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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 October 2, 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 November 12, 1999 are as follows:
Class A non-voting common stock, $1.00 par value
14,849,244 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 THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets,
October 2, 1999, October 3, 1998 and January 2, 1999 3
Consolidated Statements of Earnings,
Thirteen and Thirty-nine Weeks Ended
October 2, 1999 and October 3, 1998 4
Consolidated Statements of Cash Flows,
Thirty-nine Weeks Ended October 2, 1999 and October 3, 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)
October 2, October 3, January 2,
1999 1998 1999
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 58,024 $ 35,102 $ 91,200
Receivables, net 750,125 541,812 544,146
Inventories 587,475 630,407 490,915
Prepaid expenses 111,877 94,055 93,390
Refundable income taxes 11,845 10,842 9,897
Deferred income taxes 25,969 29,811 25,946
------------ ------------ ------------
Total current assets 1,545,315 1,342,029 1,255,494
Property and equipment, net 336,391 353,906 359,361
Intangible assets, net 150,070 157,323 153,146
Other assets 90,059 98,000 89,259
------------ ------------ ------------
Total Assets $ 2,121,835 $ 1,951,258 $ 1,857,260
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 209,464 $ 95,714 $ 85,714
Accounts payable 254,364 180,480 287,585
Accrued liabilities:
Salaries and wages 37,799 24,545 46,301
General taxes 78,489 95,335 103,890
Allowance for returns 21,796 22,811 33,222
Other accrued liabilities 113,891 88,540 106,539
------------ ------------ ------------
Total current liabilities 715,803 507,425 663,251
Long-term debt, excluding current maturities 715,572 838,036 523,036
Deferred income taxes 41,002 10,610 33,706
------------ ------------ ------------
Total liabilities 1,472,377 1,356,071 1,219,993
Stockholders' equity:
Class A non-voting common stock,
$1.00 par value; authorized 16,000,000 shares;
14,837,844, 14,703,964 and 14,747,844 shares
issued and outstanding at October 2, 1999,
October 3, 1998 and January 2, 1999,
respectively 14,838 14,704 14,748
Class B voting common stock,
$1.00 par value; authorized 121,500,000
shares; 117,009,869 shares issued and
outstanding at October 2, 1999,
October 3, 1998 and January 2, 1999 117,010 117,010 117,010
Additional paid-in capital 328,904 328,276 328,489
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment (3,530) (4,850) (4,555)
Retained earnings 192,236 140,047 181,575
------------ ------------ ------------
Total stockholders' equity 649,458 595,187 637,267
------------ ------------ ------------
Total liabilities and stockholders' equity $ 2,121,835 $ 1,951,258 $ 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 Thirty-nine Weeks Ended
-------------------------- --------------------------
October 2, October 3, Ocotber 2, October 3,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net sales and other revenues:
Net sales $ 635,112 $ 550,651 $ 1,880,968 $ 1,701,108
Finance revenue 61,753 83,977 170,429 187,573
Other revenue 9,765 9,340 32,363 29,886
------------ ----------- ------------ ------------
706,630 643,968 2,083,760 1,918,567
Cost of sales and operating expenses:
Cost of sales, including buying and
occupancy expenses 414,730 390,783 1,237,550 1,196,556
Selling, general and administrative
expenses 267,199 243,247 781,210 724,592
------------ ----------- ------------ ------------
681,929 634,030 2,018,760 1,921,148
------------ ----------- ------------ ------------
Operating income (loss) 24,701 9,938 65,000 (2,581)
Interest expense 17,595 17,342 46,931 49,628
------------ ----------- ------------ ------------
Earnings (loss) before income taxes 7,106 (7,404) 18,069 (52,209)
Income tax provision (benefit) 2,913 (3,188) 7,408 (22,486)
------------ ----------- ------------ ------------
Earnings (loss) before redemption of
subsidiary preferred stock 4,193 (4,216) 10,661 (29,723)
Redemption of subsidiary preferred stock -- -- -- 8,535
Net earnings (loss) $ 4,193 $ (4,216) $ 10,661 $ (38,258)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Net earnings (loss) per common share
Basic and diluted $ 0.03 $ (0.03) $ 0.08 $ (0.30)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Weighted average number of common
shares outstanding 131,805,972 131,713,833 131,798,635 127,636,733
