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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Xxxx One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended April 3, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ............. to ...............
Commission file number 0-16126
SPIEGEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 00-0000000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
0000 Xxxxx Xxxx, Xxxxxxx Xxxxx, Xxxxxxxx 00000-0000
(Address of principal executive offices) (Zip Code)
000-000-0000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check xxxx whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of common
stock, as of May 14, 1999 are as follows:
Class A non-voting common stock, $1.00 par value
14,791,544 shares
Class B voting common stock, $1.00 par value
117,009,869 shares.
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SPIEGEL, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets, April 3, 1999 and January 2, 1999
Consolidated Statements of Earnings,
Thirteen Weeks Ended April 3, 1999 and April 4, 1998
Consolidated Statements of Cash Flows,
Thirteen Weeks Ended April 3, 1999 and April 4, 1998
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Information contained in Part I, Item 2. under the caption
"Market Risk" on page 11 of this Form 10-Q is incorporated herein
by reference.
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Spiegel, Inc. and Subsidiaries
Consolidated Balance Sheets
($000s omitted, except per share amounts)
April 3, 1999 and January 2, 1999
(unaudited)
April 3, January 2,
1999 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 34,204 $ 91,200
Receivables, net 555,162 544,146
Inventories 502,985 490,915
Prepaid expenses 89,736 93,390
Refundable income taxes 10,877 9,897
Deferred income taxes 25,960 25,946
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Total current assets 1,218,924 1,255,494
Property and equipment, net 349,279 359,361
Intangible assets, net 152,941 153,146
Other assets 87,945 89,259
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Total Assets $ 1,809,089 $ 1,857,260
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LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 35,714 $ 85,714
Accounts payable 205,720 287,585
Accrued liabilities:
Salaries and wages 24,274 46,301
General taxes 86,564 103,890
Allowance for returns 21,434 33,222
Other accrued liabilities 96,183 106,539
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Total current liabilities 469,889 663,251
Long-term debt, excluding current maturities 684,322 523,036
Deferred income taxes 26,714 33,706
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Total liabilities 1,180,925 1,219,993
Stockholders' equity:
Class A non-voting common stock,
$1.00 par value; authorized 16,000,000 shares;
14,791,544 shares issued and outstanding at
April 3, 1999; 14,747,844 shares issued and
outstanding at January 2, 1999 14,792 14,748
Class B voting common stock,
$1.00 par value; authorized 121,500,000
shares; 117,009,869 shares issued and
outstanding at April 3, 1999 and
January 2, 1999 117,010 117,010
Additional paid-in capital 328,712 328,489
Accumulated other comprehensive income (loss) (3,913) (4,555)
Retained earnings 171,563 181,575
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Total stockholders' equity 628,164 637,267
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Total liabilities and stockholders' equity $ 1,809,089 $ 1,857,260
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[FN]
See accompanying notes to consolidated financial statements.
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Spiegel, Inc. and Subsidiaries
Consolidated Statements of Earnings
($000s omitted, except per share amounts)
Thirteen Weeks Ended April 3, 1999 and April 4, 1998
(unaudited)
Thirteen Weeks Ended
April 3, April 4,
1999 1998
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Net sales and other revenues:
Net sales $ 564,525 $ 532,450
Finance revenue 51,458 49,214
Other revenue 9,194 8,889
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625,177 590,553
Cost of sales and operating expenses:
Cost of sales, including buying and
occupancy expenses 384,255 379,612
Selling, general and administrative
expenses 243,650 234,704
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627,905 614,316
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Operating income (loss) (2,728) (23,763)
Interest expense 14,242 16,870
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Earnings (loss) before income taxes (16,970) (40,633)
Income tax benefit (6,958) (17,500)
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Net earnings (loss) $ (10,012) $ (23,133)
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Net earnings (loss) per common share
Basic and diluted $ (0.08) $ (0.19)
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Weighted average number of common
shares outstanding 131,788,511 119,484,137
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[FN]
See accompanying notes to consolidated financial statements.
