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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 July 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 August 13, 1999 are as follows:
Class A non-voting common stock, $1.00 par value
14,794,844 shares
Class B voting common stock, $1.00 par value
117,009,869 shares.
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SPIEGEL, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 3, 1999
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets,
July 3, 1999 and January 2, 1999 3
Consolidated Statements of Earnings,
Thirteen and Twenty-six Weeks Ended
July 3, 1999 and July 4, 1998 4
Consolidated Statements of Cash Flows,
Twenty-six Weeks Ended July 3, 1999 and July 4, 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-15
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 13-14
2
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Spiegel, Inc. and Subsidiaries
Consolidated Balance Sheets
($000s omitted, except per share amounts)
(unaudited)
July 3, January 2,
1999 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,967 $ 91,200
Receivables, net 633,718 544,146
Inventories 491,896 490,915
Prepaid expenses 98,463 93,390
Refundable income taxes 11,041 9,897
Deferred income taxes 25,974 25,946
------------ ------------
Total current assets 1,287,059 1,255,494
Property and equipment, net 341,649 359,361
Intangible assets, net 151,941 153,146
Other assets 86,780 89,259
------------ ------------
Total Assets $ 1,867,429 $ 1,857,260
------------ ------------
------------ ------------
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 184,464 $ 85,714
Accounts payable 254,064 287,585
Accrued liabilities:
Salaries and wages 25,093 46,301
General taxes 83,979 103,890
Allowance for returns 24,625 33,222
Other accrued liabilities 90,245 106,539
------------ ------------
Total current liabilities 662,470 663,251
Long-term debt, excluding current maturities 521,572 523,036
Deferred income taxes 38,132 33,706
------------ ------------
Total liabilities 1,222,174 1,219,993
Stockholders' equity:
Class A non-voting common stock,
$1.00 par value; authorized 16,000,000 shares;
14,791,844 shares issued and outstanding at
July 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 July 3, 1999 and
January 2, 1999 117,010 117,010
Additional paid-in capital 328,713 328,489
Accumulated other comprehensive loss (3,304) (4,555)
Retained earnings 188,044 181,575
------------ ------------
Total stockholders' equity 645,255 637,267
------------ ------------
Total liabilities and stockholders' equity $ 1,867,429 $ 1,857,260
------------ ------------
------------ ------------
[FN]
See accompanying notes to consolidated financial statements.
3
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Spiegel, Inc. and Subsidiaries
Consolidated Statements of Earnings
($000s omitted, except per share amounts)
(unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------- --------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------------ ----------- ------------ ------------
Net sales and other revenues:
Net sales $ 681,331 $ 618,007 $ 1,245,856 $ 1,150,457
Finance revenue 57,722 54,382 108,676 103,596
Other revenue 12,900 11,657 22,598 20,546
------------ ----------- ------------ ------------
751,953 684,046 1,377,130 1,274,599
Cost of sales and operating expenses:
Cost of sales, including buying and
occupancy expenses 438,565 426,160 822,820 805,772
Selling, general and administrative
expenses 270,361 246,642 514,011 481,346
------------ ----------- ------------ ------------
708,926 672,802 1,336,831 1,287,118
------------ ----------- ------------ ------------
Operating income (loss) 43,027 11,244 40,299 (12,519)
Interest expense 15,094 15,416 29,336 32,286
------------ ----------- ------------ ------------
Earnings (loss) before income taxes 27,933 (4,172) 10,963 (44,805)
Income tax provision (benefit) 11,453 (1,798) 4,495 (19,298)
------------ ----------- ------------ ------------
Earnings (loss) before redemption of
subsidiary preferred stock 16,480 (2,374) 6,468 (25,507)
Redemption of subsidiary preferred stock -- 8,535 -- 8,535
Net earnings (loss) $ 16,480 $ (10,909) $ 6,468 $ (34,042)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Net earnings (loss) per common share
Basic and diluted $ 0.13 $ (0.08) $ 0.05 $ (0.27)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Weighted average number of common
shares outstanding 131,801,423 131,712,229 131,794,967 125,598,183
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
[FN]
See accompanying notes to consolidated financial statements.
