-----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, L873dz9CQo436VzNAvzP92Y11A7L2WVnqqwj2zLd16BlE2vzhTdMwkkKzQghhpkk biPitBVjVP2hgCe1b85g5g== 0000740126-98-000034.txt : 19981124 0000740126-98-000034.hdr.sgml : 19981124 ACCESSION NUMBER: 0000740126-98-000034 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980925 FILED AS OF DATE: 19981123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINGERHUT COMPANIES INC CENTRAL INDEX KEY: 0000740126 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 411396490 STATE OF INCORPORATION: MN FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-08668 FILM NUMBER: 98757552 BUSINESS ADDRESS: STREET 1: 4400 BAKER RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129323100 MAIL ADDRESS: STREET 1: 4400 BAKER ROAD STREET 2: 4400 BAKER ROAD CITY: MINNETONKA STATE: MN ZIP: 55343 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________ FORM 10-Q/A QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Quarter Ended 1-8668 September 25, 1998 Commission File Number ___________________________ FINGERHUT COMPANIES, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1396490 (State of Incorporation) (IRS Employer Identification No.) 4400 Baker Road, Minnetonka, Minnesota 55343 (Address of principal executive offices) (612) 932-3100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ As of November 4, 1998, 49,376,941 shares of the Registrant's Common Stock, $.01 par value, were outstanding. FINGERHUT COMPANIES, INC. FORM 10-Q September 25, 1998 TABLE OF CONTENTS Part I - Financial Information Page Item 1. Financial Statements Consolidated Statements of Operations (Unaudited) - thirteen weeks and thirty-nine weeks ended September 25, 1998 and September 26, 1997.............. 3 Consolidated Statements of Financial Position (Unaudited) - September 25, 1998 and December 26, 1997. 5 Consolidated Statements of Cash Flows (Unaudited) - thirteen weeks and thirty-nine weeks ended September 25, 1998 and September 26, 1997.............. 6 Condensed Notes to Consolidated Financial Statements (Unaudited)................................. 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .....................11 Part II - Other Information Item 1. Legal Proceedings ......................................22 Item 5. Other Events............................................22 Item 6. Exhibits and Reports on Form 8-K .......................22 Signatures.......................................................24 FINGERHUT COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except share and per share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 25, Sept. 26, Sept. 25, Sept.26, 1998 1997 1998 1997 Revenues: Net sales $ 347,806 $ 322,837 $ 943,722 $ 953,393 Finance income and other securitization income, net 2,031 2,212 5,652 5,701 349,837 325,049 949,374 959,094 Costs and expenses: Product cost 166,416 158,753 450,271 482,475 Administrative and selling expenses 151,852 131,638 421,424 389,562 Provision for uncol- lectible accounts 19,218 20,957 57,692 62,102 Interest expense, net 4,060 6,881 13,827 21,315 Provision for non- recurring items 38,130 - 38,130 - 379,676 318,229 981,344 955,454 (Loss)earnings from continuing operations before income taxes (29,839) 6,820 (31,970) 3,640 Provision for income taxes (11,175) 2,578 (11,975) 1,314 Net (loss) earnings from continuing operations before extraordinary item (18,664) 4,242 (19,995) 2,326 Earnings from discontinued operations (less income taxes of $6,733 and $18,945 in 1998 and $5,479 and $14,484 in 1997) 10,642 8,751 30,150 23,137 Net (loss) earnings before extraordinary item (8,022) 12,993 10,155 25,463 Extraordinary item - early retirement of debt (less income taxes of $4,259) (7,096) - (7,096) - Net (loss) earnings $ (15,118) $ 12,993 $ 3,059 $ 25,463 See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of dollars, except share and per share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 25, Sept. 26, Sept. 25, Sept. 26, 1998 1997 1998 1997 (Loss)/earnings per share: Continuing operations Basic $ (.39) $ .09 $ (.42) $ .05 Diluted $ (.39) $ .09 $ (.42) $ .05 Discontinued operations, net Basic $ .22 $ .19 $ .64 $ .50 Diluted $ .22 $ .18 $ .64 $ .47 Extraordinary item, net Basic $ (.14) $ - $ (.15) $ - Diluted $ (.14) $ - $ (.15) $ - Total operations Basic $ (.31) $ .28 $ .07 $ .55 Diluted $ (.31) $ .26 $ .07 $ .52 Dividends $ - $ .04 $ .08 $ .12 Weighted average shares: Basic 48,004,534 46,163,574 47,061,954 46,122,419 Diluted 48,004,534 49,848,481 47,061,954 49,119,663
FINGERHUT COMPANIES, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of dollars) (Unaudited) September 25, December 26, 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 31,624 $ 96,889 Accounts receivable 226,775 339,553 Retained interest in securitized receivables 167,412 178,652 Less: reserve for uncollectible accounts and unearned finance income (124,976) (157,798) Accounts receivable, net 269,211 360,407 Inventories, net 198,741 124,424 Promotional material 101,393 46,689 Deferred income taxes 85,015 118,472 Current income taxes receivable 35,478 - Other 12,826 14,186 Total current assets 734,288 761,067 Property and equipment, net 216,604 256,726 Excess of cost over fair value of net assets acquired, net 117,836 40,409 Net assets of discontinued operations - 146,249 Customer lists, net 8,355 8,401 Other assets 19,825 16,633 $1,096,908 $1,229,485 LIABILITIES Current liabilities: Accounts payable $ 187,618 $ 142,894 Accrued payroll and employee benefits 29,449 43,534 Other accrued liabilities 29,618 35,371 Revolving credit facility 167,000 - Current portion of long-term debt 125,076 84 Current income taxes payable - 61,958 Total current liabilities 538,761 283,841 Long-term debt, less current portion 149 245,187 Deferred income taxes 22,263 22,345 Other non-current liabilities 13,911 8,127 575,084 559,500 STOCKHOLDERS' EQUITY Preferred stock - - Common stock 502 463 Additional paid-in capital 353,142 292,407 Unearned compensation (1,036) (738) Earnings reinvested 169,216 377,853 Total stockholders' equity 521,824 669,985 $1,096,908 $1,229,485 See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (Unaudited) Thirty-Nine Weeks Ended Sept. 25, Sept. 26, 1998 1997 Cash flows from operating activities: Net earnings $ 3,059 $ 25,463 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Income from discontinued operations (30,150) (23,137) Extraordinary net loss on debt extinguishment 7,096 - Non-recurring expenses 38,130 - Depreciation and amortization 33,388 37,318 Amortization of unearned compensation 628 993 Change in assets and liabilities; net of effects of acquisition: Accounts receivable, net 131,922 67,987 Inventories, net (50,021) (45,444) Promotional material and other current assets (49,636) (13,052) Accounts payable 37,763 1,011 Accrued payroll and employee benefits (14,325) (13,493) Accrued liabilities (17,705) (33,155) Current income taxes payable (56,963) (47,429) Deferred income taxes 33,375 33,720 Other (3,203) 4,163 Net cash provided by/(used in) operating activities 63,358 (5,055) Cash flows from investing activities: Purchase of Arizona Mail Order (AMO) (109,812) - Investment in PC Flowers (2,041) - Additions to property and equipment (19,516) (15,919) Net cash used by investing activities (131,369) (15,919) Cash flows from financing activities: Repayments of long-term debt (120,046) (46) Prepayment penalty (10,768) - Repayment of AMO credit facility (24,000) - Revolving credit facility 167,000 26,000 Issuance of common stock 31,453 3,322 Repurchase of common stock (35,285) (3,385) Cash dividends paid (5,608) (5,536) Net cash provided by financing activities 2,746 20,355 Net decrease in cash and cash equivalents (65,265) (619) Cash and cash equivalents at beginning of period 96,889 28,795 Cash and cash equivalents at end of period $ 31,624 $ 28,176 Supplemental non-cash investing and financing activities: Tax benefit from exercise of non-qualified stock options, disqualified dispositions of Employee Stock Purchase Plan Shares, and vesting of restricted stock $ 36,215 $ 784 Issuance of restricted stock, net of forfeitures $ 926 $ - Dividend of Metris shares $ 178,623 $ - Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 19,062 $ 22,869 Cash paid during the period for income taxes $ 16,720 $ 10,876 Included in cash and cash equivalents were