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EX-13 — Annual or Quarterly Report to Security Holders
Exhibit Table of Contents
Exhibit 13
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FINGERHUT COMPANIES, INC.
FIVE-YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
For the Fiscal Year Ended December 26, December 27, December 29, December 30, December 31,
(In thousands, except 1997 1996 1995 1994 1993(e)
per share data)
Earnings data:
Revenues (a) $1,798,617 $1,762,865 $1,814,853 $1,699,772 $1,652,244
Earnings before income
taxes and minority 120,871 64,991 76,306 70,926 111,879
interest (b)
Net earnings 69,329 40,159 50,858 45,925 75,328
Net earnings as a 3.9% 2.3% 2.8% 2.7% 4.6%
percent of revenues
Per Share:
Earnings:
Basic (c) $ 1.50 $ .87 $ 1.11 $ .99 $1.64
Diluted (d) $ 1.40 $ .83 $ 1.05 $ .91 $1.50
Dividends declared $ .16 $ .16 $ .16 $ .16 $ .16
At Fiscal Year-End
(In thousands)
Financial position data:
Total assets $1,751,756 $1,389,698 $1,281,077 $1,097,933 $988,302
Total current debt $144,084 $73,084 $215,099 $ 336 $ 313
Long-term debt and
capitalized leases,
less current portion $345,187 $271,481 $146,564 $246,516 $246,852
Total stockholders' equity $669,985 $605,401 $547,490 $500,950 $472,389
(a)Prior year revenues were restated to reflect the
reclassification of "Discount on sale of accounts
receivable," the "Provision for uncollectible accounts," and
"Administrative and selling expenses" (collection costs)
associated with the receivables sold to "Finance income and
other securitization income, net." These amounts totaled
$264.5 million, $262.5 million, $214.7 million, and $140.4
million for the fiscal years ended December 27, 1996;
December 29, 1995; December 30, 1994; and December 31, 1993,
respectively.
(b)1994 earnings before income taxes and minority interest
included a $29.9 million charge ($19.4 million after tax)
relating to unusual items. 1995 earnings before income taxes
and minority interest included an $8.0 million adjustment
($5.3 million after tax) to these unusual items.
(c)Based on a weighted average of 46,166,842; 46,210,151;
45,834,575; 46,237,706; and 46,019,158 shares of common stock
for the fiscal years ended December 26, 1997; December 27,
1996; December 29, 1995; December 30, 1994; and December 31,
1993, respectively.
(d)Based on a weighted average of 49,377,695; 48,628,308;
48,478,971; 50,270,419; and 50,101,739 shares of common stock
and common stock equivalents for the fiscal years ended
December 26, 1997; December 27, 1996; December 29, 1995;
December 30, 1994; and December 31, 1993, respectively.
(e)In 1993, the Company sold certain assets of COMB Corporation
and FDC, Inc., a subsidiary of Figi's, Inc.
Fingerhut Companies, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS & FINANCIAL CONDITION
RESULTS OF OPERATIONS
Fingerhut Companies, Inc. (the "Company") experiences variances
in quarterly results from year to year that result from changes
in the timing of its promotions, the types of customers and
products promoted and, to some extent, variations in dates of
holidays and the timing of the fiscal quarter ends. In addition,
the individual cost components (product cost, administrative and
selling expenses, and provision for uncollectible accounts) and
gross margin as a percent of net sales may vary from period to
period due to the different types of products, mail programs and
customers promoted.
1997 COMPARED WITH 1996
The Company reported revenues of $1.799 billion in 1997 compared
to $1.763 billion in 1996. 1997 revenues were positively
impacted by a significant increase in finance income and other
securitization income, net, due to the continued strong
performance of Metris Companies Inc. ("Metris"). Revenues also
reflected a decrease in net sales in the Retail Segment as a
result of the Company's strategy to reduce credit risk and
optimize long term customer profitability.
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RETAIL SEGMENT
Highlights of Operations -- For the Fiscal Year Ended
Managed Basis (a):
(In thousands) 1997 1996
Net sales $1,530,228 $1,638,363
Finance income and other revenue 232,181 241,130
Product cost 738,740 827,086
Administrative and selling 610,022 633,448
expenses
Provision for uncollectible 259,981 283,762
accounts
Discount on sale of accounts 66,732 77,447
receivable
Interest expense, net 27,946 25,305
Provision for income taxes 21,267 11,322
Net earnings $37,721 $21,123
(a) Presented in a format consistent with prior periods.
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Highlights of Operations -- Owned For the Fiscal Year Ended
Basis (b):
(In thousands) 1997 1996
Net sales $1,530,228 $1,638,363
Finance income and other (10,877) (23,361)
securitization expense, net
Product cost 738,740 827,086
Administrative and selling 596,084 618,082
expenses
Provision for uncollectible 97,593 112,084
accounts
Interest expense, net 27,946 25,305
Provision for income taxes 21,267 11,322
Net earnings $37,721 $21,123
(b)During 1997, the "Discount on sale of accounts receivable,"
the "Provision for uncollectible accounts" and
"Administrative and selling expenses" (collection costs)
associated with the receivables sold were reclassified to
"Finance income and other securitization expense, net." This
reclassification results in the financial statements being
presented on an "owned" versus "managed" basis. All prior
period financial information was restated to conform with the
current period's presentation. The reclassifications had no
effect on net earnings.
Net sales in 1997 were $1.530 billion compared to net sales of
$1.638 billion in 1996, a decrease of 7 percent. Fingerhut
Corporation ("Fingerhut"), the Company's core business in this
segment, generated net sales of $1.420 billion in 1997 compared
to $1.538 billion in 1996, a decrease of 8 percent. Net sales
from Fingerhut's new customer acquisition programs decreased 13
percent in 1997 to $231 million, due to a 20 percent reduction in
mailings, partially offset by a 10 percent improvement in sales
per mailing. New customer acquisition mailings were lower due to
segmentation actions designed to optimize long term customer
profitability and reduce cost per new customer. Net sales from
Fingerhut's existing customer list declined 7 percent to $1.190
billion, due to a 7 percent reduction in sales per mailing.
Credit actions taken to reduce the number of orders from high
risk customer segments, the UPS strike in August 1997, and
subsequent postal service delays throughout the fourth quarter,
were the primary reasons for the lower sales per mailing. Net
sales from Figi's Inc. ("Figi's") increased 5 percent in 1997 to
$98 million compared to $93 million in 1996 primarily due to an
increase in mailings. Net sales from Infochoice USA, Inc.
("Infochoice") were $2 million in 1997, compared with $2 million
in 1996.
Finance income and other securitization expense, net, was an
expense of $10.9 million for the year compared to an expense of
$23.4 million in 1996. The reduction in expense was primarily
due to a lower provision for uncollectible accounts relating to
receivables sold.
Product cost for the year was $738.7 million, or 48.3 percent of
net sales, compared to $827.1 million, or 50.5 percent of net
sales, during the prior year. The decrease as a percent of net
sales was the result of negotiated cost reductions, partially
driven by favorable currency changes, a change in the sales mix
to more high-margin products, lower product obsolescence expense
and favorable refurbishing costs.
Administrative and selling expenses in 1997 were $596.1 million,
or 39.0 percent of net sales, compared to $618.1 million, or 37.7
percent of net sales, in the prior year. Lower paper prices,
reduced mailings and tighter cost controls resulted in expense
levels below the prior year. The increase as a percent of net
sales was due to lower sales per mailing.
The provision for uncollectible accounts on a managed basis in
1997 was $260.0 million, or 17.0 percent of net sales, compared
with $283.8 million, or 17.3 percent of net sales, for the prior
year. Balances 29 days or more delinquent as a percent of
managed receivables were 22.2 percent, down from 22.9 percent at
the end of 1996.
The effective consolidated tax rate, which includes both the
Retail Segment and Metris, was 37.3 percent in 1997 compared with
36.7 percent in the prior year. The increase in the effective
tax rate was due primarily to additional state income taxes.
The Retail Segment generated net earnings of $37.7 million, or
$.76 per share, compared with $21.1 million, or $.44 per share,
for 1996, an increase of 79 percent.
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FINANCIAL SERVICES SEGMENT (METRIS)
Highlights of Operations -- For the Year Ended Dec. 31,
Managed Basis:
(In thousands) 1997 1996
Net interest income $306,361 $143,491
Provision for loan losses 319,299 136,305
Other operating income 212,869 126,647
Other operating expense 138,048 101,287
Provision for income taxes 23,825 12,530
Minority interest 6,450 980
Net earnings $31,608 $19,036
Total accounts 2,293 1,418
Average managed loans $2,294,893 $1,018,856
Net charge-off ratio 8.3 % 6.2 %
Delinquency ratio 6.6 % 5.5 %
Metris contributed net earnings for the year ended December 31,
1997, of $31.6 million, or $.64 per share, up from $19.0 million,
or $.39 per share for 1996. The 66 percent increase in net
earnings is the result of an increase in net interest income and
other operating income partially offset by increases in the
provision for loan losses and other operating expenses. These
increases are largely attributable to the 125 percent growth in
average managed loans from $1.0 billion at December 31, 1996 to
$2.3 billion at December 31, 1997.
The provision for loan losses on a managed basis was $319.3
million in 1997, compared to $136.3 million in 1996. The
increase primarily reflects higher credit card loan balances as
well as an increase in net charge-offs. The managed net charge-
off rate was 8.3 percent for 1997, compared to 6.2 percent in
1996.
Other operating income on a managed basis increased $86.2 million
to $212.9 million, primarily due to credit card fees, interchange
and other credit card income, which increased to $153.6 million
for 1997, up 74 percent over $88.3 million for 1996. In
addition, fee-based product revenues increased 86 percent to
$55.5 million for 1997, up from $29.9 million for 1996. These
increases were primarily due to the growth in total accounts and
outstanding receivables in the managed credit card loan
portfolio.
Other operating expenses increased to $138.0 million in 1997,
compared to $101.3 million in 1996. The increase in operating
expenses is primarily due to expansion in infrastructure to
support future growth. Metris' managed operating efficiency
ratio improved to 26.6 percent in 1997 from 37.5 percent in 1996.
1996 COMPARED WITH 1995
The Company reported revenues of $1.763 billion in 1996. Revenues
reflected a decrease in net sales as a result of the Company's
strategy to reduce mailings and improve advertising productivity.
As a result of this initiative, sales per mailing with respect to
Fingerhut Corporation's existing customer list increased 14
percent over 1995. 1996 revenues were positively impacted by a
significant increase in finance income and other revenues due to
the continued strong performance of Metris.
[Download Table]
RETAIL SEGMENT
Highlights of Operations -- For the Fiscal Year Ended
Managed Basis (a):
(In thousands) 1996 1995
Net sales $1,638,363 $1,782,282
Finance income and other revenue 241,130 245,001
Product cost 827,086 890,737
Administrative and selling 633,448 687,789
expenses
Provision for uncollectible 283,762 272,295
accounts
Discount on sale of accounts 77,447 82,392
receivable
Interest expense, net 25,305 25,213
Provision for income taxes 11,322 22,580
Net earnings $21,123 $46,277
(a) Presented in a format consistent with prior periods.
[Download Table]
Highlights of Operations -- Owned For the Fiscal Year Ended
Basis (b):
(In thousands) 1996 1995
Net sales $1,638,363 $1,782,282
Finance income and other (23,361) (17,490)
securitization expense, net
Product cost 827,086 890,737
Administrative and selling 618,082 673,456
expenses
Provision for uncollectible 112,084 106,529
accounts
Interest expense, net 25,305 25,213
Provision for income taxes 11,322 22,580
Net earnings $21,123 $46,277
(b)During 1997, the "Discount on sale of accounts receivable,"
the "Provision for uncollectible accounts" and
"Administrative and selling expenses" (collection costs)
associated with the receivables sold, were reclassified to
"Finance income and other securitization expense, net." This
reclassification results in the financial statements being
presented on an "owned" versus "managed" basis. All prior
period financial information was restated to conform with the
current period's presentation. The reclassifications had no
effect on net earnings.
Net sales in 1996 were $1.638 billion compared to net sales of
$1.782 billion in 1995, a decrease of 8 percent. Fingerhut
generated net sales of $1.538 billion in 1996 compared to $1.639
billion in 1995, a decrease of 6 percent. Net sales from
Fingerhut's new customer acquisition programs decreased 5 percent
in 1996 to $264 million. Net sales from Fingerhut's existing
customer list declined 6 percent to $1.274 billion. Both
decreases were primarily due to planned reductions in mailings,
partially offset by higher average order sizes and higher sales
per mailing. Net sales from Figi's Inc. increased 13 percent in
1996 to $93 million compared to $82 million in 1995 due to an
increase in mailings coupled with a higher average order size.
Net sales from Infochoice USA, Inc. were $2 million in 1996
compared to $57 million for 1995. Infochoice owns 50 percent of
USA Direct/Guthy Renker, Inc. ("USA Direct"), which had 1996 net
sales of $10 million. Montgomery Ward Direct L.P. ("MWD"), a
former 50 percent owned affiliate, had net sales of $31 million
for 1996 compared to $165 million for 1995. Because USA Direct
and MWD are both accounted for under the equity method, their
sales are not included as revenues in the Company's consolidated
financial statements. In June 1996, the Company reached an
agreement with Montgomery Ward & Co., Incorporated to withdraw as
a partner in the MWD joint venture. This transaction did not
have a material impact on the Company's consolidated financial
statements.
Finance income and other securitization expense, net, for the
year was an expense of $23.4 million compared to $17.5 million in
1995. The increase in expense was primarily due to a higher
provision for uncollectible accounts relating to receivables
sold, partially offset by the favorable effect of lengthened
payment plans.
Product cost for the year was $827.1 million, or 50.5 percent of
net sales, compared to $890.7 million, or 50.0 percent of net
sales, during the prior year. The increase as a percent of net
sales was primarily due to margin reductions in the core catalog
business as a result of the full year impact of the price value
strategy implemented in mid-1995.
Administrative and selling expenses in 1996 were $618.1 million,
or 37.7 percent of net sales, compared to $673.5 million, or 37.8
percent of net sales, in the prior year. Higher sales per
mailing, coupled with Fingerhut's cost-reduction programs, offset
the impact of higher paper and depreciation costs as well as the
start-up of two phone centers in Tampa, Florida.
The provision for uncollectible accounts in 1996 on a managed
basis was $283.8 million, or 17.3 percent of net sales, compared
with $272.3 million, or 15.3 percent of net sales, for the prior
year. Fingerhut experienced a 1996 deterioration in credit
performance relating to sales booked in the fourth quarter of
1995. This deterioration was driven by a significant increase in
bankruptcies. The increase as a percent of net sales was also
due to the higher ongoing delinquency levels Fingerhut
experienced as a result of a systems error reported in the third
quarter. Fingerhut implemented corrective measures to mitigate
the risk of credit losses, including tighter credit screens as
well as accelerated collection programs.
The effective consolidated tax rate, which includes both the
Retail Segment and Metris, was 36.7 percent in 1996 compared with
33.3 percent in the prior year. The increase in the effective
tax rate was due primarily to a decrease in merchandise donations
as well as additional state income taxes. In addition, the 1995
effective tax rate included a benefit for prior years' net
favorable resolution of an Internal Revenue Service examination.
As a result of the items discussed above, the Retail Segment
generated net earnings of $21.1 million, or $.44 per share,
compared with $46.3 million, or $.96 per share, for 1995.
[Download Table]
FINANCIAL SERVICES SEGMENT (METRIS)
Highlights of Operations -- For the Year Ended Dec. 31,
Managed Basis:
(In thousands) 1996 1995
Net interest income $143,491 $26,354
Provision for loan losses 136,305 26,234
Other operating income 126,647 52,969
Other operating expense 101,287 45,640
Provision for income taxes 12,530 2,868
Minority interest 980 -
Net earnings $19,036 $ 4,581
Total accounts 1,418 703
Average managed loans $1,018,856 $183,274
Net charge-off ratio 6.2% 2.2%
Delinquency ratio 5.5% 4.0%
Metris reported net earnings for the year ended December 31,
1996, of $19.0 million, or $.39 per share, up from $4.6 million,
or $.09 per share for 1995. The 316 percent increase in net
earnings was the result of an increase in net interest income and
other operating income partially offset by increases in the
provision for loan losses and other operating expenses. These
increases are largely attributable to the growth in average
managed loans from $183 million at December 31, 1995 to $1
billion at December 31, 1996, an increase of 456 percent.
The provision for loan losses on a managed basis was $136.3
million in 1996, compared to $26.2 million in 1995. The increase
primarily reflects an increase in credit card loans as well as an
increase in net charge-offs consistent with the continued
seasoning of the portfolio and industry trends. The managed net
charge-off rate was 6.2 percent for 1996, compared to 2.2 percent
in 1995.
Other operating income on a managed basis increased $73.7 million
to $126.6 million, primarily due to credit card fees, interchange
and other credit card income which increased to $88.3 million for
1996, up 298 percent over $22.2 million for 1995. In addition,
fee-based product revenues increased 348 percent to $29.9 million
for 1996, up from $6.7 million for 1995. These increases were
primarily due to the growth in total accounts and outstanding
receivables in the managed credit card loan portfolio.
Other operating expenses increased to $101.3 million in 1996,
compared to $45.6 million in 1995. However, Metris' managed
operating efficiency ratio improved to 37.5 percent in 1996 from
57.5 percent in 1995. The increase in operating expenses is
primarily due to expansion in the infrastructure to support the
growth of all three Metris businesses: consumer credit products,
extended service plans, and fee-based products and services.
LIQUIDITY AND CAPITAL RESOURCES (CONSOLIDATED)
The Company funds its operations through internally generated
funds, the sale of accounts receivable pursuant to the Fingerhut
Master Trust and the Metris Master Trust, third party bank
conduits, borrowings under the Company's Amended and Restated
Revolving Credit Facility and Metris' Revolving Credit Facility
(the "Revolving Credit Facilities") and the issuance of long-term
debt and common stock.
The proceeds from the sale of Fingerhut accounts receivable were
$1.205 billion and $1.280 billion at December 26, 1997 and
December 27, 1996, respectively. Net proceeds received from the
sale of Metris credit card receivables were $3.057 billion at
December 31, 1997 and $1.397 billion at December 31, 1996, of
which $29.3 million and $17.0 million, respectively, was
deposited in investor reserve accounts held by the trustee of the
Metris Master Trust for the benefit of the Metris Master Trust's
certificateholders.
In December 1996, the Fingerhut Master Trust Series 1994-1
certificates commenced controlled amortization, whereby
collections on the securitized receivables were used to pay down
the principal portion of the underlying certificates. In January
1997, the Company issued Series 1997-1 variable funding
certificates to refinance $790.0 million of the amortizing
certificates. The monthly proceeds generated from Series 1997-1,
combined with the proceeds of the issuance of additional
commercial paper under the Company's asset-backed commercial
paper program, was sufficient to cover the monthly pay-down of
the amortizing 1994-1 certificates. The Company plans to support
future receivables growth through the sale and issuance of
additional certificates by the Master Trusts and through
borrowings under the Revolving Credit Facilities. During 1998,
the Company plans to refinance Series 1997-1 with the proceeds
from the issuance of approximately $900 million of asset-backed
term certificates.
In December 1997, the Company entered into an agreement which
allows the Company to sell, to a third party conduit on a
continuous basis, an undivided interest in a pool of revolving
receivables arising out of private label credit card accounts
originated by Fingerhut National Bank. Per the agreement,
amortization begins in May 1998, whereby collections on the
securitized receivables will be used to pay down the balance of
the pool. Management expects to amend the Fingerhut Master Trust
in 1998 to include the revolving receivables.
In May 1997, the Metris Master Trust issued Series 1997-1
certificates to third parties with a principal amount of $794.8
million, generating net proceeds of $792.2 million of which
$667.7 million was used to reduce the Class A Variable Funding
Certificate issued under Series 1995-1. The Series 1997-1
certificates are scheduled to begin accumulating principal
collections in March 2001.
In September 1997, Metris acquired a $317.0 million credit card
portfolio from Key Bank USA, National Association. In October
1997, Metris acquired a $405.0 million credit card portfolio from
Mercantile Bank, National Association. These credit card
receivables were securitized and sold to investors through a bank
sponsored, multi-seller conduit.
In November 1997, the Metris Master Trust issued Series 1997-2
certificates to third parties with a principal amount of $654.5
million, generating net proceeds of $652.0 million of which
$478.0 million was used to reduce the Class A Variable Funding
Certificate issued under Series 1995-1. The Series 1997-2
certificates are scheduled to begin accumulating principal
collections in October 2001.
The Revolving Credit Facilities provide for aggregate
commitments of up to $500.0 million, of which $200.0 million
represents Fingerhut's credit facility and $300.0 million
represents Metris' credit facility. The expiration date for both
facilities is September 2001. Under the Revolving Credit
Facilities, outstanding revolving credit balances totaled $144.0
million and outstanding letters of credit totaled $6.0 million,
as of year-end 1997. As of year-end 1996, the Company had
outstanding revolving credit balances of $73.0 million and
outstanding letters of credit of $5.9 million. Additional
outstanding letters of credit under a separate agreement
aggregated $28.4 million and $23.2 million at December 26, 1997
and December 27, 1996, respectively.
In February 1997, the Company completed an exchange offer whereby
substantially all of the $125.0 million unregistered notes issued
in September 1996, were exchanged for registered notes with
substantially identical terms. In November 1997, