-----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, Q7gdhuv9sE2Ln5Eb7zYEwnyMLdmYU6zts4yZRFvrUKhXKjQy/lmA2yHfjXY3ZFI9 kTFRzOyXwRs+LvGIMDvOcg== 0000921751-97-000002.txt : 19971110 0000921751-97-000002.hdr.sgml : 19971110 ACCESSION NUMBER: 0000921751-97-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970926 FILED AS OF DATE: 19971107 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: SEC FILE NUMBER: 001-08668 FILM NUMBER: 97709568 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 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 September 26, 1997 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 November 5, 1997, 46,279,513 shares of the Registrant's Common Stock, $.01 par value, were outstanding. FINGERHUT COMPANIES, INC. FORM 10-Q September 26, 1997 TABLE OF CONTENTS Part I - Financial Information Page Item 1. Financial Statements Consolidated Statements of Earnings (Unaudited) - thirteen weeks and thirty-nine weeks ended September 26, 1997 and September 27, 1996.............. 3 Consolidated Statements of Financial Position (Unaudited) - September 26, 1997 and December 27, 1996. 4 Consolidated Statements of Cash Flows (Unaudited) - thirty-nine weeks ended September 26, 1997 and September 27, 1996..................................... 5 Condensed Notes to Consolidated Financial Statements (Unaudited)................................. 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .....................10 Part II - Other Information Item 1. Legal Proceedings.......................................21 Item 5. Other Matters...........................................21 Item 6. Exhibits and Reports on Form 8-K .......................21 Signatures.......................................................22 FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands of dollars, except share and per share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1997 1996 1997 1996 Revenues: Net sales $ 323,774 $ 346,444 $ 954,037 $1,034,832 Finance income and other securitization income, net 79,267 37,447 195,233 93,112 ------- ------- ---------- ---------- 403,041 383,891 1,149,270 1,127,944 Costs and expenses: Product cost 158,781 175,675 482,513 535,507 Administrative and selling expenses 179,486 159,234 501,066 474,066 Provision for uncol- lectible accounts 32,063 28,418 90,691 83,074 Interest expense, net 8,758 7,134 25,842 21,719 -------- -------- --------- ---------- 379,088 370,461 1,100,112 1,114,366 Earnings before income taxes and minority interest 23,953 13,430 49,158 13,578 Provision for income taxes 9,174 4,865 18,838 4,919 ------- ------ -------- -------- Net earnings before minority interest 14,779 8,565 30,320 8,659 Minority interest (1,786) - (4,857) - -------- --------- ---------- -------- Net earnings $ 12,993 $ 8,565 $ 25,463 $ 8,659 ========== ========== ========== ========== Earnings per share $ .26 $ .18 $ .52 $ .18 Dividends $ .04 $ .04 $ .12 $ .12 Weighted average shares 49,848,481 48,624,018 49,119,663 48,680,145 See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In thousands of dollars) (Unaudited) September 26, December 27, 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 77,943 $ 61,003 Customer accounts receivable, net 662,887 596,560 Inventories, net 173,179 127,735 Promotional material 91,145 60,871 Deferred income taxes 165,011 166,879 Other 9,789 12,815 ---------- --------- Total current assets 1,179,954 1,025,863 Property and equipment, net 272,310 285,182 Excess of cost over fair value of net assets acquired, net 81,502 42,601 Customer lists, net 9,767 9,801 Other assets 16,642 26,251 ---------- ---------- $1,560,175 $1,389,698 ========== ========== LIABILITIES Current liabilities: Accounts payable $ 173,220 $ 164,557 Accrued payroll and employee benefits 34,489 46,723 Other accrued liabilities 68,110 78,239 Revolving credit facility 202,000 73,000 Other payables due to credit card securitizations, net 107,102 36,619 Current portion of long-term debt 25,084 84 Current income taxes payable 18,228 60,721 --------- -------- Total current liabilities 628,233 459,943 Long-term debt, less current portion 246,435 271,481 Deferred income taxes 22,327 21,744 Other non-current liabilities 8,069 7,692 --------- -------- 905,064 760,860 Minority interest 28,229 23,437 STOCKHOLDERS' EQUITY Preferred stock - - Common stock 462 462 Additional paid-in capital 291,445 288,793 Unearned compensation (863) (1,856) Earnings reinvested 335,838 318,002 --------- -------- Total stockholders' equity 626,882 605,401 $1,560,175 $1,389,698 ========== ========== See accompanying Condensed Notes to Consolidated Financial Statements.
