-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fl3qm5rAv0XRqg21YecnivvZ/woXKF32PW7vOUzbX2RKp8Ts5Fuc/9uwNefVDjg2 9vDcErrH4EUB32VReu9Wpw== 0000276641-99-000006.txt : 19990818 0000276641-99-000006.hdr.sgml : 19990818 ACCESSION NUMBER: 0000276641-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990703 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPIEGEL INC CENTRAL INDEX KEY: 0000276641 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 362593917 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16126 FILM NUMBER: 99694628 BUSINESS ADDRESS: STREET 1: 3500 LACEY RD CITY: DOWNERS GROVE STATE: IL ZIP: 60515-5432 BUSINESS PHONE: 7089868800 MAIL ADDRESS: STREET 1: 3500 LACEY ROAD CITY: DOWNERS GROVE STATE: IL ZIP: 60515-5432 EX-27 1 ART. 5 FDS FOR 2ND QUARTER 10-Q
5 1,000 6-MOS JAN-01-2000 JUL-03-1999 25,967 0 652,841 19,123 491,896 1,287,059 609,971 268,322 1,867,429 662,470 521,572 131,802 0 0 513,453 1,867,429 1,245,856 1,377,130 822,820 822,820 0 0 29,336 10,963 4,495 6,468 0 0 0 6,468 0.05 0.05
10-Q 2 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 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 July 3, 1999 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 August 13, 1999 are as follows: Class A non-voting common stock, $1.00 par value 14,794,844 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 TWENTY-SIX WEEKS ENDED JULY 3, 1999 PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets, July 3, 1999 and January 2, 1999 3 Consolidated Statements of Earnings, Thirteen and Twenty-six Weeks Ended July 3, 1999 and July 4, 1998 4 Consolidated Statements of Cash Flows, Twenty-six Weeks Ended July 3, 1999 and July 4, 1998 5 Notes to Consolidated Financial Statements 6-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13-14 2 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Spiegel, Inc. and Subsidiaries Consolidated Balance Sheets ($000s omitted, except per share amounts)
(unaudited) July 3, January 2, 1999 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 25,967 $ 91,200 Receivables, net 633,718 544,146 Inventories 491,896 490,915 Prepaid expenses 98,463 93,390 Refundable income taxes 11,041 9,897 Deferred income taxes 25,974 25,946 ------------ ------------ Total current assets 1,287,059 1,255,494 Property and equipment, net 341,649 359,361 Intangible assets, net 151,941 153,146 Other assets 86,780 89,259 ------------ ------------ Total Assets $ 1,867,429 $ 1,857,260 ------------ ------------ ------------ ------------ LIABILITIES and STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 184,464 $ 85,714 Accounts payable 254,064 287,585 Accrued liabilities: Salaries and wages 25,093 46,301 General taxes 83,979 103,890 Allowance for returns 24,625 33,222 Other accrued liabilities 90,245 106,539 ------------ ------------ Total current liabilities 662,470 663,251 Long-term debt, excluding current maturities 521,572 523,036 Deferred income taxes 38,132 33,706 ------------ ------------ Total liabilities 1,222,174 1,219,993 Stockholders' equity: Class A non-voting common stock, $1.00 par value; authorized 16,000,000 shares; 14,791,844 shares issued and outstanding at July 3, 1999; 14,747,844 shares issued and outstanding at January 2, 1999 14,792 14,748 Class B voting common stock, $1.00 par value; authorized 121,500,000 shares; 117,009,869 shares issued and outstanding at July 3, 1999 and January 2, 1999 117,010 117,010 Additional paid-in capital 328,713 328,489 Accumulated other comprehensive loss (3,304) (4,555) Retained earnings 188,044 181,575 ------------ ------------ Total stockholders' equity 645,255 637,267 ------------ ------------ Total liabilities and stockholders' equity $ 1,867,429 $ 1,857,260 ------------ ------------ ------------ ------------
[FN] 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 Twenty-six Weeks Ended -------------------------- -------------------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ------------ ----------- ------------ ------------ Net sales and other revenues: Net sales $ 681,331 $ 618,007 $ 1,245,856 $ 1,150,457 Finance revenue 57,722 54,382 108,676 103,596 Other revenue 12,900 11,657 22,598 20,546 ------------ ----------- ------------ ------------ 751,953 684,046 1,377,130 1,274,599 Cost of sales and operating expenses: Cost of sales, including buying and occupancy expenses 438,565 426,160 822,820 805,772 Selling, general and administrative expenses 270,361 246,642 514,011 481,346 ------------ ----------- ------------ ------------ 708,926 672,802 1,336,831 1,287,118 ------------ ----------- ------------ ------------ Operating income (loss) 43,027 11,244 40,299 (12,519) Interest expense 15,094 15,416 29,336 32,286 ------------ ----------- ------------ ------------ Earnings (loss) before income taxes 27,933 (4,172) 10,963 (44,805) Income tax provision (benefit) 11,453 (1,798) 4,495 (19,298) ------------ ----------- ------------ ------------ Earnings (loss) before redemption of subsidiary preferred stock 16,480 (2,374) 6,468 (25,507) Redemption of subsidiary preferred stock -- 8,535 -- 8,535 Net earnings (loss) $ 16,480 $ (10,909) $ 6,468 $ (34,042) ------------ ----------- ------------ ------------ ------------ ----------- ------------ ------------ Net earnings (loss) per common share Basic and diluted $ 0.13 $ (0.08) $ 0.05 $ (0.27) ------------ ----------- ------------ ------------ ------------ ----------- ------------ ------------ Weighted average number of common shares outstanding 131,801,423 131,712,229 131,794,967 125,598,183 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
[FN] See accompanying notes to consolidated financial statements. 4 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Spiegel, Inc. and Subsidiaries Consolidated Statements of Cash Flows ($000s omitted) (unaudited)
Twenty-six Weeks Ended July 3, July 4, 1999 1998 ------------ ------------ Cash flows from operating activities: Net earnings (loss) $ 6,468 $ (34,042) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 38,245 38,590 Incremental gains on sale of receivables -- (3,000) Change in assets and liabilities, net of effects of acquisition: (Increase) decrease in receivables, net (89,572) 68,230 (Increase) decrease in inventories (981) 13,838 (Increase) decrease in prepaid expenses (5,073) 1,400 Decrease in accounts payable (33,521) (77,770) Decrease in accrued liabilities (66,010) (59,430) Increase (decrease) in income taxes 3,254 (23,466) ------------ ------------ Net cash used in operating activities (147,190) (75,650) ------------ ------------ Cash flows from investing activities: Net additions to property and equipment (10,794) (8,146) Net additions to (reductions in) other assets (6,054) 42,813 ------------ ------------ Net cash provided by (used in) investing activities (16,848) 34,667 ------------ ------------ Cash flows from financing activities: Issuance of debt 158,000 86,500 Payment of debt (60,714) (130,000) Issuance of Class B common stock -- 69,992 Exercise of stock options 268 209 ------------ ------------ Net cash provided by financing activities 97,554 26,701 ------------ ------------ Effect of exchange rate on cash 1,251 (1,071) Net change in cash and cash equivalents (65,233) (15,353) Cash and cash equivalents at beginning of year 91,200 47,582 ------------ ------------ Cash and cash equivalents at end of period $ 25,967 $ 32,229 ------------ ------------ ------------ ------------ Supplemental cash flow information: Cash paid during the period for: Interest $ 30,063 $ 31,882 ------------ ------------ ------------ ------------ Income taxes $ 1,813 $ 4,886 ------------ ------------ ------------ ------------
[FN] 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 the notes thereto included in the Company's most recent Annual Report on Form 10-K, which includes financial statements for the year ended January 2, 1999. Due to the seasonality of the Company's business, the results for interim periods are not necessarily indicative of the results for the year. (2) Reclassifications Certain prior amounts have been reclassified from amounts previously reported to conform with the 1999 presentation. (3) Debt Outstanding borrowings of $158,000 related to a revolving credit agreement set to expire on March 26, 2000 were classified as long-term debt in the Company's balance sheet as of July 3, 1999. The Company amended and restated the above revolving credit agreement in July 1999, effectively extending the term of the agreement to July 2003 and increasing the commitment from $350,000 to $500,000. All other terms of the amended and restated credit agreement are similar to those under the previous financing arrangement. (4) Comprehensive income The components of comprehensive income, net of related tax, for the thirteen and twenty-six week periods ended July 3, 1999 and July 4, 1998 are as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended -------------------------- -------------------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net income (loss) $ 16,480 $ (10,909) $ 6,468 $ (34,042) Foreign currency translation adjustments 609 (881) 1,251 (1,071) ------------ ------------ ------------ ------------ Comprehensive income (loss) $ 17,089 $ (11,790) $ 7,719 $ (35,113) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
