10-Q 1 spglnovfil01.txt SPIEGEL, INC. 3RD QTR 2001 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 29, 2001 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 9, 2001 are as follows: Class A non-voting common stock, $1.00 par value 14,945,144 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 29, 2001 PART I - FINANCIAL INFORMATION PAGE Item 1 - Financial Statements Consolidated Balance Sheets, September 29, 2001, September 30, 2000 and December 30, 2000 3 Consolidated Statements of Earnings, Thirteen and Thirty-nine Weeks Ended September 29, 2001 and September 30, 2000 4 Consolidated Statements of Cash Flows, Thirty-nine Weeks Ended September 29, 2001 and September 30, 2000 5 Notes to Consolidated Financial Statements 6-9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14-15 SIGNATURE 17 2 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SPIEGEL, INC. AND SUBSIDIARIES Consolidated Balance Sheets ($000s omitted, except per share amounts)
(unaudited) (unaudited) September 29, September 30, December 30, 2001 2000 2000 ------------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 73,226 $ 48,189 $ 143,822 Receivables, net 1,106,607 1,066,296 1,113,451 Inventories 607,729 649,806 562,863 Prepaid expenses 121,548 118,140 109,220 Deferred income taxes 52,826 41,370 52,858 ------------- ------------- ------------- Total current assets 1,961,936 1,923,801 1,982,214 ------------- ------------- ------------- Property and equipment, net 366,272 334,023 347,557 Intangible assets, net 141,522 146,656 142,730 Other assets 180,966 117,685 110,518 ------------- ------------- ------------- Total Assets $ 2,650,696 $ 2,522,165 $ 2,583,019 ------------- ------------- ------------- ------------- ------------- ------------- LIABILITIES and STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 30,214 $ 125,714 $ 107,714 Accounts payable and accrued liabilities 522,626 644,391 813,553 Income taxes payable 24,245 10,285 26,637 ------------- ------------- ------------- Total current liabilities 577,085 780,390 947,904 ------------- ------------- ------------- Long-term debt, excluding current maturities 1,162,643 877,857 686,857 Deferred income taxes 118,525 91,473 120,776 ------------- ------------- ------------- Total liabilities 1,858,253 1,749,720 1,755,537 ------------- ------------- ------------- Stockholders' equity: Class A non-voting common stock, $1.00 par value; authorized 16,000,000 shares; 14,945,144, 14,854,244 and 14,855,244 shares issued and outstanding at September 29, 2001, September 30, 2000 and December 30, 2000, respectively 14,945 14,854 14,855 Class B voting common stock, $1.00 par value; authorized 121,500,000 shares; 117,009,869 shares issued and outstanding 117,010 117,010 117,010 Additional paid-in capital 334,150 329,012 329,015 Accumulated other comprehensive loss (10,217) (4,315) (5,299) Retained earnings 336,555 315,884 371,901 ------------- ------------- ------------- Total stockholders' equity 792,443 772,445 827,482 ------------- ------------- ------------- Total liabilities and stockholders' equity $ 2,650,696 $ 2,522,165 $ 2,583,019 ------------- ------------- ------------- ------------- ------------- -------------
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 29, September 30, September 29, September 30, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Net sales and other revenues: Net sales $ 574,735 $ 644,006 $ 1,861,139 $ 1,983,253 Finance revenue 63,180 99,882 203,181 249,919 Other revenue 65,837 63,656 214,669 207,704 ------------- ------------- ------------- ------------- 703,752 807,544 2,278,989 2,440,876 ------------- ------------- ------------- ------------- Cost of sales and operating expenses: Cost of sales, including buying and occupancy expenses 378,341 412,176 1,191,484 1,239,338 Selling, general and administrative expenses 326,798 351,795 1,062,872 1,054,846 ------------- ------------- ------------- ------------- 705,139 763,971 2,254,356 2,294,184 ------------- ------------- ------------- ------------- Operating income (loss) (1,387) 43,573 24,633 146,692 Interest expense 18,101 22,191 55,571 52,206 ------------- ------------- ------------- ------------- Earnings (loss) before income taxes (19,488) 21,382 (30,938) 94,486 Income tax provision (benefit) (7,183) 7,911 (11,420) 34,960 ------------- ------------- ------------- ------------- Earnings (loss) before cumulative effect of accounting change (12,305) 13,471 (19,518) 59,526 Cumulative effect of accounting change (net of income tax benefit of $2,503) -- -- -- 4,076 ------------- ------------- ------------- ------------- Net earnings (loss) $ (12,305) $ 13,471 $ (19,518) $ 55,450 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Net earnings (loss) per common share before cumulative effect of accounting change, basic and diluted $ (0.09) $ 0.10 $ (0.15) $ 0.45 Cumulative effect of accounting change -- -- -- 0.03 ------------- -------------- -------------- ------------- Net earnings (loss) per common share $ (0.09) $ 0.10 $ (0.15) $ 0.42 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding: Basic 131,926,286 131,864,113 131,893,049 131,860,871 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Diluted 131,926,286 131,974,593 131,893,049 131,980,491 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
