<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
MARCH 18, 1999
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
------------------
FEDERATED DEPARTMENT STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------
DELAWARE 1-13536 133324058
(STATE OF INCORPORATION) (COMMISSION FILE NUMBER) (IRS EMPLOYER
IDENTIFICATION NUMBER)
------------------
7 WEST SEVENTH STREET, CINCINNATI, OHIO 45202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(513) 579-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
===============================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 18, 1999, Bengal Subsidiary Corp. ("Purchaser"), a wholly
owned subsidiary of Federated Department Stores, Inc. (the "Company"), acquired
96.3% of the outstanding common shares of Fingerhut Companies, Inc.
("Fingerhut") pursuant to a tender offer (the "Offer").
The Offer was made pursuant to an Agreement and Plan of Merger, dated
as of February 10, 1999 (the "Merger Agreement"), among the Company, Purchaser
and Fingerhut, a copy of which is filed as Exhibit 2.1 hereto. The Merger
Agreement provides for, among other things, the merger of Purchaser with and
into Fingerhut (the "Merger") on the terms and subject to the conditions set
forth therein. Upon the consummation of the Merger, Fingerhut will become a
wholly owned subsidiary of the Company. The Company expects the
Merger to be consummated on March 22, 1999.
The total purchase price for Fingerhut is $1.7 billion, including
$297.0 million of outstanding Fingerhut indebtedness. The purchase price was
determined through arm's-length negotiations between representatives of the
Company and representatives of Fingerhut.
The Company will fund the purchase price for Fingerhut through a
combination of cash on hand, the issuance of commercial paper and borrowings
under its existing credit facilities. The Company expects to refinance a
portion of such borrowings through the issuance of long-term debt securities.
Fingerhut is a database marketing company that sells a broad range of
products and services directly to consumers via catalogs, direct marketing and
the Internet. Fingerhut's tangible assets include merchandise inventories,
buildings, machinery and equipment and furniture and fixtures. The Company
presently intends, in general, to continue using such assets in the conduct of
Fingerhut's business.
ITEM 5. OTHER EVENTS
On March 2, 1999, the Company issued a press release, a copy of which
is filed as Exhibit 99.1 hereto, announcing unaudited results of operations
data for the 13 and 52 weeks ended January 30, 1999.
Audited consolidated financial statements of Fingerhut Companies, Inc.
as of and for the three-year period ended December 25, 1998 are filed as Exhibit
99.2 hereto.
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) and (b) Not applicable.
(c) Exhibits.
2.1 Agreement and Plan of Merger, dated as of February 10, 1999,
among Federated Department Stores, Inc., Bengal Subsidiary
Corp. and Fingerhut Companies, Inc. (Incorporated by reference
to Exhibit (c)(1) of the Schedule 14D-1 (File No. 5-41336),
filed by Federated and Bengal on February 18, 1999)
99.1 Press release of the Company issued on March 2, 1999
99.2 Consolidated Financial Statements of Fingerhut Companies,
Inc., as of December 25, 1998 and December 26, 1997 and for
each of the fiscal years in the 3 year period ended December
25, 1998.
99.3 Consent of KPMG Peat Marwick LLP
<PAGE> 4
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 hereunto duly authorized.
FEDERATED DEPARTMENT STORES, INC.
Dated: March 18, 1999
By: /s/ DENNIS J. BRODERICK
-------------------------------
Name: Dennis J. Broderick
Title: Senior Vice President and
General Counsel
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of February 10, 1999,
among Federated Department Stores, Inc., Bengal Subsidiary
Corp. and Fingerhut Companies, Inc. (Incorporated by reference
to Exhibit (c)(1) of the Schedule 14D-1 (File No. 5-41336),
filed by Federated and Bengal on February 18, 1999)
99.1 Press release of the Company issued on March 2, 1999
99.2 Consolidated Financial Statements of Fingerhut Companies,
Inc., as of December 25, 1998 and December 26, 1997 and for
each of the fiscal years in the 3 year period ended December
25, 1998.
99.3 Consent of KPMG Peat Marwick LLP
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FEDERATED
DEPARTMENT STORES, INC.
CONTACTS:
News Release MEDIA - CAROL SANGER
513/579-7764
FOR RELEASE: INVESTOR - SUSAN ROBINSON
8 A.M. MARCH 2, 1999 513/579-7780
FEDERATED REPORTS 19% INCREASE IN FISCAL 1998 EPS
CINCINNATI, OHIO, March 2, 1999 - Federated Department Stores, Inc.
today reported fiscal 1998 and fourth quarter results that showed increased
sales and significantly improved operating results for both periods ended
January 30, 1999.
Federated's diluted earnings per share (EPS) of $3.06 were up 19
percent for the year, excluding extraordinary charges. Operating income was up
8.5 percent for the year and annual comparable-store sales were up 2.2 percent.
"This past year was a very good one for Federated," James M.
Zimmerman, chairman and chief executive officer, said of the year's results.
"We were particularly pleased with our very strong performance in the important
fourth quarter, including both sales and gross margin. Improving our fourth
quarter performance was a key priority for us in 1998, and we are gratified by
the results of the intensive efforts that went into achieving this objective."
Zimmerman also credited good inventory management and continued
expense reductions for contributing to fiscal 1998's solid earnings
performance. He also noted that during the course of the year, Federated
repurchased approximately $590 million (12.8 million shares) of common stock.
NET INCOME
For fiscal 1998, Federated posted earnings of $685 million, excluding
an extraordinary charge related to the early retirement of debt. This compares
to earnings of $575 million for the 52 weeks ended January 31, 1998, also
excluding an extraordinary charge related to the early retirement of debt. On
this basis, diluted earnings per share rose to $3.06 for fiscal 1998, compared
to $2.58 for fiscal 1997 - an increase of 19 percent.
(more)
- -------------------------------------------------------------------------------
Macy's o Bloomingdale's o The Bon Marche Bloomingdale's By Mail, Ltd.
Burdines o Goldsmith's o Lazarus o Rich's o Stern's Macy's by Mail
<PAGE> 2
-2-
For the fourth quarter, Federated's net income was $408 million,
compared to $379 million for the same period last year. Diluted earnings per
share for the fourth quarter of 1998 amounted to $1.88, compared to $1.66 last
year.
OPERATING INCOME
Operating income for fiscal 1998 was $1.455 billion, an increase of
8.5 percent over operating income of $1.341 billion for the prior fiscal year.
As a percent of sales, operating income increased 60 basis points to 9.2
percent in 1998.
Operating income for the fourth quarter of 1998 was $750 million or
14.4 percent of sales, an increase of 5.2 percent from operating income of $713
million or 14.1 percent of sales for the fourth quarter of 1997.
SALES
For fiscal 1998, sales totaled $15.833 billion, an increase of 1.1
percent over sales of $15.668 billion for the prior year. Excluding sales of
the specialty stores division that was sold in July, sales increased 1.8
percent over last year. On a comparable-store basis, Federated's 52-week sales
increased 2.2 percent.
For the fourth quarter, sales totaled $5.207 billion, an increase of
2.9 percent over sales of $5.060 billion for the same period last year.
Excluding sales of the specialty stores division, sales for the quarter
increased 4.2 percent. On a comparable-store basis, fourth quarter sales were
up 4.1 percent.
RETURN ON INVESTMENT
Return on gross investment increased to 16.6 percent for 1998,
compared to 15.7 percent in 1997.
Federated, with corporate offices in Cincinnati and New York, is one
of the nation's leading department store retailers, with annual sales of more
than $15.8 billion. Federated currently operates more than 400 department
stores in 33 states under the names of Bloomingdale's, The Bon Marche,
Burdines, Goldsmith's Lazarus, Macy's, Rich's and Stern's. Federated also
operated direct mail catalog and electronic commerce subsidiaries under the
names of Bloomingdale's By Mail, Macy's By Mail and Macys.Com.
(more)
<PAGE> 3
-3-
Forward-looking statements contained in this release involve risks and
uncertainties that could cause actual results to differ materially from those
contemplated by those statements. Factors that could cause such differences
include the risks associated with retailing generally, transactional effects
and other investment considerations described from time to time by the company
in its filings with the Securities and Exchange Commission.
# # #
(NOTE: Information on Federated and its operating divisions is available on the
Internet at http://www.federated-fds.com. Copies of past press releases and
corporate background data also are available by calling Fax-On-Demand at
1-800-853-9150.)