6 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- (5) Segment reporting Segment revenues and operating profit, including a reconciliation to the consolidated Company's earnings before income taxes, follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended --------------------------- -------------------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ------------ ------------- ------------ ------------ Revenues: Merchandising $ 734,666 $ 660,380 $ 1,344,094 $ 1,233,401 Bankcard 17,287 23,666 33,036 41,198 ------------ ------------ ------------ ------------ Total revenues $ 751,953 $ 684,046 $ 1,377,130 $ 1,274,599 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating income (loss): Merchandising $ 43,203 $ 3,233 $ 36,149 $ (31,023) Bankcard 854 8,808 5,418 19,698 ------------ ------------ ------------ ------------ Total segment operating income (loss) 44,057 12,041 41,567 (11,325) Premium on acquisitions (1,030) (797) (1,268) (1,194) ------------ ------------ ------------ ------------ Total operating income (loss) 43,027 11,244 40,299 (12,519) Interest expense 15,094 15,416 29,336 32,286 ------------ ------------ ------------ ------------ Earnings (loss) before income taxes $ 27,933 $ (4,172) $ 10,963 $ (44,805) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
7 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ($000s omitted, except per share amounts) RESULTS OF OPERATIONS Net earnings for the thirteen weeks ended July 3, 1999 were $16,480, or $0.13 per share basic and diluted, a significant improvement compared to the net loss of $10,909, or $0.08 per share, recorded in the same period last year. Net earnings for the twenty-six week period ended July 3, 1999 were $6,468, or $0.05 per share, compared to a net loss of $34,042, or $0.27 per share, for the twenty-six week period ended July 4, 1998. The results for the thirteen and twenty-six week periods of 1998 reflect a reduction in earnings of $8,535, or $0.06 per share, due to the redemption of subsidiary preferred stock in the second quarter. This reduction was offset somewhat by incremental pretax gains of $3,000 on the sale of receivables in accordance with SFAS No. 125. Also providing benefit to the first half of 1998 was the reversal of approximately $3,000 of provision for doubtful accounts related to the sale of receivables in the first quarter. Excluding the impact of the above non-comparable items, 1999 net earnings improved over the prior year by nearly $22 million in the thirteen-week period and $38 million in the twenty-six week period. The considerable improvement in operating results was driven primarily by a stronger customer response to merchandise offerings and gross margin improvement in the merchandising segment. Merchandising segment:
Thirteen Weeks Ended Twenty-six Weeks Ended -------------------------- -------------------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Retail net sales $ 302,439 $ 286,886 $ 558,853 $ 524,665 Comp store % change 7% -9% 6% -9% Catalog net sales 378,892 331,121 687,003 625,792 ------------ ------------ ------------ ------------ Total net sales 681,331 618,007 1,245,856 1,150,457 Finance revenue 40,435 30,716 75,640 62,398 Other revenue 12,900 11,657 22,598 20,546 ------------ ------------ ------------ ------------ Total revenue $ 734,666 $ 660,380 $ 1,344,094 $ 1,233,401 ------------ ------------ ------------ ------------ % change 11.2% (3.1)% 9.0% (3.4)% Gross margin % to total net sales 35.7% 31.1% 34.0% 30.0% SG&A % to total revenue 34.4% 35.0% 36.1% 37.2% Operating income (loss) $ 43,203 $ 3,233 $ 36,149 $ (31,023) ------------ ------------ ------------ ------------
Thirteen weeks ended July 3, 1999 compared to thirteen weeks ended July 4, 1998 - --------------------------------------------------------------------- Total merchandising revenues increased in the thirteen weeks ended July 3, 1999 compared to the same period last year, driven by a 10 percent increase in net sales and a substantial increase in finance revenue generated from FCNB Preferred charge programs. 8 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- The net sales improvement included a 14 percent increase in total catalog net sales and a 5 percent increase in total retail net sales, reflecting stronger customer response to merchandise offerings. Solid customer response to increased pages circulated for Spiegel Catalog and Newport News drove the growth in catalog net sales compared to last year. Eddie Bauer and Spiegel Catalog Internet sales contributed to the favorable catalog net sales results as well. Newport News joined Eddie Bauer and Spiegel Catalog on the Internet with a Web site launched in June. Eddie Bauer catalog sales were lower than the prior year period, reflecting a planned decrease in pages circulated to marginal customers, partially offset by a significant gain in productivity. Retail net sales results included a 