10-Q 1 spglnovfil.txt SPIEGEL, INC. 3RD QTR 2000 FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 2000 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ............. to ............... Commission file number 0-16126 SPIEGEL, INC. (Exact name of registrant as specified in its charter) Delaware 36-2593917 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3500 Lacey Road, Downers Grove, Illinois 60515-5432 (Address of principal executive offices) (Zip Code) 630-986-8800 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of each of the issuer's classes of common stock, as of November 10, 2000 are as follows: Class A non-voting common stock, $1.00 par value 14,854,244 shares Class B voting common stock, $1.00 par value 117,009,869 shares -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SPIEGEL, INC. AND SUBSIDIARIES Index to Quarterly Report on Form 10-Q Thirteen and Thirty-nine Weeks Ended September 30, 2000 PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets, September 30, 2000, October 2, 1999 and January 1, 2000 3 Consolidated Statements of Earnings, Thirteen and Thirty-nine Weeks Ended September 30, 2000 and October 2, 1999 4 Consolidated Statements of Cash Flows, Thirty-nine Weeks Ended September 30, 2000 and October 2, 1999 5 Notes to Consolidated Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 12 2 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SPIEGEL, INC. AND SUBSIDIARIES Consolidated Balance Sheets ($000s omitted, except per share amounts)
(unaudited) (unaudited) September 30, October 2, January 1, 2000 1999 2000 ------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 48,189 $ 58,024 $ 46,023 Receivables, net 1,066,296 750,125 971,566 Inventories 649,806 587,475 499,413 Prepaid expenses 118,140 111,877 101,915 Refundable income taxes -- 11,845 3,830 Deferred income taxes 41,370 25,969 41,397 ------------- ------------ ------------ Total current assets 1,923,801 1,545,315 1,664,144 Property and equipment, net 334,023 336,391 333,852 Intangible assets, net 146,656 150,070 148,143 Other assets 117,685 90,059 95,901 ------------- ------------ ------------ Total Assets $ 2,522,165 $ 2,121,835 $ 2,242,040 ------------- ------------ ------------ ------------- ------------ ------------ LIABILITIES and STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 125,714 $ 209,464 $ 214,464 Accounts payable and other accrued liabilities 654,676 506,339 644,455 ------------- ------------ ------------ Total current liabilities 780,390 715,803 858,919 Long-term debt, excluding current maturities 877,857 715,572 566,572 Deferred income taxes 91,473 41,002 91,409 ------------- ------------ ------------ Total liabilities 1,749,720 1,472,377 1,516,900 Stockholders' equity: Class A non-voting common stock, $1.00 par value; authorized 16,000,000 shares; 14,854,244, 14,837,844 and 14,849,244 shares issued and outstanding at September 30, 2000, October 2, 1999 and January 1, 2000, respectively 14,854 14,838 14,849 Class B voting common stock, $1.00 par value; authorized 121,500,000 shares; 117,009,869 shares issued and outstanding at September 30, 2000, October 2, 1999 and January 1, 2000 117,010 117,010 117,010 Additional paid-in capital 329,012 328,904 328,984 Accumulated other comprehensive loss: Foreign currency translation adjustment (4,315) (3,530) (2,608) Retained earnings 315,884 192,236 266,905 ------------- ------------ ------------ Total stockholders' equity 772,445 649,458 725,140 ------------- ------------ ------------ Total liabilities and stockholders' equity $ 2,522,165 $ 2,121,835 $ 2,242,040 ------------- ------------ ------------ ------------- ------------ ------------
See accompanying notes to consolidated financial statements. 3 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SPIEGEL, INC. AND SUBSIDIARIES Consolidated Statements of Earnings ($000s omitted, except per share amounts) (unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended ---------------------------- --------------------------- September 30, October 2, September 30, October 2, 2000 1999 2000 1999 ------------- ------------ ------------- ------------ Net sales and other revenues: Net sales $ 644,006 $ 635,112 $ 1,983,253 $ 1,880,968 Finance revenue 102,938 61,754 259,745 170,430 Other revenue 10,659 9,764 35,410 32,362 ------------- ------------ ------------- ------------ 757,603 706,630 2,278,408 2,083,760 ------------- ------------ ------------- ------------ Cost of sales and operating expenses: Cost of sales, including buying and occupancy expenses 421,100 414,730 1,266,984 1,237,550 Selling, general and administrative expenses 292,930 267,199 864,732 781,210 ------------- ------------ ------------- ------------ 714,030 681,929 2,131,716 2,018,760 ------------- ------------ ------------- ------------ Operating