<PAGE> 4
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income (Unaudited)
(All amounts in millions except percentages and per share figures)
<TABLE>
<CAPTION>
13 WEEKS ENDED 52 WEEKS ENDED
----------------------------- -----------------------------
JANUARY 30, JANUARY 31, JANUARY 30, JANUARY 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales .................................................. $ 5,207 $ 5,060 $ 15,833 $ 15,668
------------ ------------ ------------ ------------
Cost of sales (Note 1)...................................... 3,180 3,109 9,616 9,581
Percent to sales................................... 61.1% 61.4% 60.7% 61.1%
Selling, general and administrative expenses (Note 2) 1,277 1,238 4,762 4,746
------------ ------------ ------------ ------------
Percent to sales................................... 24.5% 24.5% 30.1% 30.3%
------------ ------------ ------------ ------------
Operating Income............................................ 750 713 1,455 1,341
Percent to sales................................... 14.4% 14.1% 9.2% 8.6%
Interest expense - net...................................... (69) (88) (292) (383)
------------ ------------ ------------ ------------
Income Before Income Taxes and Extraordinary
Items .................................................... 681 625 1,163 958
Federal, state and local income tax expense ................ (273) (246) (478) (383)
------------ ------------ ------------ ------------
Income Before Extraordinary Items .......................... 408 379 685 575
Extraordinary Items - loss on early extinguishment
of debt, net of tax effect ............................... -- -- (23) (39)
------------ ------------ ------------ ------------
Net Income ................................................. $ 408 $ 379 $ 662 $ 536
============ ============ ============ ============
</TABLE>
pr 4th qtr 98
<PAGE> 5
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income (Unaudited)
(All amounts in millions except percentages and per share figures)
<TABLE>
<CAPTION>
13 WEEKS ENDED 52 WEEKS ENDED
----------------------- ------------------------
JANUARY 30, JANUARY 31, JANUARY 30, JANUARY 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic Earnings per Share (Note 3):
Income before extraordinary items ....... $ 1.95 $ 1.80 $ 3.27 $ 2.74
Extraordinary items ..................... -- -- (.11) (.18)
---------- ---------- ---------- ----------
Net income .............................. $ 1.95 $ 1.80 $ 3.16 $ 2.56
========== ========== ========== ==========
Diluted Earnings per Share (Note 3):
Income before extraordinary items ....... $ 1.88 $ 1.66 $ 3.06 $ 2.58
Extraordinary items ..................... -- -- (.10) (.17)
---------- ---------- ---------- ----------
Net income .............................. $ 1.88 $ 1.66 $ 2.96 $ 2.41
========== ========== ========== ==========
</TABLE>
Notes:
(1) Substantially all merchandise inventories are valued by the retail method
and stated on the LIFO (last-in, first-out) basis, which is generally
lower than market. Application of this method did not impact the 13 and 52
weeks ended January 30, 1999 or January 31, 1998.
(2) Includes depreciation and amortization expense of $156 million and $151
million for the 13 weeks ended January 30, 1999 and January 31, 1998,
respectively, and $624 million and $590 million for the 52 weeks ended
January 30, 1999 and January 31, 1998, respectively.
(3) Common shares outstanding used in computing basic earnings per share were
209.5 million and 210.1 million for the 13 weeks ended January 30, 1999
and January 31, 1998, respectively, and 209.5 million and 209.5 million
for the 52 weeks ended January 30, 1999 and January 31, 1998,
respectively. Potential common shares used in computing diluted earnings
per share were 217.1 million and 229.7 million for the 13 weeks ended
January 30, 1999 and January 31, 1998, respectively, and 225.9 million and
227.1 million for the 52 weeks ended January 30, 1999 and January 31,
1998, respectively.
<PAGE> 6
FEDERATED DEPARTMENT STORES, INC.
Consolidated Balance Sheets (Unaudited)
(All amounts in millions except percentages)
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash ....................................................... $ 307 $ 142
Accounts receivable ........................................ 2,209 2,640
Merchandise inventories .................................... 3,259 3,239
Supplies and prepaid expenses .............................. 117 115
Deferred income tax assets ................................. 80 58
------------ ------------
Total Current Assets ............................... 5,972 6,194
Property and Equipment - net .................................... 6,572 6,520
Intangible Assets - net ......................................... 631 690
Other Assets .................................................... 289 334
------------ ------------
Total Assets ....................................... $ 13,464 $ 13,738
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Short-term debt ........................................... $ 524 $ 556
Accounts payable and accrued liabilities .................. 2,446 2,416
Income taxes ............................................. 98 88
Total Current Liabilities ........................ 3,068 3,060
Long-Term Debt .................................................. 3,057 3,919
Deferred Income Taxes ........................................... 1,060 939
Other Liabilities ............................................... 570 564
Shareholders' Equity ............................................ 5,709 5,256
------------ ------------
Total Liabilities and Shareholders' Equity ....... $ 13,464 $ 13,738
============ ============
Ratio of debt to total capitalization (Note 1) ....................... 38.5% 45.0%
============ ============
Return on gross investment (Note 2) .................................. 16.6% 15.7%
============ ============
</TABLE>
Notes:
1. Excluding the Note Monetization Facility at January 31, 1998.
2. Operating income, excluding depreciation, amortization and gross rent
expense divided by gross investment. Gross investment is defined as
average gross fixed assets, including capitalization of operating
leases, and the average balances of all other assets and liabilities
excluding debt, the note receivable related to the Note Monetization
Facility, intangible assets and income taxes.
<PAGE> 7
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(millions)
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 662 $ 536
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment ............................................... 596 563
Amortization of intangible assets ........................... 27 27
Amortization of financing costs ............................. 7 20
Amortization of unearned restricted stock ................... 1 --
Loss on early extinguishment of debt ........................ 23 39
Changes in assets and liabilities:
Decrease in accounts receivable ........................ 235 194
(Increase) decrease in merchandise inventories ......... (20) 7
Increase in supplies and prepaid expenses .............. (2) (5)
(Increase) decrease in other assets not separately ..... 31 (7)
identified
(Increase) decrease in accounts payable and ............ 6 (36)
accrued liabilities not separately identified
Increase in current income taxes ....................... 25 103
Increase in deferred income taxes ...................... 103 138
Decrease in other liabilities not separately
identified ........................................ (4) (6)
------------ ------------
Net cash provided by operating activities ... 1,690 1,573
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ................................. (695) (696)
Disposition of property and equipment .............................. 50 178
Decrease in notes receivable ....................................... 200 200
------------ ------------
Net cash used by investing activities ....... (445) (318)
------------ ------------
Cash flows from financing activities:
Debt issued ........................................................ 650 763
Financing costs .................................................... -- (7)
Debt repaid ........................................................ (1,229) (2,027)
Increase (decrease) in outstanding checks .......................... 47 (45)
Acquisition of treasury stock ...................................... (594) (2)
Issuance of common stock ........................................... 46 56
------------ ------------
Net cash used by financing activities ....... (1,080) (1,262)
------------ ------------
Net increase (decrease) in cash ...................................... 165 (7)
Cash beginning of period ............................................. 142 149
------------ ------------
Cash end of period ................................................... $ 307 $ 142
============ ============
</TABLE>
<PAGE> 1
EXHIBIT 99.2
FINGERHUT COMPANIES, INC.