liquid investments with original maturities of fifteen days or less. See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited 1. Consolidated financial statements The consolidated financial statements of Fingerhut Companies, Inc. (the "Company") reflect the financial position and results of operations of the Company and its wholly owned and majority owned subsidiaries, after elimination of all material intercompany transactions and balances. The consolidated financial statements at September 25, 1998 include Arizona Mail Order (AMO), since the date of acquisition on August 31, 1998, the Company's equity investment in PC Flowers, and the tax-free spin-off of Metris Companies Inc. (Metris), which is now accounted for as a discontinued operation. All prior period financial statements have been restated to eliminate the results of Metris to conform to the current period's presentation. The reclassifications had no effect on net earnings (loss). The consolidated financial statements as of September 25, 1998 and September 26, 1997, and for the thirteen and thirty-nine weeks ended September 25, 1998 and September 26, 1997, included herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The interim financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, necessary for a fair statement of the results for the interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 1997 Annual Report to Shareholders and incorporated by reference in the Company's annual report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the interim period should not be considered indicative of the results to be expected for the entire year. During the first quarter of 1998, the Company implemented Statement of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive Income." FAS 130 has no material effect on the consolidated financial statements. 2. Earnings (loss) per share Basic earnings (loss) per share were computed by dividing net earnings (loss) by the weighted average shares of common stock outstanding during the periods. Diluted earnings (loss) per share were computed by dividing net earnings (loss) by the weighted average shares of common stock and common stock equivalents outstanding during the periods. The dilutive effect of the potential exercise of outstanding options to purchase shares of common stock was calculated using the treasury stock method. Due to the loss from continuing operations in current quarter and year to date, dilutive effect of stock options is not considered in the earnings (loss) per share calculation. 3. Investment and acquisition In July 1998, the Company acquired a 20 percent equity investment in PC Flowers and Gifts, Inc. for $2.0 million. PC Flowers and Gifts, Inc. is a leading on-line provider of flowers, gift baskets and gourmet food. On August 31, 1998, the Company purchased Arizona Mail Order (AMO), a leading direct marketer of women's apparel for $109.8 million. The effects of AMO's income statement for September 1998 are included within the Consolidated Statements of Operations. The acquired goodwill will be amortized on a straight-line basis over 15 years. 4. Provision for non-recurring items The pre-tax provision for non-recurring items of $38.1 million includes a non-cash charge for the write-down of $33.6 million for Fingerhut's Western Distribution Center (WDI), which was placed in service in January 1998, as well as other pre-tax provisions for restructuring of $4.5 million. Due to the Company's changing focus to growth through acquisitions, it reviewed the carrying value of the WDI facility, to be held and used, for impairment in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). It was determined that the sum of the undiscounted cash flow was less than the carrying value of the facility and therefore indicated that an impairment existed. Accordingly, an impairment loss was recognized as the amount by which the carrying value of the facility exceeded the fair market value. The fair market value of WDI was determined using an independent appraisal for the land and building and the Company's internal analysis for the equipment and improvements. As a result of this review, the Company recorded a non-cash, pre-tax charge of $33.6 million to write-down WDI to its estimated fair market value of $26.0 million. Included within the remaining non-recurring charges are $2.9 million related to termination benefits for 111 exempt employees, mainly from the Company's corporate office. As of September 25, 1998, the entire balance was included in "Other accrued liabilities." 5. Discontinued operations In August 1998, the Company received a favorable tax-free spin ruling from the Internal Revenue Service to spin off its 83 percent owned subsidiary, Metris Companies Inc. ("Metris") via a tax-free stock dividend to the Company's shareholders. The distribution date of the dividend was September 25, 1998. As a result, the earnings of Metris are shown through September 25, 1998 (versus its normal cut-off of September 30) as earnings from discontinued operations, net of tax on the Consolidated Statement of Operations. Also included in discontinued operations in the third quarter of 1998 and year to date 1998 are $2.7 million of expenses, net of income tax, related to the spin-off. The Consolidated Statements of Financial Position and Cash Flows have been restated for prior periods to reflect Metris as a discontinued operation. 6. Extraordinary item - loss on early retirement of debt In September 1998, the Company prepaid the holders of its $120 million privately placed Senior Notes. Accordingly, the Company recorded an extraordinary loss of $7.1 million, net of tax, related to the early retirement of debt. The extraordinary net loss was comprised of a $6.7 million prepayment penalty and $0.4 million write-off of unamortized fees related to the debt. 7. Accounts receivable, net Accounts receivable, net of amounts sold, consisted of the following: (In thousands of dollars) September 25, December 26, 1998 1997 Customer receivables $ 229,083 $ 339,553 Retained interest in securitized receivables 167,412 178,652 Reserve for uncollectible accounts, net of anticipated recoveries (84,419) (100,901) Reserve for returns and exchanges (8,781) (11,382) Other reserves (12,880) (22,765) Net collectible amount 290,415 383,157 Unearned finance income (21,204) (22,750) Accounts receivable, net $ 269,211 $ 360,407
During the quarter, the Company continued to accelerate its efforts to move customers from an installment-based lending program to revolving credit accounts. By the end of the quarter, approximately 1.3 million customer accounts had been converted or were awaiting conversion, representing $333.8 million in managed receivables, including the effect of all financial activity subsequent to conversion. It is the intention of the Company to continue this practice over the next 12 to 18 months until substantially all of its customer accounts have been converted to revolving credit. Reserves associated with owned and retained receivables have decreased from December 26, 1997 levels primarily because of the reduction in the receivables balance. On a percent of receivables basis, reserve levels differ from December 26, 1997 due to the inclusion of AMO in the September 25, 1998 balance, seasonality, and the impact of the conversion of installment based receivables to revolving credit (customer allowances and collection costs are being recorded as period costs for new revolving credit sales going forward, after conversion). 8. Revolving credit accounting methods The provision for uncollectible accounts for revolving credit is based on a twelve-month roll rate of charge-offs versus a provision to cover the entire estimated charge-offs for an installment contract balance. Finance income, net, is recognized as earned for revolving credit accounts versus recognition of the full net finance income from an installment based contract at the time the receivable is sold. 9. Stockholders' equity During the thirty-nine week period ended September 25, 1998, 5,198,532 shares of common stock were issued related to the exercise of employee stock options, and 26,610 shares of common stock were issued under the Fingerhut Companies, Inc. Employee Stock Purchase Plan. The Company repurchased 26,500 shares of Common Stock from the open market for $203,106. The Company also repurchased approximately 1.4 million mature shares for $35.1 million, which was authorized in connection with the spin-off of Metris. The total of the shares of common stock outstanding as of September 25, 1998 was 50,197,056. The Company issued a tax free stock dividend to its shareholder on September 25, 1998 relating to the Company's investment in Metris. The investment had a carrying value of $178.6 million at the time of the dividend. Also, the Company's Board of Directors approved a stock option grant under existing option plans of 3.9 million shares and 80,000 shares of restricted stock of which 20,000 shares vest over 3 years and 60,000 shares vest over 4 years. 