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Spiegel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
($000s omitted)
Thirteen Weeks ended April 3, 1999 and April 4, 1998
(unaudited)
Thirteen Weeks Ended
April 3, April 4,
1999 1998
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Cash flows from operating activities:
Net earnings (loss) $ (10,012) $ (23,133)
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities:
Depreciation and amortization 19,021 19,207
Change in assets and liabilities,
net of effects of acquisition:
(Increase) decrease in receivables, net (11,016) 98,853
Increase in inventories (12,070) (6,729)
Decrease in prepaid expenses 3,654 7,794
Decrease in accounts payable (81,865) (91,657)
Decrease in accrued liabilities (61,497) (51,602)
Decrease in income taxes (7,986) (20,286)
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Net cash used in operating activities (161,771) (67,553)
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Cash flows from investing activities:
Net additions to property and equipment (4,613) (6,147)
Net additions to other assets (2,807) (3,874)
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Net cash used in investing activities (7,420) (10,021)
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Cash flows from financing activities:
Issuance of debt 172,000 145,000
Payment of debt (60,714) (155,000)
Issuance of Class B common stock -- 69,998
Exercise of stock options 267 113
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Net cash provided by financing activities 111,553 60,111
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Effect of exchange rate on cash 642 (190)
Net change in cash and cash equivalents (56,996) (17,653)
Cash and cash equivalents at beginning of year 91,200 47,582
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Cash and cash equivalents at end of period $ 34,204 $ 29,929
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Supplemental cash flow information:
Cash paid during the period for:
Interest $ 11,085 $ 13,374
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Income taxes $ 979 $ 3,243
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[FN]
See accompanying notes to consolidated financial statements.
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Spiegel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
($000s omitted)
(unaudited)
(1) Basis of presentation
The consolidated financial statements included herein are unaudited
and have been prepared from the books and records of the Company in
accordance with generally accepted accounting principles and the rules
and regulations of the Securities and Exchange Commission. All
adjustments (consisting only of normal recurring accruals) which are,
in the opinion of management, necessary for a fair presentation
of financial position and operating results for the interim periods are
reflected. These financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in
the Company's most recent Annual Report on Form 10-K, which includes
financial statements for the year ended January 2, 1999. Due to the
seasonality of the Company's business, the results for interim periods
are not necessarily indicative of the results for the year.
(2) Reclassifications
Certain prior amounts have been reclassified from amounts previously
reported to conform with the 1999 presentation.
(3) Debt
The Company has a revolving credit agreement with a group of banks
that expires on March 26, 2000. Outstanding borrowings of $172,000
related to the revolver are classified as long-term debt in the Company's
balance sheet as of April 3, 1999. The Company intends to refinance the
obligation on a long-term basis with terms similar to those existing
under the current financing agreement prior to its expiration.
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(4) Segment reporting
Segment revenues and operating profit, including a reconciliation to
the consolidated Company's earnings before income taxes, follows:
Thirteen Weeks Ended
April 3, April 4,
1999 1998
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Revenues:
Merchandising $ 609,428 $ 573,021
Bankcard 15,749 17,532
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Total revenues $ 625,177 $ 590,553
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Operating income (loss):
Merchandising $ (7,054) $ (34,256)
Bankcard 4,564 10,890
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Total segment operating income (2,490) (23,366)
Premium on acquisitions (238) (397)
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Total operating income (loss) (2,728) (23,763)
Interest expense 14,242 16,870
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Earnings (loss) before income taxes $ (16,970) $ (40,633)
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Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
($000s omitted, except per share amounts)
RESULTS OF OPERATIONS
For the thirteen weeks ended April 3, 1999, the Company recorded a net
loss of $10,012, or $0.08 per share, compared with a net loss of $23,133,
or $0.19 per share, in the first thirteen weeks of 1998. The significant
improvement in operating results was driven primarily by a stronger
customer response to merchandise offerings and gross margin improvement in
the merchandising segment.