4
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Spiegel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
($000s omitted)
(unaudited)
Twenty-six Weeks Ended
July 3, July 4,
1999 1998
------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 6,468 $ (34,042)
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities:
Depreciation and amortization 38,245 38,590
Incremental gains on sale of receivables -- (3,000)
Change in assets and liabilities,
net of effects of acquisition:
(Increase) decrease in receivables, net (89,572) 68,230
(Increase) decrease in inventories (981) 13,838
(Increase) decrease in prepaid expenses (5,073) 1,400
Decrease in accounts payable (33,521) (77,770)
Decrease in accrued liabilities (66,010) (59,430)
Increase (decrease) in income taxes 3,254 (23,466)
------------ ------------
Net cash used in operating activities (147,190) (75,650)
------------ ------------
Cash flows from investing activities:
Net additions to property and equipment (10,794) (8,146)
Net additions to (reductions in) other assets (6,054) 42,813
------------ ------------
Net cash provided by (used in) investing activities (16,848) 34,667
------------ ------------
Cash flows from financing activities:
Issuance of debt 158,000 86,500
Payment of debt (60,714) (130,000)
Issuance of Class B common stock -- 69,992
Exercise of stock options 268 209
------------ ------------
Net cash provided by financing activities 97,554 26,701
------------ ------------
Effect of exchange rate on cash 1,251 (1,071)
Net change in cash and cash equivalents (65,233) (15,353)
Cash and cash equivalents at beginning of year 91,200 47,582
------------ ------------
Cash and cash equivalents at end of period $ 25,967 $ 32,229
------------ ------------
------------ ------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 30,063 $ 31,882
------------ ------------
------------ ------------
Income taxes $ 1,813 $ 4,886
------------ ------------
------------ ------------
[FN]
See accompanying notes to consolidated financial statements.
5
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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
Outstanding borrowings of $158,000 related to a revolving credit
agreement set to expire on March 26, 2000 were classified as long-term
debt in the Company's balance sheet as of July 3, 1999. The Company
amended and restated the above revolving credit agreement in July 1999,
effectively extending the term of the agreement to July 2003 and
increasing the commitment from $350,000 to $500,000. All other terms
of the amended and restated credit agreement are similar to
those under the previous financing arrangement.
(4) Comprehensive income
The components of comprehensive income, net of related tax, for the
thirteen and twenty-six week periods ended July 3, 1999 and
July 4, 1998 are as follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) $ 16,480 $ (10,909) $ 6,468 $ (34,042)
Foreign currency
translation adjustments 609 (881) 1,251 (1,071)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 17,089 $ (11,790) $ 7,719 $ (35,113)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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(5) Segment reporting
Segment revenues and operating profit, including a reconciliation to
the consolidated Company's earnings before income taxes, follows:
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------------- --------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------------ ------------- ------------ ------------
Revenues:
Merchandising $ 734,666 $ 660,380 $ 1,344,094 $ 1,233,401
Bankcard 17,287 23,666 33,036 41,198
------------ ------------ ------------ ------------
Total revenues $ 751,953 $ 684,046 $ 1,377,130 $ 1,274,599
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Operating income (loss):
Merchandising $ 43,203 $ 3,233 $ 36,149 $ (31,023)
Bankcard 854 8,808 5,418 19,698
------------ ------------ ------------ ------------
Total segment operating
income (loss) 44,057 12,041 41,567 (11,325)
Premium on acquisitions (1,030) (797) (1,268) (1,194)
------------ ------------ ------------ ------------
Total operating income (loss) 43,027 11,244 40,299 (12,519)
Interest expense 15,094 15,416 29,336 32,286
------------ ------------ ------------ ------------
Earnings (loss) before income
taxes $ 27,933 $ (4,172) $ 10,963 $ (44,805)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
7
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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
Net earnings for the thirteen weeks ended July 3, 1999 were $16,480,
or $0.13 per share basic and diluted, a significant improvement
compared to the net loss of $10,909, or $0.08 per share, recorded in
the same period last year. Net earnings for the twenty-six week period
ended July 3, 1999 were $6,468, or $0.05 per share, compared to a net
loss of $34,042, or $0.27 per share, for the twenty-six week period ended
July 4, 1998. The results for the thirteen and twenty-six week periods
of 1998 reflect a reduction in earnings of $8,535, or $0.06 per share,
due to the redemption of subsidiary preferred stock in the second quarter.