4400 Baker Road
Minnetonka, MN 55343
(612) 932-3100
CONSOLIDATED FINANCIAL STATEMENTS FOR
THE FISCAL YEAR ENDED DECEMBER 25, 1998
THE FISCAL YEAR ENDED DECEMBER 26, 1997 AND
THE FISCAL YEAR ENDED DECEMBER 27, 1996
<PAGE> 2
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
For the fiscal year ended December 25, December 26, December 27,
(In thousands, except share and per share data) 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net sales $ 1,594,965 $ 1,530,228 $ 1,638,363
Finance income and other securitization income, net 14,186 (10,877) (23,361)
------------ ------------ ------------
Total revenue 1,609,151 1,519,351 1,615,002
COSTS AND EXPENSES:
Product cost 763,418 738,740 827,086
Administrative and selling expenses 664,313 596,084 618,082
Provision for uncollectible accounts 88,424 97,593 112,084
Interest expense, net 19,196 27,946 25,305
Provision for non-recurring items 38,130 -- --
------------ ------------ ------------
1,573,481 1,460,363 1,582,557
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES 35,670 58,988 32,445
Provision for income taxes 13,377 21,267 11,322
------------ ------------ ------------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM 22,293 37,721 21,123
Earnings from discontinued operations (less income taxes
of $18,945, $19,787 and $11,917 in 1998, 1997 and
1996, respectively) 30,150 31,608 19,036
------------ ------------ ------------
EARNINGS BEFORE EXTRAORDINARY ITEM 52,443 69,329 40,159
Extraordinary item - loss on early retirement of debt
(less income tax benefit of $4,259) 7,096 -- --
------------ ------------ ------------
NET EARNINGS $ 45,347 $ 69,329 $ 40,159
============ ============ ============
EARNINGS PER SHARE:
CONTINUING OPERATIONS:
BASIC $ .47 $ .82 $ .46
============ ============ ============
DILUTED $ .43 $ .76 $ .44
============ ============ ============
DISCONTINUED OPERATIONS, NET:
BASIC $ .63 $ .68 $ .41
============ ============ ============
DILUTED $ .59 $ .64 $ .39
============ ============ ============
EXTRAORDINARY ITEM, NET:
BASIC $ (.15) $ -- $ --
============ ============ ============
DILUTED $ (.14) $ -- $ --
============ ============ ============
NET EARNINGS:
BASIC $ .95 $ 1.50 $ .87
============ ============ ============
DILUTED $ .88 $ 1.40 $ .83
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 47,669,295 46,166,842 46,210,151
============ ============ ============
DILUTED 51,406,643 49,377,695 48,628,308
============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 3
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
December 25, December 26,
(In thousands) 1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,190 $ 96,889
Accounts receivable 248,997 308,498
Less: reserve for uncollectible accounts and unearned
finance income (74,901) (93,203)
------------ ------------
Accounts receivable, net 174,096 215,295
Retained interest in securitized receivables 205,296 145,112
Inventories 152,159 124,424
Promotional material 58,337 46,689
Deferred income taxes 105,204 118,472
Other 14,595 14,186
------------ ------------
TOTAL CURRENT ASSETS 721,877 761,067
Property and equipment, net 226,740 256,726
Excess of cost over fair value of net assets acquired 150,718 48,810
Net assets of discontinued operations -- 146,249
Other assets 27,591 16,633
------------ ------------
$ 1,126,926 $ 1,229,485
============ ============
LIABILITIES
CURRENT LIABILITIES:
Accounts payable $ 191,661 $ 142,894
Accrued payroll and employee benefits 55,623 43,534
Other accrued liabilities 61,980 35,371
Revolving credit facility 80,000 --
Current portion of long-term debt 125,076 84
Current income taxes payable 21,112 61,958
------------ ------------
TOTAL CURRENT LIABILITIES 535,452 283,841
Long-term debt, less current portion 125 245,187
Deferred income taxes 25,021 22,345
Other non-current liabilities 11,839 8,127
------------ ------------
572,437 559,500
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock 493 463
Additional paid-in capital 350,600 292,407
Unearned compensation (1,828) (738)
Earnings reinvested 205,224 377,853
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 554,489 669,985
------------ ------------
$ 1,126,926 $ 1,229,485
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 4
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the fiscal year ended December 25, December 26, December 27,
(In thousands) 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 45,347 $ 69,329 $ 40,159
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities, net of effects
of acquisitions:
Net earnings from discontinued operations (30,150) (31,608) (19,036)
Extraordinary net loss on debt extinguishment 7,096 -- --
Provision for non-recurring items 38,130 -- --
Depreciation and amortization 47,173 50,279 51,733
Amortization of unearned compensation 1,542 1,322 2,922
Change in assets and liabilities net of affects of acquisitions:
Accounts receivable, net and retained interest
in securitized receivables 36,064 30,064 14,986
Inventories 25,046 3,311 28,617
Promotional material and other current assets 377 13,561 23,074
Accounts payable 15,317 (6,010) (14,237)
Accrued payroll and employee benefits 11,672 9,061 (5,399)
Accrued liabilities (9,695) (16,767) (19,170)
Current income taxes payable 1,237 3,494 22,059
Deferred and other income taxes 16,235 17,480 113
Other (6,089) 1,070 (3,795)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 199,302 144,586 122,026
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Popular Club Plan, Inc. (42,500) -- --
Purchase of Arizona Mail Order (AMO) (109,812) -- --
Investments in Internet companies (8,623) -- --
Additions to property and equipment (26,865) (20,334) (47,109)
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (187,800) (20,334) (47,109)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- -- 125,000
Repayments of long-term debt (120,070) (26,294) (100,098)
Debt prepayment penalty (10,768) -- --
Revolving credit facility 80,000 (23,000) (92,000)
Repayments of AMO revolving credit facility (24,000) -- --
Repurchase of common stock (48,233) (3,385) (4,877)
Issuance of common stock 32,478 3,908 1,881
Cash dividends paid (5,608) (7,387) (7,394)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (96,201) (56,158) (77,488)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (84,699) 68,094 (2,571)
Cash and cash equivalents at beginning of year 96,889 28,795 31,366
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,190 $ 96,889 $ 28,795
============ ============ ============
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Net tax benefit from exercise of non-qualified stock
options, disqualified dispositions of ESPP shares,
and vesting of restricted stock $ 37,825 $ 797 $ 293
Issuance of restricted stock $ 2,632 $ 204 $ 4,778
Dividend of Metris shares $ 178,623 $ -- $ --
</TABLE>
The Company includes in cash and cash equivalents, liquid investments with
maturities of 15 days or less
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 5
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional
Number of Par Paid-in Earnings Unearned
(In thousands, except share data) shares value Capital Reinvested Compensation Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 29, 1995 45,949,722 $ 459 $ 258,917 $ 288,114 $ -- $ 547,490
Stock repurchase (358,800) (3) (1,997) (2,877) -- (4,877)
Exercise of stock options 109,900 1 1,012 -- -- 1,013
Employee stock purchase plan 100,141 1 1,160 -- -- 1,161
Issuance of restricted stock,
net of forfeitures 353,917 4 4,774 -- (4,778) --
Compensation expense -- -- -- -- 2,922 2,922
Excess of market value over
book value of minority
interest sold -- -- 24,927 -- -- 24,927
Cash dividends paid -- -- -- (7,394) -- (7,394)
Net earnings -- -- -- 40,159 -- 40,159
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 27, 1996 46,154,880 462 288,793 318,002 (1,856) 605,401
Stock repurchase (231,900) (2) (1,292) (2,091) -- (3,385)
Exercise of stock options 300,740 3 4,007 -- -- 4,010
Employee stock purchase plan 55,159 -- 695 -- -- 695
Issuance of restricted stock,
net of forfeitures 13,582 -- 204 -- (204) --
Compensation expense -- -- -- -- 1,322 1,322
Cash dividends paid -- -- -- (7,387) -- (7,387)
Net earnings -- -- -- 69,329 -- 69,329
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 26, 1997 46,292,461 463 292,407 377,853 (738) 669,985
Stock repurchase (2,598,350) (26) (14,462) (33,745) -- (48,233)
Exercise of stock options 5,377,305 54 69,569 -- -- 69,623
Employee stock purchase plan 45,021 -- 680 -- -- 680
Issuance of restricted stock,
net of forfeitures 225,728 2 2,406 -- (2,632) (224)
Compensation expense -- -- -- -- 1,542 1,542
Dividend of Metris shares -- -- -- (178,623) -- (178,623)
Cash dividends paid -- -- -- (5,608) -- (5,608)
Net earnings -- -- -- 45,347 -- 45,347
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 25, 1998 49,342,165 $ 493 $ 350,600 $ 205,224 $ (1,828) $ 554,489
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 6
Fingerhut Companies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Fingerhut Companies, Inc. (the Company) is a database and on-line marketing
company selling a broad range of products and services to moderate income
consumers via catalogs, the Internet, telemarketing, and other media.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company
and its wholly owned subsidiaries, after elimination of all material
intercompany transactions and balances. At December 25, 1998, the Company's
principal subsidiaries are Fingerhut Corporation (Fingerhut), Figi's Inc.
(Figi's), Arizona Mail Order (AMO), Popular Club Plan (Popular Club). "Net
assets of discontinued operations" represents the Company's former
subsidiary, Metris Companies, Inc. (Metris,) which was spun off to
shareholders in 1998 (see Note 5).
Fiscal Year
The Company's fiscal year ends on the last Friday in December. The fiscal
years ended December 25, 1998, December 26, 1997, and December 27, 1996,
included 52 weeks. The accounts of Metris, which are presented on a
discontinued basis, are on a calendar year basis.
Revenue Recognition
Sales are recorded at the time of shipment and a provision for anticipated
merchandise returns and merchant allowances, net of exchanges, is recorded
based upon historical experience. The provision charged against sales for
1998, 1997 and 1996 amounted to $209.4 million, $216.0 million and $249.9
million, respectively.
Amounts billed to customers for shipping and handling of orders are netted
against the associated costs.
Substantially all of Fingerhut's sales are financed by Fingerhut National
Bank (FNB) on either the installment contract basis or revolving credit
account basis. Finance income on installment contracts (net of estimated
returns and exchanges, allowances, uncollectible amounts and collection
costs) is deferred and recognized using an effective interest method over
the weighted average of the contract periods (which approximates nineteen
months) or when collected, whichever is faster. When accounts receivable
are sold (see Note 8), finance income, net, which was previously deferred,
is recognized. Finance income on revolving credit receivables is accrued
and earned based on the principal amount of the receivables outstanding
using the effective yield method. Accrued interest is classified on the
balance sheet with the related receivables. Interest income is generally
recognized as earned, until a loan is charged off.
Beginning in 1997, the sale of receivables has been recorded in accordance
with Statement of Financial Accounting Standards No. 125 (FAS 125),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Upon sale, the sold receivables are
removed from the balance sheet and the related financial and servicing
assets controlled and
<PAGE> 7
liabilities incurred are measured at fair value, if practicable. FAS 125
also requires that servicing assets and other retained interests in the
transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any, based on
their relative fair values at the date of the transfer. The retained
interest is then considered a security and subject to FAS 115, "Accounting
for Certain Investments in Debt and Equity Securities." Based upon the type
of security retained, the Company considers its Retained Interest in
Securitized Receivables to be a trading security, with all market gains and
losses being reflected in the Consolidated Statements of Earnings.
