SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Fiscal Quarter Ended 1-8668
September 25, 1998 Commission File Number
___________________________
FINGERHUT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1396490
(State of Incorporation) (IRS 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 4, 1998, 49,376,941 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
FINGERHUT COMPANIES, INC.
FORM 10-Q
September 25, 1998
TABLE OF CONTENTS
Part I - Financial Information Page
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited) -
thirteen weeks and thirty-nine weeks ended
September 25, 1998 and September 26, 1997.............. 3
Consolidated Statements of Financial Position
(Unaudited) - September 25, 1998 and December 26, 1997. 5
Consolidated Statements of Cash Flows (Unaudited) -
thirteen weeks and thirty-nine weeks ended
September 25, 1998 and September 26, 1997.............. 6
Condensed Notes to Consolidated Financial
Statements (Unaudited)................................. 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition .....................11
Part II - Other Information
Item 1. Legal Proceedings ......................................22
Item 5. Other Events............................................22
Item 6. Exhibits and Reports on Form 8-K .......................22
Signatures.......................................................24
<TABLE>
FINGERHUT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except share and per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 25, Sept. 26, Sept. 25, Sept.26,
1998 1997 1998 1997
Revenues:
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Net sales $ 347,806 $ 322,837 $ 943,722 $ 953,393
Finance income and
other securitization
income, net 2,031 2,212 5,652 5,701
349,837 325,049 949,374 959,094
Costs and expenses:
Product cost 166,416 158,753 450,271 482,475
Administrative and
selling expenses 151,852 131,638 421,424 389,562
Provision for uncol-
lectible accounts 19,218 20,957 57,692 62,102
Interest expense, net 4,060 6,881 13,827 21,315
Provision for non-
recurring items 38,130 - 38,130 -
379,676 318,229 981,344 955,454
(Loss)earnings from
continuing operations
before income taxes (29,839) 6,820 (31,970) 3,640
Provision for income
taxes (11,175) 2,578 (11,975) 1,314
Net (loss) earnings from
continuing operations
before extraordinary
item (18,664) 4,242 (19,995) 2,326
Earnings from
discontinued operations
(less income taxes of
$6,733 and $18,945 in
1998 and $5,479 and
$14,484 in 1997) 10,642 8,751 30,150 23,137
Net (loss) earnings before
extraordinary item (8,022) 12,993 10,155 25,463
Extraordinary item -
early retirement of
debt (less income taxes
of $4,259) (7,096) - (7,096) -
Net (loss) earnings $ (15,118) $ 12,993 $ 3,059 $ 25,463
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
FINGERHUT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except share and per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
(Loss)/earnings per share:
Continuing operations
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Basic $ (.39) $ .09 $ (.42) $ .05
Diluted $ (.39) $ .09 $ (.42) $ .05
Discontinued operations, net
Basic $ .22 $ .19 $ .64 $ .50
Diluted $ .22 $ .18 $ .64 $ .47
Extraordinary item, net
Basic $ (.14) $ - $ (.15) $ -
Diluted $ (.14) $ - $ (.15) $ -
Total operations
Basic $ (.31) $ .28 $ .07 $ .55
Diluted $ (.31) $ .26 $ .07 $ .52
Dividends $ - $ .04 $ .08 $ .12
Weighted average shares:
Basic 48,004,534 46,163,574 47,061,954 46,122,419
Diluted 48,004,534 49,848,481 47,061,954 49,119,663
</TABLE>
<TABLE>
FINGERHUT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands of dollars)
(Unaudited)
September 25, December 26,
1998 1997
ASSETS
Current assets:
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Cash and cash equivalents $ 31,624 $ 96,889
Accounts receivable 226,775 339,553
Retained interest in securitized
receivables 167,412 178,652
Less: reserve for uncollectible
accounts and unearned finance income (124,976) (157,798)
Accounts receivable, net 269,211 360,407
Inventories, net 198,741 124,424
Promotional material 101,393 46,689
Deferred income taxes 85,015 118,472
Current income taxes receivable 35,478 -
Other 12,826 14,186
Total current assets 734,288 761,067
Property and equipment, net 216,604 256,726
Excess of cost over fair value of
net assets acquired, net 117,836 40,409
Net assets of discontinued operations - 146,249
Customer lists, net 8,355 8,401
Other assets 19,825 16,633
$1,096,908 $1,229,485
LIABILITIES
Current liabilities:
Accounts payable $ 187,618 $ 142,894
Accrued payroll and employee benefits 29,449 43,534
Other accrued liabilities 29,618 35,371
Revolving credit facility 167,000 -
Current portion of long-term debt 125,076 84
Current income taxes payable - 61,958
Total current liabilities 538,761 283,841
Long-term debt, less current portion 149 245,187
Deferred income taxes 22,263 22,345
Other non-current liabilities 13,911 8,127
575,084 559,500
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 502 463
Additional paid-in capital 353,142 292,407
Unearned compensation (1,036) (738)
Earnings reinvested 169,216 377,853
Total stockholders' equity 521,824 669,985
$1,096,908 $1,229,485
See accompanying Condensed Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
FINGERHUT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
Thirty-Nine Weeks Ended
Sept. 25, Sept. 26,
1998 1997
Cash flows from operating activities:
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Net earnings $ 3,059 $ 25,463
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Income from discontinued operations (30,150) (23,137)
Extraordinary net loss on debt extinguishment 7,096 -
Non-recurring expenses 38,130 -
Depreciation and amortization 33,388 37,318
Amortization of unearned compensation 628 993
Change in assets and liabilities; net of effects of
acquisition:
Accounts receivable, net 131,922 67,987
Inventories, net (50,021) (45,444)
Promotional material and other current assets (49,636) (13,052)
Accounts payable 37,763 1,011
Accrued payroll and employee benefits (14,325) (13,493)
Accrued liabilities (17,705) (33,155)
Current income taxes payable (56,963) (47,429)
Deferred income taxes 33,375 33,720
Other (3,203) 4,163
Net cash provided by/(used in)
operating activities 63,358 (5,055)
Cash flows from investing activities:
Purchase of Arizona Mail Order (AMO) (109,812) -
Investment in PC Flowers (2,041) -
Additions to property and equipment (19,516) (15,919)
Net cash used by investing activities (131,369) (15,919)
Cash flows from financing activities:
Repayments of long-term debt (120,046) (46)
Prepayment penalty (10,768) -
Repayment of AMO credit facility (24,000) -
Revolving credit facility 167,000 26,000
Issuance of common stock 31,453 3,322
Repurchase of common stock (35,285) (3,385)
Cash dividends paid (5,608) (5,536)
Net cash provided by financing activities 2,746 20,355
Net decrease in cash and cash
equivalents (65,265) (619)
Cash and cash equivalents at beginning of period 96,889 28,795
Cash and cash equivalents at end of period $ 31,624 $ 28,176
Supplemental non-cash 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 $ 36,215 $ 784
Issuance of restricted stock, net of forfeitures $ 926 $ -
Dividend of Metris shares $ 178,623 $ -
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 19,062 $ 22,869
Cash paid during the period for income taxes $ 16,720 $ 10,876
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.
