-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, E0svWtBJpyHdotW3J3o8xFI1XgLxTtxb9DRQNzZgDIJo8f4YVsr2ppKLIf31aQ7j oWOPOyd3qYiP0sJGd1SmcQ== 0000740126-95-000003.txt : 19950517 0000740126-95-000003.hdr.sgml : 19950516 ACCESSION NUMBER: 0000740126-95-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950512 SROS: NYSE 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08668 FILM NUMBER: 95537398 BUSINESS ADDRESS: STREET 1: 4400 BAKER RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129323100 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Quarter Ended 1-8668 March 31, 1995 Commission File Number ___________________________ FINGERHUT COMPANIES, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1396490 (State of Incorporation) (I.R.S. 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 May 2, 1995, 45,799,336 shares of the Registrant's Common Stock, $.01 par value, were outstanding. FINGERHUT COMPANIES, INC. FORM 10-Q March 31, 1995 TABLE OF CONTENTS Part I - Financial Information Page Item 1. Financial Statements Consolidated Statements of Earnings (Unaudited) - thirteen weeks ended March 31, 1995 and April 1, 1994..................................... 3 Consolidated Statements of Financial Position (Unaudited) - March 31, 1995, April 1, 1994 and December 30, 1994 .................................... 4 Consolidated Statements of Cash Flows (Unaudited) - thirteen weeks ended March 31, 1995 and April 1, 1994..........................................5 Condensed Notes to Consolidated Financial Statements (Unaudited)................................ 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition..................... 9 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K ..................... 14 Signatures..................................................... 15 FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars, except share and per share data) (Unaudited) Thirteen Weeks Ended March 31, April 1, 1995 1994 Revenues: Net sales $ 365,365 $ 324,681 Finance income, net 43,665 37,463 409,030 362,144 Costs and expenses: Product cost 178,330 160,389 Administrative and selling expenses 150,922 133,768 Provision for uncollectible accounts 46,866 38,673 Discount on sale of accounts receivable 17,521 6,922 Interest expense, net 5,817 6,990 399,456 346,742 Earnings before taxes 9,574 15,402 Provision for income taxes 3,390 5,429 Net earnings $ 6,184 $ 9,973 Earnings per share $ .13 $ .20 Dividends per share $ .04 $ .04 Weighted average shares outstanding 48,456,450 50,760,001 See accompanying Condensed Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of dollars) (Unaudited) March 31, April 1, December 30, 1995 1994 1994 ASSETS Current assets: Cash and cash equivalents $ 19,697 $ 50,896 $ 85,382 Customer accounts receivable, net 331,637 335,547 351,605 Inventories, net 175,342 147,662 159,048 Promotional material 86,064 72,042 59,477 Deferred and other income taxes 108,272 67,228 116,755 Other 21,009 13,547 19,645 Total current assets 742,021 686,922 791,912 Property and equipment, net 240,586 191,086 226,385 Excess of cost over fair value of net assets acquired, net 44,283 45,473 44,321 Customer lists, net 12,569 13,879 12,601 Other assets 20,795 16,053 22,714 $1,060,254 $ 953,413 $1,097,933 LIABILITIES Current liabilities: Accounts payable $ 161,802 $ 129,304 $ 156,121 Accrued payroll and employee benefits 23,968 21,454 39,891 Other accrued liabilities 58,007 52,919 55,595 Accrued unusual charges 12,406 - 29,358 Short-term debt 23,000 - - Current portion of long-term debt 269 319 336 Current income taxes payable - - 42,327 Total current liabilities 279,452 203,996 323,628 Long-term debt, less current portion 246,509 246,777 246,516 Deferred income taxes 21,616 15,107 21,762 Other non-current liabilities 6,539 5,084 5,077 554,116 470,964 596,983 STOCKHOLDERS' EQUITY Preferred stock - - - Common stock 458 463 456 Additional paid-in capital 256,734 256,918 253,926 Earnings reinvested 248,946 225,068 246,568 Total stockholders' equity 506,138 482,449 500,950 $1,060,254 $ 953,413 $1,097,933 See accompanying Condensed Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (Unaudited) Thirteen Weeks Ended March 31, April 1, 1995 1994 Cash flows from operating activities: Net earnings $ 6,184 $ 9,973 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation and amortization 9,908 8,422 Change in assets and liabilities, excluding the effects of business divestitures: Customer accounts receivable, net 19,968 20,204 Inventories, net (16,294) 4,367 Promotional material and other current assets (24,885) (15,457) Accounts payable 5,681 5,377 