10. Subsequent events In October 1998, the Company issued 18,411 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan. The Company repurchased 861,000 shares of Common Stock in the open market for $8.4 million. The Company entered into a definitive stock purchase agreement on October 28, 1998 to acquire Popular Club, a New Jersey based regional cataloger of general merchandise with annual revenues of $180 million. The acquisition is expected to be completed prior to the Company's year-end. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 25, 1998 AND SEPTEMBER 26, 1997 FINGERHUT COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Managed Basis) (In thousands of dollars, except per share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 25, Sept. 26, Sept. 25, Sept. 26, 1998 1997 1998 1997 Revenues: Net sales $ 347,806 $ 322,837 $ 943,722 $ 953,393 Finance income and other securitization income, net 50,754 55,733 148,449 161,606 398,560 378,570 1,092,171 1,114,999 Costs and expenses: Product cost 166,416 158,753 450,271 482,475 Administrative and selling expenses 153,126 134,837 426,431 397,766 Provision for uncol- lectible accounts 51,120 55,450 147,117 159,211 Discount on sale of accounts receivable 15,547 15,829 48,365 50,592 Interest expense, net 4,060 6,881 13,827 21,315 Provision for non- recurring items 38,130 - 38,130 - 428,399 371,750 1,124,141 1,111,359 (Loss)earnings from continuing operations before income taxes (29,839) 6,820 (31,970) 3,640 Provision for income taxes (11,175) 2,578 (11,975) 1,314 Net (loss) earnings from continuing operations before extraordinary item (18,664) 4,242 (19,995) 2,326 Earnings from discontinued operations (less income taxes of $6,733 and $18,945 in 1998 and $5,479 and $14,484 in 1997) 10,642 8,751 30,150 23,137 Net (loss) earnings before extraordinary item (8,022) 12,993 10,155 25,463 Extraordinary item - early retirement of debt (less income taxes of $4,259) (7,096) - (7,096) - Net (loss) earnings $ (15,118) $ 12,993 $ 3,059 $ 25,463 NOTE: All prior-period financial information has been restated to conform to the current period's presentation. The reclassifications had no effect on net earnings.
CONTINUING OPERATIONS (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 25, Sept. 26, Sept. 25, Sept. 26, 1998 1997 1998 1997 Fingerhut Corporation Key Statistics: Sales per mailing - existing customer list $ 3.02 $ 3.09 $ 2.74 $ 2.99 Cost per new customer $ 18.72 $ 10.87 $ 19.24 $ 13.66 Mailings (in 000's) New customers 35,439 30,254 113,375 98,315 Existing customers 81,551 77,174 241,095 230,469 Active customer list (in 000's) 4,073 4,442 4,073 4,442 Contribution margin per existing customer $ 22 $ 20 $ 58 $ 56 Reserves for bad debt as a percent of total managed receivables 16.6% 16.7% 16.6% 16.7%
Results of Operations - Continuing Operations Third Quarter Net sales for the current 13-week period were $347.8 million compared to net sales of $322.8 million for the related period in 1997, an increase of 8 percent. Fingerhut Corporation ("Fingerhut"), the Company's core business, had third quarter net sales of $332.1 million compared to $317.1 million in the same period in 1997, an increase of 5 percent. Net sales from Fingerhut's new customer acquisition programs remained flat at $56.8 million. Net sales from Fingerhut's existing customer list totaled $275.3 million, which was a 6 percent increase from the third quarter of 1997. The increase was due to a higher volume of mailings (partially offset by lower customer response), higher average order size, lower returns and allowances, and increased commission revenue related to extended service plans. With the spin-off of Metris, and in accordance with Generally Accepted Accounting Principles, the Company discontinued the deferral of commission revenue earned from the sale of extended service plans (underwritten by Metris; now a third party) over the life of such plans. This resulted in $4.0 million of additional revenue over prior year in the quarter. Finally, net sales from the Company's subsidiaries were $15.7 million compared to net sales of $5.7 million in third quarter 1997, primarily the result of the acquisition of Arizona Mail Order (AMO) on August 31, 1998. Finance income and other securitization income, net, for the quarter was $2.0 million, compared to $2.2 million in the third quarter of 1997. This decrease was primarily due to lower finance income resulting from a reduction in the size of the accounts receivable portfolio, and was partially offset by a lower provision for uncollectible accounts, lower collection costs applied to securitized receivables, and the securitization of new customer accounts. In addition, the conversion of closed end customer accounts to revolving credit has resulted in lower finance income related to new sales and other customer charges. Finance income for revolving credit accounts is recognized as earned versus at the time of securitization of the receivable balance on an installment- based account. Product cost for the current 13-week period was 47.8 percent of net sales, or $166.4 million, compared to 49.2 percent of net sales, or $158.8 million, during the comparable prior-year period. The decrease as a percent of net sales was primarily the result of foreign currency devaluation, lower inventory obsolescence and cost reductions related to customer returns, partially offset by a shift in the sales mix to lower margin electronics. Administrative and selling expenses for the current 13-week period were $151.9 million, or 43.7 percent of net sales, compared to $131.6 million, or 40.8 percent of net sales, in the comparable prior-year period. Selling expenses increased over the prior year due to an increase in mailings, higher paper costs, costs associated with the conversion of customer accounts to revolving credit, and expenses related to AMO. Before inclusion of administrative costs associated with revolving credit and AMO, administrative expense levels were consistent with the prior year. The provision for uncollectible accounts relating to receivables sold is included in "Finance income and other securitization income, net." The provision for uncollectible accounts on a "managed" basis for the current 13-week period was 14.7 percent of net sales, compared to 17.2 percent of net sales for the third quarter of 1997. At the end of the third quarter, account balances 29 days or more delinquent as a percent of managed receivables stood at 21.9 percent, down from 25.0 percent at the end of the prior-year third quarter, and 27.6 percent at the end of third quarter 1996. Credit sales and other charges to newly created revolving credit accounts generated a lower provision for uncollectible accounts because the provision was based on estimated charge-offs for the next twelve months (versus closed end accounts which incur provisions to cover charge-offs over the life of the contract). The lower revolving credit provision for uncollectible accounts is offset by lower finance income recognized at the time of securitization, as noted above. Finance income recognized in future periods will offset charge-offs beyond the next twelve months. Net interest expense for the current 13-week period was $4.1 million, compared with $6.9 million in the third quarter of 1997. The decrease in expense was due to lower working capital requirements as a result of lower customer receivables and better inventory management. The pre-tax provision for non-recurring items of $38.1 million includes a non-cash charge for the write-down of Fingerhut's Western Distribution Center (WDI) of $33.6 million, as well as other pre-tax provisions