Merchandising segment:
Thirteen Weeks Ended
April 3, April 4,
1999 1998
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Retail net sales $ 256,414 $ 237,779
Comp store % change 4% (10)%
Catalog net sales 308,111 294,671
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Total net sales 564,525 532,450
Finance revenue 35,709 31,682
Other revenue 9,194 8,889
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Total revenue 609,428 573,021
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% change 6.4% (3.7)%
Gross margin % to total net sales 32.0% 28.7%
SG&A % to total revenue 38.1% 39.7%
Operating income $ (7,054) $ (34,256)
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Total merchandising revenues increased in the thirteen weeks ended April 3, 1999
compared to the same period last year, driven by a 6 percent increase in net
sales and a 13 percent increase in finance revenue generated from FCNB
Preferred charge programs. The net sales increase included a 5 percent gain
in total catalog net sales and an 8 percent increase in total retail net sales,
reflecting stronger customer response to merchandise offerings. The increase
in catalog net sales was led by sales growth at Newport News and Spiegel
Catalog, both of which experienced a positive response to an increase in pages
circulated. Xxxxx Xxxxx catalog sales were down in the period, reflecting a
planned decrease in pages circulated, offset substantially by significant
gains in productivity. Retail net sales results included a 4 percent increase
in Xxxxx Xxxxx comparable-store sales, reflecting an improved merchandising and
inventory position compared to last year. Finance revenue was driven higher
primarily by an increase in the net excess realized from off-balance sheet
receivables, reflecting an improvement in the productivity of the portfolio.
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Operating income for the merchandising segment increased $27,202 in the thirteen
weeks ended April 3, 1999 compared to the last year period. Xxxxx Xxxxx,
Xxxxxxx Catalog and Newport News each improved upon the prior year's results,
accompanied by a positive earnings contribution from the FCNB Preferred
charge programs. Key factors contributing to this progress included higher
gross margins and better expense ratios realized due to the growth in revenue
accompanied by successful cost containment initiatives.
Gross profit margin on net sales increased to 32.0 percent for the thirteen
weeks ended April 3, 1999 from 28.7 percent for the comparable 1998 period.
The favorable margin performance, driven by Spiegel Catalog and Xxxxx Xxxxx,
resulted from stronger customer response to merchandise offerings and in turn,
lower markdowns compared to last year.
The selling, general and administrative expenses ratio benefited from the
increase in revenues ending the period at 38.1 percent of total revenues
compared to 39.7 percent in the comparable last year period. Continued
emphasis on cost controls and higher levels of productivity on catalog
mailings realized by Xxxxx Xxxxx, Newport News and Spiegel Catalog also
contributed to the improvement.
Bankcard segment:
Thirteen Weeks Ended
April 3, April 4,
1999 1998
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Finance revenue $ 15,749 $ 17,532
Operating income $ 4,564 $ 10,890
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Bankcard finance revenue decreased 10 percent in the thirteen weeks ended
April 3, 1999 compared with the same period last year. Overall, bankcard
revenue from serviced receivables grew by 38 percent during the period. The
relative level of receivables sold for the period remained the same as last year
at approximately 75 percent of the total portfolio. However, recognized
revenues decreased relative to last year, primarily due to lower late fee income
and, to a lesser extent, the impact of the accounting for receivables sold under
SFAS 125. The lower late fee income is being driven by improved delinquency
statistics in the overall bankcard portfolio.
Bankcard operating income declined in the first thirteen weeks of 1999 compared
to the prior year as well, primarily due to certain noncomparable items which
benefited the first thirteen weeks of 1998. The 1998 period was favorably
impacted by the reversal of approximately $3,000 of provision for doubtful
accounts related to the sale of receivables in accordance with SFAS 125.
Additionally, the first period of 1998 benefited from a new credit program
which began in late 1997. In general, newly issued credit programs initially
generate finance revenues without the immediate corresponding charge-offs
associated with extending credit. The 1999 results reflect the full impact of
this credit program. Excluding these noncomparable items from 1998's first
period results, bankcard operating income was essentially flat to last year.
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INTEREST EXPENSE
The Company continues to benefit from lower average debt levels, a reflection
of stronger operating results and improved utilization of working capital.