income 43,573 24,701 146,692 65,000 Interest expense 22,191 17,595 52,206 46,931 ------------- ------------ ------------- ------------ Earnings before income taxes 21,382 7,106 94,486 18,069 Income tax provision 7,911 2,913 34,960 7,408 ------------- ------------ ------------- ------------ Net earnings $ 13,471 $ 4,193 $ 59,526 $ 10,661 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ Net earnings per common share: Basic and diluted $ 0.10 $ 0.03 $ 0.45 $ 0.08 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ Weighted average number of common shares outstanding: Basic 131,864,113 131,805,972 131,860,871 131,798,635 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ Diluted 131,974,593 132,004,689 131,980,491 131,935,921 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
See accompanying notes to consolidated financial statements. 4 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SPIEGEL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows ($000s omitted) (unaudited)
Thirty-nine Weeks Ended ----------------------------- September 30, October 2, 2000 1999 ------------- ------------ Cash flows from operating activities: Net earnings $ 59,526 $ 10,661 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 50,686 59,953 Incremental securitization income (39,163) (1,383) Changes in assets and liabilities: Increase in receivables, net (55,567) (204,596) Increase in inventories (150,393) (96,560) Increase in prepaid expenses (16,225) (18,487) Decrease in accounts payable and other accrued liabilities (64) (71,198) Increase in income taxes 14,206 5,325 ------------- ------------ Net cash used in operating activities (136,994) (316,285) ------------- ------------ Cash flows from investing activities: Net additions to property and equipment (38,001) (19,861) Net additions to other assets (33,153) (14,846) ------------- ------------ Net cash used in investing activities (71,154) (34,707) ------------- ------------ Cash flows from financing activities: Issuance of debt 407,000 377,000 Payment of debt (184,464) (60,714) Payment of dividends (10,548) -- Exercise of stock options 33 505 ------------- ------------ Net cash provided by financing activities 212,021 316,791 ------------- ------------ Effect of exchange rate changes on cash (1,707) 1,025 Net change in cash and cash equivalents 2,166 (33,176) Cash and cash equivalents at beginning of year 46,023 91,200 ------------- ------------ Cash and cash equivalents at end of period $ 48,189 $ 58,024 ------------- ------------ ------------- ------------ Supplemental cash flow information: Cash paid during the period for: Interest $ 46,151 $ 43,818 ------------- ------------ ------------- ------------ Income taxes $ 25,318 $ 2,860 ------------- ------------ ------------- ------------
See accompanying notes to consolidated financial statements. 5 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SPIEGEL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ($000s omitted) (unaudited) (1) Basis of presentation The consolidated financial statements included herein are unaudited and have been prepared from the books and records of the Company in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. All adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position and operating results for the interim periods are reflected. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's most recent Annual Report on Form 10-K, which includes financial statements for the fiscal year ended January 1, 2000. Due to the seasonality of the Company's business, results for interim periods are not necessarily indicative of the results for the year. (2) Debt In June 2000, the Company amended its existing revolving credit agreement to increase the commitment from $500,000 to $750,000. The current commitment is comprised of two components including a $600,000 long-term agreement maturing in July 2003 and a $150,000 364-day agreement maturing in June 2001. Additionally, in conjunction with the maturity of certain senior and subordinated term indebtedness, the Company entered into seven new senior term loan agreements totaling $200,000, due June 2005 through July 2007. (3) Dividends In April 2000, the Company announced it would resume regular quarterly dividend payments of $0.04 per share. On May 15, 2000, the Company made a quarterly dividend payment totaling $5,274 to shareholders of record on May 8, 2000. On August 21, 2000, the Company made a quarterly dividend payment totaling $5,274 to shareholders of record on August 14, 2000. (4) Comprehensive income The components of comprehensive income for the 13- and 39-week periods ended September 30, 2000 and October 2, 1999 are as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended --------------------------- --------------------------- September 30, October 2, September 30, October 2, 2000 1999 2000 1999 ------------- ------------ ------------- ------------ Net income $ 13,471 $ 4,193 $ 59,526 $ 10,661 Foreign currency translation adjustment (1,141) (266) (1,707) 1,025 ------------- ------------ ------------- ------------ Comprehensive income $ 12,330 $ 3,927 $ 57,819 $ 11,686 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