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (Unaudited) Thirty-Nine Weeks Ended Sept. 26, Sept. 27, 1997 1996 Cash flows from operating activities: Net earnings $ 25,463 $ 8,659 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 39,524 37,431 Amortization of unearned compensation 993 2,409 Minority interest in earnings 4,792 - Change in assets and liabilities: Customer accounts receivable, net and other payables due to credit card securitizations, net 4,156 65,203 Inventories, net (45,444) (53,665) Promotional material and other current assets (27,248) (15,910) Accounts payable 8,663 13,281 Accrued payroll and employee benefits (12,234) (14,095) Accrued liabilities (10,129) (11,183) Current income taxes payable (41,709) (30,494) Deferred income taxes 2,451 1,439 Other (33,304) (6,613) ------- ------- Net cash used by operating activities (84,026) (3,538) Cash flows from investing activities: Additions to property and equipment (22,389) (41,464) ------- ------- Net cash used by investing activities (22,389) (41,464) Cash flows from financing activities: Proceeds from long-term debt - 125,000 Repayments of long-term debt (46) (100,053) Revolving credit facility 129,000 5,000 Issuance of common stock 3,322 1,609 Repurchase of common stock (3,385) (4,536) Cash dividends paid (5,536) (5,547) -------- -------- Net cash provided by financing activities 123,355 21,473 Net increase/(decrease) in cash and cash equivalents 16,940 (23,529) Cash and cash equivalents at beginning of period 61,003 66,109 -------- --------- Cash and cash equivalents at end of period $ 77,943 $ 42,580 ========== ========== Supplemental noncash 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 $ 784 $ 282 Issuance of restricted stock $ - $ 4,790 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 28,927 $ 28,627 Cash paid during the period for income taxes $ 58,262 $ 34,162 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 and majority owned subsidiaries, after elimination of all material intercompany transactions and balances. Minority interest represents minority stockholders' 17 percent share of the equity in Metris Companies Inc. ("Metris"). The consolidated financial statements as of September 26, 1997 and September 27, 1996, and for the thirteen and thirty-nine weeks ended September 26, 1997 and September 27, 1996, 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 1996 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 1997, the Company implemented Statement of Financial Accounting Standards No. 125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FAS 125 did not have a material effect on the consolidated financial statements. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128 (FAS 128), "Earnings Per Share." This Statement is effective for financial statements issued for periods ending after December 15, 1997 and supersedes APB Opinion No. 15, "Earnings Per Share." The Statement replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement as well as requires companies to restate prior-period EPS for all periods in which an income statement is presented. The Company has reviewed this Statement and notes that it will affect the computation and presentation of EPS. However, the Company has not completed all of the detailed computations and analysis necessary to determine the definitive impact on prior-period EPS as well as the calculation of EPS going forward. The Company intends to adopt this Statement prospectively, in the fourth quarter of 1997, as early application is not permitted. 2. Reclassifications Certain expenses, which were previously classified as "Discount on sale of accounts receivable", have been reclassified as a reduction of "Finance income and other securitization income, net." This reclassification totaled $18.6 million for the thirteen weeks ended September 27, 1996, and $49.5 million for the respective thirty-nine week period. In addition, that portion of the "Provision for uncollectible accounts" relating to accounts receivable sold have been reclassed and netted with "Finance income and other securitization income, net." This reclassification totaled $35.2 million for the thirteen weeks ended September 27, 1996, and $98.2 million for the respective thirty-nine week period. Lastly, collection costs associated with the receivables sold were reclassified out of "Administrative and selling expenses" and netted with "Finance income and other securitization income, net." This reclassification totaled $4.2 million for the thirteen weeks ended September 27, 1996, and $9.2 million for the respective thirty-nine week period. These reclassifications, in addition to certain balance sheet reclassifications, were made in order to present the accounting for securitizations consistently between the Company's two segments. All prior-period financial information has been restated to conform with the current period's presentation, and the reclassifications had no effect on net earnings. 