This reduction was offset somewhat by incremental pretax gains of $3,000
on the sale of receivables in accordance with SFAS No. 125. Also providing
benefit to the first half of 1998 was the reversal of approximately
$3,000 of provision for doubtful accounts related to the sale of
receivables in the first quarter. Excluding the impact of the above
non-comparable items, 1999 net earnings improved over the prior year by
nearly $22 million in the thirteen-week period and $38 million in the
twenty-six week period. The considerable 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 Twenty-six Weeks Ended
-------------------------- --------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Retail net sales $ 302,439 $ 286,886 $ 558,853 $ 524,665
Comp store % change 7% -9% 6% -9%
Catalog net sales 378,892 331,121 687,003 625,792
------------ ------------ ------------ ------------
Total net sales 681,331 618,007 1,245,856 1,150,457
Finance revenue 40,435 30,716 75,640 62,398
Other revenue 12,900 11,657 22,598 20,546
------------ ------------ ------------ ------------
Total revenue $ 734,666 $ 660,380 $ 1,344,094 $ 1,233,401
------------ ------------ ------------ ------------
% change 11.2% (3.1)% 9.0% (3.4)%
Gross margin %
to total net sales 35.7% 31.1% 34.0% 30.0%
SG&A % to total revenue 34.4% 35.0% 36.1% 37.2%
Operating income (loss) $ 43,203 $ 3,233 $ 36,149 $ (31,023)
------------ ------------ ------------ ------------
Thirteen weeks ended July 3, 1999 compared to thirteen weeks ended
July 4, 1998
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Total merchandising revenues increased in the thirteen weeks ended
July 3, 1999 compared to the same period last year, driven by a 10
percent increase in net sales and a substantial increase in finance
revenue generated from FCNB Preferred charge programs.
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The net sales improvement included a 14 percent increase in total catalog
net sales and a 5 percent increase in total retail net sales, reflecting
stronger customer response to merchandise offerings. Solid customer
response to increased pages circulated for Spiegel Catalog and Newport
News drove the growth in catalog net sales compared to last year.
Xxxxx Xxxxx and Xxxxxxx Catalog Internet sales contributed to the
favorable catalog net sales results as well. Newport News joined Xxxxx
Xxxxx and Xxxxxxx Catalog on the Internet with a Web site launched in
June. Xxxxx Xxxxx catalog sales were lower than the prior year period,
reflecting a planned decrease in pages circulated to marginal customers,
partially offset by a significant gain in productivity. Retail net sales
results included a 7 percent increase in Xxxxx Xxxxx comparable-store
sales, reflecting an improved merchandising and inventory position compared
to last year, offset slightly by lower sales in the Company's outlet
stores.
Finance revenue for the thirteen-week period ended July 3, 1999 was
32 percent higher than the prior year due to growth in the portfolio and
improved productivity. The average FCNB Preferred charge portfolio
was 6 percent above the 1998 level due to an increase in customer
utilization of Preferred charge programs and higher sales at the
merchant companies. Additionally, the Preferred charge programs realized
improved yields and lower charge-offs from reduced delinquencies,
resulting in an increase in the net excess recognized in finance revenue
from off-balance sheet receivables. There have been no material changes
in the assumptions utilized in the calculation of receivable gains in
accordance with SFAS No. 125 since January 2, 1999.
Operating income for the merchandising segment increased nearly $40
million in the thirteen weeks ended July 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 improved performance of FCNB Preferred charge
programs. Key factors contributing to this progress included higher
gross margins and improved expense ratios realized due to the growth in
revenue accompanied by successful cost-containment initiatives.
Gross profit margin on net sales increased to 35.7 percent for the thirteen
weeks ended July 3, 1999 from 31.1 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 expense ratio benefited from the
increase in revenue, ending the period at 34.4 percent of total revenues
compared to 35.0 percent in the comparable last year period. Continued
emphasis on cost controls and a higher level of sales productivity on
catalog mailings realized by Xxxxx Xxxxx, Newport News and Spiegel Catalog
contributed to the improvement.
Twenty-six weeks ended July 3, 1999 compared to twenty-six weeks ended
July 4, 1998
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Total merchandising revenue increased $110,693, or 9 percent, in the first
half of fiscal 1999 compared to the same period last year. The growth in
revenue was primarily attributable to an 8 percent increase in net sales,
coupled with a favorable contribution from the FCNB Preferred charge
programs.
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The net sales improvement included a 10 percent increase in total catalog
net sales and a 7 percent increase in total retail net sales, reflecting
stronger customer response to merchandise offerings. Higher catalog net
sales were generated by solid customer response to increased pages
circulated for Spiegel Catalog and Newport News, as well as the increasing
contribution from Internet sales. Xxxxx Xxxxx catalog sales were lower
than the prior year period, reflecting a planned decrease in pages
circulated to marginal customers, partially offset by a significant gain
in productivity. Retail net sales results included a 6 percent increase
in Xxxxx Xxxxx comparable-store sales, reflecting an improved merchandising
and inventory position compared to last year.