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. The consolidated financial statements at
September 25, 1998 include Arizona Mail Order (AMO), since the date
of acquisition on August 31, 1998, the Company's equity investment
in PC Flowers, and the tax-free spin-off of Metris Companies Inc.
(Metris), which is now accounted for as a discontinued operation.
All prior period financial statements have been restated to
eliminate the results of Metris to conform to the current period's
presentation. The reclassifications had no effect on net earnings
(loss).
The consolidated financial statements as of September 25, 1998 and
September 26, 1997, and for the thirteen and thirty-nine weeks ended
September 25, 1998 and September 26, 1997, 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
1997 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 1998, the Company implemented Statement
of Financial Accounting Standards No. 130 (FAS 130), "Reporting
Comprehensive Income." FAS 130 has no material effect on the
consolidated financial statements.
2. Earnings (loss) per share
Basic earnings (loss) per share were computed by dividing net
earnings (loss) by the weighted average shares of common stock
outstanding during the periods. Diluted earnings (loss) per share
were computed by dividing net earnings (loss) 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. Due to
the loss from continuing operations in current quarter and year to
date, dilutive effect of stock options is not considered in the
earnings (loss) per share calculation.
3. Investment and acquisition
In July 1998, the Company acquired a 20 percent equity investment in
PC Flowers and Gifts, Inc. for $2.0 million. PC Flowers and Gifts,
Inc. is a leading on-line provider of flowers, gift baskets and
gourmet food.
On August 31, 1998, the Company purchased Arizona Mail Order (AMO),
a leading direct marketer of women's apparel for $109.8 million.
The effects of AMO's income statement for September 1998 are
included within the Consolidated Statements of Operations. The
acquired goodwill will be amortized on a straight-line basis over 15
years.
4. Provision for non-recurring items
The pre-tax provision for non-recurring items of $38.1 million
includes a non-cash charge for the write-down of $33.6 million for
Fingerhut's Western Distribution Center (WDI), which was placed in
service in January 1998, as well as other pre-tax provisions for
restructuring of $4.5 million.
Due to the Company's changing focus to growth through acquisitions,
it reviewed the carrying value of the WDI facility, to be held and
used, for impairment in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121).
It was determined that the sum of the undiscounted cash flow was
less than the carrying value of the facility and therefore indicated
that an impairment existed. Accordingly, an impairment loss was
recognized as the amount by which the carrying value of the facility
exceeded the fair market value. The fair market value of WDI was
determined using an independent appraisal for the land and building
and the Company's internal analysis for the equipment and
improvements. As a result of this review, the Company recorded a
non-cash, pre-tax charge of $33.6 million to write-down WDI to its
estimated fair market value of $26.0 million.
Included within the remaining non-recurring charges are $2.9 million
related to termination benefits for 111 exempt employees, mainly
from the Company's corporate office. As of September 25, 1998, the
entire balance was included in "Other accrued liabilities."
5. Discontinued operations
In August 1998, the Company received a favorable tax-free spin
ruling from the Internal Revenue Service to spin off its 83 percent
owned subsidiary, Metris Companies Inc. ("Metris") via a tax-free
stock dividend to the Company's shareholders. The distribution date
of the dividend was September 25, 1998. As a result, the earnings
of Metris are shown through September 25, 1998 (versus its normal
cut-off of September 30) as earnings from discontinued operations,
net of tax on the Consolidated Statement of Operations. Also
included in discontinued operations in the third quarter of 1998 and
year to date 1998 are $2.7 million of expenses, net of income tax,
related to the spin-off. The Consolidated Statements of Financial
Position and Cash Flows have been restated for prior periods to
reflect Metris as a discontinued operation.
6. Extraordinary item - loss on early retirement of debt
In September 1998, the Company prepaid the holders of its $120
million privately placed Senior Notes. Accordingly, the Company
recorded an extraordinary loss of $7.1 million, net of tax, related
to the early retirement of debt. The extraordinary net loss was
comprised of a $6.7 million prepayment penalty and $0.4 million
write-off of unamortized fees related to the debt.
7. Accounts receivable, net
Accounts receivable, net of amounts sold, consisted of the
following:
<TABLE>
(In thousands of dollars) September 25, December 26,
1998 1997
<S> <C> <C>
Customer receivables $ 229,083 $ 339,553
Retained interest in securitized
receivables 167,412 178,652
Reserve for uncollectible accounts,
net of anticipated recoveries (84,419) (100,901)
Reserve for returns and exchanges (8,781) (11,382)
Other reserves (12,880) (22,765)
Net collectible amount 290,415 383,157
Unearned finance income (21,204) (22,750)
Accounts receivable, net $ 269,211 $ 360,407
</TABLE>
During the quarter, the Company continued to accelerate its efforts
to move customers from an installment-based lending program to
revolving credit accounts. By the end of the quarter, approximately
1.3 million customer accounts had been converted or were awaiting
conversion, representing $333.8 million in managed receivables,
including the effect of all financial activity subsequent to
conversion. It is the intention of the Company to continue this
practice over the next 12 to 18 months until substantially all of
its customer accounts have been converted to revolving credit.
Reserves associated with owned and retained receivables have
decreased from December 26, 1997 levels primarily because of the
reduction in the receivables balance. On a percent of receivables
basis, reserve levels differ from December 26, 1997 due to the
inclusion of AMO in the September 25, 1998 balance, seasonality, and
the impact of the conversion of installment based receivables to
revolving credit (customer allowances and collection costs are being
recorded as period costs for new revolving credit sales going
forward, after conversion).
8. Revolving credit accounting methods
The provision for uncollectible accounts for revolving credit is
based on a twelve-month roll rate of charge-offs versus a provision
to cover the entire estimated charge-offs for an installment
contract balance. Finance income, net, is recognized as earned for
revolving credit accounts versus recognition of the full net finance
income from an installment based contract at the time the receivable
is sold.
9. Stockholders' equity
During the thirty-nine week period ended September 25, 1998,
5,198,532 shares of common stock were issued related to the exercise
of employee stock options, and 26,610 shares of common stock were
issued under the Fingerhut Companies, Inc. Employee Stock Purchase
Plan. The Company repurchased 26,500 shares of Common Stock from
the open market for $203,106. The Company also repurchased
approximately 1.4 million mature shares for $35.1 million, which was
authorized in connection with the spin-off of Metris. The total of
the shares of common stock outstanding as of September 25, 1998 was
50,197,056. The Company issued a tax free stock dividend to its
shareholder on September 25, 1998 relating to the Company's
investment in Metris. The investment had a carrying value of $178.6
million at the time of the dividend. Also, the Company's Board of
Directors approved a stock option grant under existing option plans
of 3.9 million shares and 80,000 shares of restricted stock of which
20,000 shares vest over 3 years and 60,000 shares vest over 4 years.
10. Subsequent events
In October 1998, the Company issued 18,411 shares of common stock
under the Fingerhut Companies, Inc. Employee Stock Purchase Plan.
The Company repurchased 861,000 shares of Common Stock in the open
market for $8.4 million.
The Company entered into a definitive stock purchase agreement on
October 28, 1998 to acquire Popular Club, a New Jersey based
regional cataloger of general merchandise with annual revenues of
$180 million. The acquisition is expected to be completed prior to
the Company's year-end.