Accrued payroll and employee benefits (15,923) (17,023) Accrued liabilities (9,845) (6,266) Current income taxes payable (41,205) (26,395) Deferred and other income taxes 8,337 4,142 Other (349) (3,950) Net cash used by operating activities (58,423) (16,606) Cash flows from investing activities: Additions to property and equipment (23,375) (8,122) Proceeds from business divestitures - 11,555 Net cash (used) provided by investing activities (23,375) 3,433 Cash flows from financing activities: Repayments of long-term debt (74) (69) Revolving credit facility 23,000 - Issuance of common stock 2,877 965 Repurchase of common stock (7,862) - Cash dividends paid (1,828) (1,849) Net cash provided (used) by financing activities 16,113 (953) Net decrease in cash and cash equivalents (65,685) (14,126) Cash and cash equivalents at beginning of period 85,382 65,022 Cash and cash equivalents at end of period $ 19,697 $ 50,896 Supplemental noncash investing and financing activities: Tax benefit from exercise of non-qualified stock options $ 1,122 $ 971 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 3,770 $ 3,166 Cash paid during the period for income taxes $ 36,238 $ 27,638 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. AND SUBSIDIARIES 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 subsidiaries. The consolidated financial statements as of March 31, 1995 and April 1, 1994, and for the thirteen weeks ended March 31, 1995 and April 1, 1994, 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 1994 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. Reclassifications have been made to prior periods' consolidated financial statements whenever necessary to conform to the current period's presentation. 2. Earnings per share of common stock and common stock equivalents Earnings per share was computed by dividing net earnings 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. 3. Unusual Charges In 1994, the Company recorded charges relating to the cancellation of its proposed 24-hour cable television shopping channel, substantially scaling back USA Direct, as well as provisions for corporate streamlining. A summary of the change in the Company's reserve for unusual charges is as follows: Accrued Accrued unusual unusual charges at charges at Dec. 30, Reserves Reserve March 31, (In thousands of dollars) 1994 Utilized Adjustments 1995 Product costs $ 5,253 $( 100) $( 1,895) $ 3,258 Administrative and selling expenses 20,771 (12,309) ( 675) 7,787 Provision for uncollectible accounts 3,334 ( 73) ( 1,900) 1,361 $29,358 $(12,482) $( 4,470) 12,406 4. Sale of accounts receivable The Receivables Transfer Agreement was replaced with the Fingerhut Master Trust (the "Trust")in June 1994. Under the Trust, Fingerhut sold a greater percentage of its receivables, which had the effect of increasing the proceeds received by the Company as of March 31, 1995. The proceeds from the sale of accounts receivable were $1.010 billion, $767.0 million and $1.096 billion as of March 31, 1995, April 1, 1994 and December 30, 1994, respectively. The Company's retained interest in the Trust was approximately $178.4 million and $184.2 million as of March 31, 1995 and December 30, 1994, respectively. The holdback under the Receivables Transfer Agreement, which represented the Company's interest under that agreement, was approximately $228.0 million as of April 1, 1994. In December 1994, the Company entered into interest rate cap agreements to hedge its economic exposure to increasing interest rates from floating rate certificates issued by the Fingerhut Master Trust for the sale of accounts receivable. The premium paid for these cap agreements is being amortized to "Discount on sale of accounts receivable" where the economic exposure to rising interest rates exists, not interest expense as previously noted in the Company's 1994 Annual Report. 5. Customer accounts receivable, net Customer accounts receivable, net consisted of the following: (In thousands of dollars) March 31, April 1, December 30, 1995 1994 1994 Due from customers $ 457,855 $ 469,987 $ 484,158 Reserve for uncollectible accounts, net of anticipated recoveries (80,760) (76,187) (81,271) Reserve for returns and exchanges (11,790) (14,701) (14,889) Other reserves (15,670) (19,354) (17,223) Net collectible amount 349,635 359,745 370,775 Unearned finance income (17,998) (24,198) (19,170) Customer accounts receivable, net $ 331,637 $ 335,547 $ 351,605 6. Revolving credit facility Interest expense related to the revolving credit facility for the thirteen week periods ended March 31, 1995 and April 1, 1994 was $464 thousand and $25 thousand, respectively. The average outstanding balances during such periods were $22.8 million and $1.7 million, respectively, and the average annual interest rate for the 1995 and 1994 periods were 8.2% and 6.0%, respectively. 