Interest expense decreased 16 percent to $14,242 for the thirteen weeks ended
April 3, 1999 compared to $16,870 for the prior year period. Average debt
for the first thirteen weeks of 1999 was $677,961 compared to $899,475 for
the comparable period last year. Ending debt levels of $722,412 were nearly
$172 million, or 19 percent, below the year earlier levels.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company, like other retailers, experiences seasonal fluctuations in its
revenues and net earnings. Historically, a significant amount of the
Company's net sales and a majority of its net earnings have been realized
during the fourth quarter. Accordingly, the results for the individual
quarters are not necessarily indicative of the results to be expected for
the entire year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its operating and cash requirements through
funds generated from operations, the securitization of customer accounts
receivable and the issuance of debt and common stock. Total customer
receivables sold were $1,367,730 at April 3, 1999, $1,420,730 at
January 2, 1999 and $1,267,816 at April 4, 1998.
Impacted primarily by the Company's overall level of receivables, net
cash provided by operations declined $94,218 in the first thirteen weeks of
1999 compared to the same period last year. Receivables provided $109,869
less cash in the 1999 period, driven by growth in the Preferred credit
portfolio as well as increases in the bankcard portfolio. Excluding
receivables, net cash provided by operating activities increased $15,651
in the first thirteen weeks of 1999, driven by improved operating results and
strong inventory controls. Total inventories at quarter-end were down 2
percent compared to last year, despite a 6 percent increase in net sales.
Net additions to property and equipment for the thirteen weeks ended
April 3, 1999 were $4,613 compared to $6,147 in the same period last year.
Capital spending, which is primarily related to Xxxxx Xxxxx retail store
expansion and remodeling, declined compared to the 1998 period driven by a
lower number of Xxxxx Xxxxx store openings planned in 1999.
On March 26, 1998, the Company issued 13,526,571 shares of Class B voting
common stock to its majority shareholder, Spiegel Holdings, Inc. The net
proceeds of $69,998 were used primarily to fund working capital and
investing needs.
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The Company believes that its cash on hand, together with cash flows
anticipated to be generated from operations, borrowings under its existing
credit facilities, securitizations of customer receivables and other
available sources of funds, will be adequate to fund the Company's capital
and operating requirements for the foreseeable future.
MARKET RISK
The Company is exposed to market risk from changes in interest rates and,
to a lesser extent, foreign exchange rate fluctuations. In seeking to
minimize risk, the Company manages exposure through its regular operating
and financing activities and, when deemed appropriate, through the use of
derivative financial instruments. The Company does not use financial
instruments for trading or other speculative purposes and is not party to
any leveraged financial instruments.
Interest rates:
The Company manages interest rate exposure through a mix of fixed- and
variable-rate financings. The Company is generally able to meet certain
targeted objectives through its direct borrowings, a significant portion of
which are fixed-rate obligations. Accordingly, the interest rate risk to
the Company is minimal. Substantially all of the Company's variable-rate
exposure relates to changes in the three month LIBOR rate. If the three
month LIBOR rate had changed by 50 basis points, the Company's first quarter
1999 interest expense would have changed by approximately $190. In addition,
derivative financial instruments are utilized occasionally to reach the
Company's targeted objectives. Interest rate swaps may be used to minimize
interest rate exposure when appropriate based on market conditions. The use
of interest rate swaps is minimal, and as of April 3, 1999, the notional
amount totaled $64,286.
In conjunction with its asset-backed securitizations, the Company recognizes
gains representing the present value of estimated future cash flows the
Company expects to receive over the estimated outstanding securitization
period. Certain estimates inherent in determining the present value of these
estimated future cash flows are influenced by factors outside the Company's
control, including the impact of interest rate fluctuations on variable-rate
instruments. As a result, estimates could materially change in the near
term and affect the carrying value of these receivables.
The Company believes that its interest rate exposure management policies,
including the use of derivative financial instruments, are adequate to
limit any material market risk exposure to its consolidated financial
statements at April 3, 1999.