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 29, September 30, 2001 2000 ------------- ------------- Cash flows from operating activities: Net earnings (loss) $ (19,518) $ 55,450 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Cumulative effect of accounting change -- 4,076 Depreciation and amortization 53,108 50,686 Net pretax gains on sale of receivables (43,728) (39,163) Deferred income taxes -- 91 Changes in assets and liabilities: (Increase) decrease in receivables, net 50,161 (55,567) Increase in inventories (45,687) (150,393) Increase in prepaid expenses (12,382) (16,225) Decrease in accounts payable and accrued liabilities (296,829) (64) Increase (decrease) in income taxes (2,392) 14,115 ------------- ------------- Net cash used in operating activities (317,267) (136,994) ------------- ------------- Cash flows from investing activities: Net additions to property and equipment (59,176) (38,001) Net additions to other assets (82,218) (33,153) ------------- ------------- Net cash used in investing activities (141,394) (71,154) ------------- ------------- Cash flows from financing activities: Issuance of debt 494,000 407,000 Payment of debt (95,714) (184,464) Payment of dividends (15,828) (10,548) Other financing activities 4,661 -- Exercise of stock options 564 33 ------------- ------------- Net cash provided by financing activities 387,683 212,021 ------------- ------------- Effect of exchange rate changes on cash 382 (1,707) ------------- ------------- Net change in cash and cash equivalents (70,596) 2,166 Cash and cash equivalents at beginning of year 143,822 46,023 ------------- ------------- Cash and cash equivalents at end of period $ 73,226 $ 48,189 ------------- ------------- ------------- ------------- Supplemental cash flow information Cash paid during the period for: Interest $ 53,186 $ 30,637 ------------- ------------- ------------- ------------- Income taxes $ 22,822 $ 21,206 ------------- ------------- ------------- -------------
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 accounting principles generally accepted in the United States of America 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 December 30, 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) Reclassifications Certain prior period amounts have been reclassified to conform with the current presentation. In fiscal 2000, the Company reclassified shipping and handling revenue from selling, general and administrative (SG&A) expense to other revenue in response to Emerging Issues Task Force (EITF) Issue No. 00-10. The Company also reclassified certain occupancy expense from cost of sales to SG&A expense. In the third quarter of 2001, the Company reclassified certain amounts previously recorded as finance revenue to SG&A to eliminate the effect of an intercompany transaction from the consolidated statements of earnings. (3) Securitization Transactions Effective April 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which superceded SFAS 125. 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 were effective for transfers occurring after March 31, 2001 and generally do not affect the accounting for previous transfers. The adoption of SFAS No. 140 did not have a material effect on the Company's consolidated results of operations or financial position. (4) Debt In September 2001, the Company entered into a revolving credit agreement with Otto Versand (GmbH & Co), a related party. The initial availability under this credit agreement was $75,000. The credit agreement bears interest at a variable rate based on LIBOR plus a margin, comparable to the Company's other revolving credit agreements. The initial agreement extended through December 15, 2001. In November 2001, this revolving credit agreement with Otto Versand (GmbH & Co) was increased from $75,000 to $100,000 and the maturity date was extended from December 15, 2001 to June 15, 2002. At September 29, 2001, there were no outstanding borrowings under this agreement. The Company's existing debt agreements have restrictive covenants, including restrictions on the payment of dividends. Financial covenants establish minimum levels of tangible net worth and require the maintenance of certain ratios, including fixed charge coverage (Coverage), total debt to equity (Leverage), and adjusted total debt to earnings before interest, taxes, depreciation and amortization, and rents (Debt to EBITDAR). Additionally, these and certain other debt agreements contain cross default provisions. At September 29, 2001, the Company was in compliance with all financial covenants. 