7. Stockholders' equity During the thirteen week period ended March 31, 1995, 373,299 shares of common stock were issued related to the exercise of employee stock options and 30,866 shares of common stock were issued under the Fingerhut Companies, Inc. Employee Stock Purchase Plan. The Company also repurchased at prevailing market prices 214,100 shares of its common stock for an aggregate of $3.2 million. The total shares of common stock outstanding as of March 31, 1995 was 45,762,968. 8. Subsequent events On April 20, 1995, the Company declared a cash dividend in the amount of $.04 per share, aggregating approximately $1.8 million, payable on May 25, 1995, to the shareholders of record as of the close of business on May 4, 1995. In April 1995, the Company issued 33,168 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 3,200 shares related to the exercise of employee stock options. In April 1995, the Company signed a letter of intent to sell certain assets of Figi's Inc. The agreement is subject to purchaser due diligence and other closing conditions. The Company can give no assurances to the closing of this transaction. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRTEEN WEEKS ENDED MARCH 31, 1995 AND APRIL 1, 1994 Results of Operations The business maintained relatively flat operating income in the first quarter of 1995 versus the comparable quarter in 1994, as a result of increased mailings and savings from cost reduction measures. This was achieved in spite of substantial increases in paper and postage rates, increased provisions for uncollectible accounts, lower customer response rates, as well as losses in Montgomery Ward Direct primarily caused by paper and postage increases; and even after excluding a $4.5 million favorable impact from the recovery of reserves established for unusual charges in the fourth quarter of 1994. Net sales for the current 13 week period were $365.4 million compared to net sales of $324.7 million for the related period in 1994, an increase of 13%, or 10% excluding Figi's which was not consolidated in last year's first quarter. Fingerhut Corporation ("Fingerhut"), the Company's core business, had first quarter net sales of $326.8 million compared to $304.4 million in the same period in 1994, an increase of 7%. Net sales from Fingerhut's existing customer list increased 8% to $263.4 million. Net sales from Fingerhut's new customer acquisition programs increased 5% to $63.4 million. Both increases were primarily due to additional mailings and higher average order size, partially offset by lower response rates. Other net sales were $38.5 million compared to $20.3 million for the same period in 1994. The increase was the result of Figi's, which was not consolidated in 1994, and sales from infomercials first aired in 1994. In March 1995, the Company entered into a strategic alliance with Guthy-Renker Corporation, a producer of infomercials. The Company will account for the results of the alliance's new infomercials using the equity method of accounting. Sales related to these infomercials will not appear as consolidated net sales of the Company. Net finance income for the current 13 week period increased 17% to $43.7 million from $37.5 million in the comparable 1994 period due to increased sales from Fingerhut's existing customers and the effect of lengthened payment plans. Product cost for the current 13 week period was 48.8% of net sales, or $178.3 million, compared to 49.4% of net sales, or $160.4 million, during the comparable prior year period. The reduction as a percent of net sales was due to a small improvement in product margins and the recovery of $1.9 million in reserves established for unusual charges in the fourth quarter of 1994. Administrative and selling expenses for the current 13 week period were $150.9 million, or 41.3% of net sales, compared to $133.8 million, or 41.2% of net sales, in the comparable prior year period. As a percentage of net sales, costs were higher as a result of price increases for paper and postage, lower response rates from the existing customer list and new customer acquisition programs, and losses associated with the Montgomery Ward Direct joint venture, all of which were substantially offset by lower expenses primarily due to our cost reduction program. The provision for uncollectible accounts for the first quarter of 1995 was $46.9 million, or 12.8% of