<TABLE>
MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
THIRTEEN AND THIRTY-NINE WEEKS ENDED
SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997
FINGERHUT COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Managed Basis)
(In thousands of dollars, except per share data)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
Revenues:
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Net sales $ 347,806 $ 322,837 $ 943,722 $ 953,393
Finance income and
other securitization
income, net 50,754 55,733 148,449 161,606
398,560 378,570 1,092,171 1,114,999
Costs and expenses:
Product cost 166,416 158,753 450,271 482,475
Administrative and
selling expenses 153,126 134,837 426,431 397,766
Provision for uncol-
lectible accounts 51,120 55,450 147,117 159,211
Discount on sale of
accounts receivable 15,547 15,829 48,365 50,592
Interest expense, net 4,060 6,881 13,827 21,315
Provision for non-
recurring items 38,130 - 38,130 -
428,399 371,750 1,124,141 1,111,359
(Loss)earnings from
continuing operations
before income taxes (29,839) 6,820 (31,970) 3,640
Provision for income
taxes (11,175) 2,578 (11,975) 1,314
Net (loss) earnings from
continuing operations
before extraordinary
item (18,664) 4,242 (19,995) 2,326
Earnings from
discontinued operations
(less income taxes of
$6,733 and $18,945 in
1998 and $5,479 and
$14,484 in 1997) 10,642 8,751 30,150 23,137
Net (loss) earnings before
extraordinary item (8,022) 12,993 10,155 25,463
Extraordinary item -
early retirement of
debt (less income taxes
of $4,259) (7,096) - (7,096) -
Net (loss) earnings $ (15,118) $ 12,993 $ 3,059 $ 25,463
NOTE: All prior-period financial information has been restated to
conform to the current period's presentation. The reclassifications had
no effect on net earnings.
</TABLE>
<TABLE>
CONTINUING OPERATIONS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
Fingerhut Corporation Key Statistics:
Sales per mailing -
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existing customer list $ 3.02 $ 3.09 $ 2.74 $ 2.99
Cost per new customer $ 18.72 $ 10.87 $ 19.24 $ 13.66
Mailings (in 000's)
New customers 35,439 30,254 113,375 98,315
Existing customers 81,551 77,174 241,095 230,469
Active customer list
(in 000's) 4,073 4,442 4,073 4,442
Contribution margin per
existing customer $ 22 $ 20 $ 58 $ 56
Reserves for bad debt
as a percent of total
managed receivables 16.6% 16.7% 16.6% 16.7%
</TABLE>
Results of Operations - Continuing Operations
Third Quarter
Net sales for the current 13-week period were $347.8 million compared to
net sales of $322.8 million for the related period in 1997, an increase
of 8 percent. Fingerhut Corporation ("Fingerhut"), the Company's core
business, had third quarter net sales of $332.1 million compared to
$317.1 million in the same period in 1997, an increase of 5 percent. Net
sales from Fingerhut's new customer acquisition programs remained flat at
$56.8 million. Net sales from Fingerhut's existing customer list totaled
$275.3 million, which was a 6 percent increase from the third quarter of
1997. The increase was due to a higher volume of mailings (partially
offset by lower customer response), higher average order size, lower
returns and allowances, and increased commission revenue related to
extended service plans. With the spin-off of Metris, and in accordance
with Generally Accepted Accounting Principles, the Company discontinued
the deferral of commission revenue earned from the sale of extended
service plans (underwritten by Metris; now a third party) over the life
of such plans. This resulted in $4.0 million of additional revenue over
prior year in the quarter. Finally, net sales from the Company's
subsidiaries were $15.7 million compared to net sales of $5.7 million in
third quarter 1997, primarily the result of the acquisition of Arizona
Mail Order (AMO) on August 31, 1998.
Finance income and other securitization income, net, for the quarter was
$2.0 million, compared to $2.2 million in the third quarter of 1997.
This decrease was primarily due to lower finance income resulting from a
reduction in the size of the accounts receivable portfolio, and was
partially offset by a lower provision for uncollectible accounts, lower
collection costs applied to securitized receivables, and the
securitization of new customer accounts. In addition, the conversion of
closed end customer accounts to revolving credit has resulted in lower
finance income related to new sales and other customer charges. Finance
income for revolving credit accounts is recognized as earned versus at
the time of securitization of the receivable balance on an installment-
based account.
Product cost for the current 13-week period was 47.8 percent of net
sales, or $166.4 million, compared to 49.2 percent of net sales, or
$158.8 million, during the comparable prior-year period. The decrease as
a percent of net sales was primarily the result of foreign currency
devaluation, lower inventory obsolescence and cost reductions related to
customer returns, partially offset by a shift in the sales mix to lower
margin electronics.
Administrative and selling expenses for the current 13-week period were
$151.9 million, or 43.7 percent of net sales, compared to $131.6 million,
or 40.8 percent of net sales, in the comparable prior-year period.
Selling expenses increased over the prior year due to an increase in
mailings, higher paper costs, costs associated with the conversion of
customer accounts to revolving credit, and expenses related to AMO.
Before inclusion of administrative costs associated with revolving credit
and AMO, administrative expense levels were consistent with the prior
year.
The provision for uncollectible accounts relating to receivables sold is
included in "Finance income and other securitization income, net." The
provision for uncollectible accounts on a "managed" basis for the current
13-week period was 14.7 percent of net sales, compared to 17.2 percent of
net sales for the third quarter of 1997. At the end of the third
quarter, account balances 29 days or more delinquent as a percent of
managed receivables stood at 21.9 percent, down from 25.0 percent at the
end of the prior-year third quarter, and 27.6 percent at the end of third
quarter 1996. Credit sales and other charges to newly created revolving
credit accounts generated a lower provision for uncollectible accounts
because the provision was based on estimated charge-offs for the next
twelve months (versus closed end accounts which incur provisions to cover
charge-offs over the life of the contract). The lower revolving credit
provision for uncollectible accounts is offset by lower finance income
recognized at the time of securitization, as noted above. Finance income
recognized in future periods will offset charge-offs beyond the next
twelve months.
Net interest expense for the current 13-week period was $4.1 million,
compared with $6.9 million in the third quarter of 1997. The decrease in
expense was due to lower working capital requirements as a result of
lower customer receivables and better inventory management.
The pre-tax provision for non-recurring items of $38.1 million includes a
non-cash charge for the write-down of Fingerhut's Western Distribution
Center (WDI) of $33.6 million, as well as other pre-tax provisions for
restructuring of $4.5 million. The write-down of WDI was taken in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
The extraordinary after-tax charge of $7.1 million reflects the
retirement cost of the Company's $120 million privately placed Senior
Notes plus the write-off of the related unamortized fees.
The effective tax rate for continuing operations for the third quarter of
1998 was 37.5 percent compared to 37.8 percent in the comparable prior-
year period.