7 percent increase in Eddie Bauer comparable-store sales, reflecting an improved merchandising and inventory position compared to last year, offset slightly by lower sales in the Company's outlet stores. Finance revenue for the thirteen-week period ended July 3, 1999 was 32 percent higher than the prior year due to growth in the portfolio and improved productivity. The average FCNB Preferred charge portfolio was 6 percent above the 1998 level due to an increase in customer utilization of Preferred charge programs and higher sales at the merchant companies. Additionally, the Preferred charge programs realized improved yields and lower charge-offs from reduced delinquencies, resulting in an increase in the net excess recognized in finance revenue from off-balance sheet receivables. There have been no material changes in the assumptions utilized in the calculation of receivable gains in accordance with SFAS No. 125 since January 2, 1999. Operating income for the merchandising segment increased nearly $40 million in the thirteen weeks ended July 3, 1999 compared to the last year period. Eddie Bauer, Spiegel Catalog and Newport News each improved upon the prior year's results, accompanied by a positive earnings contribution from the improved performance of FCNB Preferred charge programs. Key factors contributing to this progress included higher gross margins and improved expense ratios realized due to the growth in revenue accompanied by successful cost-containment initiatives. Gross profit margin on net sales increased to 35.7 percent for the thirteen weeks ended July 3, 1999 from 31.1 percent for the comparable 1998 period. The favorable margin performance, driven by Spiegel Catalog and Eddie Bauer, resulted from stronger customer response to merchandise offerings and in turn, lower markdowns compared to last year. The selling, general and administrative expense ratio benefited from the increase in revenue, ending the period at 34.4 percent of total revenues compared to 35.0 percent in the comparable last year period. Continued emphasis on cost controls and a higher level of sales productivity on catalog mailings realized by Eddie Bauer, Newport News and Spiegel Catalog contributed to the improvement. Twenty-six weeks ended July 3, 1999 compared to twenty-six weeks ended July 4, 1998 - -------------------------------------------------------------------------- Total merchandising revenue increased $110,693, or 9 percent, in the first half of fiscal 1999 compared to the same period last year. The growth in revenue was primarily attributable to an 8 percent increase in net sales, coupled with a favorable contribution from the FCNB Preferred charge programs. 9 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- The net sales improvement included a 10 percent increase in total catalog net sales and a 7 percent increase in total retail net sales, reflecting stronger customer response to merchandise offerings. Higher catalog net sales were generated by solid customer response to increased pages circulated for Spiegel Catalog and Newport News, as well as the increasing contribution from Internet sales. Eddie Bauer catalog sales were lower than the prior year period, reflecting a planned decrease in pages circulated to marginal customers, partially offset by a significant gain in productivity. Retail net sales results included a 6 percent increase in Eddie Bauer comparable-store sales, reflecting an improved merchandising and inventory position compared to last year. Finance revenue for the twenty-six week period ended July 3, 1999 was 21 percent higher than the prior year due to growth in the portfolio as well as improved productivity. FCNB Preferred receivables serviced ended the 1999 period 10 percent above last year's level due to an increase in customer utilization of Preferred charge programs and higher sales at the merchant companies. Additionally, the Preferred charge programs realized improved yields and lower charge-offs from reduced delinquencies, resulting in an increase in the net excess recognized in finance revenue from off-balance sheet receivables. There have been no material changes in the assumptions utilized in the calculation of receivable gains in accordance with SFAS No. 125 since January 2, 1999. Operating income for the merchandising segment increased more than $67 million in the twenty-six weeks ended July 3, 1999 compared to the last year period. Eddie Bauer, Spiegel Catalog and Newport News each improved upon the prior year's results, accompanied by a positive earnings contribution from the FCNB Preferred charge programs. Key factors contributing to this progress included higher gross margins and improved expense ratios realized due to