net sales, compared to $38.7 million, or 11.9% of net sales, for the same period in the prior year. The increase in the provision as a percent of net sales was due to added provisions resulting from increased delinquencies experienced during the first quarter related to receivables generated in 1994. In addition, the provision was reduced as a result of a favorable impact from the recovery of $1.9 million in reserves established for unusual charges in the fourth quarter of 1994. Management believes that reserves are adequate; however, should the higher level of delinquencies continue, additional provisions may be necessary. Discount on sale of accounts receivable for the 13 week period ended March 31, 1995 was $17.5 million compared to $6.9 million for the comparable period in 1994. The increase resulted primarily from the increase in short- term interest rates during 1994, and expense relating to interest rate cap agreements entered into in December 1994, as well as an increase in the amount of accounts receivable sold due to an increase in sales from Fingerhut's existing customers and the replacement of the Receivables Transfer Agreement with the Fingerhut Master Trust. Net interest expense for the current 13 week period was $5.8 million compared to $7.0 million in the first quarter of 1994 primarily due to the favorable impact from the expiration of interest rate swap agreements in June 1994. The effective tax rate for the first quarter of 1995 was 35.4% compared with 35.2% in the comparable prior year period. As a result of the items discussed above, net earnings for the thirteen week period ended March 31, 1995 were $6.2 million, or $.13 per share, compared to first quarter 1994 net earnings of $10.0 million, or $.20 per share. Liquidity and Capital Resources The Company funds its operations through internally generated funds, the sale of accounts receivable pursuant to the Fingerhut Master Trust, borrowings under the Revolving Credit Facility and issuance of long-term debt and common stock. The Receivables Transfer Agreement was replaced with the Fingerhut Master Trust in June 1994 (See note 4 of the Condensed Notes to Consolidated Financial Statements). Under the Fingerhut Master Trust, Fingerhut sold a greater percentage of its receivables, which had the effect of increasing the proceeds received by the Company as of March 31, 1995. The proceeds received as of March 31, 1995 and December 30, 1994 were $1.010 billion and $l.096 billion, respectively, compared with $767.0 million as of April 1, 1994 and $829.0 million as of December 31, 1993. The Revolving Credit Facility provides for aggregate commitments of $400.0 million, which includes the issuance of up to $200.0 million in letters of credit. The commitment expires in October 1999. As of March 31, 1995, the Company had an outstanding revolving credit balance of $23.0 million and outstanding letters of credit of $5.8 million. As of April 1, 1994, the Company had no borrowings under the Revolving Credit Facility but had outstanding letters of credit of $34.4 million. Additional outstanding open letters of credit under a separate agreement aggregated $30.7 million at March 31, 1995. The Company had an aggregate amount of fixed rate notes outstanding of $245.0 million as of March 31, 1995 and April 1, 1994. The Company used $58.4 million of cash for operations during the thirteen week period ended March 31, 1995, compared with $16.6 million for the related period in 1994. This net $41.8 million increase in cash used for operations resulted from increased working capital requirements. The most significant item affecting the increase in working capital was a change in inventory. The change in inventory from a $4.4 million source of cash in 1994 to a $16.3 million use of cash in 1995 resulted from increases in inventory primarily due to higher purchases reflecting planned increases in future sales. The $26.8 million increase in net cash used by investing activities was the result of increased capital expenditures related to the facility additions discussed below and proceeds received in 1994 from businesses divested at the end of 1993. Three separate facility additions were approved by the Company's Board of Directors in 1994. The $20.0 million 547,000 square-foot warehouse and distribution facility expansion in St. Cloud, Minnesota became operational during the fourth quarter of 1994. Spending through March 31, 1995 on the St. Cloud expansion was $19.7 million. Construction on a western distribution center in Spanish Fork, Utah began in the third quarter of 1994. Spending through March 31, 1995 was $24.0 million. This one million square-foot facility is projected to cost approximately $60.0 million and to be fully operational in early to mid 1996. The Company also broke ground in the third quarter of 1994 on a $23.0 million data and technology center in Plymouth, Minnesota, which is anticipated to be open in the second quarter of 1995. Spending through March 31, 1995 was $11.3 million. The owner of certain office and warehouse facilities exercised its right to require the Company to repurchase those facilities in 1995 for approximately $14.9 million. The Company anticipates completing the purchase on or before September 29, 1995. During the first quarter the Company rolled out its planned MasterCard solicitation through Direct Merchants Credit Card Bank, N.A. (the "Bank"), a wholly owned subsidiary. The Company plans to issue approximately 400,000 credit card accounts by year end. As of May 10, 1995, approximately 303,000 accounts have been issued cards and outstanding receivables totaled $66.9 million. The Company currently finances these receivables by using available cash and borrowings under its Revolving Credit Facility. The Company is in discussion with various parties with respect to the establishment of a new master trust, similar in structure to the Fingerhut Master Trust, which will purchase the Bank's receivables in the future. The Company expects to have the new master trust established by the end of the second quarter of 1995. During 1994, the Company announced that its 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 will be made within certain restrictions relating to volume, price and timing in order to minimize the impact of the purchase on the market for the Company's stock. During the first quarter, the Company repurchased at prevailing market prices 214,100 shares of its common stock for an aggregate of $3.2 million. On April 20, 1995, the Company declared a cash dividend of $.04 per share, or an aggregate of $1.8 million, payable on May 25, 1995, to the shareholders of record as of the close of business on May 4, 1995. In April 1995, the Company issued 33,168 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 3,200 shares related to the exercise of employee stock options. The Company believes it will have sufficient funds available to meet current and anticipated commitments. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 11 Computation of Earnings per Share 27 Financial Data Schedule (b) Reports on Form 8-K: None 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: May 11, 1995 By: /s/ Michael A. Qualen Michael A. Qualen Acting Chief Financial Officer (Principal Financial Officer) Date: May 11, 1995 By: /s/ Thomas C. Vogt Thomas C. Vogt Corporate Controller (Principal Accounting Officer) EX-11 2 Exhibit 11 FINGERHUT COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share (In thousands of dollars, except per share data) Unaudited Thirteen Weeks Ended March 31, April 1, 1995 1994 Primary Net earnings (a) $ 6,184 $ 9,973 Weighted average shares of common stock outstanding 45,699,556 46,230,124 Common stock equivalents 2,756,894 4,529,877 Weighted average shares of common stock and common stock equivalents (b) 48,456,450 50,760,001 Primary earnings per share of common stock and common stock equivalents (a/b) $ .13 $ .20 Fully diluted Net earnings (c) $ 6,184 $ 9,973 Weighted average shares of common stock outstanding 45,699,556 46,230,124 Common stock equivalents 2,756,894 4,653,898 Weighted average shares of common stock and common stock equivalents (d) 48,456,450 50,884,022 Fully diluted earnings per share of common stock and common stock equivalents (c/d) $ .13 $ .20 Common stock equivalents for primary earnings per share are computed by the treasury stock method using the average market price. Common stock equivalents for quarterly fully diluted earnings per share are computed by the treasury stock method using the ending market price, average market price for the last month or the average of the fully diluted monthly amounts used in the quarter, whichever is higher. EX-27 3 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary financial information extracted from the Registrant's Consolidated Financial Statements for the thirteen week period ended March 31, 1995 and is qualified in its entirety by reference to such financial statements. 1000 QTR-1 DEC-29-1995 MAR-31-1995 19,697 0 457,855 126,218 175,342 742,021 339,617 99,031 1,060,254 279,452 246,509 458 0 0 505,680 1,060,254 365,365 409,030 178,330 376,118 17,521 46,866 5,817 9,574 3,390 6,184 0 0 0 6,184 .13 .13
-----END PRIVACY-ENHANCED MESSAGE-----