Excluding non-recurring and extraordinary items, the Company's Continuing
Operations generated net earnings of $5.2 million, or $0.11 per share,
compared to a third quarter 1997 net earnings of $4.2 million, or $0.09
per share. The net earnings from discontinued operations (Metris) was
$10.6 million, or $0.22 per share, net of $2.7 million in costs
associated with the spin, compared to a third quarter 1997 net earnings
of $8.8 million, or $0.18 per share. Consolidated net loss was $15.1
million, or ($0.31) per share, compared to third quarter 1997 net
earnings of $13.0 million, or $0.26 per share.
Thirty-Nine Week Period
Net sales for the 39-week period ended September 25, 1998 were $943.7
million compared to $953.4 million for the corresponding period in 1997,
a decrease of 1 percent. Fingerhut had year to date net sales of $906.3
million compared to $927.0 million in the same period in 1997, a decrease
of 2 percent. Net sales from Fingerhut's new customer acquisition
programs increased 2 percent to $170.8 million, which was primarily due
to an increase in the number of mailings. Net sales from Fingerhut's
existing customer list declined 3 percent to $735.5 million, primarily as
a result of lower sales per mailing, partially driven by the Company's
strategy to control credit risk.
Finance income and other securitization income, net, for the first thirty-
nine weeks of 1998 was $5.7 million, which was flat compared to the same
period in 1997.
Product cost for the current 39-week period was 47.7 percent of net
sales, or $450.3 million, compared to 50.6 percent of net sales, or
$482.5 million, during the comparable prior-year period. The decrease as
a percent of net sales was primarily the result of negotiated vendor cost
reductions, foreign currency devaluations, cost reductions related to
customer returns, and lower inventory obsolescence.
Administrative and selling expenses for the first thirty-nine weeks of
1998 were $421.4 million, or 44.7 percent of net sales, compared to
$389.6 million, or 40.9 percent of net sales, in the comparable prior-
year period. Continued cost controls resulted in administrative expense
levels consistent with the prior year, while lower sales per mailing was
a major reason for the increase as a percent of net sales. Costs related
to the conversion of accounts to revolving credit also contributed to the
year over year increase.
The provision for uncollectible accounts on a "managed" basis for the
first thirty-nine weeks of 1998 was 15.6 percent of net sales, compared
to 16.7 percent of net sales in the comparable prior-year period. The
Company continues to focus on controlling bad debt through the use of
stringent credit criteria and effective collection programs, which have
resulted in lower charge-offs year over year. At the end of the third
quarter, account balances 29 days or more delinquent as a percent of
managed receivables stood at 21.9 percent, down from 25.0 percent at the
end of the prior-year third quarter, and 27.6 percent at the end of third
quarter 1996.
Net interest expense for the first thirty-nine weeks of 1998 was $13.8
million compared to $21.3 million in the comparable prior-year period.
The decrease was primarily due to lower working capital requirements.
Also, lower utilization of the Company's revolving credit facility, the
pay-down of senior notes in December 1997 and more investment income have
reduced net interest expense year over year.
The pre-tax provision for non-recurring items of $38.1 million includes a
non-cash charge for the write-down of Fingerhut's Western Distribution
Center (WDI) of $33.6 million, as well as other pre-tax provision for
restructuring of $4.5 million. The write-down of WDU was taken in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
The extraordinary after-tax charge of $7.1 million reflects the
retirement cost of the Company's $120 million privately placed Senior
Notes plus the write-off of the related unamortized fees.
The effective consolidated tax rate for the Company's Continuing
Operations for the first thirty-nine weeks of 1998 was 37.5 percent
compared with 36.1 percent in the comparable period of the prior-year.
Excluding non-recurring and extraordinary items, the Company's Continuing
Operations generated net earnings for the 39-week period ended September
25, 1998 of $3.8 million, or $.08 per share, compared to net earnings of
$2.3 million, or $.05 per share in the comparable period of 1997. The
net earnings from discontinued operations (Metris) was $30.2 million, or
$0.64 per share, net of $2.7 million in costs associated with the spin,
for the first 39 weeks of 1998, compared to 1997 net earnings of $23.1
million, or $0.47 per share. Consolidated net earnings were $3.1
million, or $0.07 per share, compared to 1997 net earnings of $25.5
million, or $0.52 per share.
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,
borrowings under the Company's Revolving Credit Facility and the issuance
of long-term debt and common stock.
The proceeds from the sale of Fingerhut accounts receivable were $1.044
billion and $1.205 billion at September 25, 1998 and December 26, 1997,
respectively.
During the first quarter, the Fingerhut Master Trust was amended to
include certain revolving receivables and certain previously unsold, new
customer installment receivables. As a result of this the Company
terminated an agreement to sell revolving receivables to a third party
conduit.
In April 1998, the Company issued Series 1998-1 and Series 1998-2
securities to third parties. These agreements generated net proceeds of
$897.0 million of which $790.0 million was used to pay down the entire
principal portion of the 1997-1 Series. Approximately $102.5 million of
the remaining proceeds were used to reduce the Class A Variable Funding
Certificate issued under Series 1994-2.
On July 30, 1998, the Company closed Series 1998-3, a $400 million
variable-funding series issued out of the Fingerhut Master Trust and sold
to third party conduits. Approximately $91 million in proceeds were used
to make an early repayment of Series 1994-2. Series 1994-2 supported the
$1.2 billion asset backed commercial paper program through the Fingerhut
Owner Trust that the Company shared with Metris. This commercial paper
program was terminated on July 30, 1998. It was replaced by Series 1998-
3 for the Company.
In connection with the spin-off of Metris, the Company amended its
Amended and Restated Revolving Credit Facility. The changes resulted in
the removal of the Company's guarantee on the Metris outstanding balances
and an increase in aggregate commitments to up to $250.0 million from
$200.0 million. The expiration date for the facility was extended to
September 2003. Additionally, as of September 25, 1998, outstanding
revolving credit balances totaled $167.0 million and outstanding letters
of credit totaled $6.3 million. As of September 26, 1997, outstanding
revolving credit balances totaled $49.0 million and outstanding letters
of credit totaled $4.9 million. Additional outstanding open letters of
credit under separate agreements aggregated $34.1 million and $43.6
million at September 25, 1998 and September 26, 1997, respectively.
On September 24, 1998, the Company prepaid $120 million of privately
placed Senior Notes using existing credit facilities. The prepayment
resulted in an extraordinary loss of $7.1 million, net of tax. In
October 1998, as a result of the prepayment of the privately placed
Senior Notes, the Company entered into 364-day revolving credit facility
for $130 million. The Company had an aggregate amount of fixed rate
notes outstanding of $125.0 million as of September 25, 1998 and $270.0
million as of September 26, 1997.
The Company generated $63.4 million in cash from operations during the 39-
week period ended September 25, 1998 compared with a $5.0 million use of
cash for operations during the related period in 1997. This $68.4
million net increase in cash generated by operations resulted primarily
from a significant decrease in accounts receivable, net and an increase
in accounts payable, partially offset by an increase in promotional
materials.
Net cash used by investing activities for the 39-week period ended
September 25, 1998 was $131.4 million, compared to $15.9 million for the
comparable period in 1997. This $115.5 million increase in cash used by
investing activities resulted primarily from the acquisition of AMO in
the third quarter of 1998.