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
[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)
Thirty-nine Weeks Ended
October 2, October 3,
1999 1998
------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 10,661 $ (38,258)
Adjustments to reconcile net earnings (loss) to
net cash used in operating activities:
Depreciation and amortization 59,953 61,888
Incremental gains on sale of receivables (1,383) (28,414)
Change in assets and liabilities,
net of effects of acquisition:
(Increase) decrease in receivables, net (204,596) 49,978
Increase in inventories (96,560) (121,651)
Increase in prepaid expenses (18,487) (4,918)
Decrease in accounts payable (33,221) (58,243)
Decrease in accrued liabilities (37,977) (64,367)
Increase (decrease) in income taxes 5,325 (27,053)
------------ ------------
Net cash used in operating activities (316,285) (231,038)
------------ ------------
Cash flows from investing activities:
Net additions to property and equipment (19,861) (8,529)
Net additions to (reductions in) other assets (14,846) 42,143
------------ ------------
Net cash provided by (used in) investing activities (34,707) 33,614
------------ ------------
Cash flows from financing activities:
Issuance of debt 377,000 315,000
Payment of debt (60,714) (197,900)
Issuance of Class B common stock -- 69,992
Exercise of stock options 505 209
------------ ------------
Net cash provided by financing activities 316,791 187,301
------------ ------------
Effect of exchange rate on cash 1,025 (2,357)
Net change in cash and cash equivalents (33,176) (12,480)
Cash and cash equivalents at beginning of year 91,200 47,582
------------ ------------
Cash and cash equivalents at end of period $ 58,024 $ 35,102
------------ ------------
------------ ------------
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 46,515 $ 46,214
------------ ------------
------------ ------------
Income taxes $ 2,860 $ 5,477
------------ ------------
------------ ------------
[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
In July 1999, the Company amended and restated its existing revolving
credit agreement, 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 for the thirteen and thirty-nine
week periods ended October 2, 1999 and October 3, 1998 are as follows:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- --------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) $ 4,193 $ (4,216) $ 10,661 $ (38,258)
Foreign currency
translation adjustments (226) (1,286) 1,025 (2,357)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 3,967 $ (5,502) $ 11,686 $ (40,615)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
6
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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 Thirty-Nine Weeks Ended
--------------------------- --------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------ ------------- ------------ ------------
Revenues:
Merchandising $ 686,319 $ 598,462 $ 2,030,413 $ 1,831,863
Bankcard 20,311 45,506 53,347 86,704
------------ ------------ ------------ ------------
Total revenues $ 706,630 $ 643,968 $ 2,083,760 $ 1,918,567
------------ ------------ ------------ ------------
Operating income (loss):
Merchandising $ 21,617 $ (17,518) $ 57,766 $ (48,541)
Bankcard 4,987 28,156 10,405 47,854
------------ ------------ ------------ ------------
Total segment operating
income (loss) 26,604 10,638 68,171 (687)
Premium on acquisitions (1,903) (700) (3,171) (1,894)
------------ ------------ ------------ ------------
Total operating income (loss) 24,701 9,938 65,000 (2,581)
Interest expense 17,595 17,342 46,931 49,628
------------ ------------ ------------ ------------
Earnings (loss) before income
taxes $ 7,106 $ (7,404) $ 18,069 $ (52,209)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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 week period ended October 2, 1999 were $4,193,
or $0.03 per share basic and diluted, compared to a net loss of $4,216, or
$0.03 per share, for the thirteen week period ended October 3, 1998. The
above results include incremental pretax gains related to the sale of
receivables of $1,383 in 1999 and $25,414 in 1998. Excluding the positive
impact of SFAS No. 125 accounting, net earnings improved over the prior year
by more than $32 million driven by strong customer response to merchandise
offerings and gross margin improvement in the merchandising segment.