6 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (5) Derivatives and Hedging Activities Effective December 31, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. All derivative financial instruments, such as interest rate swap agreements and foreign currency forward contracts, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a cash flow hedge, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The Company currently is party to interest rate swap agreements and foreign currency forward contracts that are designated as cash flow hedges under SFAS No. 133. The adoption of SFAS No. 133 on December 31, 2000, resulted in a cumulative reduction to OCI of $1,566 (net of income tax benefit of $919). The reduction to OCI was attributable to losses of $1,768 (net of income tax benefit of $1,037) on interest rate swap agreements offset slightly by a $202 gain (net of taxes of $118) on foreign currency forward contracts. As of December 31, 2000, interest rate swaps were reflected at a fair value of $2,805 in accrued liabilities and foreign currency forward contracts were reflected at a fair value of $320 in other assets. The adoption of SFAS No. 133 did not have a material effect on the Company's earnings. Use of derivative financial instruments: The Company uses derivative financial instruments principally to manage the risk that changes in interest rates will affect the amount of its future interest payments, and to a lesser extent, to manage risk associated with future cash flows in foreign currencies. The Company does not enter into derivative financial instruments for any purpose other than cash flow hedging purposes. The Company does not use derivative financial instruments for trading or other speculative purposes. Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk that results from these instruments relates to changes in interest rates and foreign currency exchange rates. Credit risk relates to the risk of nonperformance by a counterparty to one of the Company's derivative transactions. The Company believes that there is no significant credit risk associated with the potential failure of any counterparty to perform under the terms of any derivative financial instrument. Interest rate risk management: The Company uses a mix of fixed- and variable-rate debt to finance its operations. Variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. To limit the variability of a portion of these interest payments, the Company will enter into receive-variable, pay-fixed interest rate swaps. Under these interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments; thereby creating fixed-rate debt. The variable-rate of interest received is based on the same terms, including interest rates, notional amounts and payment schedules, as the hedged interest payments on the variable-rate debt. These interest rate swaps are considered to be perfectly effective; therefore, changes in fair value are reflected in OCI and not recognized in earnings until the related interest payments are made. The notional amounts of the Company's interest rate swap agreements at September 29, 2001, totaled $65,000. At September 29, 2001, the fair value of these interest rate swap agreements recorded in accrued liabilities was $6,302. These fair values were obtained from financial institutions and represent the estimated amount the Company would pay to terminate the agreements, taking into consideration current interest rates and risks of the transactions. The offsetting amount is a loss of $3,971 (net of income tax benefit of $2,331) reflected in accumulated other comprehensive income (AOCI). The Company estimates that $2,213 of the total net derivative losses related to interest rate swap agreements included in AOCI as of September 29, 2001, will be reclassified into earnings during the twelve months ended September 28, 2002. 7 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The Company assesses interest rate cash flow exposure by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company's outstanding and forecasted debt obligations as well as the Company's offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company's future cash flows. Foreign currency risk management: The Company is subject to foreign currency exchange rate risk related to its Canadian operations, as well as its joint venture investments in Germany and Japan. The Company occasionally enters into foreign currency forward contracts to minimize the variability caused by foreign currency risk related to certain forecasted semi-annual transactions with the joint ventures that are denominated in foreign currencies. The principal currency hedged is the Japanese yen. During the 39 weeks ended September 29, 2001, derivative gains of $202 (net of taxes of $118) were reclassified to earnings upon settlement of the hedged transactions. There were no unrealized gains or losses related to foreign currency forward contracts included in AOCI as of September 29, 2001. Hedge ineffectiveness, determined in accordance with SFAS No. 133, had no impact on earnings for the 39 weeks ended September 29, 2001. The Company monitors its foreign currency exposures on a continual basis to maximize the overall effectiveness of its foreign currency hedge positions. (6) Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss The components of comprehensive income (loss) are as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------------- -------------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net earnings (loss) $ (12,305) $ 13,471 $ (19,518) $ 55,450 Cumulative effect of a change in accounting for derivative financial instruments (net of tax benefit) -- -- (1,566) -- Unrealized loss on derivatives (net of tax benefit) (1,778) -- (2,405) -- Foreign currency translation adjustment (816) (1,141) (947) (1,707) ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (14,899) $ 12,330 $ (24,436) $ 53,743 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The components of accumulated other comprehensive loss are as follows:
Sept. 29, Sept. 30, December 30, 2001 2000 2000 ------------ ------------ ------------- Accumulated loss on derivative financial instruments (net of tax benefit of $2,331) $ (3,971) $ -- $ -- Foreign currency translation adjustment (6,246) (4,315) (5,299) ------------ ------------ ------------- Accumulated other comprehensive loss $ (10,217) $ (4,315) $ (5,299) ------------ ------------ ------------- ------------ ------------ -------------
8 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- (7) Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following:
Sept. 29, Sept. 30, December 30, 2001 2000 2000 ------------ ------------ ------------- Trade payables $ 148,875 $ 189,404 $ 258,804 Deposits 119,606 186,278 190,906 Gift certificates and other customer credits 46,787 40,706 54,067 Salaries, wages and employee benefits 54,247 68,227 110,254 General taxes 55,154 58,406 72,205 Allowance for future returns 18,711 22,485 35,334 Other liabilities 79,246 78,885 91,983 ------------ ------------ ------------- Total accounts payable and accrued liabilities $ 522,626 $ 644,391 $ 813,553 ------------ ------------ ------------- ------------ ------------ -------------
(8) Segment Reporting Segment revenues and operating profit, including a reconciliation to the Company's consolidated earnings (loss) before income taxes, consist of the following:
Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------------- -------------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenue: Merchandising $ 653,370 $ 750,115 $ 2,141,479 $ 2,317,327 Bankcard 50,382 57,429 137,510 123,549 ------------ ------------ ------------ ------------ Total revenue $ 703,752 $ 807,544 $ 2,278,989 $ 2,440,876 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating income (loss): Merchandising $ (33,912) $ 3,374 $ (47,386) $ 81,318 Bankcard 32,925 40,557 72,892 66,726 ------------ ------------ ------------ ------------ Total segment operating income (loss) (987) 43,931 25,506 148,044 Premium on acquisitions (400) (358) (873) (1,352) ------------ ------------ ------------ ------------ Total operating income (loss) (1,387) 43,573 24,633 146,692 Interest expense 18,101 22,191 55,571 52,206 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes $ (19,488) $ 21,382 $ (30,938) $ 94,486 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Segment assets, including a reconciliation to the Company's consolidated total assets, are as follows:
Sept. 29, Sept. 30, December 30, 2001 2000 2000 ------------ ------------ ------------- Merchandising $ 2,031,213 $ 2,002,440 $ 1,904,952 Bankcard 470,223 365,536 527,934 Premium on acquisitions 149,260 154,189 150,133 ------------ ------------ ------------- Total assets $ 2,650,696 $ 2,522,165 $ 2,583,019 ------------ ------------ ------------- ------------ ------------ -------------
(9) Subsequent Event On November 13, 2001, the Company announced the discontinuance of its dividend payments to shareholders, effective December 30, 2001. The Company evaluates its dividend policy on an ongoing basis and has determined that cash generated from existing operations should be used to fund internal capital requirements. 9 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ($000s omitted, except per share amounts) RESULTS OF OPERATIONS The Company recorded a consolidated operating loss of $1,387 for the 13 weeks ended September 29, 2001 (third quarter or 13-week period), compared to operating income of $43,573 for the 13 weeks ended September 30, 2000. For the 39 weeks ended September 29, 2001 (39-week period), consolidated operating income was $24,633, compared to $146,692 for the same period last year. The $44,960 decrease in operating income in the third quarter included a $37,286 decline in the merchandising segment and a $7,632 decline in the bankcard segment. The $122,059 decrease in operating income for the 39-week period included a $128,704 decline in the merchandising segment and a $6,166 improvement in the bankcard segment. The earnings decline in the merchandising segment was attributable primarily to higher charge-offs experienced in the private-label FCNB Preferred credit business and weak customer response at each merchant division. Interest expense was $18,101 and $22,191 for the 13 weeks ended September 29, 2001 and September 30, 2000, respectively. Interest expense in the third quarter benefited from lower average borrowing rates, offset slightly by higher average debt levels. Interest expense totaled $55,571 for the 39-week period, compared to $52,206 for the same period last year. The increase in interest expense in the 39-week period resulted primarily from higher average debt levels, partially offset by lower average borrowing rates. The Company's consolidated effective tax rate was 37% for all periods presented. The Company assesses its effective tax rate on a continuous basis. The