3. Derivative Financial Instruments Held or Issued for Purposes Other Than Trading The Company enters into interest rate cap and swap agreements to hedge its economic exposure to fluctuating interest rates associated with the floating rate certificates issued by the Fingerhut Master Trust and the Metris Master Trust. If a derivative financial instrument or the instrument it is hedging is sold or terminated, the Company will recognize a gain or loss resulting from the transaction in the period the derivative is sold or terminated. The Company has not sold or terminated any derivative financial instruments. 4. 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. 5. Customer accounts receivable, net Customer accounts receivable, net of amounts sold, consisted of the following: (In thousands of dollars) September 26, December 27, 1997 1996 Customer receivables (Retail) $ 454,690 $ 560,931 Reserve for uncollectible accounts, net of anticipated recoveries (81,408) (117,296) Reserve for returns and exchanges (12,655) (13,319) Other reserves (19,918) (19,820) ---------- ---------- Net collectible amount 340,709 410,496 Unearned finance income (22,170) (23,969) ---------- ---------- Customer receivables, net $ 318,539 $ 386,527 ---------- ---------- Credit card and other receivables (Metris), net 368,195 222,862 Reserve for uncollectible accounts, net of anticipated recoveries (23,847) (12,829) ---------- ---------- Credit card and other receivables, net 344,348 210,033 Total customer accounts receivable, net $ 662,887 $ 596,560 ========== ========== Certain balance sheet reclassifications were made during the current period in order to present the accounting for securitizations consistently between the Company's two segments. As a result, certain December 27, 1996 balance sheet items related to Metris' credit card securitizations were reclassified. Specifically, $49.2 million was reclassified from Credit card and other receivables, net to "Other payables due to credit card securitizations, net" ($46.6 million), "Other accrued liabilities" ($2.5 million) and "Other current assets" ($.1 million). During the quarter, the Retail segment accelerated its efforts to move customers from an installment-based lending program to revolving charge accounts. By the end of the quarter, approximately 100,000 customer accounts had been converted. It is the intention of the Company to continue this practice over the coming years until substantially all of its customer accounts have been converted to revolving charge. 6. Stockholders' equity During the thirty-nine week period ended September 26, 1997, 258,511 shares of common stock were issued related to the exercise of employee stock options and 44,080 shares of common stock were issued under the Fingerhut Companies, Inc. Employee Stock Purchase Plan. The Company also repurchased at prevailing market prices 231,900 shares of its common stock for an aggregate of $3.4 million. The total shares of common stock outstanding as of September 26, 1997 was 46,224,153. 7. Subsequent events On October 16, 1997, the Company declared a cash dividend in the amount of $.04 per share, aggregating approximately $1.8 million, payable on November 13, 1997, to the shareholders of record as of the close of business on October 30, 1997. In October 1997, the Company issued 11,079 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 25,774 shares related to the exercise of employee stock options. MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1997 AND SEPTEMBER 27, 1996 RETAIL SEGMENT STATEMENTS OF OPERATIONS (In thousands of dollars, except per share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1997 1996 1997 1996 Revenues: Net sales $ 322,837 $ 342,492 $ 953,393 $1,025,868 Finance income and other securitization income/(expense), net 2,212 (1,569) 5,701 3,220 ---------- ---------- ---------- ---------- 325,049 340,923 959,094 1,029,088 Costs and expenses: Product cost 158,753 175,108 482,475 534,273 Administrative and selling expenses 131,639 132,021 389,563 413,075 Provision for uncol- lectible accounts 20,957 23,035 62,102 72,518 Interest expense, net 6,881 6,763 21,315 19,540 ---------- ---------- ---------- ---------- 318,230 336,927 955,455 1,039,406 Earnings (loss) before income taxes 6,819 3,996 3,639 (10,318) Provision for income tax expense (benefit) 2,577 1,233 1,313 (4,281) ---------- ---------- ---------- ---------- Net earnings (loss) $ 4,242 $ 2,763 $ 2,326 $ (6,037) ========== ========== ========== ========== Earnings (loss) per share $ .09 $ .06 $ .05 $ (.12) RETAIL SEGMENT (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1997 1996 1997 1996 Fingerhut Key Statistics: Sales per mailing - existing customer list $ 3.09 $ 3.34 $ 2.99 $ 3.22 Cost per new customer $ 10.87 $ 14.64 $ 13.66 $ 15.63 Mailings (in 000's) New customers 30,254 25,889 98,315 120,689 Existing customers 77,174 80,965 230,469 224,789 Active customer list (in 000's) 4,442 4,918 4,442 4,918 Contribution margin per