Foreign currency exchange rates:
The Company is subject to foreign currency exchange risk related to its
Canadian operations, as well as its joint venture investments in Germany,
Japan and the United Kingdom. The Company believes that its foreign exchange
risk is not material due to the size and nature of the above operations and
does not utilize any hedging instruments to minimize exposure to
fluctuations in currency rates at this time.
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YEAR 2000
The Company continues to take the appropriate steps to minimize the threat
of any material technical failure relating to Year 2000 compliance issues.
A series of comprehensive plans, covering the renovation of internal systems,
outside vendor readiness and testing are in place and are being executed in
accordance with prescribed time tables.
The renovation phase is generally progressing as planned, with nearly 90%
of our internal hardware and software systems and facilities Year 2000
compliant as of April 3, 1999. Systems yet to be renovated include those
that are dependent on minor third party vendor software upgrades, systems
that have been targeted for replacement or renovation in 1999 and will be
compliant upon installation, and off-the-shelf PC hardware and software that
can be purchased and installed in a short period of time. At this point, it
is anticipated that 95% of the Company's internal systems will be Year 2000
compliant by the end of the second quarter and 100% at the end of the third
quarter. Contingency plans are currently in place in order to mitigate the
impact of possible system failure. These plans also include contingencies
for the renovation of existing systems in the event that replacement systems
cannot be installed in a timely manner. Generally, individual systems are
being tested as they are renovated. A fully integrated system test
commenced in January 1999 and is expected to be completed midyear. Systems
not yet renovated will be added to this integrated test as renovation is
completed.
The Company has also implemented a comprehensive plan to communicate to all
critical vendors and suppliers the expectation that they attain Year 2000
compliance in a timely manner. To date, the Company has received responses
from over 90% of these critical vendors and is aggressively pursuing those
who have not responded or have responded in an unsatisfactory manner.
Contingency plans have been put in place to provide alternate solutions if the
progress of certain vendors and suppliers is deemed questionable so as not to
jeopardize the Company's ability to service customers.
The direct costs associated with the Year 2000 initiative are expected to
range between $8,000 and $10,000. These costs, totaling $6,400 through
April 3, 1999, are funded through current operations and expensed as incurred.
Risks associated with Year 2000 failures range from sporadic delays of limited
scope all the way to an extended impairment of the Company's merchandise
receipt, distribution and billing capabilities. While difficult to predict,
the most reasonably likely scenario will include some sporadic delays of
limited scope. While the Company believes it is acting prudently in
addressing the Year 2000 issue, it is impossible for any company to ensure
complete Year 2000 compliance. While it is certainly possible that there
may be litigation arising from the Year 2000 conversion, at this time the
Company does not anticipate, nor can it estimate, any costs associated
with such litigation.
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ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, establishes accounting
and reporting standards for derivatives and for hedging activities. The
Company is studying the statement to determine its effect on the consolidated
financial position or results of operations, if any. The Company will adopt
SFAS No. 133, as required, in fiscal year 2000.
FORWARD-LOOKING STATEMENTS
This report contains statements which are forward-looking statements within
the meaning of applicable federal securities laws and are based upon the
Company's current expectations and assumptions. Such forward-looking statements
are subject to a number of risks and uncertainties which could cause actual
results to differ materially from those anticipated including but not
limited to, financial strength and performance of the retail and direct
marketing industry, changes in consumer spending patterns, dependence on
the securitization of accounts receivable to fund operations, state and
federal laws and regulations related to offering and extending credit, the
impact of competitive activities, inventory risks due to shifts in the
market demand, risks associated with collections on the Company's credit
card portfolios, interest rate fluctuations, and postal rate, paper or printing
cost increases, and the success of planned merchandising, advertising,
marketing and promotional campaigns, as well as other risks indicated in
other filings with the Securities and Exchange Commission such as the
Company's most recent Form 10-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPIEGEL, INC.
Signature Title Date
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/s/ Xxxxx X. Xxxxxxx Office of the President, May 18, 0000
Xxxxx X. Xxxxxxx Chief Financial Officer
(Principal Operating Executive
Officer and Principal Financial
and Accounting Officer)
