-----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, Usmi0cAABKK0IuE3On+muNcZFu3lur5+iGueTcunsGDu1xUlIBsq2qP+nueFdwdG PNB+8PNPd9WLtYyhFs6lyw== 0000740126-96-000010.txt : 19960813 0000740126-96-000010.hdr.sgml : 19960813 ACCESSION NUMBER: 0000740126-96-000010 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960628 FILED AS OF DATE: 19960812 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08668 FILM NUMBER: 96608441 BUSINESS ADDRESS: STREET 1: 4400 BAKER RD CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129323100 MAIL ADDRESS: 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 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal Quarter Ended 1-8668 June 28, 1996 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 August 7, 1996, 46,492,489 shares of the Registrant's Common Stock, $.01 par value, were outstanding. FINGERHUT COMPANIES, INC. FORM 10-Q June 28, 1996 TABLE OF CONTENTS Part I - Financial Information Page Item 1. Financial Statements Consolidated Statements of Earnings (Unaudited) - thirteen weeks and twenty-six weeks ended June 28, 1996 and June 30, 1995........................ 3 Consolidated Statements of Financial Position (Unaudited) - June 28, 1996, June 30, 1995 and December 29, 1995 ..................................... 4 Consolidated Statements of Cash Flows (Unaudited) - twenty-six weeks ended June 28, 1996 and June 30, 1995.......................................... 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 ...................... 22 Signatures...................................................... 23 FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars, except share and per share data) (Unaudited) Thirteen Weeks Ended Twenty-Six Weeks Ended June 28, June 30, June 28, June 30, 1996 1995 1996 1995 Revenues: Net sales $ 368,381 $ 408,698 $ 703,226 $ 773,813 Finance income and other revenues 81,209 62,615 154,596 106,459 449,590 471,313 857,822 880,272 Costs and expenses: Product cost 190,470 205,676 359,832 384,006 Administrative and selling expenses 171,119 176,571 334,714 327,476 Provision for uncollectible accounts 61,261 56,307 117,607 103,173 Discount on sale of accounts receivable 16,128 17,166 30,936 34,687 Interest expense, net 7,248 6,622 14,585 12,385 446,226 462,342 857,674 861,727 Earnings before income taxes 3,364 8,971 148 18,545 Provision for income taxes 1,219 3,177 54 6,567 Net earnings $ 2,145 $ 5,794 $ 94 $ 11,978 Earnings per share $ .04 $ .12 $ .00 $ .25 Dividends $ .04 $ .04 $ .08 $ .08 Weighted average 48,820,545 48,186,409 48,703,782 48,321,429 shares See accompanying Condensed Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of dollars) (Unaudited) June 28, June 30, December 29, 1996 1995 1995 ASSETS Current assets: Cash and cash equivalents $ 44,125 $ 26,987 $ 66,109 Customer accounts receivable, net 426,591 376,924 464,176 Inventories, net 143,730 151,446 156,352 Promotional material 72,278 77,198 80,357 Deferred income taxes 122,163 106,299 131,035 Other 21,049 20,162 23,542 Total current assets 829,936 759,016 921,571 Property and equipment, net 288,256 266,725 279,455 Excess of cost over fair value of net assets acquired, net 44,064 44,066 44,047 Customer lists, net 11,201 12,397 11,201 Other assets 24,716 26,146 24,803 $1,198,173 $1,108,350 $1,281,077 LIABILITIES Current liabilities: Accounts payable $ 155,128 $ 146,046 $ 185,475 Accrued payroll and employee benefits 21,062 22,396 39,872 Other accrued liabilities 64,251 57,510 70,879 Accrued unusual charges 1,333 10,105 2,458 Revolving credit facility 201,000 85,000 115,000 Current portion of long-term debt 35,099 201 100,099 Current income taxes payable - 852 42,380 Total current liabilities 477,873 322,110 556,163 Long-term debt, less current portion 146,511 246,460 146,564 Deferred income taxes 22,414 21,409 23,096 Other non-current liabilities 7,527 7,815 7,764 654,325 597,794 733,587 STOCKHOLDERS' EQUITY Preferred stock - - - Common stock 462 458 459 Additional paid-in capital 263,808 257,190 258,917 Unearned compensation (2,894) - - Earnings reinvested 282,472 252,908 288,114 Total stockholders' equity 543,848 510,556 547,490 $1,198,173 $1,108,350 $1,281,077 See accompanying Condensed Notes to Consolidated Financial Statements. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (Unaudited) Twenty-Six Weeks Ended June 28, June 30, 1996 1995 Cash flows from operating activities: Net earnings $ 94 $ 11,978 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation and amortization 24,497 20,956 Amortization of unearned compensation 1,896 - Change in operating assets and liabilities: Customer accounts receivable, net 37,585 (25,319) Inventories, net 12,622 7,602 Promotional material and other current assets 10,572 (15,151) Accounts payable (30,347) (10,075) Accrued payroll and employee benefits (18,810) (17,495) Accrued liabilities (7,753) (12,643) Current income taxes payable (43,751) (40,337) Deferred and other income taxes 9,802 10,103 Other (1,473) (5,912) Net cash used by operating activities (5,066) (76,293) Cash flows from investing activities: Additions to property and equipment (31,992) (58,706) Net cash used by investing activities (31,992) (58,706) Cash flows from financing activities: Repayments of long-term