the growth in revenue accompanied by successful cost-containment initiatives. Gross profit margin on net sales increased to 34.0 percent for the twenty-six weeks ended July 3, 1999 from 30.0 percent for the comparable 1998 period. The favorable margin performance, driven by Spiegel Catalog and Eddie Bauer, resulted from stronger customer response to merchandise offerings and in turn, lower markdowns compared to last year. The selling, general and administrative expense ratio benefited from the increase in revenues ending the period at 36.1 percent of total revenues compared to 37.2 percent in the comparable last year period. Continued emphasis on cost controls and a higher level of sales productivity on catalog mailings realized by Eddie Bauer, Newport News and Spiegel Catalog contributed to the improvement. 10 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Bankcard segment:
Thirteen Weeks Ended Twenty-six Weeks Ended --------------------------- -------------------------- July 3, July 4, July 3, July 4, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Finance revenue $ 17,287 $ 23,666 $ 33,036 $ 41,198 Operating income $ 854 $ 8,808 $ 5,418 $ 19,698 ------------ ------------ ------------ ------------
Thirteen weeks ended July 3, 1999 compared to thirteen weeks ended July 4, 1998 - --------------------------------------------------------------------------- Bankcard finance revenue decreased 27 percent in the thirteen weeks ended July 3, 1999 compared to the same period last year. Overall, bankcard revenue from serviced receivables grew by 30 percent during the period. However, recognized revenues decreased compared to last year, primarily due to the impact of the accounting for receivables sold under SFAS No. 125. Although the average level of receivables sold for the period remained the same as last year at 72 percent of the total portfolio, the net excess recognized in revenue from the off-balance-sheet receivables declined. The net excess for the 1999 period was negatively impacted by an increase in charge-offs related to certain bankcard test programs initiated in late 1997. In general, newly issued credit programs initially generate finance revenues without the immediate corresponding charge-offs associated with extending credit. The 1998 revenues benefited from this initial phase, while the 1999 results reflect the full impact of these credit programs. Revenue in the 1998 period also was favorably impacted by an incremental pretax gain of $3,000 in accordance with SFAS No. 125. Bankcard operating income declined significantly in the thirteen weeks ended July 3, 1999. This performance was primarily due to certain non-comparable items that benefited the prior year period, including the aforementioned bankcard test programs and gain recognition. Excluding these non-comparable items from the 1998 results, bankcard earnings were essentially flat to last year's unusually strong performance. Twenty-six weeks ended July 3, 1999 compared to twenty-six weeks ended July 4, 1998 - --------------------------------------------------------------------------- Bankcard finance revenue decreased 20 percent in the first half of fiscal 1999 compared to the same period last year. Overall, bankcard revenue from serviced receivables grew by 34 percent during the period. However, recognized revenues decreased compared to last year, primarily due to the impact of the accounting for receivables sold under SFAS 125. Although the average level of receivables sold increased from 67 percent of the total portfolio in the 1998 period to 73 percent in 1999, the net excess recognized in revenue from these off-balance-sheet receivables declined. The net excess for the 1999 period was negatively impacted by an increase in charge-offs related to certain bankcard test programs initiated in late 1997. In general, newly issued credit programs initially generate finance revenues without the immediate corresponding charge-offs associated with extending credit. The 1998 revenues benefited from this initial phase, while the 1999 results reflect the full impact of these credit programs. Revenue in the 1998 period also was favorably 11 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- impacted by an incremental pretax gain of $3,000 recognized in accordance with SFAS No. 125. No comparable gain was recognized in the first half of fiscal 1999. Reflecting the declines in revenue, bankcard operating income was markedly lower in the first half of fiscal 1999 compared to the prior year. This performance was primarily due to certain non-comparable items that benefited the prior year period, including the aforementioned bankcard test programs and gain recognition. Additionally, the 1998 period