6 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (5) Accounts payable and other accrued liabilities Accounts payable and other accrued liabilities consist of the following:
September 30, October 2, January 1, 2000 1999 2000 ------------- ------------ ------------ Trade payables $ 189,404 $ 170,979 $ 225,859 Deposits 186,278 72,090 79,475 Gift certificates and other customer credits 40,706 33,600 49,183 Salaries, wages and employee benefits 68,227 49,544 91,377 General taxes 58,406 78,489 87,413 Allowance for future returns 22,485 21,796 34,525 Income taxes 10,285 -- -- Other liabilities 78,885 79,841 76,623 ------------- ------------ ------------ Total accounts payable and other accrued liabilities $ 654,676 $ 506,339 $ 644,455 ------------- ------------ ------------ ------------- ------------ ------------
(6) Segment reporting Segment revenues and operating profit, including a reconciliation to the Company's consolidated earnings before income taxes, consisted of the following:
Thirteen Weeks Ended Thirty-nine Weeks Ended --------------------------- --------------------------- September 30, October 2, September 30, October 2, 2000 1999 2000 1999 ------------- ------------ ------------- ------------ Revenue: Merchandising $ 700,174 $ 686,319 $ 2,154,859 $ 2,030,413 Bankcard 57,429 20,311 123,549 53,347 ------------- ------------ ------------- ------------ Total revenue $ 757,603 $ 706,630 $ 2,278,408 $ 2,083,760 ------------- ------------ ------------- ------------ Operating income: Merchandising $ 3,374 $ 21,617 $ 81,318 $ 57,766 Bankcard 40,557 4,987 66,726 10,405 ------------- ------------ ------------- ------------ Total segment operating income 43,931 26,604 148,044 68,171 Premium on acquisition (358) (1,903) (1,352) (3,171) ------------- ------------ ------------- ------------ Total operating income 43,573 24,701 146,692 65,000 Interest expense 22,191 17,595 52,206 46,931 ------------- ------------ ------------- ------------ Earnings before income taxes $ 21,382 $ 7,106 $ 94,486 $ 18,069 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
7 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ($000s omitted, except per share amounts) RESULTS OF OPERATIONS For the 13 weeks ended September 30, 2000 (third quarter or 13-week period), consolidated operating income increased $18,872 to $43,573 from $24,701 for the comparable period last year. For the 39 weeks ended September 30, 2000 (39-week period), consolidated operating income increased $81,692 to $146,692 from $65,000 for the comparable period last year. The earnings improvement in the third quarter was driven by the favorable performance of the Company's bankcard segment offset somewhat by a lower contribution from the merchandising segment. The earnings improvement in the 39-week period included positive contributions from both the merchandising and bankcard segments. Interest expense was $22,191 and $52,206 for the 13- and 39-week periods, respectively, compared to $17,595 and $46,931 for the comparable prior year periods. The increase in interest expense resulted primarily from higher average debt levels compared to the prior year, driven by funding requirements to support customer receivable growth and increased inventory levels. The Company realized lower average interest rates in total for the current year, primarily due to a decrease in debt-related fees compared to the prior year. The Company's consolidated effective tax rate for the 13- and 39-week periods was 37% compared to 41% in the same periods last year. State tax rates have been affected by changes in earnings mix among the Company's various divisions. Consolidated net earnings for the third quarter were $13,471, or $0.10 per share basic and diluted, compared to $4,193, or $0.03 per share basic and diluted for the comparable 1999 period. Consolidated net earnings for the 39-week period were $59,526, or $0.45 per share basic and diluted, compared to $10,661, or $0.08 per share basic and diluted, for the comparable 1999 period. The Company, like other retailers, experiences seasonal fluctuations in its revenues and net earnings. Historically, a significant amount of the Company's net sales and a majority of its net earnings have been realized during the fourth quarter. Accordingly, the results for the 13- and 39-week periods are not necessarily indicative of the results to be expected for the entire year. Segment