consolidated net loss for the third quarter totaled $12,305, or $0.09 per share, compared to consolidated net earnings of $13,471, or $0.10 per share, for the same period last year. The consolidated net loss for the 39-week period totaled $19,518, or $0.15 per share, compared to consolidated net earnings of $55,450, or $0.42 per share, for the same period last year. Results for the 39-week period last year included the cumulative effect of an accounting change recorded in response to Staff Accounting Bulletin No. 101, "Revenue Recognition," that reduced net earnings by $4,076 (net of income tax benefit of $2,503), or $0.03 per share. All references to earnings per share are on a diluted basis. The Company, like other retailers, experiences seasonal fluctuations in its revenue and net earnings. Historically, a disproportionate amount of the Company's 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 private-label FCNB Preferred credit operation. The bankcard segment represents the bankcard operations of First Consumers National Bank, the Company's special-purpose bank. The Company allocates its corporate expenses to both segments. The Company routinely securitizes FCNB Preferred credit card and FCNB bankcard receivables to fund the growth of its receivables. When the Company securitizes credit card receivables, it retains interest-only strips, subordinated investor certificates, receivables, servicing rights, and cash reserve accounts, all of which are retained interests in the securitized receivables. Gains or losses on the sale of receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. Quoted market prices are not available for retained interests; therefore, the Company estimates the fair value based on the present value of future expected cash flows using management's best estimates of the key assumptions including portfolio yield, charge-offs, liquidation rates, interest rates, and discount rates commensurate with the risks involved. Gains and losses recognized upon securitization of credit card receivables and subsequent fair value adjustments to retained interests are recorded as net pretax gains on the sale of receivables and are included in finance revenue. 10 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Also included in finance revenue are cash flows from the trust resulting from these retained interests. This retained-interest income represents the excess cash flows related to securitized receivables that revert to the Company after payment of interest to investors, related charge-offs and servicing fees. Certain prior period amounts in the merchandising segment have been reclassified to conform with the current presentation. In fiscal 2000, the Company reclassified shipping and handling revenue from selling, general and administrative (SG&A) expense to other revenue in response to Emerging Issues Task Force (EITF) Issue No. 00-10. The Company also reclassified certain occupancy expense from cost of sales to SG&A expense. In the third quarter of 2001, the Company reclassified certain amounts previously recorded as finance revenue to SG&A to eliminate the effect of an intercompany transaction from the consolidated statements of earnings. All ratios presented reflect these reclassifications, including gross profit margin as a percent of total net sales and SG&A expense as a percent of total revenue. Merchandising segment:
Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------------- -------------------------- Sept. 29, Sept. 30, Sept. 29, Sept. 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Catalog net sales $ 248,851 $ 318,640 $ 855,255 $ 1,021,320 E-commerce net sales 69,561 48,990 215,673 132,146 ------------ ------------ ------------ ------------ Total direct net sales 318,412 367,630 1,070,928 1,153,466 Retail store net sales 256,323 276,376 790,211 829,787 ------------ ------------ ------------ ------------ Total net sales 574,735 644,006 1,861,139 1,983,253 Finance revenue 14,259 43,489 69,181 129,954 Other revenue 64,376 62,620 211,159 204,120 ------------ ------------ ------------ ------------ Total revenue $ 653,370 $ 750,115 $ 2,141,479 $ 2,317,327 ------------ ------------ ------------ ------------ Operating income (loss) $ (33,912) $ 3,374 $ (47,386) $ 81,318 ------------ ------------ ------------ ------------ % change Total net sales -11% 1% -6% 5% Comparable-store sales -15% -15% -11% -7% Total revenue -13% 3% -8% 7% ------------ ------------ ------------ ------------ Gross profit margin (% of total net sales) 34.2% 36.0% 36.0% 37.5% SG&A expenses (% of total revenue) 47.3% 44.6% 46.6% 43.0% Operating income (loss) (% of total revenue) -5.2% 0.4% -2.2% 3.5% ------------ ------------ ------------ ------------