debt (65,053) (191) Revolving credit facility 86,000 85,000 Issuance of common stock 1,255 3,317 Repurchase of common stock (3,428) (7,862) Cash dividends paid (3,700) (3,660) Net cash provided by financing activities 15,074 76,604 Net decrease in cash and cash equivalents (21,984) (58,395) Cash and cash equivalents at beginning of period 66,109 85,382 Cash and cash equivalents at end of period $ 44,125 $ 26,987 Supplemental noncash investing and financing activities: Tax benefit from exercise of non-qualified stock options $ 241 $ 1,138 Issuance of restricted stock $ 4,790 $ - Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 20,401 $ 13,351 Cash paid during the period for income taxes $ 34,140 $ 36,853 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 June 28, 1996 and June 30, 1995, and for the thirteen and twenty-six weeks ended June 28, 1996 and June 30, 1995, 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 1995 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 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. Customer accounts receivable, net Customer accounts receivable, net of amounts sold, consisted of the following: (In thousands of dollars) June 28, June 30, December 29, 1996 1995 1995 Customer installment receivables $ 449,435 $ 447,873 $ 511,174 Reserve for uncollectible accounts, net of anticipated recoveries (102,810) (85,963) (105,048) Reserve for returns and exchanges (10,627) (12,140) (13,442) Other reserves (18,449) (16,748) (20,192) Net collectible amount 317,549 333,022 372,492 Unearned finance income (21,706) (18,523) (24,885) Customer installment receivables, net $ 295,843 $ 314,499 $ 347,607 Credit card and other receivables 138,688 64,869 122,567 Reserve for uncollectible accounts (5,303) (2,263) (5,300) Other reserves (2,637) (181) (698) Credit card and other receivables, net 130,748 62,425 116,569 Total customer accounts receivable, net $ 426,591 $ 376,924 $ 464,176 4. Stockholders' equity During the twenty-six week period ended June 28, 1996, 101,050 shares of common stock were issued related to the exercise of employee stock options and 53,642 shares of common stock were issued under the Fingerhut Companies, Inc. Employee Stock Purchase Plan. The Company also repurchased at prevailing market prices 249,800 shares of its common stock for an aggregate of $3.4 million. The total shares of common stock outstanding as of June 28, 1996 was 46,209,461. In February 1996, 368,746 shares of restricted stock were issued under the Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock Option Plan to certain key members of management. Twenty-five percent of the shares vested on March 31, 1996 and, subject to continued employment, 25% vests on March 31, 1997 with the remaining 50% vesting on August 31, 1998. The unearned portion of the awards is being amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense totaled $611,069 and $2,623,511 for the thirteen and twenty-six week periods ended June 28, 1996, respectively, which included tax assistance payments made by the Company with respect to the first 25% of the awards that vested. 5. Executive retirement plan On February 14, 1996, the Company adopted a Supplemental Executive Retirement Plan (the "SERP") that covers officers or other senior management employees of the Company selected for participation by the Compensation Committee. Under the SERP, the Company will pay a benefit to a participant whose employment relationship with the Company is completely severed either (a) at or after age 65 with five years of service or (b) at or after age 55, if the participant has five years of service and the sum of the participant's age and years of service equals at least 70. 6. Dissolution of joint venture On June 5, 1996, the Company reached an agreement with Montgomery Ward & Co., Incorporated to withdraw as a partner in the Montgomery Ward Direct L.P. joint venture. In connection with this transaction, the Company recorded a pretax charge for the quarter of $.8 million. 7. Subsequent events On July 18, 1996, the Company declared a cash dividend in the amount of $.04 per share, aggregating approximately $1.8 million, payable on August 16, 1996, to the shareholders of record as of the close of business on August 5, 1996. In July 1996, the Company issued 25,085 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 4,450 shares related to the exercise of employee stock options. The Company also repurchased at prevailing market prices 61,000 shares of its common stock for an aggregate of $.8 million. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRTEEN AND TWENTY-SIX WEEKS ENDED JUNE 28, 1996 AND JUNE 30, 1995 Results of Operations Second Quarter Direct-to-the-Consumer Marketing Segment Net sales for the current 13-week period were $363.6 million compared to net sales of $404.7 million for the related period in 1995, a decrease of 10%. Fingerhut Corporation ("Fingerhut"), the segment's primary business, generated second quarter net sales of $356.8 million compared to $377.7 million in the same period in 1995, a decrease of 6%. Net sales from Fingerhut's new customer acquisition programs increased 1% to $77.8 million. The impact of reduced mailings was offset by higher sales per mailing and higher average order size. Net sales from Fingerhut's existing customer list declined 7% to $279.0 million primarily due to an approximately 20% planned reduction in mailings, partially offset by a higher average order size and higher sales per mailing. Finance income and other revenues for the current 13-week period increased 1% to $54.8 million from $54.5 million in the comparable 1995 period. The slight increase (on a lower sales base) was primarily the result of the effect of lengthened payment plans. Product cost for the current 13-week period was 52.0% of net sales, or $189.1 million, compared to 50.5% of net sales, or $204.4 million, during the comparable prior-year period. The increase as a percent of net sales was primarily due to margin reductions in the core catalog business, which began during the second half of fiscal year 1995, as a result of offering lower retail prices on selected products to improve the customer value package. In addition, margins were reduced due to a shift in sales mix to lower margin product categories. Administrative and selling expenses for the current 13-week period were $148.2 million, or 40.8% of net sales, compared to $166.1 million, or 41.0% of net sales, in the comparable prior-year period. The higher sales per mailing on Fingerhut's core catalog business produced lower selling expenses as a percentage of net sales, which offset the impact of higher paper and depreciation costs, as well as an increase in compensation expense and customer allowances. The provision for uncollectible accounts for the second quarter of 1996 was $62.9 million, or 17.3% of net sales, compared to $55.9 million, or 13.8% of net sales, for the same prior-year period. Provision rates for the current 13-week period were comparable to those applied in the fourth quarter of 1995. The Company continues to record provisions commensurate with the higher level of risk recognized during the latter part of the prior fiscal year. In addition, sales to new customers, which carry higher reserve requirements, represented a higher proportion of retail sales in the second quarter of 1996 versus the comparable prior- year period. Management believes that the reserves continue to be adequate to cover future estimated losses. Discount on sale of accounts receivable for the 13-week period ended June 28, 1996 was $16.1 million compared to $17.2 million for the comparable period in 1995. The decrease resulted primarily from lower interest rates as a result of interest rate swap transactions the Company entered into in June and July 1995, as well as lower amortization expense due to the expiration of an interest rate cap agreement in December 1995. These decreases were partially offset by an increase in the amount of accounts receivable sold. Net interest expense for the current 13-week period was $6.8 million compared to $6.4 million in the second quarter of 1995. The increase was primarily due to the higher utilization of the revolving credit agreement used to fund general corporate purposes. The effective consolidated tax rate, which includes both the Direct-to-the- Consumer Marketing and Financial Services Segments, for the second quarter of 1996 was 36.2% compared with 35.4% in the comparable prior-year period. As a result of the items discussed above, the Direct-to-the-Consumer Marketing Segment incurred a net loss for the 13-week period ended June 28, 1996 of $2.9 million, or $(.06) per share, compared to second quarter 1995 net earnings of $6.0 million, or $.12 per share. Financial Services Segment General The Company's Financial Services Segment is a direct marketer and provider of consumer credit products, extended service plans and other fee-based products and services to moderate income consumers and to businesses that serve the moderate income consumer market. Currently, the segment operates three core business lines: 1) consumer credit products, which presently consists of credit card lending through various MasterCard credit card products issued by Direct Merchants Credit Card Bank, National Association ("Direct Merchants Bank"), 2) extended service plans (warranties) which includes sales of extended service plans to the Company's customers, and 3) other fee-based products and services which presently includes third-party insurance offerings, membership clubs, card registration and debt waiver programs. The segment generates interest and other income through finance charges assessed on outstanding credit card loans, credit card fees, including annual membership, interchange income, and other revenues from sales of fee-based products and service to its customer base, in addition to revenues from the sales of extended service plans to the retail customers of the Direct-to-the-Consumer Marketing Segment. The segment's primary expenses are the costs of funding its assets, provisions for loan losses and operating expenses, including employee compensation, account solicitation and marketing expenses, and third party data processing and servicing expenses. The segment's profitability is affected by credit card account and loan growth, interest spreads on loans, credit card activity, warrantable product sales penetration for extended service plans sold to the Company's customers, credit quality (delinquencies and charge- offs), the level of solicitation and promotional (marketing) expenses, and servicing and other administrative costs. The Financial Services Segment records its income on a calendar quarter basis, instead of under the Company's fiscal year basis. The difference between the Company's fiscal year and the segment's calendar basis reporting was not material to the consolidated financial statements of the Company for any of the periods reported. Consequently, period-end references for the Financial Services Segment reflects its calendar year versus the fiscal year of the Company. The following segment information was based on management's best estimate of the revenues and expenses, and assets and liabilities which will comprise the Financial Services Segment at the initiation of the anticipated public transaction. This information will be subject to change based on any changes in the Financial Services Segment's capital, asset and income structure in connection with the public transaction. Results of Operations Net income for the three months ended June 30, 1996 was $5.0 million, or $.10 per share, compared to a loss of $.2 million, or $.00 per share, for the comparable prior-year period. The increase in net income was largely attributable to the growth in average managed credit card loans for the quarter from $84.7 million at June 30, 1995 to $872.6 million at June 30, 1996. In addition, the segment experienced a 25% increase in extended service plan revenues and a $10.6 million increase in other fee-based products and services revenues. These increases were partially offset by a $1.0 million increase in credit card account and other product solicitation and marketing expenses. First Half Direct-to-the-Consumer Marketing Segment Net sales for the 26-week period ended June 28, 1996 were $693.6 million compared to $766.1 million for the corresponding period in 1995, a decrease of 9%. Fingerhut had first half net sales of $673.2 million compared to $700.6 million in the same period in 1995, a decrease of 4%. Net sales from Fingerhut's new customer acquisition programs increased 6% to $149.6 million. The impact of reduced mailings was more than offset by higher sales per mailing and higher average order size. Net sales from Fingerhut's existing customer list declined 7% to $523.6 million primarily due to a planned reduction in mailings, partially offset by a higher average order size and higher sales per mailing. Finance income and other revenues for the first half of 1996 was $103.7 million compared to $98.0 million for the same period in 1995. The increase (on a lower sales base) was primarily due to the effect of lengthened payment plans. Product cost for the 26-week period ended June 28, 1996 was 51.5% of net sales, or $357.2 million, compared to 49.8% of net sales, or $381.7 million, during the comparable prior-year period. The increase as a percent of net sales was primarily due to margin reductions, which began during the second half of fiscal year 1995, as a result of offering lower retail prices on selected products to improve the customer value package. In addition, margins were reduced due to a shift in sales mix to lower margin product categories. Administrative and selling expenses for the first half of 1996 were $296.2 million, or 42.7% of net sales, compared to $314.1 million, or 41.0% of net sales, in the comparable prior-year period. The higher sales per mailing on Fingerhut's core catalog business produced lower selling expenses as a percentage of net sales, which partially offset the impact of higher paper and depreciation costs, as well as an increase in compensation expense and customer allowances. The provision for uncollectible accounts for the first half of 1996 was $114.4 million, or 16.5% of net sales, compared to $102.8 million, or 13.4% of net sales, in the comparable prior-year period. Provision rates for the current 26-week period were comparable to those applied in the fourth quarter of 1995. The Company continues to record provisions commensurate with the higher level of risk recognized during the latter part of the prior fiscal year. The increase as a percent of net sales was also impacted by an increase in new customer acquisitions, which have higher reserve requirements. Discount on sale of accounts receivable for the 26-week period ended June 28, 1996 was $30.9 million compared to $34.7 million for the comparable period in 1995. The decrease resulted primarily from the lower interest rates as a result of interest rate swap transactions the Company entered into in June and July 1995, as well as lower amortization expense due to the expiration of an interest rate cap agreement in December 1995. These decreases were partially offset by an increase in the amount of accounts receivable sold. Net interest expense for the first half of 1996 was $12.9 million compared to $12.7 million in the comparable prior-year period. The increase was primarily due to the higher utilization of the revolving credit agreement used to fund general corporate purposes. The effective consolidated tax rate, which includes both the Direct-to-the- Consumer Marketing and Financial Services Segments, for the first 26 weeks of 1996 was 36.5% compared with 35.4% in the first half of the prior-year. As a result of the items discussed above, the Direct-to-the-Consumer Marketing Segment incurred a net loss for the 26-week period ended June 28, 1996 of $8.8 million, or $(.18) per share, compared to first half 1995 net earnings of $11.8 million, or $.25 per share. Financial Services Segment Net income for the six months ended June 30, 1996 was $8.9 million, or $.18 per share, compared to $.2 million, or $.00 per share, for the comparable prior-year period. The increase in net income was largely attributable to the continued growth in managed credit card loans through the first six months of 1996. At June 30, 1996, managed credit card loans outstanding had reached $1.068 billion from $190 million at June 30, 1995, an increase of $878 million. Extended service plan revenues for the first half of 1996 were $8.6 million, an increase of 29% over the comparable prior-year period. In addition, other fee-based products and services revenues increased by $10.6 million to $12.1 million over the $1.5 million recorded in the first six months of 1996. Increases in credit card account and other product solicitation and marketing expenses, employee compensation, third party customer service, and data processing services and communications expenses of $7.1 million, $7.0 million, $3.4 million and $4.4 million, respectively, and increases in other operating expenses of $6.1 million over the comparable period in 1995, partially offset the gains noted above. These increased expenses primarily reflect the increase in marketing costs incurred in maintaining existing and establishing new customer relationships for the segment's products and services, and the increase in the cost of operations associated with the growth in the segment's businesses. Managed Loan Portfolio Data and Analysis and Securitization Securitizations affect the classification of revenues and expenses in the income statement, therefore, it is management's practice to review and analyze its financial performance on a "managed loan" portfolio basis as if the loans sold and securitized were still held in the loan portfolio, in addition to analyzing and reviewing its results of operations as reported under generally accepted accounting principles. Specifically, the effect of securitization is to remove credit card loans sold with limited recourse from the balance sheet and record a gain on sale for the difference between the carrying value of the loans and the adjusted sales proceeds. The adjusted sales proceeds are based on a present value estimate of future cash flows to be received over the life of the loans, net of certain funding and servicing costs. The resulting gain is reduced by establishing a reserve for estimated loan losses over the life of the related loans under the limited recourse provisions. As these estimates are influenced by factors outside of the segment's control, there is uncertainty inherent in these estimates, making it reasonably possible that these estimates could change in the near term. During the "revolving period" of the securitization, changes in these estimates, and income generated by additional cash flows from new loans which are sold to the trust on a continual basis to replenish the investors' interest in the loans that have been repaid by the credit cardholders, are made as an adjustment to the previously recorded gain. Consequently, for securitized credit card loans, amounts that would have been recorded as interest income, interest expense, fee income and provision for loan losses are instead recorded as net securitization income. Net securitization income is included in the consolidated statements of earnings as "Finance income and other revenues." The following table provides selected balance sheet and other information as of and for the quarters ended June 30, 1996, December 31, 1995, and June 30, 1995, on a managed basis, as well as a summary of the effects of credit card securitizations on selected line items of the Company's consolidated statements of earnings for the three months ended June 30, 1996 and 1995, and the three months ended March 31, 1996. Note that the Financial Services Segment did not have any credit card loans outstanding as of March 31, 1995, therefore, comparisons to the first quarter of 1995 are generally deemed not relevant. Balance Sheet and Other Statistics (In thousands of dollars, except percentages) Three months ended 6/30/96 12/31/95 6/30/95 Managed credit card loans $1,068,018 $543,619 $190,069 As a percentage of managed loans: Total loans 30 days or more delinquent 3.37% 3.95% 0.17% Managed loan loss reserves 4.15% 4.09% 1.49% Annualized net loan charge- offs as a percentage of average managed loans outstanding 5.33% 3.17% 0.00% Three months ended 6/30/96 3/31/96 12/31/95 Effects of credit card securitizations on: Finance income and other revenues $39,810 $18,875 $15,235 Administrative and selling expenses ($1,907) ($1,760) ($1,703) Provision for uncollectible accounts ($27,037) ($10,163) ($8,787) Interest expense, net ($10,866) ($6,952) ($4,745) With respect to the above information on the effects of credit card securitizations, the above amounts represent the amounts on each respective line item of the Company's consolidated statements of earnings that would have been higher had the securitized loans remained on the balance sheet. Interest Margin and Interest Rate Sensitivity Net interest margin on a managed basis was 13.8% and 13.2% for the six months ended June 30, 1996 and 1995, respectively. The Financial Services Segment has primarily utilized variable rate funding in its credit card securitization transactions and in its short-term borrowings, or has swapped fixed rates on such transactions back to a variable rate basis. Consequently, the net interest margin percentage has not varied materially between 1996 and 1995, for the periods reflected above, even though overall interest rates have declined during 1996 from their levels during the comparable periods in 1995. Managed Non-Interest Income and Non-Interest Expenses Total non-interest income for the Financial Services Segment for the second quarter of 1996 was $27.9 million, compared to $12.1 million for the comparable prior-year period. Non-interest income for the first six months of 1996 was $53.2 million, compared to $16.1 million in 1995. The primary reason for the large increase over the prior year was due to income generated from the growth in average managed loans, which grew from an average of $42.6 million for the six months ended June 30, 1995 ($84.7 million for the second quarter) to $741.2 million for the six months ended June 30, 1996 ($872.6 million average for the second quarter), and growth in income from extended service plan and other fee-based products and services revenues as previously noted. Total non-interest expenses for the second quarter of 1996 were $25.4 million, compared to $12.7 million for the comparable prior-year period. Non-interest expense for the first six months of 1996 was $44.4 million, compared to $16.4 million in 1995. The growth in non-interest expenses primarily reflects the Company's expansion of its business development activities. Most notably, credit card account and other product solicitation and marketing expenses increased 76.3% to $16.5 million for the six months ended June 30, 1996. For the second quarter, these expenses increased 14.7% to $8.9 million compared to the second quarter of 1995. These increases were the result of new credit card solicitation programs implemented during the first six months of 1996, with the objective of leveraging the knowledge gained in the Company's earlier credit card campaigns, and increasing the number of credit card accounts and loans outstanding. Additionally, increased solicitation costs were incurred in efforts to increase the penetration of extended service plans on warrantable products sold by Fingerhut. Asset Quality The Financial Services Segment's delinquency and net loan charge-off rates at any point in time reflect, among other factors, the credit risk of the credit card loans, the average age of the segment's various credit card account portfolios, the success of the segment's collection and recovery efforts and general economic conditions. The managed 30 days or more past due delinquency rate was 3.37% at June 30, 1996, compared to 0.17% at June 30, 1995, 3.95% at December 31, 1995, and 3.78% at March 31, 1996. The segment believes the decrease in delinquency compared to the prior two quarters reflects a reduction in delinquency trends generally from its internalization of all collections functions during the first quarter of 1996. The managed annualized net loan charge-off rate was 5.33%, 5.75% and 3.17% for the quarters ended June 30, 1996, March 31, 1996, and December 31, 1995, respectively (the segment did not incur net loan charge-offs during the first six months ended June 30, 1995). The segment believes that this rate will continue to fluctuate but generally rise over the next twelve to eighteen months until the initial credit card account portfolios begin to pass their peak loss levels. Additionally, consistent with the credit card industry, the Company has recently experienced a rise in bankruptcy filings. This industry trend, if it continues at its present pace into the second half of 1996, could also lengthen the peak loss period before net charge-offs tend to stabilize with the overall maturation of the portfolio. The segment plans to continue to focus its resources on more stringent credit underwriting standards for new accounts in the second half of 1996, and further improve collection and post charge-off recovery efforts to minimize increased losses from these negative trends. Allowance and provision for loan losses The reserve for loan losses is maintained for on-balance sheet loans and retained interests in loans securitized. For securitized loans, anticipated losses and related recourse reserves are reflected in the calculations of net securitization income. Provisions for loan losses are made in amounts sufficient to maintain the allowance at a level estimated to be sufficient to absorb probable future losses of principal and earned interest, net of recoveries, inherent in the existing on-balance sheet loan portfolio. In evaluating the adequacy of the allowance for loan losses, the Company takes into consideration several factors