for restructuring of $4.5 million. The write-down of WDI was taken in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The extraordinary after-tax charge of $7.1 million reflects the retirement cost of the Company's $120 million privately placed Senior Notes plus the write-off of the related unamortized fees. The effective tax rate for continuing operations for the third quarter of 1998 was 37.5 percent compared to 37.8 percent in the comparable prior- year period. Excluding non-recurring and extraordinary items, the Company's Continuing Operations generated net earnings of $5.2 million, or $0.11 per share, compared to a third quarter 1997 net earnings of $4.2 million, or $0.09 per share. The net earnings from discontinued operations (Metris) was $10.6 million, or $0.22 per share, net of $2.7 million in costs associated with the spin, compared to a third quarter 1997 net earnings of $8.8 million, or $0.18 per share. Consolidated net loss was $15.1 million, or ($0.31) per share, compared to third quarter 1997 net earnings of $13.0 million, or $0.26 per share. Thirty-Nine Week Period Net sales for the 39-week period ended September 25, 1998 were $943.7 million compared to $953.4 million for the corresponding period in 1997, a decrease of 1 percent. Fingerhut had year to date net sales of $906.3 million compared to $927.0 million in the same period in 1997, a decrease of 2 percent. Net sales from Fingerhut's new customer acquisition programs increased 2 percent to $170.8 million, which was primarily due to an increase in the number of mailings. Net sales from Fingerhut's existing customer list declined 3 percent to $735.5 million, primarily as a result of lower sales per mailing, partially driven by the Company's strategy to control credit risk. Finance income and other securitization income, net, for the first thirty- nine weeks of 1998 was $5.7 million, which was flat compared to the same period in 1997. Product cost for the current 39-week period was 47.7 percent of net sales, or $450.3 million, compared to 50.6 percent of net sales, or $482.5 million, during the comparable prior-year period. The decrease as a percent of net sales was primarily the result of negotiated vendor cost reductions, foreign currency devaluations, cost reductions related to customer returns, and lower inventory obsolescence. Administrative and selling expenses for the first thirty-nine weeks of 1998 were $421.4 million, or 44.7 percent of net sales, compared to $389.6 million, or 40.9 percent of net sales, in the comparable prior- year period. Continued cost controls resulted in administrative expense levels consistent with the prior year, while lower sales per mailing was a major reason for the increase as a percent of net sales. Costs related to the conversion of accounts to revolving credit also contributed to the year over year increase. The provision for uncollectible accounts on a "managed" basis for the first thirty-nine weeks of 1998 was 15.6 percent of net sales, compared to 16.7 percent of net sales in the comparable prior-year period. The Company continues to focus on controlling bad debt through the use of stringent credit criteria and effective collection programs, which have resulted in lower charge-offs year over year. At the end of the third quarter, account balances 29 days or more delinquent as a percent of managed receivables stood at 21.9 percent, down from 25.0 percent at the end of the prior-year third quarter, and 27.6 percent at the end of third quarter 1996. Net interest expense for the first thirty-nine weeks of 1998 was $13.8 million compared to $21.3 million in the comparable prior-year period. The decrease was primarily due to lower working capital requirements. Also, lower utilization of the Company's revolving credit facility, the pay-down of senior notes in December 1997 and more investment income have reduced net interest expense year over year. The pre-tax provision for non-recurring items of $38.1 million includes a non-cash charge for the write-down of Fingerhut's Western Distribution Center (WDI) of $33.6 million, as well as other pre-tax provision for restructuring of $4.5 million. The write-down of WDU was taken in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The extraordinary after-tax charge of $7.1 million reflects the retirement cost of the Company's $120 million privately placed Senior Notes plus the write-off of the related unamortized fees. The effective consolidated tax rate for the Company's Continuing Operations for the first thirty-nine weeks of 1998 was 37.5 percent compared with 36.1 percent in the comparable period of the prior-year. Excluding non-recurring and extraordinary items, the Company's Continuing Operations generated net earnings for the 39-week period ended September 25, 1998 of $3.8 million, or $.08 per share, compared to net earnings of $2.3 million, or $.05 per share in the comparable period of 1997. The net earnings from discontinued operations (Metris) was $30.2 million, or $0.64 per share, net of $2.7 million in costs associated with the spin, for the first 39 weeks of 1998, compared to 1997 net earnings of $23.1 million, or $0.47 per share. Consolidated net earnings were $3.1 million, or $0.07 per share, compared to 1997 net earnings of $25.5 million, or $0.52 per share. Liquidity and Capital Resources (Consolidated) The Company funds its operations through internally generated funds, the sale of accounts receivable pursuant to the Fingerhut Master Trust, borrowings under the Company's Revolving Credit Facility and the issuance of long-term debt and common stock. The proceeds from the sale of Fingerhut accounts receivable were $1.044 billion and $1.205 billion at September 25, 1998 and December 26, 1997, respectively. During the first quarter, the Fingerhut Master Trust was amended to include certain revolving receivables and certain previously unsold, new customer installment receivables. As a result of this the Company terminated an agreement to sell revolving receivables to a third party conduit. In April 1998, the Company issued Series 1998-1 and Series 1998-2 securities to third parties. These agreements generated net proceeds of $897.0 million of which $790.0 million was used to pay down the entire principal portion of the 1997-1 Series. Approximately $102.5 million of the remaining proceeds were used to reduce the Class A Variable Funding Certificate issued under Series 1994-2. On July 30, 1998, the Company closed Series 1998-3, a $400 million variable-funding series issued out of the Fingerhut Master Trust and sold to third party conduits. Approximately $91 million in proceeds were used to make an early repayment of Series 1994-2. Series 1994-2 supported the $1.2 billion asset backed commercial paper program through the Fingerhut Owner Trust that the Company shared with Metris. This commercial paper program was terminated on July 30, 1998. It was replaced by Series 1998- 3 for the Company. In connection with the spin-off of Metris, the Company amended its Amended and Restated Revolving Credit Facility. The changes resulted in the removal of the Company's guarantee on the Metris outstanding balances and an increase in aggregate commitments to up to $250.0 million from $200.0 million. The expiration date for the facility was extended to September 2003. Additionally, as of September 25, 1998, outstanding revolving credit balances totaled $167.0 million and outstanding letters of credit totaled $6.3 million. As of September 26, 1997, outstanding revolving credit balances totaled $49.0 million and outstanding letters of credit totaled $4.9 million. Additional outstanding open letters of credit under separate agreements aggregated $34.1 million and $43.6 million at September 25, 1998 and September 26, 1997, respectively. On September 24, 1998, the Company prepaid $120 million of privately placed Senior Notes using existing credit facilities. The prepayment resulted in an extraordinary loss of $7.1 million, net of tax. In October 1998, as a result of the prepayment of the privately placed Senior Notes, the Company entered into 364-day revolving credit facility for $130 million. The Company had an aggregate amount of fixed rate notes outstanding of $125.0 million as of September 25, 1998 and $270.0 million as of September 26, 1997. The Company generated $63.4 million in cash