was favorably impacted by the reversal of approximately $3,000 of provision for doubtful accounts related to the sale of receivables. Excluding these non-comparable items from the 1998 results, bankcard earnings were essentially flat to last year's unusually strong performance, as the core bankcard portfolio continues to experience favorable charge-off and delinquency trends. INTEREST EXPENSE The Company continues to benefit from lower average debt levels, a reflection of stronger operating results and improved utilization of working capital. Interest expense decreased 9 percent to $29,336 for the twenty-six weeks ended July 3, 1999 compared to $32,286 for the prior year period. Average debt for the first half of fiscal 1999 was $694,234 compared to $837,804 for the comparable period last year. Ending debt levels of $706,036 were nearly $67 million, or 9 percent, below the year earlier levels. Net interest expense was impacted in the current year period by a decline in interest income that resulted from a lower restricted cash position than the prior year. SEASONALITY AND QUARTERLY FLUCTUATIONS 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 individual quarters are not necessarily indicative of the results to be expected for the entire 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 $1,392,730 at July 3, 1999, $1,420,730 at January 2, 1999 and $1,220,330 at July 4, 1998. Impacted primarily by the Company's overall level of receivables, net cash provided by operations declined $71,540 in the first twenty-six weeks of 1999 compared to the same period last year. Changes in receivable levels provided $157,802 less cash in the 1999 period, driven by growth in the Preferred credit portfolio as well as increases in the bankcard portfolio. Excluding receivables, net cash provided by operating activities increased $86,262 in the first half of fiscal 1999 compared to last year, driven by significantly improved operating results and strong inventory controls. Total inventories at quarter-end were relatively flat compared to last year, despite an 8 percent increase in net sales and the addition of 26 retail and outlet stores. 12 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Net additions to property and equipment for the twenty-six weeks ended July 3, 1999 were $10,794 compared to $8,146 in the same period last year. Eddie Bauer retail store expansion and remodeling comprised more than half of the capital spending in 1999 and a majority of the spending in 1998. The remainder of the 1999 capital spending was primarily related to information technology equipment upgrades at FCNB, the Company's special purpose bank. In March 1998, the Company issued 13,526,571 shares of Class B voting common stock to its majority shareholder, Spiegel Holdings, Inc. The net proceeds of $69,992 were used primarily to fund working capital and investing needs. In March 1994 and December 1995, Newport News issued shares of non-voting redeemable preferred stock to certain directors and executive officers of the Company, its subsidiaries and Otto Versand. All outstanding shares were redeemed in April 1998 for $12,236. The excess of the redemption price over the carrying value of the preferred stock reduced net earnings by $8,535 and the related basic and diluted net earnings per common share by $0.06. The Company believes that its cash on hand, together with cash flows anticipated to be generated from operations, borrowings under its 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. MARKET RISK The Company is exposed to market risk from changes in interest rates and, to a lesser extent, foreign 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, a significant portion of which are fixed-rate obligations. Accordingly, the interest rate risk to the Company is minimal. Substantially all of the Company's variable-rate exposure relates to changes in the three-month LIBOR rate. If the three-month LIBOR rate had changed by 50 basis points, the Company's second quarter 1999 interest expense would have changed by approximately $295. In addition, derivative financial instruments are utilized occasionally to reach the Company's targeted objectives. Interest rate swaps may be used to minimize interest rate exposure when appropriate based on market conditions. The use of interest rate swaps is minimal, and as of July 3, 1999, the notional amount totaled $64,286. 