including: historical charge-off and recovery activity by loan portfolio; recent delinquency and collection trends by loan portfolio; current economic conditions and the impact such conditions might have on borrowers' ability to repay; the risk characteristics of the portfolios and other factors that management believes to be appropriate. The provision for loan losses on a managed basis totaled $42.5 million for the first half of 1996 ($27.5 million in the second quarter), up from $2.8 million for the six months ended June 30, 1996 (all of which was incurred in the second quarter). Total managed credit card loan loss reserves stood at 4.15% of total managed credit card loans, or $44.3 million at June 30, 1996, up from $22.2 million, or 4.09% of managed credit card loans at December 29, 1995, and up from $2.8 million or 1.49% of managed loans at June 30, 1995. Management believes that the allowance for loan losses on both an owned and a managed basis is adequate to cover anticipated losses in the loan portfolio under current conditions. However, there can be no assurance as to the future credit losses that may be incurred in connection with the Company's loan portfolio, nor can there be any assurance that the loan loss allowance that has been established by the Company will be sufficient to absorb such future loan losses. Management will continue to monitor the allowance for loan losses and make additional provisions to the allowance as it deems appropriate and necessary given the circumstances. 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 and the Fingerhut Financial Services Master Trust, borrowings under the Revolving Credit Facility and issuance of long-term debt and common stock. The proceeds received as of June 28, 1996 and December 29, 1995 from the sale of Fingerhut accounts receivable were $1.092 billion and $1.254 billion, respectively, compared with $1.003 billion as of June 30, 1995 and $1.096 billion as of December 30, 1994. Net proceeds received from the sale of MasterCard receivables were $932.8 million as of June 28, 1996 and $445.3 million as of December 29, 1995, of which $16.1 million and $25.8 million, respectively, was deposited in an investor reserve account held by the trustee of the FFS Master Trust for the benefit of the Trust's certificateholders. Net proceeds received from the sale of MasterCard receivables were $136.9 million as of June 30, 1995, of which $8.4 million was deposited in an investor reserve account. 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 June 28, 1996, the Company had an outstanding revolving credit balance of $201.0 million and outstanding letters of credit of $5.2 million. As of June 30, 1995, the Company had an outstanding revolving credit balance of $85.0 million and outstanding letters of credit of $5.8 million. Additional outstanding open letters of credit under a separate agreement aggregated $37.3 million and $44.0 million at June 28, 1996 and June 30, 1995, respectively. The Company had an aggregate amount of fixed rate notes outstanding of $180.0 million and $245.0 million as of June 28, 1996 and June 30, 1995, respectively. A total of $35.0 million of the notes mature in August 1996. The Company intends to refinance the maturing long-term debt in the second half of 1996. In addition, the Fingerhut Master Trust Series 1994- 1 certificates enter into amortization periods beginning in December 1996. The Company believes the Fingerhut Master Trust will be able to issue a new series of certificates to replace the amortizing certificates. The Company used $5.1 million of cash for operations during the 26-week period ended June 28, 1996, compared with $76.3 million for the related period in 1995. This net $71.2 million decrease in cash used for operations resulted from decreased working capital requirements, partially offset by the $11.9 million decrease in net earnings. The most significant items affecting working capital were decreases in customer accounts receivable, promotional material and other current assets, and accounts payable. The change in customer accounts receivable from a $25.3 million use of cash in 1995 to a $37.6 million source of cash in 1996 resulted primarily from the decrease in net sales due to the Company's strategy to reduce mailings. The change in promotional material and other current assets from a $15.2 million use of cash in 1995 to a $10.6 million source of cash in 1996 was due to lower inventory levels as a result of the planned reduction in mailings. The above factors were partially offset by a decrease in accounts payable, which was due to a reduction in inventory purchases as well as lower promotional material levels. Net cash used by investing activities for the 26-week period ended June 28, 1996 was $32.0 million, compared to $58.7 million for the comparable period in 1995. The lower level of spending in 1996 was primarily due to a significant reduction in capital expenditures relating to the western distribution center in Spanish Fork, Utah, as well as the data and technology center in Plymouth, Minnesota, which opened in the second quarter of 1995. The $61.5 million decrease in net cash provided by financing activities was due primarily to $65.0 million of fixed rate notes which matured in June 1996. 