Net earnings for the thirty-nine week period ended October 2, 1999 were
$10,661, or $0.08 per share, a significant improvement compared to the net
loss of $38,258, or $0.30 per share, recorded in the same period last year.
The results for both periods were impacted favorably by SFAS No. 125 accounting,
including incremental pretax gains related to the sale of receivables of
$1,383 in 1999 and $28,414 in 1998. Somewhat offsetting the positive impact
of SFAS No. 125 accounting in 1998 was a reduction in earnings of $8,535,
or $0.06 per share, due to the redemption of subsidiary preferred stock in
the second quarter. Excluding the impact of the above non-comparable items,
1999 net earnings improved over the prior year by more than $70 million.
The considerable improvement in operating results was driven primarily by
strong customer response to merchandise offerings and gross margin improvement
in the merchandising segment.
Merchandising segment:
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- --------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Retail net sales $ 304,096 $ 277,839 $ 862,949 $ 802,503
Comp store % change 9% -13% 7% -10%
Catalog net sales (1) 331,016 272,812 1,018,019 898,605
------------ ------------ ------------ ------------
Total net sales 635,112 550,651 1,880,968 1,701,108
Finance revenue 41,442 38,471 117,082 100,869
Other revenue 9,765 9,340 32,363 29,886
------------ ------------ ------------ ------------
Total revenue $ 686,319 $ 598,462 $ 2,030,413 $ 1,831,863
------------ ------------ ------------ ------------
% change 14.7% (6.5)% 10.8% (4.4)%
Gross margin %
to total net sales 34.7% 29.0% 34.2% 29.7%
SG&A % to total revenue 36.5% 37.6% 36.2% 37.4%
Operating income (loss) $ 21,617 $ (17,518) $ 57,766 $ (48,541)
------------ ------------ ------------ ------------
(1) including e-commerce sales
8
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Thirteen weeks ended October 2, 1999 compared to thirteen weeks ended
October 3, 1998
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Total merchandising revenue increased in the thirteen weeks ended
October 2, 1999 compared to the prior year period, driven by a 15 percent
increase in net sales and an increase in finance revenue generated from
FCNB Preferred charge programs.
The net sales improvement included a 21 percent increase in catalog net
sales, including e-commerce, and a 9 percent increase in retail net sales.
The Company attributed the favorable performance to strong customer response
to merchandise offerings. Each merchant division achieved growth in catalog
net sales. Spiegel Catalog had significantly higher productivity on increased
catalog pages circulated. Xxxxx Xxxxx benefited from significant gains in
productivity as catalog net sales increased despite a planned decrease in
pages circulated to marginal customers. Growth in e-commerce sales also
contributed to the favorable catalog net sales results. Retail net sales
results included a 9 percent increase in Xxxxx Xxxxx comparable-store sales,
reflecting an improved merchandise assortment and inventory position compared
to last year.
Finance revenue increased in the thirteen weeks ended October 2, 1999 compared
to the prior year primarily due to growth in the portfolio as well as the
favorable impact of pricing changes implemented in June 1999. Growth in the
FCNB Preferred charge portfolio was driven by higher sales at the merchant
companies accompanied by an increase in customer utilization of Preferred
charge programs. Finance revenue included incremental pretax gains on the
sale of receivables of $1,949 in the 1999 period compared to $3,393 in same
period last year. There have been no significant changes to 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 $39,135 in the
thirteen weeks ended October 2, 1999 compared to the last year period. Key
factors contributing to the merchandising segment's overall progress included
higher gross margins and improved expense ratios realized due to the growth
in revenue accompanied by successful cost-containment initiatives. The
merchandising segment also benefited from a positive earnings contribution
from the FCNB Preferred charge programs.
Gross profit margin on net sales increased to 34.7 percent for the thirteen
weeks ended October 2, 1999 from 29.0 percent for the comparable 1998 period.
The favorable margin performance, driven by Spiegel Catalog and Xxxxx Xxxxx,
resulted from strong 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 36.5 percent of total revenue
compared to 37.6 percent in the comparable period last year. Continued
emphasis on cost controls and a higher level of sales productivity on
catalog mailings realized by Xxxxx Xxxxx and Xxxxxxx Catalog contributed to
the improvement.