results: Operating results for the Company are reported for two segments: merchandising and bankcard. The merchandising segment is an aggregation of the Company's three merchant divisions: Eddie Bauer, Newport News and Spiegel, and includes the FCNB Preferred credit operation. The bankcard segment represents the bankcard operations of First Consumers National Bank (FCNB), the Company's special-purpose bank. Corporate expenses are allocated completely to both segments based on an equitable division of costs. The Company routinely securitizes FCNB Preferred and FCNB bankcard credit card receivables to fund the growth of its receivable portfolios. When the Company sells receivables in securitizations of credit card loans, it retains interest-only strips, subordinated tranches, servicing rights, and in some cases a cash reserve account, all of which are residual interests in the securitized receivables. Gains or losses on the sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the residual interests based on their fair value at the date of transfer. Quoted market prices are not available for residual interests, so the Company estimates fair value based on the present value of future expected cash flows using management's best estimates of the key assumptions including credit losses, payment speeds, forward yield curves, and discount rates commensurate with the risks involved. Gains and losses recognized upon securitization of credit card receivables and subsequent fair value adjustments on residual interests are recorded as securitization income and are included in finance revenue. Also included in finance revenue are cash flows from the trust resulting from these residual interests. This residual interest income represents the excess cash flows related to securitized receivables that revert back to the Company after payment of interest to investors, related credit losses and servicing fees. 8 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Merchandising segment:
Thirteen Weeks Ended Thirty-nine Weeks Ended --------------------------- --------------------------- September 30, October 2, September 30, October 2, 2000 1999 2000 1999 ------------- ------------ ------------- ------------- Catalog net sales $ 318,640 $ 315,614 $ 1,021,320 $ 985,268 E-commerce net sales 48,990 15,402 132,146 32,751 ------------- ------------ ------------- ------------ Total direct net sales 367,630 331,016 1,153,466 1,018,019 Retail store net sales 276,376 304,096 829,787 862,949 ------------- ------------ ------------- ------------ Total net sales 644,006 635,112 1,983,253 1,880,968 Finance revenue 46,545 41,442 139,780 117,082 Other revenue 9,623 9,765 31,826 32,363 ------------- ------------ ------------- ------------ Total revenue $ 700,174 $ 686,319 $ 2,154,859 $ 2,030,413 ------------- ------------ ------------- ------------ Operating income $ 3,374 $ 21,617 $ 81,318 $ 57,766 ------------- ------------ ------------- ------------ % change: Total net sales 1% 15% 5% 11% Comparable-store sales -15% 9% -7% 7% Total revenue 2% 15% 6% 11% ------------- ------------ ------------- ------------ Gross profit margin (% of total net sales) 34.7% 34.7% 36.1% 34.2% SG&A expenses (% of total revenue) 39.4% 36.5% 37.5% 36.2% Operating income (% of total revenue) 0.5% 3.1% 3.8% 2.8% ------------- ------------ ------------- ------------
For the 13-week period, operating income for the merchandising segment was $3,374 compared to $21,617 for the prior year period. Positive sales growth and margin performance at Newport News and Spiegel were offset by declines at Eddie Bauer and a lower contribution from the FCNB Preferred credit operation. For the 39-week period, operating income increased 41% to $81,318, from $57,766 for the prior year period. The year-to-date period reflects the continued strong performance of Newport News and Spiegel, somewhat offset by declines at Eddie Bauer. Total merchandising revenue increased 2% in the third quarter to $700,174, resulting from a 1% increase in net sales and a 12% increase in finance revenue. The 1% net sales increase in the third quarter included an 11% increase in direct net sales offset by a 9% decline in retail store net sales. Total merchandising revenue increased 6% in the 39-week period, resulting from a 5% increase in net sales and a 19% increase in finance revenue. The 5% increase in net sales for the 39-week period included a 13% increase in direct net sales, offset by a 4% decline in retail store net sales. The direct sales channel is comprised of catalog and e-commerce sales. E-commerce net sales drove the increase in direct sales, rising 218% in the third quarter and 303% in the 39-week period over the prior year periods. Catalog net sales increased 1% in the third quarter and 4% for the 39-week period, as