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 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. No purchases were made during the first quarter ended March 29, 1996. During the second quarter of 1996, the Company repurchased at prevailing market prices 249,800 shares of its common stock for an aggregate of $3.4 million. Total purchases to date were 1,271,300 shares for an aggregate of $20.0 million. On July 18, 1996, the Company declared a cash dividend of $.04 per share, or an aggregate of $1.8 million, payable on August 16, 1996, to the shareholders of record as of the close of business on August 5, 1996. In July 1996, the Company issued 25,085 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 4,450 shares related to the exercise of employee stock options. The Company also repurchased at prevailing market prices 61,000 shares of its common stock for an aggregate of $.8 million. The Company believes it will have sufficient funds available to meet current and future commitments. Forward Looking Statements Fingerhut Companies, Inc. (the "Company"), or persons acting on behalf of the Company, or outside reviewers retained by the Company making statements on behalf of the Company, or underwriters, from time to time make, in writing or orally, "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995 (the "Act"). When used in conjunction with an identified forward-looking statement, this Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of the Act and is intended to be a readily available written document that contains factors which could cause results to differ materially from such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matters, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the context of a forward-looking statement or statements shall be deemed to be a statement that any or more of the following factors may cause actual results to differ materially from those in such forward-looking statement or statements. These forward looking statements involve risks and uncertainties, including but not limited to the following: interest rates may increase more than is currently anticipated; customer response rates may not continue to increase, or may decrease; additional reserves may be required for bad debts, returns and allowances; product margins may decrease; paper prices may not fall, or may increase; postage and shipping rates may increase; the collective bargaining agreement for union employees at the registrant's Tennessee facility may result in increased labor or benefits costs; the performance of the financial markets and the demand for and market acceptance of the Direct Merchants Credit Card Bank, National Association credit card and related financial products may deteriorate; changes in general economic conditions may affect consumer spending and payment practices. 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: August 12, 1996 By: /s/ Peter G. Michielutti Peter G. Michielutti Chief Financial Officer (Principal Financial Officer) Date: August 12, 1996 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 Twenty-six Weeks Ended June 28, June 30, June 28, June 30, 1996 1995 1996 1995 Primary Net earnings (a) $ 2,145 $ 5,794 $ 94 $ 11,978 ========== ========== ========== ========== Weighted average shares of common stock outstanding 46,334,885 45,797,745 46,246,928 45,748,650 Common stock equivalents 2,485,660 2,388,664 2,456,854 2,572,779 ---------- ---------- ---------- ---------- Weighted average shares of common stock and common stock equivalents 48,820,545 48,186,409 48,703,782 48,321,429 ========== ========== ========== ========== Primary earnings per share of common stock and common stock equivalents (a/b) $ .04 $ .12 $ .00 $ .25 ========== ========== ========== ========== Fully diluted Net earnings (c) $ 2,145 $ 5,794 $ 94 $ 11,978 Weighted average shares ========== ========== ========== ========== of common stock outstanding 46,334,885 45,797,745 46,246,928 45,748,650 Common stock equivalents 2,810,177 2,473,542 2,705,618 2,777,403 ---------- ---------- ---------- ---------- Weighted average shares of common stock and common stock equivalents (d) 49,145,062 48,271,287 48,952,546 48,526,053 ========== ========== ========== ========== Fully diluted earnings per share of common stock and common stock equivalents (c/d) $ .04 $ .12 $ .00 $ .25 ========== ========== ========== ========== 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. Common stock equivalents for year-to-date fully diluted earnings per share are computed by the treasury stock method using the ending market price or the average of the fully diluted monthly amounts used in the period, which ever is higher. EX-27 3
5 This schedule contains summary financial information extracted from the consolidated financial statements of Fingerhut Companies, Inc. for the 26-week fiscal period ended June 28, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-27-1996 DEC-30-1995 JUN-28-1996 44,125 0 588,123 161,532 143,730 829,936 440,643 152,387 1,198,173 477,873 146,511 0 0 462 543,386 1,198,173 703,226 857,822 359,832 812,153 30,936 117,607 14,585 148 54 94 0 0 0 94 .00 .00
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