Net cash provided by financing activities for the 39-week period ended
September 25, 1998 was $2.7 million, compared with $20.4 million
generated for the comparable period in 1997. The $17.7 million net
decrease was primarily due a repayment of long term notes of $120.0
million, the repayment of AMO's revolving credit facility of $24.0
million, an increase in the repurchase of common stock of $31.9 million,
partially offset by the increase in the revolving credit facility of
$141.0 million.
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 SEC Rule 10-b-18, which has 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, 26,500 shares were repurchased. In October 1998, the Company
repurchased an additional 861,000 shares, bringing total purchases to
date under this plan to 2,499,700 shares for an aggregate of $33.5
million.
In October 1998, the Company issued 18,411 shares of common stock under
the Fingerhut Companies, Inc. Employee Stock Purchase Plan.
The Company entered into a definitive stock purchase agreement on October
28, 1998 to acquire Popular Club, a New Jersey based regional cataloger
of general merchandise with annual revenues of $180 million. The
acquisition is expected to be completed prior to the Company's year-end.
The Company believes it will have sufficient funds available to meet
current and future commitments.
Year 2000 Issue
The "Year 2000" issue developed because most computer systems and
programs were designed to record years (e.g. "1998") as two-digit fields
(e.g. "98"). When the year 2000 begins, these systems may interpret "00"
as the year 1900 and may stop processing date-related computations or
process them incorrectly. To prevent this, companies need to examine
their computer systems and programs, fix the problem and test the
results. Year 2000 compliance must be achieved on or before December 31,
1999. Also, certain systems currently refer to dates beyond December 31,
1999 and, therefore, have required earlier compliance.
READINESS FOR YEAR 2000: The Company, as with all database marketing
companies, is heavily dependent upon computer systems for all phases of
its operations. For this reason, it is aggressively addressing the Year
2000 issue to mitigate the effect on software performance. In early 1996,
a comprehensive effort to identify and correct the Year 2000 programming
issues began. By mid-1996 the most critical mainframe processing system
was converted to be Year 2000 compliant and the Company initiated a
project to address all remaining systems, utilizing both internal and
external resources. In late 1997, a Year 2000 Project Office was created
to oversee the project, to address all related business issues, and to
facilitate communication with significant suppliers and service
providers. The project was divided into the following phases: (i)
identification and inventorying of all systems with potential Year 2000
problems; (ii) evaluation of scope of Year 2000 issues and assignment of
priorities to each item based upon its importance in the Company's
operations; (iii) rectification of Year 2000 issues in accordance with
assigned priorities, by correction, upgrade, replacement, or retirement;
and (iv) testing for and validation of Year 2000 compliance. Because the
Company uses a variety of systems, internally developed and third party
provided software, and embedded chip equipment, depending on the business
function and location, various aspects of the Company's Year 2000 efforts
are in different phases and are proceeding parallel.
The Company's operations are also dependent on the Year 2000 readiness of
third parties that do business with the Company. In particular, the
Company's systems interact with automated clearing-houses to handle the
transfer of cash relating to the sale of the Company's receivables. The
Company is also dependent on third-party suppliers of such infrastructure
elements as, but not limited to, telephone services, electric power, and
water. The Company does not depend to any significant degree on any
single merchandise vendor. The Company has identified and initiated
formal communications with key suppliers and merchandise vendors to
determine the extent to which the Company will be vulnerable to such
parties' failures to address and resolve their Year 2000 issues.
Although the Company is not aware of any known third party problem that
will not be rectified, the Company has limited information concerning the
Year 2000 readiness of third parties.
COSTS: The Company estimates that its internally developed systems will
be Year 2000 compliant by mid-1999. Aggregate costs for work related to
Year 2000 efforts are anticipated to range from approximately $16 to $18
million. Operating costs related to the Year 2000 compliance project
will be incurred over several quarters and will be expensed as incurred.
The Company incurred $5.1 million and $3.4 million in expense during the
39 weeks ended September 25, 1998 and September 26, 1997, respectively.
RISKS: The Company expects to implement the changes necessary to address
the Year 2000 issue for systems and equipment used within the Company.
The Company presently believes that, with modifications to existing
software, conversions to new software, and appropriate replacement of
equipment, the Year 2000 issue is not likely to pose significant
operational problems. However, if unforeseen difficulties arise or such
modification, conversions and replacements are not completed in a timely
manner, or if the Company's vendors' or suppliers' systems are not
modified to become Year 2000 compliant, the Year 2000 issue may have a
material impact on the results of operations and financial condition of
the Company. The Company is presently unable to assess the likelihood
that it will experience significant operational problems due to
unresolved Year 2000 problems of third parties.
The Company's estimates of the costs of achieving Year 2000 compliance
and the date by which Year 2000 compliance will be achieved are based on
management's best estimates. These estimates are derived using numerous
assumptions about future events including the continued availability of
resources, third party modification plans and other factors. However,
there can be no assurance that these estimates will be achieved, and
actual results could differ materially from these estimates. Specific
factors that might cause such differences include, but are not limited
to, the availability and cost of personnel trained in Year 2000 issues,
the ability to locate, correct, and test all relevant computer codes, the
success achieved by the Company's suppliers in reaching year 2000
readiness, the timely availability of necessary replacement equipment,
and similar uncertainties.
CONTINGENCY PLANS: The Company believes the most likely worst-case
scenarios that it might confront with respect to the Year 2000 issues
have to do with the possible failure in one or more geographic regions of
third party systems over which the Company has no control, such as, but
not limited to, power and telephone service. The Company has in place a
business continuity plan that addresses recovery from various kinds of
disasters, including recovery from significant interruption to data flows
and distribution capabilities at the Company's major data systems centers
and major distribution centers. The Company is using that plan as a
starting point for developing specific Year 2000 contingency plans, which
it expects to complete during the first half of 1999.
FINGERHUT COMPANIES, INC.
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; Year 2000 compliance; 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 26, 1997.
Part II. Other Information
Item 1. Legal Items
The Company is a party to various claims, legal actions, disputes
and other complaints arising in the ordinary course of business. In
the opinion of management, any losses that may occur are adequately
covered by insurance, are provided for in the financial statements,
or are without merit and the ultimate outcome of these matters will
not have a material effect on the financial position or operations
of the Company.
On August 14, 1997, Fingerhut Corporation ("Fingerhut") 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. Fingerhut
responded to the complaint by filing a motion for judicial
reassignment. The court denied this motion. On September 28, 1998,
the court denied in part and granted in part Fingerhut's motion for
summary judgment on the plaintiffs' claims. A pre-trial settlement
conference was held on October 19, 1998.
The Company has been named as a defendant in two class
action lawsuits filed on October 6, 1998 and October 14, 1998 in the
United States District Court for the District of Minnesota against Metris
Companies Inc., the Company, two current officers of Metris and
a current officer of the Company. The Company has not yet been served
with the Complaint in either case. Both lawsuits allege (i) that Metris
misled investors about its financial performance by failing to properly
account for revenues and expenses associated with fee-based services for
which a full refund period exists, and (ii) requests certification as
a class action on behalf of shareholders of Metris who purchased Metris
common stock during a specified period. The Company considers the
plaintiffs' claims to be without merit and intends to vigorously
defend the matter. The complaints allege that the Company was aware of
Metris' financial condition and internal business practices, influenced
and controlled the decisionmaking of Metris and had the power to prevent
Metris' issuance of misleading statements to the public.
