Company's Amended and Restated
Revolving Credit Facility and Metris' Revolving Credit Facility (the
"Revolving Credit Facilities") and the issuance of long-term debt and
common stock.
The proceeds from the sale of Fingerhut accounts receivable were $1.037
billion and $1.280 billion at September 26, 1997 and December 27, 1996,
respectively. Net proceeds received from the sale of credit card
receivables were $2.317 billion at September 30, 1997 and $1.397 billion
at December 31, 1996, of which $14.7 million and $17.0 million,
respectively, was deposited in an investor reserve account held by the
trustee of the Metris Master Trust for the benefit of the Metris Master
Trust's certificateholders. In May 1997, the Metris Master Trust issued
Series 1997-1 certificates to third parties with a principal amount of
$794.8 million, generating proceeds of $792.2 million of which $667.7
million was used to reduce the Class A Variable Funding Certificate issued
under Series 1995-1. The Series 1997-1 certificates are scheduled to
begin accumulating principal collections in March 2001, however, the
accumulation period could potentially begin at a later date. The expected
final payment date for these certificates is in April 2002.
In December 1996, the Fingerhut Master Trust Series 1994-1 certificates
commenced controlled amortization, whereby collections on the securitized
receivables are now being used to pay down the principal portion of the
underlying certificates. In January 1997, the Company issued Series 1997-
1 variable funding certificates to refinance approximately half of the
amortizing certificates. The Company subsequently issued additional
Series 1997-1 variable funding certificates, which increased the maximum
proceeds to $790.0 million. The monthly proceeds generated from Series
1997-1 will be sufficient to cover the monthly pay-down of the amortizing
1994-1 certificates. The Company plans to support future receivables
growth through the sale and issuance of additional certificates by the
Master Trusts and through borrowings under the Revolving Credit
Facilities. The Company plans to refinance Series 1997-1 and the
remaining portion of Series 1994-1 in the public term asset backed market.
The Company also plans to finance its revolving credit portfolio through
the asset backed securities market.
The Revolving Credit Facilities provide for aggregate commitments of up to
$500.0 million, of which $200.0 million represents the Company's credit
facility and $300.0 million represents Metris' credit facility. The
expiration date for both facilities is September 2001. As of September
26, 1997, outstanding revolving credit balances totaled $202.0 million, of
which $49 million and $153 million related to the Company and Metris,
respectively and outstanding letters of credit totaled $6.4 million, of
which $4.9 million and $1.5 million related to the Company and Metris,
respectively. As of September 27, 1996, outstanding revolving credit
balances totaled $120.0 million, of which $105 million and $15 million
related to the Company and Metris, respectively and the Company's
outstanding letters of credit totaled $5.9 million. Additional
outstanding open letters of credit under a separate agreement aggregated
$43.6 million and $37.6 million at September 26, 1997 and September 27,
1996, respectively.
The Company had an aggregate amount of fixed rate notes outstanding of
$270.0 million as of September 26, 1997 and $270.0 million as of September
27, 1996. A total of $25.0 million of the notes mature in December 1997.
The Company used $84.0 million in cash from operations during the 39-week
period ended September 26, 1997 compared with $3.5 million used for
operations during the related period in 1996. This $80.5 million net
increase in cash used by operations resulted primarily from a significant
increase in Metris customer accounts receivable, net, partially offset by
increases in net earnings, payables due to Metris credit card
securitizations, net, and other current assets.
Net cash used by investing activities for the 39-week period ended
September 26, 1997 was $22.4 million, compared to $41.5 million for the
comparable period in 1996. In January 1996, the owner of certain office
and warehouse facilities leased to the Company exercised its right to
require the Company to repurchase those facilities for approximately $14.1
million. Thus, the decrease in capital spending year over year was due
primarily to this prior-year expenditure as well as the Company's overall
reduction in capital outlays.
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. During the current 39-week period, the Company repurchased
at prevailing market prices 231,900 shares of its common stock for an
aggregate of $3.4 million. Total purchases to date under this plan were
1,612,200 shares for an aggregate of $24.9 million.
On October 16, 1997, the Company declared a cash dividend in the amount of
$.04 per share, aggregating approximately $1.8 million, payable on
November 13, 1997, to the shareholders of record as of the close of
business on October 30, 1997.
In October 1997, the Company issued 11,079 shares of common stock under
the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 25,774
shares related to the exercise of employee stock options.
The Company believes it will have sufficient funds available to meet
current and future commitments.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
statements include statements regarding intent, belief or current
expectations of the Company and its management. Shareholders and
prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve a number
of risks and uncertainties that may cause the Company's actual results to
differ materially from the results discussed in the forward-looking
statements, including: general economic conditions affecting disposable
consumer income such as employment, business conditions, interest rates
and taxation; risks associated with unsecured credit transactions;
interest rate risks; seasonal variations in consumer purchasing
activities; increases in postal and paper costs; competition in the retail
and direct marketing industry; dependence on the securitization of
accounts receivable and credit card loans to fund operations; state and
federal laws and regulations related to advertising, offering and
extending credit, charging and collecting state sales/use taxes; product
safety; and risks of doing business with foreign suppliers. Each of these
factors is more fully discussed in Exhibit 99 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 27, 1996.
Part II. Other Information
Item 1. Legal Proceedings
On August 14, 1997 Fingerhut Corporation was served with a
summons and class action complaint commenced in Minnesota District
Court, Fourth Judicial District, on behalf of named plaintiffs in
ten states. The alleged class consists of "Fingerhut customers
whose contracts are declared by Fingerhut to be governed by
Minnesota law." The complaint alleges violations of the usury
law, deceptive trade practices and consumer fraud based on
Fingerhut's use of the "time price" doctrine in its credit sales.
The plaintiffs' claims are substantially identical to the claims
asserted in an earlier case brought against Fingerhut in the same
court. The court granted summary judgment in favor of Fingerhut
in that case in March 1997. The plaintiffs in that case did not
appeal the summary judgment, and their counsel has refiled their
claims on behalf of new members of the purported plaintiff class.
The Company has filed a notice of motion to dismiss, or in the
alternative for summary judgment.
Item 5. Other Matters
On October 9, 1997, the Company announced that its board of
directors had approved the filing of an application with the
Internal Revenue Service (IRS) for a ruling on a tax free
distribution of its stock of Metris. The Company filed the
ruling request with the IRS on October 23, 1997. The proposed
spin off of Metris would be subject to receipt of a favorable
ruling from the IRS, approval by Fingerhut's board of directors,
and to market conditions. If approved, the spin off would be expected
to be completed during 1998.
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: By:
/s/ Gerald T. Knight
Gerald T. Knight
Chief Financial Officer
(Principal Financial Officer)
Date: By:
/s/ John C. Manning
John C. Manning
Vice President, Finance
Date: By:
/s/ Thomas C. Vogt
Thomas C. Vogt
Corporate Controller
(Principal Accounting Officer)
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
Computation of Earnings Per Share
(In thousands of dollars, except per share data)
Unaudited
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
Primary
Net earnings (a) $ 12,993 $ 8,565 $ 25,463 $ 8,659
Weighted average shares
of common stock
outstanding 46,163,574 46,181,050 46,122,419 46,224,968
Common stock equivalents 3,684,907 2,442,968 2,997,244 2,455,177
Weighted average shares of
common stock and common
stock equivalents (b) 49,848,481 48,624,018 49,119,663 48,680,145
Primary earnings per share
of common stock and common
stock equivalents (a/b) $ .26 $ .18 $ .52 $ .18
Fully diluted
Net earnings (c) $ 12,993 $ 8,565 $ 25,463 $ 8,659
Weighted average shares
of common stock
outstanding 46,163,574 46,181,050 46,122,419 46,224,968
Common stock
equivalents 3,990,436 2,444,628 3,990,436 2,498,521
Weighted average shares of
common stock and common
stock equivalents (d) 50,154,010 48,625,678 50,112,855 48,723,489
Fully diluted earnings per
share of common stock and
common stock equivalents
(c/d) $ .26 $ .18 $ .51 $ .18
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 quarter
ended September 26, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-END> SEP-26-1997
<CASH> 77,943
<SECURITIES> 0
<RECEIVABLES> 823,284
<ALLOWANCES> 160,397
<INVENTORY> 173,179
<CURRENT-ASSETS> 1,179,954
<PP&E> 481,290
<DEPRECIATION> 208,980
<TOTAL-ASSETS> 1,560,175
<CURRENT-LIABILITIES> 628,233
<BONDS> 246,435
0
0
<COMMON> 462
<OTHER-SE> 626,420
<TOTAL-LIABILITY-AND-EQUITY> 1,560,175
<SALES> 954,037
<TOTAL-REVENUES> 1,149,270
<CGS> 482,513
<TOTAL-COSTS> 1,074,270
<OTHER-EXPENSES> 4,857
<LOSS-PROVISION> 90,691
<INTEREST-EXPENSE> 25,842
<INCOME-PRETAX> 44,301
<INCOME-TAX> 18,838
<INCOME-CONTINUING> 25,463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,463
<EPS-PRIMARY> .52
<EPS-DILUTED> .51
</TABLE>