strong sales growth at Newport News and Spiegel was substantially offset by declines at Eddie Bauer. Newport News and Spiegel continue to benefit from positive customer response to merchandise offerings on increased catalog circulation. Retail store net sales declined 9% in the quarter, reflecting a 15% decline in Eddie Bauer comparable store sales, partially offset by higher outlet store sales. For the 39-week period, Eddie Bauer comparable-store sales were 7% lower than last year. 9 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FCNB Preferred credit finance revenue increased 12% to $46,545 for the third quarter from the comparable prior-year period. For the 39-week period, finance revenue increased 19% to $139,780 from $117,082 in the prior year period. The increase in finance revenue was primarily attributable to an increase in average receivables owned, reflecting sales growth at Newport News and Spiegel accompanied by an increase in customer utilization of the private-label credit programs. An improved finance charge yield on average receivables serviced, which resulted from variable-rate pricing, was more than offset by lower credit fees and an increase in finance charge and credit fee write-offs. Residual interest income was negatively impacted by an increase in credit losses on securitized receivables compared to last year. The Company sold an additional $67,578 and $222,579 of receivables in the 13- and 39-week periods, respectively. Gains related to the sale of receivables in the quarter were more than offset by losses recorded to adjust residual interests to fair value, resulting in a net decrease to finance revenue of $59. For the 39-week period, securitization income added $13,588 to finance revenue compared to $1,959 for the prior year. Gross profit margin on net sales for the merchandising segment was 34.7% in the third quarter, flat to the comparable prior year period. Margin growth achieved by Newport News and Spiegel was offset by lower margins at Eddie Bauer. The favorable margin performance at Newport News and Spiegel resulted primarily from higher initial profits. In addition to benefiting from a shift in sales mix towards higher-margin apparel and private-label products, Spiegel also achieved margin growth from stronger customer response to merchandise offerings and, in turn, lower markdowns compared to last year. Eddie Bauer experienced lower margins in the quarter due to higher markdowns taken to sell through slow-moving merchandise. For the 39-week period, gross profit margin on net sales increased to 36.1% from 34.2% in the comparable 1999 period reflecting the margin improvement at Newport News and Spiegel. For the third quarter, the selling, general and administrative (SG&A) expense ratio increased 290 basis points to 39.4% of total revenue compared to 36.5% in the same period last year. For the 39-week period, the SG&A ratio increased 130 basis points to 37.5% of total revenue compared to 36.2% in the same period last year. The increase resulted primarily from the lack of operating expense leverage at Eddie Bauer due to lower sales, and included higher credit losses experienced in the FCNB Preferred credit portfolio. Bankcard segment:
Thirteen Weeks Ended Thirty-nine Weeks Ended ---------------------------- --------------------------- September 30, October 2, September 30, October 2, 2000 1999 2000 1999 ------------- ------------ ------------- ------------ Total revenue $ 57,429 $ 20,311 $ 123,549 $ 53,347 Operating income $ 40,557 $ 4,987 $ 66,726 $ 10,405 ------------- ------------ ------------- ------------
Bankcard revenue increased 183% to $57,429 for the third quarter, compared to $20,311 for the prior year period. The growth in revenue was primarily attributable to a 60% increase in average receivables owned, higher securitization income and an improved yield. Residual interest income was negatively impacted in the quarter by an increase in interest payable to investors on variable-rate securitizations. The yield on average receivables serviced benefited from variable-rate pricing, offset slightly by lower credit fee income. The securitization of $130,000 of customer receivables in the third quarter, combined with gains taken to adjust residual interests to fair value, added $15,567 of securitization income to finance revenue. Comparatively, the 1999 third quarter revenue was reduced by $566, as gains related to new securitizations were more than offset by adjustments to record residual interests to fair value. 