Thirty-nine weeks ended October 2, 1999 compared to thirty-nine weeks ended
October 3, 1998
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Total merchandising revenue for the thirty-nine weeks ended October 2, 1999
increased $198,550, or 11 percent, compared to the same period last year.
The growth in revenue was primarily attributable to an 11 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 13 percent increase in catalog net
sales, including e-commerce, and an 8 percent increase in retail net sales.
The Company attributed the favorable performance to strong customer response
to merchandise offerings. Each merchant division achieved growth in catalog
net sales. Spiegel Catalog had significantly higher productivity on increased
catalog pages circulated. Xxxxx Xxxxx sales generated through catalog media
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. Growth in e-commerce sales also contributed to the favorable
catalog net sales results. Retail net sales results included a 7 percent
increase in Xxxxx Xxxxx comparable-store sales, reflecting an improved
merchandise assortment and inventory position compared to last year.
Finance revenue for the thirty-nine week period ended October 2, 1999 was
16 percent higher than the prior year primarily due to growth in the
portfolio as well as improved productivity. The average FCNB Preferred
charge portfolio was 6 percent above the 1998 level due to higher sales at
the merchant companies accompanied by an increase in customer utilization
of Preferred charge programs. 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. Finance revenue included incremental
pretax gains on the sale of receivables of $1,949 in the 1999 period
compared to $3,393 in same period last year. There have been no significant
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 $106,307 in the
thirty-nine weeks ended October 2, 1999 compared to the last year period.
Key factors contributing to the merchandising segment's overall progress
included higher gross margins and improved expense ratios realized due to
the growth in revenue accompanied by successful cost-containment initiatives.
The merchandising segment also benefited from a positive earnings contribution
from the FCNB Preferred charge programs.
Gross profit margin on net sales increased to 34.2 percent for the thirty-nine
weeks ended October 2, 1999 from 29.7 percent for the comparable 1998 period.
The favorable margin performance, driven by Spiegel Catalog and Xxxxx Xxxxx,
resulted from strong 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 36.2 percent of total revenue
compared to 37.4 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 and Xxxxxxx Catalog contributed
to the improvement.
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Bankcard segment:
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- --------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Finance revenue $ 20,311 $ 45,506 $ 53,347 $ 86,704
Operating income $ 4,987 $ 28,156 $ 10,405 $ 47,854
------------ ------------ ------------ ------------
Thirteen weeks ended October 2, 1999 compared to thirteen weeks ended
October 3, 1998
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Bankcard finance revenue decreased 55 percent for the thirteen weeks ended
October 2, 1999 compared to the same period last year. Overall, bankcard
revenue from serviced receivables grew by 48 percent during the period.
However, recognized revenue decreased compared to last year, primarily due
to the impact of the accounting for receivables sold under SFAS No. 125.
While revenue in the 1998 period was favorably impacted by an incremental
pretax gain of $22,021 recognized in accordance with SFAS No. 125, revenue
in the 1999 period was reduced by $566 reflecting a minor revision in the
assumptions utilized to calculate receivable gains. Excluding the impact
of SFAS No. 125 accounting, 1999 bankcard finance revenue decreased 11
percent compared to the prior year due in part to lower late fees realized
resulting from a decline in delinquencies. Additionally, although the
average level of receivables sold increased in the 1999 period compared to
the prior year, the net excess recognized in revenue from these
off-balance-sheet receivables did not increase proportionately. The net
excess for the 1999 period continued to be negatively impacted by an increase
in charge-offs related to certain bankcard test programs initiated in late
1997 and early 1998. In general, newly issued credit programs initially
generate finance revenue without the immediate corresponding charge-offs
associated with extending credit. The 1998 revenue benefited from this
initial phase, while the 1999 results reflect the full impact of these
credit programs.
Reflecting the declines in revenue, bankcard operating income was significantly
lower in the thirteen weeks ended October 2, 1999 compared to the prior year.