Earnings Per Share
Basic earnings per share are computed by dividing net earnings by the
weighted average shares of common stock outstanding during the year.
Diluted earnings per share are computed by dividing net earnings by the
weighted average shares of common stock and potential common stock
outstanding during the year. The dilutive effect of the potential exercise
of outstanding stock options is calculated using the treasury stock method.
A reconciliation relating to the calculation for continuing operations
before extraordinary items is as follows:
<TABLE>
<CAPTION>
In thousands, except per share data For the Year Ended December 25, 1998
-----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- -------
<S> <C> <C> <C>
BASIC EPS:
Earnings available to common stockholders $ 22,293 47,669 $ .47
=======
EFFECT OF DILUTIVE SECURITIES:
Options - 3,738
------------ ------------
DILUTED EPS:
Earnings available to common
stockholders and assumed conversion $ 22,293 51,407 $ .43
============ ============ =======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 25, 1998
-----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- -------
<S> <C> <C> <C>
BASIC EPS:
Earnings available to common stockholders $ 37,721 46,167 $ .82
=======
EFFECT OF DILUTIVE SECURITIES:
Options - 3,211
------------ ------------
DILUTED EPS:
Earnings available to common
stockholders and assumed conversion $ 37,721 49,378 $ .76
============ ============ =======
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
In thousands, except per share data For the Year Ended December 25, 1998
-------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
<S> <C> <C> <C>
BASIC EPS:
Earnings available to common stockholders $ 21,123 46,210 $ .46
==========
EFFECT OF DILUTIVE SECURITIES:
Options - 2,418
------------ ------------
DILUTED EPS:
Earnings available to common
stockholders and assumed conversion $ 21,123 48,628 $ .44
============ ============ ==========
</TABLE>
Inventories
Inventories, principally merchandise, are stated at the lower of cost (as
determined on a first-in, first-out basis) or market. The Company has
established a reserve for excess and obsolete inventory, which is based on
management's best estimates of the amount of inventory that is slow moving
or subject to obsolescence. The estimates are subject to change in the near
term, depending on changes in economic conditions and other factors.
Promotional Material
Promotional material primarily includes free gifts and items in inventory
associated with direct response advertising (paper, printing and postage).
The cost of direct response advertising is deferred and expensed over the
period during which the sales are expected to occur, generally one to four
months. The amount of direct response advertising included in the
Consolidated Statements of Financial Position is not material.
The cost of non-direct response advertising is expensed as incurred.
Revolving Credit Card Loan Origination Costs
The Company defers direct revolving credit card loan origination costs
associated with successful credit card solicitations that it incurs in
transactions with independent third parties, and certain other costs that
it incurs in connection with loan underwriting and the preparation and
processing of loan documents. These deferred credit card loan origination
costs are amortized on a straight-line basis over a six-month period, as an
adjustment to "Finance income and other securitization income, net" and
"Administrative and Selling Expense."
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over their estimated economic useful lives (30 years
for buildings; five years for software; three to 10 years for machinery and
equipment, furniture and fixtures; and over the estimated useful life of
the property or the life of the lease, whichever is shorter, for leasehold
improvements). The Company capitalizes software developed for internal use
that represents major enhancements and replacements of operating and
management information systems.
<PAGE> 9
Intangible Assets
The excess of cost over fair value of net assets acquired is amortized on a
straight-line basis up to 40 years for purchases prior to 1998. For
acquisitions made in 1998, the excess of cost over fair value of net assets
acquired is amortized on a straight-line basis over 15 years.
At each balance sheet date, management assesses whether there has been an
impairment in the carrying value of intangible assets, primarily by
comparing current and projected sales, operating income and annual cash
flows with the related annual amortization expense. Based on this
assessment, management has concluded that intangible assets are fully
realizable.
Income Taxes
The Company provides for deferred taxes on the temporary differences
between the financial statement carrying amounts and the tax bases of
assets and liabilities that will result in future taxable or deductible
amounts. The Company provides for deferred taxes at the enacted tax rate
that is expected to apply when the temporary differences reverse.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Stock-Based Employee Compensation
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting
for Stock-Based Compensation," encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. Compensation expense for restricted
stock is recorded over the vesting period of the awards based on the fair
market value of the Company's stock on the date of grant.
(See Note 18).
Reclassifications
All prior-period financial information was restated to conform with the
current period's presentation, and the reclassifications had no effect on
net earnings. The effects of Metris are being presented as "Earnings from
discontinued operations" on the Consolidated Statements of Earnings and as
"Net assets of discontinued operations" on the Consolidated Statements of
Financial Position.
Comprehensive Income
During the first quarter of 1998, the Company implemented Statement of
Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive
Income." Currently, FAS 130 has no material effect on the consolidated
financial statements.
<PAGE> 10
Segment Reporting
During the fourth quarter of 1998, the Company implemented Statement of
Financial Accounting Standards No. 131 (FAS 131), " Disclosures about
Segments of an Enterprise and Related Information." This statement has no
material effect on the disclosure requirement of the financial statements
as the Company's continuing operations are currently considered one segment
as defined by FAS 131.
Pension Disclosures
In 1998 the Company implemented Statement of Financial Accounting Standard
No. 132 (FAS 132), "Employers' Disclosures about Pensions and Other
Retirement Benefits." The Company's disclosures have been modified to
comply with FAS 132 (see Note 15).
Newly Issued Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for fiscal years beginning after
June 15, 1999. The Company is assessing the impact that the implementation
will have on the consolidated financial statements. The Company intends to
adopt this statement prospectively in the first quarter of 2000.
3. ACQUISITIONS
On August 31, 1998, the Company acquired the majority of the assets of AMO,
a direct marketer of women's apparel, in a business combination accounted
for as a purchase. The effects of AMO's operations since the acquisition
are included within the Consolidated Statements of Earnings. The total cost
of the acquisition was $109.8 million, which exceeded the fair value of the
net assets of AMO by $77.8 million. The acquired goodwill will be amortized
on a straight-line basis over 15 years.
On October 31, 1998, the Company acquired 100 percent of the outstanding
stock of Popular Club, a direct marketer of merchandise and apparel, in a
business combination accounted for as a purchase. The effects of Popular
Club's operations since the acquisition are included within the Consolidated
Statements of Earnings. The total cost of the acquisition was $42.5 million,
which exceeded the fair value of the net assets of Popular Club by $28.8
million. The acquired goodwill will be amortized on a straight-line basis
over 15 years.
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on December 28, 1996 (i.e. the first day of
fiscal year ended December 26, 1997).
<TABLE>
<CAPTION>
Fiscal Year Ended
(In thousands, except per share data) December 25, December 26,
1998 1997
------------------ ------------------
<S> <C> <C>
Net sales $ 1,825,977 $ 1,845,042
================== ==================
Net earnings before extraordinary item $ 56,925 $ 79,234
================== ==================
Net earnings $ 49,829 $ 79,234
================== ==================
Earnings per share:
Net earnings before extraordinary item
Basic $ 1.19 $ 1.72
================== ==================
Diluted $ 1.11 $ 1.60
================== ==================
Net earnings
Basic $ 1.05 $ 1.72
================== ==================
Diluted $ .97 $ 1.60
================== ==================
</TABLE>
<PAGE> 11
4. PROVISION FOR NON-RECURRING ITEMS
The pre-tax provision for non-recurring items of $38.1 million includes a
$33.6 million non-cash charge for the writedown for Fingerhut's Western
Distribution Center (WDI), 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, 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 flows generated was less than the carrying value of the
facility, indicating 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 equipment and improvements. As a result
of this review, the Company recorded a non-cash, pre-tax charge of $33.6
million to writedown 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 December 25, 1998, $0.8 million of this
amount was included in "Other accrued liabilities."
5. DISCONTINUED OPERATIONS
In August 1998, the Company received a favorable 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 through September 25, 1998 are
reflected as "Earnings from Discontinued Operations," net of tax on the
Consolidated Statement of Earnings for the year ended December 25, 1998.
Also included in discontinued operations for the year ended December 25,
1998, are $2.7 million of expenses, net of income tax, incurred as a result
of the transaction. The Consolidated Statements of Earnings, Financial
Position and
<PAGE> 12
Cash Flows have been restated for prior periods to reflect Metris as a
discontinued operation. The operating results of the discontinued operation
are summarized as follows:
<TABLE>
<CAPTION>
For the fiscal year ended: December 25, December 26, December 27,
(In thousands, except per share data) 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues $ 303,256 $ 284,064 $ 155,434
Earnings before income taxes 49,095 51,395 30,953
Provision for income taxes 18,945 19,787 11,917
Net Income $ 30,150 $ 31,608 $ 19,036
Earning per share:
Basic $ .63 $ .68 $ .41
Diluted $ .59 $ .64 $ .39
</TABLE>
<TABLE>
<CAPTION>
The net assets of discontinued operations are summarized as follows:
(In thousands) December 26,
1997
------------
<S> <C>
Current assets $ 609,838
Property and equipment, net 15,464
Excess of cost over fair value of assets acquired 36,752
Other assets 11,180
Current liabilities 397,195
Minority interest 29,790
Long-term debt, less current portion 100,000
------------
Net assets of discontinued operations $ 146,249
============
</TABLE>
6. EXTRAORDINARY ITEM
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, which was composed of a
$6.7 million prepayment penalty and a $0.4 million write-off of unamortized
fees related to the debt.