Finance revenue for the twenty-six week period ended July 3, 1999 was
21 percent higher than the prior year due to growth in the portfolio as
well as improved productivity. FCNB Preferred receivables serviced ended
the 1999 period 10 percent above last year's level due to an increase in
customer utilization of Preferred charge programs and higher sales at
the merchant companies. Additionally, the Preferred charge programs
realized improved yields and lower charge-offs from reduced delinquencies,
resulting in an increase in the net excess recognized in finance revenue
from off-balance sheet receivables. There have been no material changes
in the assumptions utilized in the calculation of receivable gains in
accordance with SFAS No. 125 since January 2, 1999.
Operating income for the merchandising segment increased more than $67
million in the twenty-six weeks ended July 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 improved
expense ratios realized due to the growth in revenue accompanied by
successful cost-containment initiatives.
Gross profit margin on net sales increased to 34.0 percent for the
twenty-six weeks ended July 3, 1999 from 30.0 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 expense ratio benefited from
the increase in revenues ending the period at 36.1 percent of total
revenues compared to 37.2 percent in the comparable last year period.
Continued emphasis on cost controls and a higher level of sales
productivity on catalog mailings realized by Xxxxx Xxxxx, Newport News
and Spiegel Catalog contributed to the improvement.
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Bankcard segment:
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------- --------------------------
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Finance revenue $ 17,287 $ 23,666 $ 33,036 $ 41,198
Operating income $ 854 $ 8,808 $ 5,418 $ 19,698
------------ ------------ ------------ ------------
Thirteen weeks ended July 3, 1999 compared to thirteen weeks ended
July 4, 1998
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Bankcard finance revenue decreased 27 percent in the thirteen weeks ended
July 3, 1999 compared to the same period last year. Overall, bankcard
revenue from serviced receivables grew by 30 percent during the period.
However, recognized revenues decreased compared to last year, primarily
due to the impact of the accounting for receivables sold under SFAS
No. 125. Although the average level of receivables sold for the period
remained the same as last year at 72 percent of the total portfolio, the
net excess recognized in revenue from the off-balance-sheet receivables
declined. The net excess for the 1999 period was negatively impacted by
an increase in charge-offs related to certain bankcard test programs
initiated in late 1997. In general, newly issued credit programs initially
generate finance revenues without the immediate corresponding charge-offs
associated with extending credit. The 1998 revenues benefited from
this initial phase, while the 1999 results reflect the full impact of these
credit programs. Revenue in the 1998 period also was favorably impacted by
an incremental pretax gain of $3,000 in accordance with SFAS No. 125.
Bankcard operating income declined significantly in the thirteen weeks
ended July 3, 1999. This performance was primarily due to certain
non-comparable items that benefited the prior year period, including
the aforementioned bankcard test programs and gain recognition. Excluding
these non-comparable items from the 1998 results, bankcard earnings were
essentially flat to last year's unusually strong performance.
Twenty-six weeks ended July 3, 1999 compared to twenty-six weeks ended
July 4, 1998
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Bankcard finance revenue decreased 20 percent in the first half of fiscal
1999 compared to the same period last year. Overall, bankcard revenue
from serviced receivables grew by 34 percent during the period. However,
recognized revenues decreased compared to last year, primarily due to
the impact of the accounting for receivables sold under SFAS 125.
Although the average level of receivables sold increased from 67 percent
of the total portfolio in the 1998 period to 73 percent in 1999, the net
excess recognized in revenue from these off-balance-sheet receivables
declined. The net excess for the 1999 period was negatively impacted by
an increase in charge-offs related to certain bankcard test programs
initiated in late 1997. In general, newly issued credit programs initially
generate finance revenues without the immediate corresponding charge-offs
associated with extending credit. The 1998 revenues benefited from
this initial phase, while the 1999 results reflect the full impact of these
credit programs. Revenue in the 1998 period also was favorably
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impacted by an incremental pretax gain of $3,000 recognized in accordance
with SFAS No. 125. No comparable gain was recognized in the first half
of fiscal 1999.