The third quarter operating loss for the merchandising segment totaled $33,912 compared to operating income of $3,374 for the prior year period. For the 39-week period, the merchandising segment recorded an operating loss of $47,386 compared to operating income of $81,318 for the prior year period. The decline in operating income resulted primarily from a lower contribution from the FCNB Preferred credit operation driven by higher charge-offs, and included the impact of lower customer response at each merchant division. Total merchandising revenue decreased 13% in the third quarter to $653,370 from $750,115 for the comparable prior year period. Lower revenue resulted from an 11% decline in net sales and a 67% decline in finance revenue. The 11% net sales decline in the third quarter included a 13% decrease in direct net sales and a 7% decrease in retail store net sales. Total merchandising revenue decreased 8% in the 39-week period, resulting from a 6% decline in net sales and a 47% decline in finance revenue. The 6% decrease in net sales for the 39-week period included a 7% decline in direct net sales and a 5% decline in retail store net sales. 11 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The direct sales channel is comprised of catalog and e-commerce sales. The 13% decline in direct net sales in the third quarter reflected a 42% increase in e-commerce sales offset by a 22% decrease in catalog net sales. For the 39-week period, a 63% increase in e-commerce sales was offset by a 16% decrease in catalog net sales. Retail store net sales declined 7% in the third quarter, reflecting a 15% decline in Eddie Bauer's comparable-store sales partially offset by higher outlet store sales. Eddie Bauer's comparable-store sales decreased 11% for the 39-week period. Weak customer response continued to be experienced at each merchant division. FCNB Preferred credit finance revenue decreased 67% to $14,259 in the third quarter from $43,489 in the comparable prior year period. For the 39-week period, finance revenue decreased 47% to $69,181 from $129,954 in the prior year period. The decline in finance revenue is due primarily to lower retained-interest income from securitized receivables. While average receivables serviced increased and the finance charge and credit fee yields remained relatively constant, retained-interest income decreased significantly reflecting an increase in charge-offs on securitized receivables compared to last year. The Company sold additional FCNB Preferred credit card receivables of $76,000 in the third quarter compared to $67,578 in the same period last year. The Company recorded a $4,000 reduction to net pretax gains on the sale of receivables in the 13-week period compared to a reduction of $59 in the same period last year. The reduction to net pretax gains in the third quarter reflects the expectation of higher charge-offs. In addition, the cash reserve accounts related to securitization activities have been discounted to net present value resulting in lower net pretax gains on the sale of receivables. For the 39-week period, receivables sold increased $21,998 compared to a net increase of $222,579 in the prior year period. Net pretax gains on the sale of receivables totaled $13,834 for the 39-week period compared to $13,588 for the same period last year. Gross profit margin on net sales for the merchandising segment decreased 180 basis points to 34.2% in the third quarter compared to 36.0% in the comparable period last year, primarily due to margin declines at Eddie Bauer. Margin declines at Eddie Bauer reflect higher markdowns taken to sell through slow-moving merchandise to manage inventories, primarily in the retail store business. For the 39-week period, gross profit margin on net sales decreased 150 basis points to 36.0% from 37.5% in the comparable prior year period. Margin growth achieved by Spiegel, resulting primarily from lower markdowns compared to the prior year period, was offset by lower margins at Eddie Bauer and to a lesser extent, Newport News. For the third quarter, the selling, general and administrative (SG&A) expense ratio increased 270 basis points to 47.3% of total revenue compared to 44.6% in the same period last year. The increase resulted from lower productivity on catalog circulation and decreased operating expense leverage due to lower revenues. For the 39-week period, the SG&A ratio increased 360 basis points to 46.6% of total revenue compared to 43.0% in the same period last year. The current year period also reflects an incremental allowance for doubtful accounts while the prior year period benefited from a net reversal of allowance for doubtful accounts, primarily related to the securitization of credit card receivables. Stringent cost controls continue to be a focus across all merchandising divisions. 12 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Bankcard segment:
Thirteen Weeks Ended Thirty-nine Weeks Ended --------------------------- -------------------------- Sept. 29, Sept. 30, Sept, 29, Sept. 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Total revenue $ 50,382 $ 57,429 $ 137,510 $ 123,549 Operating income $ 32,925 $ 40,557 $ 72,892 $ 66,726 ------------ ------------ ------------ ------------