7. ACCOUNTS RECEIVABLE, NET
Substantially all of the Company's sales are financed under either
installment based contracts or revolving credit agreements generated by
Fingerhut National Bank, AMO, Popular Club and Figi's. Historically,
Fingerhut used fixed-term, fixed-payment installment plans with terms up to
36 months (excluding deferred billing periods of up to five months) and
finance charge rates of 24.9 percent. Beginning in 1996, Fingerhut began
converting its customers from existing fixed payment installment plans to
revolving credit plans with finance charge rates ranging from prime plus
10.9 percent to prime plus 23.9 percent. Figi's uses fixed-term,
fixed-payment plans with terms up to three months (excluding deferred
billing periods of up to approximately three months) with no finance
charge. AMO uses a revolving credit plan with finance charge rates ranging
from 10.5 percent to 24.0 percent. Popular Club uses an installment-based
plan with finance charge rates ranging from 18.0 percent to 24.0 percent.
<PAGE> 13
Accounts receivable are classified as current assets and include amounts
which are due after one year, consistent with industry practice. Accounts
receivable, net of amounts sold (see Note 8), consists of the following:
<TABLE>
<CAPTION>
For the fiscal year ended
(In thousands) 1998 1997
------------ ------------
<S> <C> <C>
Customer receivables $ 248,997 $ 308,498
Reserve for uncollectible accounts, net
of anticipated recoveries (62,904) (68,890)
Other reserves (10,903) (20,352)
------------ ------------
Net collectible amount 175,190 219,256
Unearned finance income (1,094) (3,961)
------------ ------------
Accounts receivable, net $ 174,096 $ 215,295
============ ============
</TABLE>
Other reserves for customer receivables consist primarily of returns and
exchanges, allowances for anticipated adjustments of finance charges billed
to customers (due to earlier than scheduled payment) and anticipated costs
required to collect customer installment accounts.
The above reserves represent management's best estimates of the amounts not
expected to be collected. A change in economic conditions could have a
significant impact on the Company's target market, which consists of
moderate to middle income consumers. As such, the reserve estimates are
subject to change in the near term.
8. SALE OF ACCOUNTS RECEIVABLE
The Company established the Fingerhut Master Trust (the Trust) as a vehicle
to accelerate cash flow through the sale of accounts receivable. The Trust
allows Fingerhut to sell, on a continual basis, an undivided interest in a
pool of customer accounts receivables, subject to meeting certain
eligibility and securitization requirements. During the first quarter 1998,
the Company received approval to expand the pool of eligible receivables by
including certain revolving receivables and certain previously unsold new
customer installment receivables in the Trust.
In order to fund the purchase of the receivables by the Trust, the Trust
periodically issues securities in the public marketplace. In April 1998,
the Trust issued Series 1998-1 and Series 1998-2 securities out of the
Trust and sold them in the public asset backed markets 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 and approximately $102.5 million was used to reduce the Class A
Variable Funding Certificates issued under Series 1994-2.
The Series 1994-2 supported the $1.2 billion asset backed commercial paper
program through the Fingerhut Owner Trust that the Company shared with
Metris. In July 1998, in connection with the pending spin-off of Metris,
the Company closed Series 1998-3, a $400 million variable-funding
certificate issued out of the Fingerhut Master Trust and sold it to third
party conduits. On July 30, 1998, approximately $91 million in proceeds was
used to repay Series 1994-2, thereby terminating the Fingerhut Owner Trust
and its related commercial paper program.
<PAGE> 14
Although the Company continues to service the underlying accounts
receivable balances and maintains the customer relationships, these
transactions are treated as sales for financial reporting purposes and the
associated receivable balances are not reflected on the Consolidated
Statements of Financial Position. The Company receives annual servicing
fees of 2 percent of the outstanding balance from the Trust. In addition,
the Company owns certain certificates issued by the Trust which provides
the Company with rights to future cash flows arising after the investors in
the Trust have received the return for which they have contracted. This
participating interest in the Trust is classified as "Retained interest in
securitized receivables" (Retained Interest) on the Consolidated Statements
of Financial Position. The investors and the Trust have no recourse to the
Company's other assets for failure of debtors to pay when due. The
Company's Retained Interest is generally restricted, however, until
investors have been fully paid and is subordinate to investor's interests.
The Retained Interest's value is subject to credit, prepayment and interest
rate risk on the transferred financial assets.
The Retained Interest is calculated as the present value of the future cash
flows, arising after the investors in the Trust have received the return
for which they are contracted. A total "collectible amount" is calculated
taking into account future credit risk as well as future finance income.
The cash flow then calculates a payment stream based upon historical
trends, including prepayment history. The cash flow is discounted at a
market rate that accounts for the inherent risk of the Retained Interest.
As the Retained Interest is considered a trading security, gains or losses
are recognized monthly through the Consolidated Statements of Earnings in
"Finance income and other securitization income, net."
The proceeds from the sale of Fingerhut accounts receivable were $1.244
billion and $1.205 billion at December 25, 1998 and December 26, 1997,
respectively. The pretax loss on the sale of receivables was $11.5 million
in 1998 compared to a pre tax gain of $2.3 million in 1997.
Included in "Finance income and other securitization income, net" are
period securitization expenses, which are comprised of the interest,
commercial paper discount and administrative and other fees paid or accrued
to the purchasers of the accounts receivables.
9. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
For the fiscal year ended
(In thousands) 1998 1997
------------ ------------
<S> <C> <C>
Land and improvements $ 12,092 $ 7,449
Buildings and leasehold improvements 133,907 115,069
Construction in progress 6,526 64,851
Machinery and equipment 148,861 135,833
Software 151,372 128,615
Other, principally furniture and fixtures 22,481 21,011
------------ ------------
475,239 472,828
Less: Accumulated depreciation (154,440) (134,750)
Accumulated amortization of software (94,059) (81,352)
------------ ------------
Property and equipment, net $ 226,740 $ 256,726
============ ============
</TABLE>
<PAGE> 15
Software amortization expense recorded in 1998, 1997 and 1996 was $13.0
million, $17.8 million, and $19.3 million, respectively.
10. REVOLVING CREDIT FACILITY
In connection with the spin-off of Metris, the Company further amended its
Amended and Restated Revolving Credit Facility (the "Amended Revolving
Credit Facility"). The changes resulted in the removal of the Company's
guarantee on the Metris outstanding balances, an increase in aggregate
commitments to $250.0 million from $200.0 million, and an extension of the
expiration date to September 2003. The proceeds from borrowings under the
Amended Revolving Credit Facility are to be used by the Company to provide
for working capital and other general corporate purposes.
In addition to amending the Amended Revolving Credit Facility, the Company
implemented $95 million in uncommitted lines of credit with various banks.
These bank lines provide flexibility for short-term borrowings at
favorable rates.
In October 1998 the Company entered into a committed 364-day revolving
credit bridge facility for $130 million.
At December 25, 1998, outstanding short-term credit borrowings totaled
$80.0 million, including the Amended Revolving Credit Facility, the
uncommitted lines, and the $130 million bridge facility. The
weighted-average interest rate on borrowings was 5.5 percent at December
25, 1998. At December 26, 1997, the Company had no short-term credit
balance outstanding. The outstanding portion of open letters of credit,
primarily established to facilitate international merchandise purchases,
was not reflected in the accompanying financial statements and aggregated
$20.5 million at December 25, 1998 and $32.8 million at December 26, 1997.
11. LONG-TERM DEBT
As of December 25, 1998, the Company had $125 million of public notes due
in September 1999. As a result of removing the Metris guarantee on the
Revolving Credit Facility, these notes received a credit ratings upgrade
in September 1998. Following the upgrade, these notes rank equally with
the Amended Revolving Credit Facility.
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.
<PAGE> 16
Long-term debt and related maturity dates are as follows:
<TABLE>
<CAPTION>
(In thousands) Maturity date Interest rate 1998 1997
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Privately Placed Senior Notes
Series A Unsecured June 2002 8.92% $ -- $ 60,500
Series B Unsecured June 2004 8.92% -- 14,500
Series C Unsecured Aug. 2000 6.83% -- 45,000
Senior Notes Sept. 1999 7.38% 125,000 125,000
Other indebtedness (due in various installments through November 2010;
interest at varying rates ranging
from 7.5% to 8.0% at Dec. 25, 1998) 201 271
-------- --------
125,201 245,271
Current portion of long-term debt (125,076) (84)
-------- --------
Long-term debt, less current portion $ 125 $245,187
======== ========
</TABLE>
Scheduled annual maturities due on long-term debt at December 25, 1998 were as
follows:
<TABLE>
<S> <C>
(In thousands)
1999 $ 125,076
2000 57
2001 14
2002 3
2003 45
Thereafter 6
------------
$ 125,201
============
</TABLE>
12. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This footnote discloses the fair value of all financial instruments, both
assets and liabilities, recognized and not recognized, in the
Consolidated Statements of Financial Position for which it is practicable
to estimate fair value.