Additional information required by this item appears in Item 1 of
Part II of the Company's Form 10-Q for the fiscal quarter ended June
26, 1998, which information is incorporated herein by reference.
Item 5. Other Events
On November 3, 1998, the Company announced that it had entered into
a definitive stock purchase agreement dated as of October 28 1998,
to acquire Popular Club Plan, Inc. ("PCP"), a New Jersey based
regional cataloger of general merchandise with annual revenues of
$180 million. PCP is a wholly-owned subsidiary of J. Crew Operating
Corp. The expected date of the consummation of the transaction will
be as soon as practicable and is contingent upon, among other
things, the expiration or early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.n Amended and Restated Revolving Credit and Letter
of Credit Facility Agreement dated as of October
29, 1990, as amended and restated as of June 18,
1998, among Fingerhut Companies, Inc., the
Guarantors party thereto, the Lenders party
thereto, NationsBank, N.A., as Syndication Agent,
the Issuing Banks party thereto, and The Chase
Manhattan Bank, as Administrative Agent (Incorporated
by reference to Exhibit 10.n to Registrant's Quarterly
Report on Form 10-Q (File No. 1-8668) for the fiscal
quarter ended September 25, 1998).
10.n(i)First Amendment to the Amended and Restated
Revolving Credit and Letter of Credit Facility
Agreement dated as of September 9, 1998 (Incorporated
by reference to Exhibit 10.n(i) to Registrant's
Quarterly Report on Form 10-Q (File No. 1-8668)
for the fiscal quarter ended September 25, 1998).
10.n(ii)Second Amendment to the Amended and Restated
Revolving Credit and Letter of Credit Facility
Agreement dated as of September 15, 1998 (Incorporated
by reference to Exhibit 10.n(ii) to Registrant's
Quarterly Report on Form 10-Q (File No. 1-8668) for
the fiscal quarter ended September 25, 1998).
11 Computation of Earnings per Share
27 Financial Data Schedule
99 Cautionary Statement Regarding Forward Looking
Statements
(b) Reports on Form 8-K:
During the quarter ended September 25, 1998, the Company
filed the following Current Reports on Form 8-K:
(i) Current Report on Form 8-K dated August 17, 1998,
reporting under Item 5 the receipt of a favorable
private letter ruling from the Internal Revenue
Service in connection with the Company's previously-
filed request to spin off its approximate 83%
interest in Metris Companies Inc., a Delaware
corporation ("Metris") by distributing, on a pro rata
basis, all of the shares of common stock of Metris
owned by the Company to all of the holders of common
stock of the Company (the "Spin-Off").
(ii) Current Report on Form 8-K dated September 17, 1998,
reporting under Item 5 the acquisition of
substantially all of the assets of Arizona Mail Order
Company, Inc.
(iii)Current Report on Form 8-K dated October 1, 1998,
reporting under Item 2 the Spin Off and under Item 5
(1) the repurchase of shares of Fingerhut common
stock from its Chief Executive Officer, (2) the
recording of a non-recurring, after-tax charge in the
third quarter, and (3) the amendment of certain stock
option plans in connection with the Spin-Off.
(iv) Amendment to Current Report on Form 8-K/A dated
October 5, 1998, revising disclosure previously
reported on October 1, 1998 under Item 5 relating to
the recording of a non-recurring, after-tax charge.
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: November 19, 1998 By:
/s/ Gerald T. Knight
Gerald T. Knight
Chief Financial Officer
(Principal Financial Officer)
Date: November 19, 1998 By:
/s/ John C. Manning
John C. Manning
Vice President, Finance
Date: November 19, 1998 By:
/s/ Thomas C. Vogt
Thomas C. Vogt
Corporate Controller
(Principal Accounting Officer)
<TABLE>
Exhibit 11
FINGERHUT COMPANIES, INC.
Computation of Earnings Per Share
(In thousands of dollars, except per share data)
Unaudited
Thirteen Weeks Ended Thirty-nine Weeks Ended
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
Basic
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings (a) $ (15,118) $ 12,993 $ 3,059 $ 25,463
Weighted average shares
of common stock
outstanding (b) 48,004,534 46,163,574 47,061,954 46,122,419
Basic earnings per share
of common stock (a/b) $ (.31) $ .28 $ .07 $ .55
Diluted
Net earnings (c) $ (15,118) $ 12,993 $ 3,059 $ 25,463
Weighted average shares
of common stock
outstanding 48,004,534 46,163,574 47,061,954 46,122,419
Common stock
equivalents - 3,684,907 - 2,997,244
Weighted average shares of
common stock and common
stock equivalents (d) 48,004,534 49,848,481 47,061,954 49,119,663
Diluted earnings per
share of common stock and
common stock equivalents
(c/d) $ (.31) $ .26 $ .07 $ .52
Common stock equivalents for earnings per share are computed by
the treasury stock method using the average market price.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements of Fingerhut Companies, Inc. for the fiscal
quarter ended September 25, 1998 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-25-1998
<PERIOD-END> SEP-25-1998
<CASH> 31,624
<SECURITIES> 0
<RECEIVABLES> 372,983
<ALLOWANCES> 103,772
<INVENTORY> 198,741
<CURRENT-ASSETS> 734,288
<PP&E> 455,926
<DEPRECIATION> 239,322
<TOTAL-ASSETS> 1,096,908
<CURRENT-LIABILITIES> 538,761
<BONDS> 125,000
0
0
<COMMON> 502
<OTHER-SE> 521,322
<TOTAL-LIABILITY-AND-EQUITY> 1,096,908
<SALES> 943,722
<TOTAL-REVENUES> 949,374
<CGS> 450,271
<TOTAL-COSTS> 967,517
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (57,692)
<INTEREST-EXPENSE> 13,827
<INCOME-PRETAX> (31,970)
<INCOME-TAX> (11,975)
<INCOME-CONTINUING> (19,995)
<DISCONTINUED> 30,150
<EXTRAORDINARY> (7,096)
<CHANGES> 0
<NET-INCOME> 3,059
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information for Fingerhut
Companies, Inc. reflecting the discontinued operation of Metris Companies Inc.
for the fiscal quarters ending March 27, 1998 and June 26, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-25-1998 DEC-25-1998
<PERIOD-END> MAR-27-1998 JUN-26-1998
<CASH> 104,106 138,446
<SECURITIES> 0 0
<RECEIVABLES> 272,427 341,632
<ALLOWANCES> 127,549 130,611
<INVENTORY> 121,918 125,150
<CURRENT-ASSETS> 653,253 677,083
<PP&E> 472,760 480,020
<DEPRECIATION> 222,158 232,084
<TOTAL-ASSETS> 1,135,718 1,159,183
<CURRENT-LIABILITIES> 176,863 181,739
<BONDS> 245,000 245,000
0 0
0 0
<COMMON> 465 472
<OTHER-SE> 677,578 700,497
<TOTAL-LIABILITY-AND-EQUITY> 1,135,718 1,159,183
<SALES> 269,420 595,916
<TOTAL-REVENUES> 269,857 599,537
<CGS> 128,590 283,855
<TOTAL-COSTS> 270,365 591,901
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 17,488 38,474
<INTEREST-EXPENSE> 5,420 9,767
<INCOME-PRETAX> (5,928) (2,131)
<INCOME-TAX> (2,223) (800)
<INCOME-CONTINUING> (3,705) (1,331)
<DISCONTINUED> 9,210 23,624
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,505 18,177
<EPS-PRIMARY> .12 .39
<EPS-DILUTED> .11 .36
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains restated summary financial information for Fingerhut
Companies, Inc. reflecting the discontinued operation of Metris Companies Inc.