from operations during the 39- week period ended September 25, 1998 compared with a $5.0 million use of cash for operations during the related period in 1997. This $68.4 million net increase in cash generated by operations resulted primarily from a significant decrease in accounts receivable, net and an increase in accounts payable, partially offset by an increase in promotional materials. Net cash used by investing activities for the 39-week period ended September 25, 1998 was $131.4 million, compared to $15.9 million for the comparable period in 1997. This $115.5 million increase in cash used by investing activities resulted primarily from the acquisition of AMO in the third quarter of 1998. Net cash provided by financing activities for the 39-week period ended September 25, 1998 was $2.7 million, compared with $20.4 million generated for the comparable period in 1997. The $17.7 million net decrease was primarily due a repayment of long term notes of $120.0 million, the repayment of AMO's revolving credit facility of $24.0 million, an increase in the repurchase of common stock of $31.9 million, partially offset by the increase in the revolving credit facility of $141.0 million. During 1994, the Company's Board of Directors authorized the repurchase of up to 2.5 million shares of the Company's common stock that may be made from time to time at prevailing prices in the open market or by block purchase and may be discontinued at any time. The purchases are made within SEC Rule 10-b-18, which has certain restrictions relating to volume, price and timing in order to minimize the impact of the purchase on the market for the Company's common stock. During the current 39-week period, 26,500 shares were repurchased. In October 1998, the Company repurchased an additional 861,000 shares, bringing total purchases to date under this plan to 2,499,700 shares for an aggregate of $33.5 million. In October 1998, the Company issued 18,411 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan. The Company entered into a definitive stock purchase agreement on October 28, 1998 to acquire Popular Club, a New Jersey based regional cataloger of general merchandise with annual revenues of $180 million. The acquisition is expected to be completed prior to the Company's year-end. The Company believes it will have sufficient funds available to meet current and future commitments. Year 2000 Issue The "Year 2000" issue developed because most computer systems and programs were designed to record years (e.g. "1998") as two-digit fields (e.g. "98"). When the year 2000 begins, these systems may interpret "00" as the year 1900 and may stop processing date-related computations or process them incorrectly. To prevent this, companies need to examine their computer systems and programs, fix the problem and test the results. Year 2000 compliance must be achieved on or before December 31, 1999. Also, certain systems currently refer to dates beyond December 31, 1999 and, therefore, have required earlier compliance. READINESS FOR YEAR 2000: The Company, as with all database marketing companies, is heavily dependent upon computer systems for all phases of its operations. For this reason, it is aggressively addressing the Year 2000 issue to mitigate the effect on software performance. In early 1996, a comprehensive effort to identify and correct the Year 2000 programming issues began. By mid-1996 the most critical mainframe processing system was converted to be Year 2000 compliant and the Company initiated a project to address all remaining systems, utilizing both internal and external resources. In late 1997, a Year 2000 Project Office was created to oversee the project, to address all related business issues, and to facilitate communication with significant suppliers and service providers. The project was divided into the following phases: (i) identification and inventorying of all systems with potential Year 2000 problems; (ii) evaluation of scope of Year 2000 issues and assignment of priorities to each item based upon its importance in the Company's operations; (iii) rectification of Year 2000 issues in accordance with assigned priorities, by correction, upgrade, replacement, or retirement; and (iv) testing for and validation of Year 2000 compliance. Because the Company uses a variety of systems, internally developed and third party provided software, and embedded chip equipment, depending on the business function and location, various aspects of the Company's Year 2000 efforts are in different phases and are proceeding parallel. The Company's operations are also dependent on the Year 2000 readiness of third parties that do business with the Company. In particular, the Company's systems interact with automated clearing-houses to handle the transfer of cash relating to the sale of the Company's receivables. The Company is also dependent on third-party suppliers of such infrastructure elements as, but not limited to, telephone services, electric power, and water. The Company does not depend to any significant degree on any single merchandise vendor. The Company has identified and initiated formal communications with key suppliers and merchandise vendors to determine the extent to which the Company will be vulnerable to such parties' failures to address and resolve their Year 2000 issues. Although the Company is not aware of any known third party problem that will not be rectified, the Company has limited information concerning the Year 2000 readiness of third parties. COSTS: The Company estimates that its internally developed systems will be Year 2000 compliant by mid-1999. Aggregate costs for work related to Year 2000 efforts are anticipated to range from approximately $16 to $18 million. Operating costs related to the Year 2000 compliance project will be incurred over several quarters and will be expensed as incurred. The Company incurred $5.1 million and $3.4 million in expense during the 39 weeks ended September 25, 1998 and September 26, 1997, respectively. RISKS: The Company expects to implement the changes necessary to address the Year 2000 issue for systems and equipment used within the Company. The Company presently believes that, with modifications to existing software, conversions to new software, and appropriate replacement of equipment, the Year 2000 issue is not likely to pose significant operational problems. However, if unforeseen difficulties arise or such modification, conversions and replacements are not completed in a timely manner, or if the Company's vendors' or suppliers' systems are not modified to become Year 2000 compliant, the Year 2000 issue may have a material impact on the results of operations and financial condition of the Company. The Company is presently unable to assess the likelihood that it will experience significant operational problems due to unresolved Year 2000 problems of third parties. The Company's estimates of the costs of achieving Year 2000 compliance and the date by which Year 2000 compliance will be achieved are based on management's best estimates. These estimates are derived using numerous assumptions about future events including the continued availability of resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from these estimates. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to locate, correct, and test all relevant computer codes, the success achieved by the Company's suppliers in reaching year 2000 readiness, the timely availability of necessary replacement equipment, and similar uncertainties. CONTINGENCY PLANS: The Company believes the most likely worst-case scenarios that it might confront with respect to the Year 2000 issues have to do with the possible failure in one or more geographic regions of third party systems over which the Company has no control, such as, but not limited to, power and telephone service. The Company has in place a business continuity plan that addresses recovery from various kinds of disasters, including recovery from significant interruption to data flows and distribution capabilities at the Company's major data systems centers and major distribution centers. The Company is using that plan as a starting point for developing specific Year 2000 contingency plans, which it expects to complete during the first half of 1999. FINGERHUT COMPANIES, INC. FORWARD LOOKING STATEMENTS This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding intent, belief or current expectations of the Company and its management. Shareholders and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements, including: general economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation; risks associated with unsecured credit transactions; interest rate risks; seasonal variations in consumer purchasing activities; increases in postal and paper costs; competition in the retail and direct marketing industry; dependence on the securitization of accounts receivable and credit card loans to fund operations; state and federal laws and regulations related to advertising, offering and extending credit, charging and collecting state sales/use taxes; product safety; Year 2000 compliance; and risks of doing business with foreign suppliers. Each of these factors is more fully discussed in Exhibit 99 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1997. Part II. Other Information Item 1. Legal Items The Company is a party to various claims, legal actions, disputes and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur are adequately covered by insurance, are provided for in the financial statements, or are without merit and the ultimate outcome of these matters will not have a material effect on the financial position or operations of the Company. On August 14, 1997, Fingerhut Corporation ("Fingerhut") was served with a summons and class action complaint commenced in Minnesota District Court, Fourth Judicial District, on behalf of named plaintiffs in ten states. The alleged class consists of "Fingerhut customers whose contracts are declared by Fingerhut to be governed by Minnesota law." The complaint alleges violations of the usury law, deceptive trade practices and consumer fraud based on Fingerhut's use of the "time price" doctrine in its credit sales. The plaintiffs' claims are substantially identical to the claims asserted in an earlier case brought against Fingerhut in the same court. The court granted summary judgment in favor of Fingerhut in that case in March 1997. The plaintiffs in that case did not appeal the summary judgment, and their counsel has refiled their claims on behalf of new members of the purported plaintiff class. Fingerhut responded to the complaint by filing a motion for judicial reassignment. The court denied this motion. On September 28, 1998, the court denied in part and granted in part Fingerhut's motion for summary judgment on the plaintiffs' claims. A pre-trial settlement conference was held on October 19, 1998. The Company has been named as a defendant in two class action lawsuits filed on October 6, 1998 and October 14, 1998 in the United States District Court for the District of Minnesota against Metris Companies Inc., the Company, two current officers of Metris and a current officer of the Company. The Company has not yet been served with the Complaint in either case. Both lawsuits allege (i) that Metris misled investors about its financial performance by failing to properly account for revenues and expenses associated with fee-based services for which a full refund period exists, and (ii) requests certification as a class action on behalf of shareholders of Metris who purchased Metris common stock during a specified period. The Company considers the plaintiffs' claims to be without merit and intends to vigorously defend the matter. The complaints allege that the Company was aware of Metris' financial condition and internal business practices, influenced and controlled the decisionmaking of Metris and had the power to prevent Metris' issuance of misleading statements to the public. Additional information required by this item appears in Item 1 of Part II of the Company's Form 10-Q for the fiscal quarter ended June 26, 1998, which information is incorporated herein by reference. Item 5. Other Events On November 3, 1998, the Company announced that it had entered into a definitive stock purchase agreement dated as of October 28 1998, to acquire Popular Club Plan, Inc. ("PCP"), a New Jersey based regional cataloger of general merchandise with annual revenues of $180 million. PCP is a wholly-owned subsidiary of J. Crew Operating Corp. The expected date of the consummation of the transaction will be as soon as practicable and is contingent upon, among other things, the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.n Amended and Restated Revolving Credit and Letter of Credit Facility Agreement dated as of October 29, 1990, as amended and restated as of June 18, 1998, among Fingerhut Companies, Inc., the Guarantors party thereto, the Lenders party thereto, NationsBank, N.A., as Syndication Agent, the Issuing Banks party thereto, and The Chase Manhattan Bank, as Administrative Agent (Incorporated by reference to Exhibit 10.n to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended September 25, 1998). 10.n(i)First Amendment to the Amended and Restated Revolving Credit and Letter of Credit Facility Agreement dated as of September 9, 1998 (Incorporated by reference to Exhibit 10.n(i) to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended September 25, 1998). 10.n(ii)Second Amendment to the Amended and Restated Revolving Credit and Letter of Credit Facility Agreement dated as of September 15, 1998 (Incorporated by reference to Exhibit 10.n(ii) to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended September 25, 1998). 11 Computation of Earnings per Share 27 Financial Data Schedule 99 Cautionary Statement Regarding Forward Looking Statements (b) Reports on Form 8-K: During the quarter ended September 25, 1998, the Company filed the following Current Reports on Form 8-K: (i) Current Report on Form 8-K dated August 17, 1998, reporting under Item 5 the receipt of a favorable private letter ruling from the Internal Revenue Service in connection with the Company's previously- filed request to spin off its approximate 83% interest in Metris Companies Inc., a Delaware corporation ("Metris") by distributing, on a pro rata basis, all of the shares of common stock of Metris owned by the Company to all of the holders of common stock of the Company (the "Spin-Off"). (ii) Current Report on Form 8-K dated September 17, 1998, reporting under Item 5 the acquisition of substantially all of the assets of Arizona Mail Order Company, Inc. (iii)Current Report on Form 8-K dated October 1, 1998, reporting under Item 2 the Spin Off and under Item 5 (1) the repurchase of shares of Fingerhut common stock from its Chief Executive Officer, (2) the recording of a non-recurring, after-tax charge in the third quarter, and (3) the amendment of certain stock option plans in connection with the Spin-Off. (iv) Amendment to Current Report on Form 8-K/A dated October 5, 1998, revising disclosure previously reported on October 1, 1998 under Item 5 relating to the recording of a non-recurring, after-tax charge. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FINGERHUT COMPANIES, INC. Date: November 19, 1998 By: /s/ Gerald T. Knight Gerald T. Knight Chief Financial Officer (Principal Financial Officer) Date: November 19, 1998 By: /s/ John C. Manning John C. Manning Vice President, Finance Date: November 19, 1998 By: /s/ Thomas C. Vogt Thomas C. Vogt Corporate Controller (Principal Accounting Officer) EX-11 2 Exhibit 11 FINGERHUT COMPANIES, INC. Computation of Earnings Per Share (In thousands of dollars, except per share data) Unaudited Thirteen Weeks Ended Thirty-nine Weeks Ended Sept. 25, Sept. 26, Sept. 25, Sept. 26, 1998 1997 1998 1997 Basic Net earnings (a) $ (15,118) $ 12,993 $ 3,059 $ 25,463 Weighted average shares of common stock outstanding (b) 48,004,534 46,163,574 47,061,954 46,122,419 Basic earnings per share of common stock (a/b) $ (.31) $ .28 $ .07 $ .55 Diluted Net earnings (c) $ (15,118) $ 12,993 $ 3,059 $ 25,463 Weighted average shares of common stock outstanding 48,004,534 46,163,574 47,061,954 46,122,419 Common stock equivalents - 3,684,907 - 2,997,244 Weighted average shares of common stock and common stock equivalents (d) 48,004,534 49,848,481 47,061,954 49,119,663 Diluted earnings per share of common stock and common stock equivalents (c/d) $ (.31) $ .26 $ .07 $ .52 Common stock equivalents for earnings per share are computed by the treasury stock method using the average market price.