Quoted market prices generally are not available for all of the Company's
financial instruments. Accordingly, fair values are based on judgments
regarding current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates involve
uncertainties and matters of judgment, and therefore, cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
A description of the methods and assumptions used to estimate the fair
value of each class of the Company's financial instruments is as follows:
CASH AND CASH EQUIVALENTS, ACCOUNTS PAYABLE, ACCRUED PAYROLL AND EMPLOYEE
BENEFITS, AND OTHER ACCRUED LIABILITIES
The carrying amounts approximate fair value due to the short maturity of
these instruments.
<PAGE> 17
ACCOUNTS RECEIVABLE
Customer installment receivables:
Since the average collection period exceeds 90 days, the discounted
present value of expected future cash flows from the collection of the
receivables and related deferred finance income was calculated and it was
determined that the carrying amount approximates fair value.
Revolving credit receivables:
Currently, revolving credit receivables are originated with variable
rates of interest, with interest rate spreads that differ based on the
related risk of such receivables. Thus, the carrying value approximates
market value. However, this valuation does not include the value that
relates to estimated cash flows generated from new loans from existing
customers over the life of the cardholder relationship. Accordingly, the
aggregate fair value of the revolving credit receivables does not
represent the underlying value of the established cardholder
relationships.
Retained interest in securitized receivables:
When the Company securitizes receivables, it sells its receivables and
receives cash and certificates representing undivided interests in a
portion of the receivables. Due to the short-term revolving nature of the
portfolio and the treatment of these certificates as trading securities,
the carrying amount of the Company's "Retained interest in securitized
receivables" in the Fingerhut Master Trust and third party conduits
approximates fair value. The retained interest also includes the fair
value of the interest rate swap agreement which was obtained from dealer
quoted prices.
LONG-TERM DEBT
The fair value of the Company's long-term debt was estimated based on the
amount of future cash flows associated with each instrument discounted
using the current rates offered to the Company for similar debt
instruments of comparable maturity.
INTEREST RATE CAP AGREEMENTS
The fair values of interest rate cap agreements were obtained from dealer
quoted prices. These values represent the estimated amount the Company
would receive upon termination of the agreements, taking into
consideration current interest rates and the current credit worthiness of
the counterparties.
The estimated fair values of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
December 25, 1998 December 26, 1997
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
(In thousands) amount Fair value amount fair value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 12,190 $ 12,190 $ 96,889 $ 96,889
Accounts receivable, net $ 174,096 $ 174,096 $ 215,295 $ 215,295
Retained interest in secur-
itized receivables $ 205,296 $ 205,296 $ 145,112 $ 145,112
Long-term debt $ 125,201 $ 126,364 $ 245,271 $ 252,375
Interest rate cap agreements $ 1,964 $ 32 $ 2,556 $ 79
</TABLE>
<PAGE> 18
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 currently associated with
the floating rate certificates issued by the Fingerhut Master Trust. Any
premiums paid for these agreements are amortized to "Finance income and
other securitization income, net" where the economic exposure to
fluctuating interest rates exists.
The Fingerhut Master Trust Series 1994-2 certificates, initially issued in
November 1994, required a six-year agreement which effectively capped LIBOR
exposure at 11.2 percent on a notional (hedged) amount varying up to $491.0
million over the life of the agreement. In connection with an amendment of
Series 1994-2 in May 1995, an additional two and one-half year, 11.2
percent interest rate cap was required for up to a notional amount of
$209.7 million.
In connection with the planned issuance of the $450.0 million Fingerhut
Master Trust Series 1998-1 certificates and the $450.0 million Fingerhut
Master Trust Series 1998-2 certificates in April 1998, the Company entered
into an interest rate swap agreement in October 1997 with an initial
notional amount of $415.0 million. This agreement had a forward start date
of April 1998 and amortizes down to zero in October 1999. This agreement
exchanges an obligation to pay floating LIBOR rates for an obligation to
pay fixed interest rates of approximately 5.95 percent. The Company also
cash settled (at fair market value) the final three payments of an interest
rate swap corridor agreement with a notional amount of $400.0 million set
to expire in July 1998.
For interest rate cap and swap transactions, the contract or notional
amounts do not represent exposure to credit loss. Entering into interest
rate cap and swap agreements involves the risk of dealing with
counterparties and their ability to meet the terms of the contracts.
Notional principal amounts often are used to express the volume of these
transactions, but the amounts potentially subject to credit risk are much
smaller.
13. INTEREST EXPENSE, NET
Net interest expense was as follows:
<TABLE>
<CAPTION>
Fiscal year ended
December 25, December 26, December 27,
(In thousands) 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense $ 20,993 $ 28,606 $ 28,870
Interest income (1,797) (660) (3,565)
------------ ------------ ------------
Net interest expense $ 19,196 $ 27,946 $ 25,305
============ ============ ============
</TABLE>
The Company paid interest of $20.8 million in 1998, $28.8 million in 1997
and $34.2 million in 1996.
<PAGE> 19
14. OPERATING LEASES
Rental expense for both cancelable and non-cancelable operating leases,
(principally for office and warehouse facilities and computer equipment)
for fiscal years 1998, 1997 and 1996 was $32.9 million, $33.5 million,
and $34.8 million, respectively. Future minimum annual rentals and
payments under non-cancelable operating leases at December 25, 1998 are
as follows:
<TABLE>
<S> <C>
(In thousands)
1999 $ 26,013
2000 $ 15,735
2001 $ 9,826
2002 $ 8,164
2003 $ 6,399
Thereafter $ 3,438
</TABLE>
During 1996, the Company leased office space for one of its telemarketing
centers and warehouse space from a partnership owned by various members
of the immediate family of one of the Company's Directors. Rental expense
for this space in 1996 was $.6 million.
15. EMPLOYEE BENEFIT PLANS
The Company maintains five defined contribution plans, which together
cover substantially all non-union employees. Four of the plans have a
401(k) provision, including two which provides for an employer matching
contribution only; another which provide for an employer matching
contribution as well as a profit sharing contribution; and the third
which provides for an employer profit sharing contribution only. Each of
the profit sharing contributions is discretionary and is determined by
the board of directors for each of the individual companies. The maximum
profit sharing contribution is 11 percent of each participant's eligible
compensation. The fifth defined contribution plan is a money purchase
plan and provides for a non-discretionary employer contribution of 4
percent of each participant's eligible compensation. The cost to the
Company of these plans was $12.5 million, $12.2 million, and $10.8
million for 1998, 1997 and 1996, respectively.
Additionally, the Company maintains one defined contribution plan (with a
401(k) provision and employer matching contribution) and participates in
another multi-employer defined contribution plan (with a 401(k) provision
only) for all union employees. The cost to the Company of these plans was
not material for each of the years presented.
The Company maintains five non-contributory, defined benefit pension
plans that together cover substantially all full-time non-union
employees. The plans provide monthly retirement benefits to eligible
participants based upon years of service and level of compensation. The
Company's funding policy is to make an annual contribution equal to, or
exceeding, the minimum required by the Employee Retirement Income
Security Act of 1974. The acquisition of AMO and its related pension plan
are reflected as of August 31, 1998.
<PAGE> 20
The changes in benefit obligation and plan assets and the reconciliation
of funded status were as follows:
<TABLE>
<CAPTION>
(In thousands)
Change in benefit obligation: 1998 1997
------------ ------------
<S> <C> <C>
Benefit obligation at beginning of year $ 39,430 $ 30,466
Service cost 3,080 2,436
Interest 3,247 2,627
Plan amendments -- 1,230
Actuarial loss 1,963 3,658
Acquisition 9,286 --
Benefits paid (2,382) (987)
------------ ------------
Benefit obligation at end of year $ 54,624 $ 39,430
============ ============
Change in plan assets:
Fair value of assets at beginning of year $ 31,187 $ 24,770
Actual return on assets 7,233 6,524
Employer contributions 25 880
Acquisition 10,343 --
Divestiture -- --
Benefits paid (2,382) (987)
------------ ------------
Fair value of assets at end of year $ 46,406 $ 31,187
============ ============
Reconciliation of funded status:
1998 1997
------------ ------------
Benefit Obligation $ (54,624) $ (39,430)
Fair value of plan assets 46,406 31,187
------------ ------------
Unfunded obligation (8,218) (8,243)
Unrecognized actuarial loss (8,785) (6,670)
Unrecognized prior service cost 2,295 2,436
------------ ------------
Recognized Amount $ (14,708) $ (12,477)
============ ============
The amount recognized in the statement of financial position consists of
the following:
Prepaid benefit cost $ 975 $ --
Accrued benefit liability (15,683) (12,477)
Additional minimum liability (2,358) (2,305)
Intangible asset 2,358 2,305
------------ ------------
Recognized Amount $ (14,708) $ (12,477)
============ ============
</TABLE>
<PAGE> 21
The actuarial present value of the Benefit Obligation represents the
present value of benefits to be paid in the future under current
provisions of the plan and based upon the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate 7.0% 7.25% 7.75%
Expected return on assets 10.5% 10.5% 9.5%
Rate of compensation increase 6.0% 6.0% 5.5%
</TABLE>
Plan assets at December 25, 1998, and December 26, 1997, were primarily
invested in an equity fund. The Company's non-union pension plans have
vesting periods of four years.