for the fiscal years ending December 27, 1996 and December 26, 1997 and for the
fiscal quarters ending March 28, 1997, June 27, 1997, and September 26, 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-27-1996 DEC-26-1997 DEC-26-1997 DEC-26-1997
DEC-26-1997
<PERIOD-END> DEC-27-1996 DEC-26-1997 MAR-28-1997 JUN-27-1997
SEP-26-1997
<CASH> 28,795 96,889 45,827 35,251
28,176
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 551,128 519,767 469,497 439,345
437,747
<ALLOWANCES> 163,661 159,360 134,137 141,468
118,267
<INVENTORY> 127,735 124,424 131,916 129,458
173,179
<CURRENT-ASSETS> 756,788 761,067 728,500 660,282
712,368
<PP&E> 454,253 472,831 457,266 461,517
469,073
<DEPRECIATION> 174,234 216,105 185,327 196,104
207,441
<TOTAL-ASSETS> 1,224,178 1,229,485 1,187,984 1,122,022
1,177,284
<CURRENT-LIABILITIES> 317,860 283,841 306,810 233,329
273,574
<BONDS> 270,000 245,000 270,000 245,000
270,000
0 0 0 0
0
0 0 0 0
0
<COMMON> 462 463 462 460
462
<OTHER-SE> 604,939 669,522 605,559 612,446
626,420
<TOTAL-LIABILITY-AND-EQUITY> 1,224,178 1,229,485 1,187,984 1,122,022
1,177,284
<SALES> 1,638,363 1,530,228 290,156 630,556
953,393
<TOTAL-REVENUES> 1,615,002 1,519,351 293,290 634,045
959,094
<CGS> 827,086 738,740 146,433 323,722
482,475
<TOTAL-COSTS> 1,557,252 1,432,417 292,297 622,791
976,779
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 112,084 97,593 20,992 41,145
62,102
<INTEREST-EXPENSE> 25,305 27,946 7,219 14,434
21,315
<INCOME-PRETAX> 32,445 58,988 (6,226) (3,180)
3,640
<INCOME-TAX> 11,322 21,267 (2,476) (1,264)
1,314
<INCOME-CONTINUING> 21,123 37,721 (3,750) (1,916)
2,326
<DISCONTINUED> 19,036 31,608 6,311 14,368
23,137
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 40,159 69,329 2,561 12,470
25,463
<EPS-PRIMARY> .87 1.50 .06 .27
.55
<EPS-DILUTED> .83 1.40 .05 .26
.52
</TABLE>
CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
We and our representatives may, from time to time, make
written or verbal forward-looking statements. Those
statements relate to developments, results, conditions or
other events we expect or anticipate will occur in the
future. Our Form 10-K, our Annual Report to Shareholders,
any Form 10-Q or Form 8-K filed by us or any other written
or oral statements made by or on behalf of us may also
include forward-looking statements that reflect our then
current views and assumptions with respect to future events
and financial performance.
We caution investors that any forward-looking
statements made by or on behalf of us are subject to certain
risks and uncertainties that could cause actual results to
differ materially from those projected. These uncertainties
and other factors include, but are not limited to the
factors listed below (many of which have been discussed in
our prior filings with the Securities and Exchange
Commission). Although we have attempted to list
comprehensively these important factors, we caution
investors that other factors may in the future prove to be
important in affecting our results of operations and
financial condition. New factors emerge from time to time
and it is not possible for us to predict all of such
factors, nor can we assess the impact of each such factor on
the business or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements.
We further caution investors not to place undue
reliance on such forward-looking statements as they speak
only of our views as of the date that we made such statement
. The following list of important factors is not exclusive
and we do not undertake to publicly update or revise any
forward-looking statement to reflect events or circumstances
that occur after the date the statement is made. The words
"believe," "expect," "anticipate," "intends," "estimate,"
"forecast," "project" and similar expressions identify
forward-looking statements. Any such forward-looking
statements are qualified by the following which contain
certain of the important factors that could cause actual
results to differ materially from those predicted by the
forward-looking statements:
When we refer to "our company," "we," "our," and "us" in
this discussion, we mean Fingerhut Companies, Inc.
Importance of Fourth Quarter; Fluctuations in Quarterly
Operating Results
Our business is subject to seasonal variations in
demand that we believe are generally associated with the
direct marketing and retail industries. Historically, we
have realized a significant portion of our sales and net
earnings during the fourth quarter. Over the past several
years, we have observed that customers waited until later in
the fourth quarter to order merchandise from our catalogs,
following a trend that has affected the retail industry as a
whole. Our annual results could be adversely affected if
our sales were to be substantially below normal seasonal
sales during the fourth quarter of any year. In addition to
seasonal variations, we experience variances in quarterly
results from year to year that result from changes in the
timing of our promotions and the types of customers and
products promoted and, to some extent, variations in dates
of holidays and the timing of quarter ends.
Holding Company Structure; Effective Subordination
We are a holding company and substantially all of our
consolidated assets are held by our subsidiaries.
Accordingly, cash flow and our ability to service debt are
dependent upon the earnings of such subsidiaries.
Furthermore, our rights, and the rights of our creditors, to
participate in the assets of any subsidiary upon the
subsidiary's liquidation or reorganization will be subject
to the prior claims of such subsidiary's creditors, except
to the extent that we may ourself be a creditor with
recognized claims against the subsidiary, in which case our
claims would still be effectively subordinate to any
security interest in, or mortgages or other liens on, the
assets of such subsidiary and would be subordinate to any
indebtedness of such subsidiary senior to that held by us.
We may borrow up to $250 million under our existing amended
credit facility. All of the available $250 million under
this credit facility is guaranteed by Fingerhut Corporation
("Fingerhut") and Arizona Mail Order Company, Inc. In
addition, as of September 25, 1998, we had outstanding $125
million aggregate principal amount of outstanding senior
notes, which are also guaranteed by Fingerhut.
Increases in Postal, Paper and Freight Costs
We mail our catalogs and ship most of our merchandise
through the United States Postal Service. In 1998, the
United States Postal Service announced a proposed increase
in mailing rates that will take effect in January 1999.
This increase, as well as additional increases in postal
rates or paper costs could adversely affect our results of
operations if we are unable to offset such increases by
raising selling prices or by implementing more efficient
mailing, delivery and order fulfillment systems. Increases
in fuel costs could also adversely affect our costs of
incoming and outgoing freight.