existing customer $ 20 $ 20 $ 56 $ 50 Reserves for bad debt as a percent of total managed receivables 16.7% 17.4% 16.7% 17.4% Reserves for bad debt as a percent of accounts 29 days plus delinquent 67% 63% 67% 63% Segment Key Statistics: (in 000's) Capital expenditures $ 7,534 $ 8,779 $ 15,919 $ 38,795 Depreciation $ 11,446 $ 11,450 $ 34,125 $ 33,976 RETAIL SEGMENT STATEMENTS OF OPERATIONS (Managed Basis*) (In thousands of dollars, except per share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1997 1996 1997 1996 Revenues: Net sales $ 322,837 $ 342,492 $ 953,393 $1,025,868 Finance income and other revenues 54,576 56,417 156,237 160,137 ---------- ---------- ---------- ---------- 377,413 398,909 1,109,630 1,186,005 Costs and expenses: Product cost 158,753 175,108 482,475 534,273 Administrative and selling expenses 134,838 136,228 397,767 422,326 Provision for uncol- lectible accounts 55,450 58,228 159,211 170,662 Discount on sale of accounts receivable 14,672 18,586 45,223 49,522 Interest expense, net 6,881 6,763 21,315 19,540 ---------- --------- ---------- ---------- 370,594 394,913 1,105,991 1,196,323 Earnings (loss) before income taxes 6,819 3,996 3,639 (10,318) Provision for income tax expense (benefit) 2,577 1,233 1,313 (4,281) ---------- --------- ---------- ---------- Net earnings (loss) $ 4,242 $ 2,763 $ 2,326 $ (6,037) Earnings (loss) per share $ .09 $ .06 $ .05 $ (.12) * Presented in format consistent with prior periods. Results of Operations - Retail Segment Third Quarter Net sales for the current 13-week period were $322.8 million compared to net sales of $342.5 million for the related period in 1996, a decrease of 6 percent. Fingerhut Corporation ("Fingerhut"), the Company's core business in this segment, had third quarter net sales of $317.1 million compared to $337.5 million in the same period in 1996, a decrease of 6 percent. Net sales from Fingerhut's new customer acquisition programs increased 28 percent to $56.5 million. This increase was the result of Fingerhut moving mailings to new customers out of the first and second quarters and into the more productive third and fourth quarters. As a result, mailings to new customers increased 17 percent from last year's third quarter. Net sales from Fingerhut's existing customer list totaled $260.6 million, which was a 11 percent decrease from the third quarter of 1996. The decrease was due to the impact of lower mailings to Fingerhut's existing customer list in addition to lower response rates during the quarter. Finance income and other securitization income (expense), net, for the quarter was $2.2 million, compared to $(1.6) million in the third quarter of 1996. This increase was primarily due to the timing of sales within the third quarter as well as reduced finance charge allowances resulting from Fingerhut's cost reduction program. Product cost for the current 13-week period was 49.2 percent of net sales, or $158.8 million, compared to 51.1 percent of net sales, or $175.1 million, during the comparable prior-year period. The decrease as a percent of net sales was primarily the result of Fingerhut's continued actions to reduce merchandise costs and expenses related to returns. Margin improvements were achieved in the following categories: domestics, jewelry, home accessories, leisure, electronics and hardware. Administrative and selling expenses for the current 13-week period were $131.6 million, or 40.8 percent of net sales, compared to $132.0 million, or 38.5 percent of net sales, in the comparable prior-year period. Tighter cost controls and the impact of lower paper costs resulted in favorable expense levels, while lower sales per mailing on sales to Fingerhut's existing customer list contributed to the increase as a percent of net sales. The provision for uncollectible accounts relating to receivables sold are included in "Finance income and other securitization income (expense), net." The provision for uncollectible accounts on a "managed" basis for the current 13-week period was 17.2 percent of net sales, compared to 17.0 percent of net sales for the third quarter of 1996. Delinquencies were reduced year-over-year as a result of tightening credit criteria and accelerating collection activities. At the end of the third quarter, balances 29 days or more delinquent as a percent of managed receivables stood at 25.0 percent, down from 27.6 percent at the end of the prior-year third quarter. Net interest expense for the current 13-week period was $6.9 million, which is consistent with $6.8 million in the third quarter of 1996. The effective consolidated tax rate, which includes both the Retail Segment and Metris, for the third quarter of 1997 was 38.3 percent compared to 36.2 percent in the comparable prior-year period. The rate increase quarter over quarter was driven by the increase in Metris profits having an applied tax rate of 38.5%. As a result of the items discussed above, the Retail Segment generated net earnings of $4.2 million, or $0.09 per share, compared to a third quarter 1996 net earnings of $2.8 million, or $0.06 per share. Thirty-Nine week period Net sales for the 39-week period ended September 26, 1997 were $953.4 million compared to $1,025.9 million for the corresponding period in 1996, a decrease of 7 percent. Fingerhut had year to date net sales of $927.0 million compared to $1,000.5 million in the same period in 1996, a decrease of 7 percent. Net sales from Fingerhut's new customer acquisition programs decreased 12 percent to $168.3 million, which was primarily due to the shift of mailings from the first half to the more productive second half of the year. Net sales from Fingerhut's existing customer list declined 6 percent to $758.7 million, primarily the result of lower response rates during the period. Finance income and other securitization income (expense), net, for the first thirty-nine weeks of 1997 was $5.7 million, compared to $3.2 million for the same period in 1996. This increase was primarily the result of reduced finance charge allowances resulting from Fingerhut's cost reduction program. Product cost for the current 39-week period was 50.6 percent of net sales, or $482.5 million, compared to 52.1 percent of net sales, or $534.3 million, during the comparable prior-year period. The decrease as a percent of net sales was primarily the result of Fingerhut's continued actions to reduce costs and consolidate vendors. Administrative and selling expenses for the first thirty-nine weeks of 1997 were $389.6 million, or 40.9 percent of net sales, compared to $413.1 million, or 40.3 percent of net sales, in the comparable prior-year period. Tighter cost controls and the impact of lower paper costs were more than offset by the lower sales per mailing on sales to Fingerhut's existing customer list, resulting in the slight increase as a percent of net sales. The provision for uncollectible accounts on a "managed" basis for the first thirty-nine weeks of 1997 was 16.7 percent of net sales, compared to 16.6 percent of net sales in the comparable prior-year period. The Company continues to focus on reducing bad debt through the tightening of its credit criteria as well as the acceleration of collection programs. Net interest expense for the first thirty-nine weeks of 1997 was $21.3 million compared to $19.5 million in the comparable prior-year period. The increase was primarily due to the higher borrowings under the Revolving Credit Facilities as well as lower interest capitalization relating to fixed asset projects. The effective consolidated tax rate, which includes both the Retail and Financial Services Segments, for the first 39 weeks of 1997 was 38.3 percent compared with 36.2 percent in the comparable period of the prior- year. The rate increase year over year was driven by the increase in Metris profits which have an applied tax rate of 38.5%. The improvement in earnings year over year reflects a 13% lower cost per new customer. In addition, the reduced sales per mailing on the existing customer list was influenced by tighter mailing criteria which eliminated higher response customers with a propensity for bad debt. Consequently, profit per order has improved year over year. As a result of the items discussed above, the Retail Segment generated net earnings for the 39-week period ended September 26, 1997 of $2.3 million, or $.05 per share, compared to a net loss of $6.0 million, or $(.12) per share in the comparable period of 1996. METRIS COMPANIES INC. STATEMENTS OF EARNINGS (In thousands of dollars, except per share data) (Unaudited) Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1997 1996 1997 1996 Revenues: Net sales $ 1,746 $ 5,535 $ 4,171 $ 15,131 Finance income and other securitization income, net 77,055 39,016 189,532 89,892 ---------- ---------- ---------- ---------- 78,801 44,551 193,703 105,023 Costs and expenses: Product cost 28 1,769 38 4,393 Administrative and selling expenses 48,656 27,594 115,030 63,999 Provision for uncol- lectible accounts 11,106 5,383 28,589 10,556 Interest expense, net 1,877 371 4,527 2,179 ---------- ---------- ---------- ---------- 61,667 35,117 148,184 81,127 Earnings before income taxes and minority interest 17,134 9,434 45,519 23,896 Provision for income taxes 6,597 3,632 17,525 9,200 Net earnings before minority interest 10,537 5,802 27,994 14,696 Minority interest (1,786) - (4,857) - ---------- ---------- ---------- ---------- Net earnings $ 8,751 $ 5,802 $ 23,137 $ 14,696 Earnings per share $ .18 $ .12 $ .47 $ .30 Key Statistics: Managed net charge-off ratio 8.7% 5.7% 8.7% 5.6% Period-end managed loans (in 000's) $2,683,877 $1,276,687 $2,683,877 $1,276,687 Total accounts (in 000's) 1,802 1,117 1,802 1,117 Managed loan loss reserves (in 000's) $ 190,626 $ 70,635 $ 190,626 $ 70,635 Managed delinquency ratio 6.4% 5.2% 6.4% 5.2% Reserves as a percent of 30-day plus receivables 112% 107% 112% 107% Results of Operations - Financial Services Segment (Metris Companies Inc.) Third Quarter Metris contributed net income for the quarter ended September 30, 1997 of $8.8 million, or $.18 per share, up from $5.8 million, or $.12 per share, for the third quarter of 1996. The 51 percent increase in net income is the result of an increase in net interest income and other operating income partially offset by increases in the provision for loan losses and other operating expenses. Metris' managed credit card loan portfolio increased 26 percent, or $559 million, during the third quarter bringing the portfolio to $2.7 billion at September 30, 1997. Also during the quarter, Metris added approximately 273,000 new accounts to end the quarter with over 1.8 million credit card accounts. Year to Date Metris contributed net income for the nine months ended September 30, 1997 of $23.1 million, or $.47 per share, compared to $14.7 million, or $.30 per share, for the comparable prior-year period. Year to date, Metris' charge volume was approximately $1.7 billion, a 42 percent increase over the same period in 1996. Managed credit card fees, interchange and other related credit card income was $106.9 million compared to $55.6 million for the comparable period last year. 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 Metris Master Trust, borrowings under the Company's Amended and Restated Revolving Credit Facility and Metris' Revolving Credit Facility (the "Revolving Credit Facilities") and the issuance of long-term debt and common stock. The proceeds from the sale of Fingerhut accounts receivable were $1.037 billion and $1.280 billion at September 26, 1997 and December 27, 1996, respectively. Net proceeds received from the sale of credit card receivables were $2.317 billion at September 30, 1997 and $1.397 billion at December 31, 1996, of which $14.7 million and $17.0 million, respectively, was deposited in an investor reserve account held by the trustee of the Metris Master Trust for the benefit of the Metris Master Trust's certificateholders. In May 1997, the Metris Master Trust issued Series 1997-1 certificates to third parties with a principal amount of $794.8 million, generating proceeds of $792.2 million of which $667.7 million was used to reduce the Class A Variable Funding Certificate issued under Series 1995-1. The Series 1997-1 certificates are scheduled to begin accumulating principal collections in March 2001, however, the accumulation period could potentially begin at a later date. The expected final payment date for these certificates is in April 2002. In December 1996, the Fingerhut Master Trust Series 1994-1 certificates commenced controlled amortization, whereby collections on the securitized receivables are now being used to pay down the principal portion of the underlying certificates. In January 1997, the Company issued Series 1997- 1 variable funding certificates to refinance approximately half of the amortizing certificates. The Company subsequently issued additional Series 1997-1 variable funding certificates, which increased the maximum proceeds to $790.0 million. The monthly proceeds generated from Series 1997-1 will be sufficient to cover the monthly pay-down of the amortizing 1994-1 certificates. The Company plans to support future receivables growth through the sale and issuance of additional certificates by the Master Trusts and through borrowings under the Revolving Credit Facilities. The Company plans to refinance Series 1997-1 and the remaining portion of Series 1994-1 in the public term asset backed market. The Company also plans to finance its revolving credit portfolio through the asset backed securities market. The Revolving Credit Facilities provide for aggregate commitments of up to $500.0 million, of which $200.0 million represents the Company's credit facility and $300.0 million represents Metris' credit facility. The expiration date for both facilities is September 2001. As of September 26, 1997, outstanding revolving credit balances totaled $202.0 million, of which $49 million and $153 million related to the Company and Metris, respectively and outstanding letters of credit totaled $6.4 million, of which $4.9 million and $1.5 million related to the Company and Metris, respectively. As of September 27, 1996, outstanding revolving credit balances totaled $120.0 million, of which $105 million and $15 million related to the Company and Metris, respectively and the Company's outstanding letters of credit totaled $5.9 million. Additional outstanding open letters of credit under a separate agreement aggregated $43.6 million and $37.6 million at September 26, 1997 and September 27, 1996, respectively. The Company had an