The components of net periodic pension costs for non-union employees were
as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service cost $ 3,080 $ 2,436 $ 2,942
Interest cost 3,247 2,627 2,366
Expected return on assets (3,145) (2,295) (1,772)
Amortization of prior service cost 140 140 76
Amortization of net (gain) loss (11) (72) 1
---------- ---------- ----------
Pension expense for the period $ 3,311 $ 2,836 $ 3,613
========== ========== ==========
</TABLE>
Additionally, the Company participates in a multi-employer pension plan
for all union employees. The plan provides monthly retirement benefits to
eligible participants based upon years of service. The plan is funded
with contributions made in accordance with negotiated labor contracts.
The pension expense related to this plan for 1998, 1997 and 1996 was $.9
million, $1.0 million, and $.9 million, respectively.
16. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CURRENTLY (RECEIVABLE) PAYABLE:
Federal $ (2,745) $ 3,155 $ 26,768
State 1,687 2,240 (1,498)
DEFERRED 14,435 15,872 (13,948)
---------- ---------- ----------
Provision for income taxes $ 13,377 $ 21,267 $ 11,322
========== ========== ==========
</TABLE>
<PAGE> 22
The Company's effective income tax rate differed from the U.S. federal
statutory rate as follows:
<TABLE>
<CAPTION>
(In thousands) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit (1.2) 3.0 1.0
Merchandise donations (1.4) (3.0) (3.4)
Non deductible expenses 6.6 -- --
Other, net (1.5) 1.l 2.3
---------- ---------- ----------
Effective income tax rate 37.5% 36.l% 34.9%
========== ========== ==========
</TABLE>
The "Other, net" tax rate in 1998, 1997 and 1996 was composed of
miscellaneous items, none of which were individually significant.
The current and long-term deferred income tax assets and liabilities
included in the Consolidated Statements of Financial Position as of
December 25, 1998, and December 26, 1997, were composed of the following:
<TABLE>
<CAPTION>
(In thousands) 1998 1997
---------- ----------
<S> <C> <C>
CURRENT AND LONG-TERM DEFERRED INCOME TAX ASSETS RESULTING FROM
FUTURE DEDUCTIBLE TEMPORARY DIFFERENCES ARE:
Accounts receivable reserves $ 160,870 $ 186,980
Yield reserve 11,017 14,570
Inventory obsolescence reserves 6,211 6,311
Other 17,567 16,139
---------- ----------
Total deferred income tax assets $ 195,665 $ 224,000
========== ==========
CURRENT AND LONG-TERM DEFERRED INCOME TAX LIABILITIES RESULTING FROM
FUTURE TAXABLE TEMPORARY DIFFERENCES ARE:
Accelerated depreciation and amortization $ (18,526) $ (27,586)
Deferred finance income (92,183) (96,530)
Deferred advertising (4,409) (3,484)
Other (364) (273)
---------- ----------
Total deferred income tax liabilities $ (115,482) $ (127,873)
========== ==========
</TABLE>
The Company's prior operating earnings, on a tax basis, allows for the
full utilization of the deferred tax assets included in its consolidated
financial statements.
The Company paid income taxes (net of refunds) of $(6.2) million, $0.8
million, and $2.9 million, during 1998, 1997 and 1996, respectively.
<PAGE> 23
17. RELATED PARTY TRANSACTIONS
Related party transactions, detailed by subject and Note reference are as
follows:
Operating leases Note 14
Stockholders' equity Note 18
18. STOCKHOLDERS' EQUITY
The Company currently has 100,000,000 authorized shares of $.01 par value
common stock of which 49,342,165 and 46,292,461 were issued and
outstanding as of December 25, 1998 and December 26, 1997, respectively.
The Company is authorized to issue 5,000,000 shares of $.01 par value
preferred stock, none of which have been issued.
During 1994, the Company's Board of Directors authorized the repurchase
of up to 2.5 million common shares, which it completed in October 1998.
In November 1998, the Company's Board of Directors authorized the
repurchase of an additional 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 1998, the Company repurchased at
prevailing market prices 1.2 million shares of its common stock for an
aggregate of $13.1 million. Under current and previously authorized
programs, total purchases through December 25, 1998 were 2,834,700 shares
for an aggregate of $38.0 million. The Company has remaining
authorization to repurchase an additional 2.2 million common shares. 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.
FINGERHUT 1994 EMPLOYEE STOCK PURCHASE PLAN
Effective July 1, 1994, the Company made available to certain employees
the Fingerhut 1994 Employee Stock Purchase Plan under which eligible
employees have the opportunity to purchase Company common stock at a
discounted market value determined on the first or last business day of
the calendar quarter, whichever is lower. A maximum of 750,000 shares is
authorized, of which 200,000 shares are subject to shareholder approval.
During 1998, 45,021 shares were issued at an average price of $15.l2.
During 1997, 55,159 shares were issued at an average price of $12.60.
During 1996, 100,141 shares were issued at an average price of $11.59 per
share.
EFFECT OF SPIN ON STOCK OPTION PLANS
Effective with the spin-off of Metris, the Company's Board of Directors
authorized the re-pricing of all options outstanding at September 25,
1998 (the date of the spin). The options were re-priced to account for
the change in the Company's stock price after the spin. The impact to the
option plans was an increase in the number of options outstanding and a
corresponding decrease in the option exercise price. The economic impact
to the option holder was zero as the increase in the number of options
was equally offset by the decrease in option price.
<PAGE> 24
FINGERHUT COMPANIES, INC. STOCK OPTION PLAN
The Fingerhut Companies, Inc. Stock Option Plan provides certain
management of the Company with options to purchase up to 22,333,000
shares of common stock of which, 823,950 were available for grant at
December 25, 1998. The options are granted at the fair market value on
the date of grant. The options become exercisable in five equal annual
installments beginning on the first anniversary of the date of grant.
Unexercised options will be canceled 10 years and one month after the
date of grant.
FINGERHUT COMPANIES, INC. 1995 LONG-TERM INCENTIVE AND STOCK OPTION PLAN
The Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock Option
Plan provides for the granting of 12,218,750 stock options (either
incentive stock options or non-qualified stock options), stock
appreciation rights or restricted stock to officers and other employees.
At December 25, 1998, 176,336 shares were available for grant. The
Compensation Committee of the Board has the authority to determine the
exercise prices, vesting dates, expiration dates and other material
conditions upon which options or awards may be exercised, except that the
option price of incentive stock options may not be less than 100 percent
of the fair market value of the common stock on the date of grant, and
not less than 110 percent of the fair market value in the case of an
incentive stock option granted to any employee owning more than 10
percent of the Company's common stock (a "Ten Percent Employee"), and the
term of non-qualified stock options may not exceed 15 years from the date
of grant (not more than 10 years for incentive stock options and five
years for incentive stock options granted to a Ten Percent Employee).
During 1998 and 1997, the Compensation Committee granted a total of
6,533,993 and 985,445 options, respectively. In 1998, 1997 and 1996,
244,645, 15,000 and 353,917 shares of restricted stock were issued,
respectively. The weighted average grant date fair value of these awards
was $10.77, $14.88 and $13.50, respectively. For restricted shares
granted in 1998, 60,000 shares vest in four equal annual installments
beginning on the first anniversary of the date of grant, subject to
continued employment, 177,145 shares vest in three equal annual
installments beginning on the first anniversary of the date of grant,
subject to continued employment; and 7,500 vest 100 percent after three
years, subject to continued employment. For restricted shares granted in
1997, 5,000 shares vested May 12, 1997 and May 12, 1998 with the
remaining 5,000 shares vesting on May 12, 1999, subject to continued
employment. The restricted stock issued in 1996 became fully vested in
1998. The unearned portion of the awards is being amortized as
compensation expense on a straight-line basis over the related vesting
period. Compensation expense related to the restricted stock awards
totaled $1.3 million, $1.3 million and $2.9 million for the years ended
December 25, 1998, December 26, 1997 and December 27, 1996, respectively,
which included tax assistance payments made by the Company with respect
to the first 25 percent of the awards that vested.