10 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- For the 39-week period, bankcard revenue increased 132% to $123,549, compared to $53,347 for the prior-year period. The growth in revenue was primarily attributable to a 69% increase in average receivables owned, higher securitization income and an increase in residual interest income. While the finance charge yield on average receivables serviced benefited from variable-rate pricing, the net yield declined somewhat due to lower credit fee income. Residual interest income increased significantly compared to the prior year, as the comparable 1999 period was negatively impacted by an increase in credit losses related to certain bankcard test programs. Securitization of $224,000 of customer receivables in the 39-week period, combined with gains taken to adjust residual interests to fair value, added $25,575 of securitization income to finance revenue. Comparatively, the 1999 period revenue was reduced by $566, as gains related to new securitizations in the quarter were more than offset by adjustments to record residual interests to fair value. For the 13-week period, operating income for the bankcard segment was $40,557, compared to $4,987 for the prior-year period. For the 39-week period, operating income increased to $66,726 from $10,405 for the prior-year period. In addition to the above described revenue growth, the bankcard segment continues to benefit from improved credit loss rates and delinquency trends, due in part to a shift in the portfolio mix to lower-risk credit products relative to the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company has historically met its operating and cash requirements through funds generated from operations, the securitization of customer accounts receivable and the issuance of debt and common stock. Total customer receivables sold were $2,086,560 at September 30, 2000, $1,411,980 at October 2, 1999 and $1,639,981 at January 1, 2000. Net cash used by operating activities totaled $136,994 and $316,285 for the 39-week periods ended September 30, 2000 and October 2, 1999, respectively. Cash provided by securitization activity increased $455,329 over the prior-year period, minimizing the need to fund the significant growth in customer receivables through other sources. Excluding receivables, net cash flow from operations improved $30,262 compared to the prior year. Favorable operating results and cash provided by the issuance of jumbo certificates of deposit by the Company's special purpose bank drove the improvement, offset somewhat by increased investment in inventories to support sales growth and targeted servicing levels. Total inventories ended the period 11% higher than last year levels. Net cash used in investing activities totaled $71,154 for the 39-week period compared to $34,707 in the same period last year. Expenditures in the current year were comprised primarily of Eddie Bauer retail store expansion and remodeling, distribution facility upgrades and information technology-related projects. Expenditures in the comparable 1999 period were primarily related to Eddie Bauer retail store expansion and remodeling and information-technology related projects. In April 2000, the Company announced it would resume regular quarterly dividend payments of $0.04 per share. On May 15, 2000, the Company made a quarterly dividend payment totaling $5,274 to shareholders of record on May 8, 2000. On August 21, 2000, the Company made a quarterly dividend payment totaling $5,274 to shareholders of record on August 14, 2000. The Company believes that its cash on hand, together with cash flows anticipated to be generated from operations, borrowings under existing credit facilities, securitizations of customer receivables and other available sources of funds, will be adequate to fund the Company's capital and operating requirements for the foreseeable future. 11 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- MARKET RISK The Company is exposed to market risk from changes in interest rates, the securitization of customer receivables and, to a lesser extent, foreign currency exchange rate fluctuations. In seeking to minimize risk, the Company manages exposure through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for speculative purposes and is not party to any leveraged financial instruments. Interest rates: The Company manages interest rate exposure through a mix of fixed- and variable-rate financings. The Company is generally able to meet certain targeted objectives through its direct borrowings. Substantially all of the Company's variable-rate exposure relates to changes in the one-month LIBOR rate. If the one-month LIBOR rate had changed by 50 basis points, the Company's third quarter 2000 interest expense would have changed by approximately $672. In addition, the Company occasionally utilizes derivative financial instruments to reach its targeted objectives. Interest rate swaps may be used to minimize interest rate exposure when appropriate based on market conditions. The notional amounts of the Company's