aggregate amount of fixed rate notes outstanding of $270.0 million as of September 26, 1997 and $270.0 million as of September 27, 1996. A total of $25.0 million of the notes mature in December 1997. The Company used $84.0 million in cash from operations during the 39-week period ended September 26, 1997 compared with $3.5 million used for operations during the related period in 1996. This $80.5 million net increase in cash used by operations resulted primarily from a significant increase in Metris customer accounts receivable, net, partially offset by increases in net earnings, payables due to Metris credit card securitizations, net, and other current assets. Net cash used by investing activities for the 39-week period ended September 26, 1997 was $22.4 million, compared to $41.5 million for the comparable period in 1996. In January 1996, the owner of certain office and warehouse facilities leased to the Company exercised its right to require the Company to repurchase those facilities for approximately $14.1 million. Thus, the decrease in capital spending year over year was due primarily to this prior-year expenditure as well as the Company's overall reduction in capital outlays. 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. During the current 39-week period, the Company repurchased at prevailing market prices 231,900 shares of its common stock for an aggregate of $3.4 million. Total purchases to date under this plan were 1,612,200 shares for an aggregate of $24.9 million. On October 16, 1997, the Company declared a cash dividend in the amount of $.04 per share, aggregating approximately $1.8 million, payable on November 13, 1997, to the shareholders of record as of the close of business on October 30, 1997. In October 1997, the Company issued 11,079 shares of common stock under the Fingerhut Companies, Inc. Employee Stock Purchase Plan and 25,774 shares related to the exercise of employee stock options. The Company believes it will have sufficient funds available to meet current and future commitments. FINGERHUT COMPANIES, INC. AND SUBSIDIARIES 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; 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 27, 1996. Part II. Other Information Item 1. Legal Proceedings On August 14, 1997 Fingerhut Corporation 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. The Company has filed a notice of motion to dismiss, or in the alternative for summary judgment. Item 5. Other Matters On October 9, 1997, the Company announced that its board of directors had approved the filing of an application with the Internal Revenue Service (IRS) for a ruling on a tax free distribution of its stock of Metris. The Company filed the ruling request with the IRS on October 23, 1997. The proposed spin off of Metris would be subject to receipt of a favorable ruling from the IRS, approval by Fingerhut's board of directors, and to market conditions. If approved, the spin off would be expected to be completed during 1998. 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: By: /s/ Gerald T. Knight Gerald T. Knight Chief Financial Officer (Principal Financial Officer) Date: By: /s/ John C. Manning John C. Manning Vice President, Finance Date: By: /s/ Thomas C. Vogt Thomas C. Vogt Corporate Controller (Principal Accounting Officer) EX-11 2 FINGERHUT COMPANIES, INC. AND SUBSIDIARIES Computation of Earnings Per Share (In thousands of dollars, except per share data) Unaudited Thirteen Weeks Ended Thirty-Nine Weeks Ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1997 1996 1997 1996 Primary Net earnings (a) $ 12,993 $ 8,565 $ 25,463 $ 8,659 Weighted average shares of common stock outstanding 46,163,574 46,181,050 46,122,419 46,224,968 Common stock equivalents 3,684,907 2,442,968 2,997,244 2,455,177 Weighted average shares of common stock and common stock equivalents (b) 49,848,481 48,624,018 49,119,663 48,680,145 Primary earnings per share of common stock and common stock equivalents (a/b) $ .26 $ .18 $ .52 $ .18 Fully diluted Net earnings (c) $ 12,993 $ 8,565 $ 25,463 $ 8,659 Weighted average shares of common stock outstanding 46,163,574 46,181,050 46,122,419 46,224,968 Common stock equivalents 3,990,436 2,444,628 3,990,436 2,498,521 Weighted average shares of common stock and common stock equivalents (d) 50,154,010 48,625,678 50,112,855 48,723,489 Fully diluted earnings per share of common stock and common stock equivalents (c/d) $ .26 $ .18 $ .51 $ .18 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 quarter ended September 26, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-26-1997 SEP-26-1997 77,943 0 823,284 160,397 173,179 1,179,954 481,290 208,980 1,560,175 628,233 246,435 0 0 462 626,420 1,560,175 954,037 1,149,270 482,513 1,074,270 4,857 90,691 25,842 44,301 18,838 25,463 0 0 0 25,463 .52 .51
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