FINGERHUT COMPANIES, INC. NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
The Fingerhut Companies, Inc. Nonemployee Director Stock Option Plan
provides for the granting of 287,500 stock options to directors of the
Company who are not officers or employees. At December 25, 1998, 143,125
shares were available for grant. A committee of members of the Board of
Directors who are officers or employees of the Company has the authority
to determine the exercise prices, vesting dates, expiration dates and
other conditions upon which options may be exercised, except that the
term of such options may not exceed 15 years from the date of the grant.
<PAGE> 25
FINGERHUT COMPANIES, INC. PERFORMANCE ENHANCEMENT INVESTMENT PLAN
The Fingerhut Companies, Inc. Performance Enhancement Investment Plan
("PEIP Plan") provided certain management of the Company with the right
to purchase options to acquire up to 8,625,000 shares of common stock.
Under the PEIP Plan, management was offered the opportunity to purchase
option units, each consisting of four options to purchase common stock,
with exercise prices of 110 percent, 120 percent, 130 percent and 140
percent, respectively, of the fair market value at the time of grant. The
options were offered at prices determined by the Company on the grant
date. During 1995, the Company discontinued the PEIP Plan and canceled
the remaining ungranted shares. No shares were repurchased during 1997.
During 1996, the Company repurchased 251,000 options granted under the
PEIP Plan at or below the original purchase price paid by the option
holders, and the repurchase had no impact on the Company's net earnings.
As of December 25, 1998, 53,186 options remained outstanding and will be
repurchased, if unexercised, at an amount equal to or less than the
purchase price on the earlier of the optionee's termination of employment
or the seventh anniversary of the grant date. The remaining obligation to
repurchase outstanding options has been accrued and is included in
"Accrued payroll and employee benefits" in the Consolidated Statements of
Financial Position.
FINGERHUT COMPANIES, INC. 1992 STOCK OPTION AND LONG-TERM INCENTIVE PLAN
The Fingerhut Companies, Inc. 1992 Stock Option and Long-Term Incentive
Plan provides certain management of the Company with options to purchase
up to 523,382 shares of common stock. In 1992, the Company granted the
Chairman and Chief Executive Officer non-qualified options to purchase
523,382 shares of common stock with an option price of $15.00, the fair
market value at the date of grant. In November 1993, 50 percent of these
options became exercisable, 50 percent became exercisable in November
1994. In 1998, all of these options were exercised. On September 25,
1998, the Company granted the Chairman and Chief Executive Officer
non-qualified options to purchase 1,023,052 shares of common stock with
an option price of $8.52, the fair market value at the date of the grant.
The options vest in four equal annual installments beginning on the first
anniversary of the date of grant.
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-
Based Compensation." Accordingly, no compensation cost has been
recognized with respect to the Company's stock option grants or the
Employee Stock Purchase Plan. Had compensation cost for these plans been
determined based on the fair value methodology prescribed by FAS 123, the
Company's net earnings and earnings per share would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997
---------- ----------
<S> <C> <C>
Net earnings - as reported $ 45,347 $ 69,329
Net earnings - pro forma $ 39,442 $ 66,376
Earnings per share diluted - as reported $ .88 $ 1.40
Earnings per share diluted - pro forma $ .77 $ 1.34
</TABLE>
<PAGE> 26
The above pro forma amounts may not be representative of the effects on
reported net earnings for future years. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used
for grants in 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Dividend yield .0% 1.1%
Expected volatility 63.95% 44.72%
Risk-free interest rate 4.75% 6.38%
Expected lives 6.54 years 7.32 years
</TABLE>
Information regarding the Company's stock option plans for 1998, 1997, and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ----------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 7,794,722 $ 10.93 7,024,885 $ 9.57 6,833,547 $ 9.88
Options exercised- pre
spin (5,211,799) $ 8.71 (300,740) $ 11.36 (109,900) $ 6.55
Options granted - pre
spin 322,867 $ 28.76 1,155,445 $ 19.58 968,973 $ 13.44
Options canceled/
forfeited - pre spin (947,466) $ 12.39 (84,868) $ 14.16 (667,735) $ 18.86
Effect of spin on
options 3,600,994 $ 6.64 -- --
Options exercised -
post spin (178,773) $ 5.73 -- --
Options granted - post
spin 4,411,085 $ 8.58 -- --
Options canceled/
forfeited- post spin (64,076) $ 6.11 -- --
Options outstanding,
end of year 9,727,554 $ 7.54 7,794,722 $ 10.93 7,024,885 $ 9.57
Weighted-average fair
value of options,
granted during
the year $ 5.77 $ 10.10 $ 7.28
Weighted-average
exercise price of
options, exercisable
at end of year $ 5.60 $ 8.65 $ 7.98
</TABLE>
<PAGE> 27
The following table summarizes information about stock options outstanding
at December 25, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/25/98 Contractual Life Exercise Price at 12/25/98 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.87 to $4.957 1,312,096 6.88 $4.582 794,171 $ 4.509
$5.043 to $5.913 1,003,895 6.76 $5.209 874,916 $ 5.219
$6.087 to $7.065 596,711 8.17 $7.023 70,324 $ 6.706
$7.109 to $8.438 1,590,613 8.61 $7.331 531,491 $ 7.254
$8.52 3,921,585 9.76 $8.52 0 $ 0
$8.522 to $13.32 1,302,654 9.16 $9.862 70,698 $ 9.15
----------- -----------
$2.87 to $13.32 9,727,554 2,341,600
=========== ===========
</TABLE>
19. OTHER DISCLOSURES
Administrative and selling expenses included promotional material and
advertising expenses of $420.7 million, $379.0 million, and $409.6
million for 1998, 1997 and 1996, respectively.
Amortization expense relating to the excess of cost over fair value of
net assets acquired was $4.7 million for 1998, $2.7 million for 1997 and
$2.8 million for 1996. Accumulated amortization was $29.0 million and
$24.3 million at December 25, 1998 and December 26, 1997, respectively.
In July 1998, the Company acquired a 19.9 percent equity interest
position in PC Flowers & Gifts, Inc., a leading on-line provider of
flowers, gift baskets and gourmet food. The investment was increased in
January 1999 to 40%. In December 1998, the Company acquired 19.9 percent
equity interest positions in The Zone Network, parent of
MountainZone.com, the leading community-based web site for mountain
sports information and merchandise, and in Freeshop International, parent
of Freeshop.com, a hub for online shopping. The total amount of these
equity interests is $8.6 million at December 25, 1998 and is included in
"Other assets" on the "Consolidated Statements of Financial Position."
20. SALE OF STOCK BY SUBSIDIARY
In October 1996, Metris, a then wholly-owned subsidiary, completed an
initial public offering of 3,258,333 of its common shares at $16 a share.
The transaction reduced the Company's ownership interest to approximately
83 percent. Metris realized net cash proceeds of approximately $47.4
million from the sale of shares, after underwriting discounts and
commissions and expenses of the offering. The sale resulted in an
increase of approximately $24.9 million in the Company's proportionate
share of Metris' equity, which is included in "Additional paid-in
capital" in the Company's Consolidated Statements of Financial Position.
21. CONTINGENCIES
The Company is a party to various claims, legal actions, sales tax
disputes and other complaints arising in the ordinary course of business.
In the opinion of management, any losses which may occur are adequately
covered by insurance, are provided for in the consolidated financial
statements, or are without merit and the ultimate outcome of these
matters will not have a material effect on the consolidated financial
position or operations of the Company.
<PAGE> 28
At December 25, 1998, the Company had unused credit line commitments on
its Credit Advantage Card(SM) accounts of $1.3 billion. The Company does
not anticipate that all of its customers will exercise this entire
available credit at any one time. Commitments on credit card lines are
cancelable at any time.
22. SUBSEQUENT EVENTS (Unaudited)
On March 18, 1999, Bengal Subsidiary Corp., a wholly owned Subsidiary of
Federated Department Stores, Inc., acquired the majority of the
outstanding common shares of the Company.
On January 6, 1999, the Company increased its 19.9 percent investment in
PC Flowers and Gifts to 40 percent. Beginning in 1999, the Company will
account for PC Flowers and Gifts using the equity method of accounting.
On January 26, 1999, the Company acquired a 19.9 percent equity interest
in Roxy Systems, Inc., a leading marketer of digital technology products
on the Internet.
On January 6, 1999, the Company closed on the acquisition of Bedford
Fair, a direct marketer of apparel. The acquisition will be accounted for
as a purchase.
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Fingerhut Companies, Inc.:
We have audited the accompanying consolidated statements of financial position
of Fingerhut Companies, Inc. (the "Company") as of December 25, 1998 and
December 26, 1997 and the related consolidated statements of earnings, changes
in stockholders' equity and cash flows for each of the fiscal years in the
three-year period ended December 25, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fingerhut Companies, Inc. as of December 25, 1998 and December 26, 1997, and
the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended December 25, 1998, in conformity with
generally accepted accounting principles.
/KPMG Peat Marwick LLP/
Minneapolis, Minnesota
January 20, 1999
<PAGE> 1
EXHIBIT 99.3
AUDITOR'S CONSENT
The Board of Directors
Fingerhut Companies, Inc.:
We consent to the use of our report included herein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 18, 1999