EX-27 3
5 This schedule contains summary financial information extracted from the consolidated financial statements of Fingerhut Companies, Inc. for the fiscal quarter ended September 25, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-25-1998 SEP-25-1998 31,624 0 372,983 103,772 198,741 734,288 455,926 239,322 1,096,908 538,761 125,000 0 0 502 521,322 1,096,908 943,722 949,374 450,271 967,517 0 (57,692) 13,827 (31,970) (11,975) (19,995) 30,150 (7,096) 0 3,059 .07 .07
EX-27 4
5 This schedule contains restated summary financial information for Fingerhut Companies, Inc. reflecting the discontinued operation of Metris Companies Inc. for the fiscal quarters ending March 27, 1998 and June 26, 1998. 1,000 3-MOS 6-MOS DEC-25-1998 DEC-25-1998 MAR-27-1998 JUN-26-1998 104,106 138,446 0 0 272,427 341,632 127,549 130,611 121,918 125,150 653,253 677,083 472,760 480,020 222,158 232,084 1,135,718 1,159,183 176,863 181,739 245,000 245,000 0 0 0 0 465 472 677,578 700,497 1,135,718 1,159,183 269,420 595,916 269,857 599,537 128,590 283,855 270,365 591,901 0 0 17,488 38,474 5,420 9,767 (5,928) (2,131) (2,223) (800) (3,705) (1,331) 9,210 23,624 0 0 0 0 5,505 18,177 .12 .39 .11 .36
EX-27 5
5 This schedule contains restated summary financial information for Fingerhut Companies, Inc. reflecting the discontinued operation of Metris Companies Inc. for the fiscal years ending December 27, 1996 and December 26, 1997 and for the fiscal quarters ending March 28, 1997, June 27, 1997, and September 26, 1997. 1,000 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS DEC-27-1996 DEC-26-1997 DEC-26-1997 DEC-26-1997 DEC-26-1997 DEC-27-1996 DEC-26-1997 MAR-28-1997 JUN-27-1997 SEP-26-1997 28,795 96,889 45,827 35,251 28,176 0 0 0 0 0 551,128 519,767 469,497 439,345 437,747 163,661 159,360 134,137 141,468 118,267 127,735 124,424 131,916 129,458 173,179 756,788 761,067 728,500 660,282 712,368 454,253 472,831 457,266 461,517 469,073 174,234 216,105 185,327 196,104 207,441 1,224,178 1,229,485 1,187,984 1,122,022 1,177,284 317,860 283,841 306,810 233,329 273,574 270,000 245,000 270,000 245,000 270,000 0 0 0 0 0 0 0 0 0 0 462 463 462 460 462 604,939 669,522 605,559 612,446 626,420 1,224,178 1,229,485 1,187,984 1,122,022 1,177,284 1,638,363 1,530,228 290,156 630,556 953,393 1,615,002 1,519,351 293,290 634,045 959,094 827,086 738,740 146,433 323,722 482,475 1,557,252 1,432,417 292,297 622,791 976,779 0 0 0 0 0 112,084 97,593 20,992 41,145 62,102 25,305 27,946 7,219 14,434 21,315 32,445 58,988 (6,226) (3,180) 3,640 11,322 21,267 (2,476) (1,264) 1,314 21,123 37,721 (3,750) (1,916) 2,326 19,036 31,608 6,311 14,368 23,137 0 0 0 0 0 0 0 0 0 0 40,159 69,329 2,561 12,470 25,463 .87 1.50 .06 .27 .55 .83 1.40 .05 .26 .52
EX-99 6 CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS We and our representatives may, from time to time, make written or verbal forward-looking statements. Those statements relate to developments, results, conditions or other events we expect or anticipate will occur in the future. Our Form 10-K, our Annual Report to Shareholders, any Form 10-Q or Form 8-K filed by us or any other written or oral statements made by or on behalf of us may also include forward-looking statements that reflect our then current views and assumptions with respect to future events and financial performance. We caution investors that any forward-looking statements made by or on behalf of us are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These uncertainties and other factors include, but are not limited to the factors listed below (many of which have been discussed in our prior filings with the Securities and Exchange Commission). Although we have attempted to list comprehensively these important factors, we caution investors that other factors may in the future prove to be important in affecting our results of operations and financial condition. New factors emerge from time to time and it is not possible for us to predict all of such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We further caution investors not to place undue reliance on such forward-looking statements as they speak only of our views as of the date that we made such statement . The following list of important factors is not exclusive and we do not undertake to publicly update or revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made. The words "believe," "expect," "anticipate," "intends," "estimate," "forecast," "project" and similar expressions identify forward-looking statements. Any such forward-looking statements are qualified by the following which contain certain of the important factors that could cause actual results to differ materially from those predicted by the forward-looking statements: When we refer to "our company," "we," "our," and "us" in this discussion, we mean Fingerhut Companies, Inc. Importance of Fourth Quarter; Fluctuations in Quarterly Operating Results Our business is subject to seasonal variations in demand that we believe are generally associated with the direct marketing and retail industries. Historically, we have realized a significant portion of our sales and net earnings during the fourth quarter. Over the past several years, we have observed that customers waited until later in the fourth quarter to order merchandise from our catalogs, following a trend that has affected the retail industry as a whole. Our annual results could be adversely affected if our sales were to be substantially below normal seasonal sales during the fourth quarter of any year. In addition to seasonal variations, we experience variances in quarterly results from year to year that result from changes in the timing of our promotions and the types of customers and products promoted and, to some extent, variations in dates of holidays and the timing of quarter ends. Holding Company Structure; Effective Subordination We are a holding company and substantially all of our consolidated assets are held by our subsidiaries. Accordingly, cash flow and our ability to service debt are dependent upon the earnings of such subsidiaries. Furthermore, our rights, and the rights of our creditors, to participate in the assets of any subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of such subsidiary's creditors, except to the extent that we may ourself be a creditor with recognized claims against the subsidiary, in which case our claims would still be effectively subordinate to any security interest in, or mortgages or other liens on, the assets of such subsidiary and would be subordinate to any indebtedness of such subsidiary senior to that held by us. We may borrow up to $250 million under our existing amended credit facility. All of the available $250 million under this credit facility is guaranteed by Fingerhut Corporation ("Fingerhut") and Arizona Mail Order Company, Inc. In addition, as of September 25, 1998, we had outstanding $125 million aggregate principal amount of outstanding senior notes, which are also guaranteed by Fingerhut. Increases in Postal, Paper and Freight Costs We mail our catalogs and ship most of our merchandise through the United States Postal Service. In 1998, the United States Postal Service announced a proposed increase in mailing rates that will take effect in January 1999. This increase, as well as additional increases in postal rates or paper costs could adversely affect our results of operations if we are unable to offset such increases by raising selling prices or by implementing more efficient mailing, delivery and order fulfillment systems. Increases in fuel costs could also adversely affect our costs of incoming and outgoing freight. Funding and Securitization Considerations One of our main sources of liquidity to fund our operations is asset-backed financing ("securitization") of our subsidiaries' accounts receivable and credit card loans ("Receivables"). To date, we have been able to complete securitization transactions on terms that we believe are favorable. There can be no assurance, however, that the asset-backed securities market will continue to invest in securities backed by assets such as the Receivables or that the cost of such financings will remain an attractive source of funding. In addition, our ability to securitize the Receivables depends on the continued favorable legal, regulatory, accounting and tax environment for securitization transactions. While we do not at present foresee any significant problems in any of these areas, any such adverse change could force us to rely on other potentially more expensive funding