Bankcard revenue decreased 12% to $50,382 for the third quarter, compared to $57,429 for the prior year period. While average receivables serviced increased 40% and finance charge and credit fee yields remained relatively constant, retained-interest income decreased significantly compared to the prior year period. Retained-interest income was negatively impacted by an increase in charge-offs, which reduced the excess cash flows from securitized receivables that are recorded as finance revenue. The Company sold additional bankcard receivables of $93,000 in the third quarter, compared to $94,000 in the same period last year. Net pretax gains on the sale of receivables in the third quarter totaled $14,616 compared to $29,894 for the same period last year. Incremental gains in the third quarter were driven by the sale of additional receivables and anticipated improvements in portfolio performance, primarily related to finance charge yields. For the 39-week period, bankcard revenue increased 11% to $137,510, compared to $123,549 for the prior year period. The growth in revenue was attributable to a 67% increase in average receivables serviced, offset somewhat by lower retained-interest income. Retained-interest income was negatively impacted by an increase in charge-offs, which reduced the excess cash flows from securitized receivables that are recorded as finance revenue. The Company sold additional bankcard receivables of $165,000 in the 39-week period, compared to $224,000 in the comparable prior year period. Net pretax gains on the sale of receivables totaled $29,894 compared to $25,575 for the same period last year. Incremental gains in the 39-week period were driven by the sale of additional receivables and reflected anticipated improvements in portfolio performance, primarily related to finance charge yields. Impacted by the increase in charge-offs, operating income for the bankcard segment declined to $32,925 for the third quarter from $40,557 for the comparable period last year. For the 39-week period, operating income increased to $72,892 from $66,726 in the comparable prior year period driven by growth in the portfolio. LIQUIDITY AND CAPITAL RESOURCES The Company has historically met its operating and cash requirements through funds generated from operations, the securitization of credit card receivables and the issuance of debt and common stock. Total credit card receivables sold were $2,707,000 at September 29, 2001, $2,086,560 at September 30, 2000 and $2,520,002 at December 30, 2000. Net cash used in operating activities totaled $317,267 and $136,994 for the 39-week periods ended September 29, 2001 and September 30, 2000, respectively. Receivables contributed $105,728 more cash to operating activities in the current year period, as a $259,581 decline in cash provided by securitization activity was offset by slower growth in receivables serviced relative to last year. Excluding receivables, net cash flow from operations declined $286,001 compared to the prior year period. Declines in operating results coupled with an increase in cash utilized for accounts payable and accrued liabilities drove the increase in net cash used in operating activities compared to the prior year. Net cash used for accounts payable and accrued liabilities reflects principal payments made to investors upon maturity of jumbo certificates of deposit issued by the Company's special-purpose bank. In contrast, the fiscal 2000 period benefited from the issuance of these jumbo certificates of deposit. Partially offsetting these uses of cash was a lower investment in inventory in the current year relative to the prior year period in response to lower sales at the merchant divisions. 13 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Net cash used in investing activities totaled $141,394 for the 39-week period compared to $71,154 in the same period last year. Cash reserve requirements related to securitization activities and the purchase of previously leased warehouse equipment for $19,734 represented the primary uses of cash in the current year period. The discounted value of the Company's restricted cash accounts was $65,748 as of September 29, 2001 and $5,391 at year-end. The restricted cash accounts represent reserve funds used as credit enhancement for specific classes of investor certificates issued in certain asset-backed securitization transactions. These restricted cash accounts are included in other assets in the Company's consolidated balance sheets. Expenditures in both periods were also comprised of information technology-related projects, facilities expansion and upgrades, and to a lesser extent, Eddie Bauer retail store expansion and remodeling. As of September 29, 2001, total debt was $1,192,857 compared to $1,003,571 as of September 30, 2000. The increase in total debt compared to the prior year period was primarily driven by funding requirements of the Company's credit operations. The Company plans to continue to utilize asset-backed securitization of credit card receivables as a source of funds to manage debt and help fund the growth of its credit businesses. In September 2001, the Company entered into a revolving credit agreement with Otto Versand (GmbH & Co), a related party. The initial availability under this credit agreement was $75,000. The credit agreement bears interest at a variable rate based on LIBOR plus a margin, comparable to the Company's other revolving credit agreements. The initial agreement extended through December 15, 2001. In November 2001, this revolving credit agreement with Otto Versand (GmbH & Co) was increased from $75,000 to $100,000 and the maturity date was extended from December 15, 2001 to June 15, 2002. At September 29, 2001, there were no outstanding borrowings under this agreement. The Company's existing debt agreements have restrictive covenants, including restrictions on the payment of dividends. Financial covenants establish minimum levels of tangible net worth and require the maintenance of certain ratios, including fixed charge coverage (Coverage), total debt to equity (Leverage), and adjusted total debt to earnings before interest, taxes, depreciation and amortization, and rents (Debt to EBITDAR). Additionally, these and certain other debt agreements contain cross default provisions. At September 29, 2001, the Company was in compliance with all financial covenants. On November 13, 2001, the Company announced the discontinuance of its dividend payments to shareholders, effective December 30, 2001. The Company evaluates its dividend policy on an ongoing basis and has determined that cash generated from existing operations should be used to fund internal capital requirements. The Company believes that its cash on hand, together with anticipated cash flows from operations, borrowings under its existing credit facilities, securitization of credit card receivables and other available sources of funds, will be adequate to fund the Company's capital and operating requirements for the foreseeable future. MARKET RISK The Company is exposed to market risk from changes in interest rates, the securitization of credit card 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 trading or other 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 2001 interest expense would have changed by approximately $693. 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 $65,000 at September 29, 2001. 14 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- The Company believes that its interest rate exposure management policies, including the use of derivative financial instruments, are adequate to manage material market risk exposure. Securitizations: In conjunction with its asset-backed securitizations, the Company recognizes gains representing the present value of estimated future cash flows that the Company expects to receive over the estimated outstanding securitization period. These future cash flows consist of an estimate of the excess of finance charges and fees over the sum of the interest paid to certificate holders, contractual servicing fees, and charge-offs along with the future finance charges and principal collections related to retained interests in securitized receivables. 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. 141, "Business Combinations," supercedes APB Opinion No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preaquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001, as well all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The Company adopted this statement as required on July 1, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," which supercedes APB Opinion No. 17, "Intangible Assets," establishes financial accounting and reporting standards for acquired goodwill and other intangible assets. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The Company's intangible assets represent principally trademarks and goodwill from businesses acquired. The Company is evaluating the new statement's provisions to assess the impact on its consolidated results of operations and financial position. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (for the disposal of a segment of a business) and amends APB No. 51, "Consolidated Financial Statements." The Company is evaluating the new statement's provisions to assess the impact on its consolidated results of operations and financial position. 15 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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. Words such as "expect," "plan," "believe," "anticipate," and similar expressions identify forward-looking statements. Any such forward-looking statements 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 adverse changes in general economic conditions; world events, including terrorist activity, hostilities or other similar or related events; the financial strength and performance of the retail and direct marketing industry; changes in consumer spending patterns; dependence on the securitization of credit card receivables 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 portfolio; interest rate fluctuations; postal rate increases; paper or printing costs; the success of planned merchandising, advertising, marketing and promotional campaigns; and other factors that may be described in the Company's other filings with the Securities and Exchange Commission. 16 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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. November 13, 2001 SPIEGEL, INC. (Registrant) /s/ James R. Cannataro James R. Cannataro Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and duly authorized officer of Registrant) 17 -------------------------------------------------------------------------------- --------------------------------------------------------------------------------