This performance was primarily due to certain non-comparable items that
benefited the 1998 period, including the aforementioned bankcard test programs
and gain recognition. The bankcard portfolio continues to record strong growth
and experience favorable operating trends.
Thirty-nine weeks ended October 2, 1999 compared to thirty-nine weeks ended
October 3, 1998
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Bankcard finance revenue decreased 38 percent for the thirty-nine weeks ended
October 2, 1999 compared to the same period last year. Overall, bankcard
revenue from serviced receivables grew by 37 percent during the period.
However, recognized revenue decreased compared to last year, primarily due
to the impact of the accounting for receivables sold under SFAS No. 125.
While revenue in the 1998 period was favorably impacted by an incremental
pretax gain of $25,021 recognized in accordance with SFAS No. 125, revenue
in the 1999 period was reduced by $566 reflecting a minor revision in the
assumptions utilized to calculate receivable gains. Excluding the impact of
SFAS No. 125 accounting, 1999 bankcard finance revenue decreased 13 percent
compared to the prior year due in part to lower late fees realized resulting
from a decline in delinquencies. Additionally, although the average level
of receivables sold increased in the 1999 period compared to the prior year,
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 and early 1998. In general, newly issued credit programs initially
generate finance revenue without the immediate corresponding charge-offs
associated with extending credit. The 1998 revenue benefited from this initial
phase, while the 1999 results reflect the full impact of these credit programs.
11
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Reflecting the declines in revenue, bankcard operating income was markedly
lower in the thirty-nine weeks ended October 2, 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. 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 was $46,931 for the thirty-nine weeks ended October 2, 1999,
5 percent lower than the prior year period. Average debt for the 1999 period
was $736,721 compared to $846,676 for the comparable period last year. Total
debt as of October 2, 1999 was $925,036, slightly below the prior year. 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 revenue
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 $1,411,980 at October 2, 1999, $1,185,730 at
October 3, 1998, and $1,420,730 at January 2, 1999.
Net cash used by operations increased $85,247 in the thirty-nine weeks ended
October 2, 1999 compared to the same period last year. Significant increases
in receivable levels provided $254,574 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 $169,327 in the 1999 period compared to the prior year, driven by
significantly improved operating results and inventory controls. The Company's
consolidated inventories declined 7 percent compared to the prior year, despite
an 11 percent increase in net sales and the addition of 16 retail and outlet
stores.
Net additions to property and equipment for the thirty-nine weeks ended
October 2, 1999 were $19,861 compared to $8,529 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.
12
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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 third quarter 1999
interest expense would have changed by approximately $430. 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 October 2, 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 from the trust.
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 October 2, 1999.
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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 receives certain royalty and
commission payments from the above joint ventures denominated in the
functional currency of the originating party. The Company monitors the
exchange rates related to these currencies on a continual basis and will
enter into forward derivative contracts for foreign currency when deemed
advantageous based on current pricing and historical information. The
Company believes that its foreign exchange risk and the effect of this
hedging activity are not material due to the size and nature of the above
operations.
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 and testing phase of the project is nearly complete, with
over 99 percent of this phase completed as of October 2, 1999. The few
systems remaining include those that are dependent on minor third party
vendor software upgrades 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 and testing effort will be
completed by the end of November 1999. Contingency plans are currently in
place to mitigate the impact of possible system failure.
The Company also has 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 85 percent of these critical vendors indicating that they have already
attained Year 2000 compliance. The Company is monitoring the remaining vendors
to ensure compliance in a timely manner. Contingency plans are 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 be
approximately $11,000. These costs, totaling $9,200 through October 2, 1999,
are funded through current operations and expensed as incurred.
Risks associated with Year 2000 failure range from sporadic delays of limited
scope 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," 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
------------------------- -------------------------- ----------------
/s/ Xxxxx X. Xxxxxxx Office of the President, November 16, 0000
Xxxxx X. Xxxxxxx Chief Financial Officer
(Principal Operating
Executive Officer and
Principal Financial Officer)
/s/ D. Skip Xxxx Vice President - Controller November 16, 1999
D. Skip Xxxx (Principal Accounting Officer
and duly authorized officer of
the Registrant)