Funding and Securitization Considerations
One of our main sources of liquidity to fund our
operations is asset-backed financing
("securitization") of our subsidiaries' accounts receivable
and credit card loans ("Receivables"). To date, we have
been able to complete securitization transactions on terms
that we believe are favorable. There can be no assurance,
however, that the asset-backed securities market will
continue to invest in securities backed by assets such as
the Receivables or that the cost of such financings will
remain an attractive source of funding. In addition, our
ability to securitize the Receivables depends on the
continued favorable legal, regulatory, accounting and tax
environment for securitization transactions. While we do
not at present foresee any significant problems in any of
these areas, any such adverse change could force us to rely
on other potentially more expensive funding sources.
Increased levels of delinquencies and credit losses on the
securitized Receivables could result in a downgrade or
withdrawal of the ratings on the securities issued under our
existing securitization transactions or cause such securities
to begin early and/or rapid amortization. Such result could
jeopardize the ability of our subsidiaries to complete other
securitization transactions on acceptable terms, thereby
decreasing our liquidity and forcing us to rely on other
funding sources to the extent available. Our financial
statements reflect the treatment of securitization transactions
as sales of the related receivables for accounting purposes
under Statement of Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. Any change in such accounting treatment could
have a material effect on our financial statements.
Consumer Spending
Weak economic conditions or changes in the retail
environment or other economic factors that have an impact on
the level of consumer spending could have a material adverse
impact on us. General economic factors that are beyond our
control impact our forecasts and actual performance. These
factors include interest rates, recession, inflation,
deflation, consumer credit availability, consumer debt
levels, tax rates and policy, unemployment trends and other
matters that affect disposable consumer income and influence
consumer spending. Increasing volatility in financial
markets may cause these factors to change with a greater
degree of frequency and magnitude. Adverse changes in these
economic conditions may restrict consumer spending. There
can be no assurance that weak economic conditions or changes
in the retail environment or other economic factors that
have an impact on the level of consumer spending would not
have a material adverse impact on us. In addition, our
business depends on customer response to our solicitations
and marketing programs. A material decrease in responses to
these solicitations and marketing programs would have a
significant adverse impact on our profitability.
Credit Risks
We are subject to all of the risks associated with
unsecured credit transactions, including (1) the risk of
increasing delinquencies and credit losses during economic
downturns, (2) the risk that an increasing number of
customers will default on the payment of their outstanding
balances or seek protection under bankruptcy laws, resulting
in accounts being charged off as uncollectible, (3) the risk
of fraud and (4) in the case of revolving credit accounts,
the risk that increases in discretionary repayment of
account balances by customers will result in diminished
finance charges or other income. Also, general economic
factors, such as the rate of inflation, unemployment levels
and interest rates may affect moderate income consumers (our
target market customers) more severely than other market
segments. Any material increases in delinquencies and
losses above managements expectations would have a material
adverse impact on our results of operations and financial
condition.
Interest Rate Risk
Fingerhut National Bank's closed-end credit card loans
and Fingerhut's remaining closed-end installment sales
contracts are fixed-priced, fixed-term contracts. Fingerhut
National Bank's revolving credit card accounts currently
have variable finance charges rates ranging from the prime
interest rate plus 16.4 percent to the prime interest rate
plus 23.4 percent. Fluctuations in interest rates may
adversely affect our cost of funds.
Regulatory Matters
Our business is subject to regulation by a variety of
state and federal laws and regulations related to
advertising, offering and extending credit, charging and
collecting state sales/use taxes and product safety. Our
practices in certain of these areas are subject to periodic
inquiries and proceedings by various regulatory agencies.
While we believe that we are materially complying with all
such laws and regulations, if we are found not to be
complying with any such laws and regulations, we could
become subject to cease and desist orders, injunctive
proceedings, obligations to collect additional sales and use
taxes, obligations for prior uncollected sales and use
taxes, civil fines and other penalties. The occurrence of
any of the foregoing could adversely affect our results of
operations and financial condition.
Until January 1997, Fingerhut extended credit for its
customers' purchases. Fingerhut relied on the Minnesota
"time-price" doctrine in establishing and collecting
installment payments on products sold in many states. Under
this doctrine, the difference between the time price and
cash price for the same goods is not treated as interest
subject to regulation under laws governing the extension of
credit. Certain individuals who purchased goods from
Fingerhut filed suit challenging the applicability of the
time-price doctrine to Fingerhut's business. Fingerhut
filed a motion for summary judgment on the plaintiffs'
claims, which the court denied in part and granted in part.
A pre-trial settlement conference was held on October 19,
1998. See "Part II, Item 1--Legal Items" in our Quarterly
Report on Form 10-Q for the quarter ended September 25,
1998.
The credit operations of Fingerhut National Bank
generate additional revenue from fees related to extending
credit. Fingerhut National Bank's ability to extend credit
depends on many factors including compliance with numerous
federal and state banking and consumer protection laws, any
of which may change from time to time. Such laws, as well
as any new laws or rulings that may be adopted, may
adversely affect Fingerhut National Bank's ability to
collect on account balances or maintain previous levels of
periodic rate finance charges and other fees and charges
with respect to the accounts. Any failure by us to comply
with these legal requirements also could adversely affect
our ability to collect the full amount of the account
balances. Fingerhut National Bank is also subject to
regulation by the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the Office of the Comptroller of
the Currency. Such regulations include limitations on the
extent to which Fingerhut National Bank can finance or
otherwise supply funds to its affiliates through dividends,
loans or otherwise. In addition, changes in credit card
use, payment patterns and default rates may result from a
variety of economic, legal, social and other factors that we
cannot control or predict with certainty. Changes that
adversely impact Fingerhut National Bank's ability to extend
credit and collect payments could negatively affect our
results. Changes in federal and state bankruptcy and debtor
relief laws also could adversely affect us if such changes
result in, among other things, additional administrative
expenses and accounts being written off as uncollectible.
Foreign Suppliers
Fingerhut purchases a significant portion
(approximately 46% in 1997) of its merchandise from foreign
suppliers. Although substantially all of our foreign
purchases are denominated in U.S. dollars, we are subject to
the risks of doing business abroad, including trade
restrictions, tariffs, increases in import duties, decreases
in quotas, adverse fluctuations in currency exchange rates,
increased customs regulations and political turmoil. The
occurrence of any of these risks could adversely affect our
earnings.
Competition
The direct marketing industry includes a wide variety
of specialty and general merchandise retailers and is both
highly fragmented and highly competitive. We sell our
products to customers in all states of the United States and
competes in the purchase and sale of merchandise with all
retailers, including general and specialty catalog
marketers, television shopping marketers, retail department
stores, discount department stores and variety stores, many
of which are national chains. The loss of any significant
portion of our market share to other retailers could
adversely affect our earnings.
OTHER FACTORS
Other factors that could cause actual results to differ
materially from those predicted include: changes in the
availability or cost of capital, our inability, or the
inability of vendors and other third parties with which we
conduct business, to achieve year 2000 readiness in a timely
and cost-effective manner, labor strikes or other work
interruptions, the impact of excess retail capacity in our
markets, material acquisitions or dispositions, the success
or failure of significant new business ventures, adverse
results in material litigation, natural disasters, the
outbreak of war or other significant national or
international events.