13 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- In conjunction with its asset-backed securitizations, the Company recognizes gains representing the present value of estimated future cash flows the Company expects to receive over the estimated outstanding securitization period. Certain estimates inherent in determining the present value of these estimated future cash flows are influenced by factors outside the Company's control, including the impact of interest rate fluctuations on variable-rate instruments. As a result, estimates could materially change in the near term and affect the carrying value of these receivables. The Company believes that its interest rate exposure management policies, including the use of derivative financial instruments, are adequate to limit any material market risk exposure to its consolidated financial statements at July 3, 1999. 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, Japan and the United Kingdom. The Company believes that its foreign exchange risk is not material due to the size and nature of the above operations and does not utilize any hedging instruments to minimize exposure to fluctuations in currency rates at this time. YEAR 2000 The Company continues to take the appropriate steps to minimize the threat of any material technical failure relating to Year 2000 compliance issues. A series of comprehensive plans, covering the renovation of internal systems, outside vendor readiness and testing are in place and are being executed in accordance with prescribed timetables. The renovation phase is generally progressing as planned, with over 95 percent of this phase completed as of July 3, 1999. Systems yet to be renovated include those that are dependent on minor third party vendor software upgrades, systems targeted for replacement or renovation in 1999 that will be compliant upon installation, and off-the-shelf PC hardware and software that can be purchased and installed in a short period of time. At this point, it is anticipated that the company's renovation effort will be completed by the end of the third quarter. Contingency plans are currently in place to mitigate the impact of possible system failure. Generally, individual systems are being tested as they are renovated. A fully integrated system test commenced in January 1999 and is over 75 percent complete as of July 3, 1999. At this point, it is anticipated that Year 2000 testing will be completed by the end of the third quarter 1999. The Company has also implemented a comprehensive plan to communicate to all critical vendors and suppliers the expectation that they attain Year 2000 compliance in a timely manner. To date the Company has received notification from over 60 percent of these critical vendors indicating that they have already attained Year 2000 compliance and is monitoring the remaining vendors to ensure compliance in a timely manner. Contingency plans have been put in place to provide alternate solutions if the progress of certain vendors and suppliers is deemed questionable so as not to jeopardize the Company's ability to service customers. 14 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- The direct costs associated with the Year 2000 initiative are expected to be approximately $10,000. These costs, totaling $8,000 through July 3, 1999, are funded through current operations and expensed as incurred. Risks associated with Year 2000 failures range from sporadic delays of limited scope all the way to an extended impairment of the Company's merchandise receipt, distribution and billing capabilities. While difficult to predict, the most reasonably likely scenario will include some sporadic delays of limited scope. While the Company believes it is acting prudently in addressing the Year 2000 issue, it is impossible for any company to ensure complete Year 2000 compliance. While it is certainly possible that there may be litigation arising from the Year 2000 conversion, at this time the Company does not anticipate, nor can it estimate, any costs associated with such litigation. ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes 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 133 to fiscal quarters of all fiscal years beginning after June 15, 2000. The Company is studying the statement to determine its effect on the consolidated financial position or results of operations, if any. The Company will adopt SFAS No. 133, as required, in fiscal year 2001. 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 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, such as the Company's most recent Form 10-K. 15 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- 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, August 17, 1999 James W. Sievers Chief Financial Officer (Principal Operating Executive Officer and Principal Financial Officer) /s/ D. Skip Behm Vice President - Controller August 17, 1999 D. Skip Behm (Principal Accounting Officer and duly authorized officer of the Registrant)
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