Reflecting the declines in revenue, bankcard operating income was markedly
lower in the first half of fiscal 1999 compared to the prior year. This
performance was primarily due to certain non-comparable items that benefited
the prior year period, including the aforementioned bankcard test programs
and gain recognition. Additionally, the 1998 period was favorably impacted
by the reversal of approximately $3,000 of provision for doubtful accounts
related to the sale of receivables. Excluding these non-comparable items
from the 1998 results, bankcard earnings were essentially flat to last
year's unusually strong performance, as the core bankcard portfolio
continues to experience favorable charge-off and delinquency trends.
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 9 percent to $29,336 for
the twenty-six weeks ended July 3, 1999 compared to $32,286 for the prior
year period. Average debt for the first half of fiscal 1999 was $694,234
compared to $837,804 for the comparable period last year. Ending debt
levels of $706,036 were nearly $67 million, or 9 percent, below the year
earlier levels. Net interest expense was impacted in the current year
period by a decline in interest income that resulted from a lower
restricted cash position than the prior year.
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 $1,392,730 at July 3, 1999, $1,420,730 at
January 2, 1999 and $1,220,330 at July 4, 1998.
Impacted primarily by the Company's overall level of receivables, net cash
provided by operations declined $71,540 in the first twenty-six weeks
of 1999 compared to the same period last year. Changes in receivable levels
provided $157,802 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
$86,262 in the first half of fiscal 1999 compared to last year, driven by
significantly improved operating results and strong inventory controls.
Total inventories at quarter-end were relatively flat compared to last year,
despite an 8 percent increase in net sales and the addition of 26 retail
and outlet stores.
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Net additions to property and equipment for the twenty-six weeks ended
July 3, 1999 were $10,794 compared to $8,146 in the same period last year.
Xxxxx Xxxxx retail store expansion and remodeling comprised more than half
of the capital spending in 1999 and a majority of the spending in 1998.
The remainder of the 1999 capital spending was primarily related to
information technology equipment upgrades at FCNB, the Company's special
purpose bank.
In March 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 $69,992 were used primarily to fund working capital and
investing needs.
In March 1994 and December 1995, Newport News issued shares of non-voting
redeemable preferred stock to certain directors and executive officers of
the Company, its subsidiaries and Xxxx Versand. All outstanding shares
were redeemed in April 1998 for $12,236. The excess of the redemption
price over the carrying value of the preferred stock reduced net earnings
by $8,535 and the related basic and diluted net earnings per common share
by $0.06.
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
second quarter 1999 interest expense would have changed by approximately
$295. 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 July 3, 1999, the notional amount totaled $64,286.
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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 July 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.
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 timetables.
The renovation phase is generally progressing as planned, with over 95
percent of this phase completed as of July 3, 1999. Systems yet to be
renovated include those that are dependent on minor third party vendor
software upgrades, systems targeted for replacement or renovation in 1999
that 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 the company's renovation effort
will be completed by the end of the third quarter. Contingency plans
are currently in place to mitigate the impact of possible system
failure. Generally, individual systems are being tested as they are
renovated. A fully integrated system test commenced in January 1999
and is over 75 percent complete as of July 3, 1999. At this point, it is
anticipated that Year 2000 testing will be completed by the end of the
third quarter 1999.
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 notification from over 60 percent of these critical vendors
indicating that they have already attained Year 2000 compliance and is
monitoring the remaining vendors to ensure compliance in a timely 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.
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The direct costs associated with the Year 2000 initiative are expected
to be approximately $10,000. These costs, totaling $8,000 through
July 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.
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting
and reporting standards for derivatives and for hedging activities. As
issued, SFAS No. 133 was effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. In June 1999, SFAS No. 137 was
issued, effectively deferring the date of required adoption of SFAS 133
to fiscal quarters of all fiscal years beginning after June 15, 2000.
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 2001.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward looking within the
meaning of applicable federal securities laws and are based upon the
Company's current expectations and assumptions, which are subject to a
number of risks and uncertainties that could cause actual results to
differ materially from those anticipated. Potential risks and
uncertainties include, but are not limited to, factors such as the
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,
risks associated with collections on the Company's credit card portfolio,
interest rate fluctuations, postal rate increases, paper or printing costs,
the success of planned merchandising, advertising, marketing and
promotional campaigns, and other factors that may be described in the
Company's 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, August 17, 1999
Xxxxx X. Xxxxxxx Chief Financial Officer
(Principal Operating
Executive Officer and
Principal Financial Officer)
/s/ D. Skip Xxxx Vice President - Controller August 17, 1999
D. Skip Xxxx (Principal Accounting Officer
and duly authorized officer of
the Registrant)