interest rate swap agreements totaled $58,571 at September 30, 2000. The Company believes that its interest rate exposure management policies, including the use of derivative financial instruments, are adequate to manage market risk exposure. Securitizations: In conjunction with its asset-backed securitizations, the Company recognizes gains representing the present value of estimated future cash flows the Company will receive over the estimated outstanding period of the asset securitization. These future cash flows consist of an estimate of the excess of finance charges and fees over the sum of the return paid to certificate holders, contractual servicing fees, and credit losses along with the future finance charges and principal collections related to interests in the customer receivables retained by the Company. These estimates are calculated utilizing the current performance trends of the receivable portfolios. Certain estimates inherent in determining the present value of these estimated future cash flows are influenced by factors outside the Company's control, and, as a result, could materially change in the near term. Foreign currency exchange rates: The Company is subject to foreign currency exchange risk related to its Canadian operations, as well as its joint venture investments in Germany and Japan. The Company is party to certain transactions with the above joint ventures that are denominated in foreign currencies. The Company monitors the exchange rates related to these currencies on a continual basis and will enter into forward derivative contracts for foreign currency when deemed advantageous based on current pricing and historical information. The Company believes that its foreign exchange risk and the effect of this hedging activity are not material due to the size and nature of the above operations. ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," establish accounting and reporting standards for derivatives and for hedging activities. As issued, SFAS No. 133 was effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued, effectively deferring the date of required adoption of SFAS No. 133 to fiscal quarters of all fiscal years beginning after June 15, 2000. Due to its limited use of derivative instruments, the Company does not expect the adoption of the above standards to have a material effect on the consolidated results of operations or financial position. The Company will adopt SFAS No. 133 and SFAS No. 138, as required, in fiscal year 2001. 12 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," supercedes SFAS No. 125. SFAS 140 requires additional disclosures relating to securitized financial assets, retained interests in securitized financial assets, and collateral for fiscal years ending after December 15, 2000. In addition, SFAS No. 140 establishes new conditions for an entity to be a qualifying special purpose entity and clarifies under what conditions a transferor has retained effective control over transferred assets. The updated rules for transfers of financial assets are effective for transfers occurring after March 31, 2001 and generally do not affect the accounting for previous transfers. Early adoption of the new rules is not allowed. The Company has not yet determined what impact SFAS No. 140 might have on its consolidated financial position and results of operations. FORWARD-LOOKING STATEMENTS This report contains statements that are forward-looking within the meaning of applicable federal securities laws and are based upon the Company's current expectations and assumptions, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. Potential risks and uncertainties include, but are not limited to, factors such as the financial strength and performance of the retail and direct marketing industry, changes in consumer spending patterns, dependence on the securitization of accounts receivable to fund operations, state and federal laws and regulations related to offering and extending credit, risks associated with collections on the Company's credit card portfolios, interest rate fluctuations, postal rate increases, paper and printing costs, the success of planned merchandising, advertising, marketing and promotional campaigns, as well as other risks indicated in other filings with the Securities and Exchange Commission such as the Company's most recent Annual Report on Form 10-K. 13 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SIGNATURE 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. SPIEGEL, INC.
Signature Title Date ------------------------- -------------------------- ---------------- /s/ James W. Sievers Office of the President and November 14, 2000 James W. Sievers Chief Financial Officer (Principal Operating Executive Officer and Principal Financial and Accounting Officer)