sources. Increased levels of delinquencies and credit losses on the securitized Receivables could result in a downgrade or withdrawal of the ratings on the securities issued under our existing securitization transactions or cause such securities to begin early and/or rapid amortization. Such result could jeopardize the ability of our subsidiaries to complete other securitization transactions on acceptable terms, thereby decreasing our liquidity and forcing us to rely on other funding sources to the extent available. Our financial statements reflect the treatment of securitization transactions as sales of the related receivables for accounting purposes under Statement of Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Any change in such accounting treatment could have a material effect on our financial statements. Consumer Spending Weak economic conditions or changes in the retail environment or other economic factors that have an impact on the level of consumer spending could have a material adverse impact on us. General economic factors that are beyond our control impact our forecasts and actual performance. These factors include interest rates, recession, inflation, deflation, consumer credit availability, consumer debt levels, tax rates and policy, unemployment trends and other matters that affect disposable consumer income and influence consumer spending. Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency and magnitude. Adverse changes in these economic conditions may restrict consumer spending. There can be no assurance that weak economic conditions or changes in the retail environment or other economic factors that have an impact on the level of consumer spending would not have a material adverse impact on us. In addition, our business depends on customer response to our solicitations and marketing programs. A material decrease in responses to these solicitations and marketing programs would have a significant adverse impact on our profitability. Credit Risks We are subject to all of the risks associated with unsecured credit transactions, including (1) the risk of increasing delinquencies and credit losses during economic downturns, (2) the risk that an increasing number of customers will default on the payment of their outstanding balances or seek protection under bankruptcy laws, resulting in accounts being charged off as uncollectible, (3) the risk of fraud and (4) in the case of revolving credit accounts, the risk that increases in discretionary repayment of account balances by customers will result in diminished finance charges or other income. Also, general economic factors, such as the rate of inflation, unemployment levels and interest rates may affect moderate income consumers (our target market customers) more severely than other market segments. Any material increases in delinquencies and losses above managements expectations would have a material adverse impact on our results of operations and financial condition. Interest Rate Risk Fingerhut National Bank's closed-end credit card loans and Fingerhut's remaining closed-end installment sales contracts are fixed-priced, fixed-term contracts. Fingerhut National Bank's revolving credit card accounts currently have variable finance charges rates ranging from the prime interest rate plus 16.4 percent to the prime interest rate plus 23.4 percent. Fluctuations in interest rates may adversely affect our cost of funds. Regulatory Matters Our business is subject to regulation by a variety of state and federal laws and regulations related to advertising, offering and extending credit, charging and collecting state sales/use taxes and product safety. Our practices in certain of these areas are subject to periodic inquiries and proceedings by various regulatory agencies. While we believe that we are materially complying with all such laws and regulations, if we are found not to be complying with any such laws and regulations, we could become subject to cease and desist orders, injunctive proceedings, obligations to collect additional sales and use taxes, obligations for prior uncollected sales and use taxes, civil fines and other penalties. The occurrence of any of the foregoing could adversely affect our results of operations and financial condition. Until January 1997, Fingerhut extended credit for its customers' purchases. Fingerhut relied on the Minnesota "time-price" doctrine in establishing and collecting installment payments on products sold in many states. Under this doctrine, the difference between the time price and cash price for the same goods is not treated as interest subject to regulation under laws governing the extension of credit. Certain individuals who purchased goods from Fingerhut filed suit challenging the applicability of the time-price doctrine to Fingerhut's business. Fingerhut filed a motion for summary judgment on the plaintiffs' claims, which the court denied in part and granted in part. A pre-trial settlement conference was held on October 19, 1998. See "Part II, Item 1--Legal Items" in our Quarterly Report on Form 10-Q for the quarter ended September 25, 1998. The credit operations of Fingerhut National Bank generate additional revenue from fees related to extending credit. Fingerhut National Bank's ability to extend credit depends on many factors including compliance with numerous federal and state banking and consumer protection laws, any of which may change from time to time. Such laws, as well as any new laws or rulings that may be adopted, may adversely affect Fingerhut National Bank's ability to collect on account balances or maintain previous levels of periodic rate finance charges and other fees and charges with respect to the accounts. Any failure by us to comply with these legal requirements also could adversely affect our ability to collect the full amount of the account balances. Fingerhut National Bank is also subject to regulation by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Such regulations include limitations on the extent to which Fingerhut National Bank can finance or otherwise supply funds to its affiliates through dividends, loans or otherwise. In addition, changes in credit card use, payment patterns and default rates may result from a variety of economic, legal, social and other factors that we cannot control or predict with certainty. Changes that adversely impact Fingerhut National Bank's ability to extend credit and collect payments could negatively affect our results. Changes in federal and state bankruptcy and debtor relief laws also could adversely affect us if such changes result in, among other things, additional administrative expenses and accounts being written off as uncollectible. Foreign Suppliers Fingerhut purchases a significant portion (approximately 46% in 1997) of its merchandise from foreign suppliers. Although substantially all of our foreign purchases are denominated in U.S. dollars, we are subject to the risks of doing business abroad, including trade restrictions, tariffs, increases in import duties, decreases in quotas, adverse fluctuations in currency exchange rates, increased customs regulations and political turmoil. The occurrence of any of these risks could adversely affect our earnings. Competition The direct marketing industry includes a wide variety of specialty and general merchandise retailers and is both highly fragmented and highly competitive. We sell our products to customers in all states of the United States and competes in the purchase and sale of merchandise with all retailers, including general and specialty catalog marketers, television shopping marketers, retail department stores, discount department stores and variety stores, many of which are national chains. The loss of any significant portion of our market share to other retailers could adversely affect our earnings. OTHER FACTORS Other factors that could cause actual results to differ materially from those predicted include: changes in the availability or cost of capital, our inability, or the inability of vendors and other third parties with which we conduct business, to achieve year 2000 readiness in a timely and cost-effective manner, labor strikes or other work interruptions, the impact of excess retail capacity in our markets, material acquisitions or dispositions, the success or failure of significant new business ventures, adverse results in material litigation, natural disasters, the outbreak of war or other significant national or international events. -----END PRIVACY-ENHANCED MESSAGE-----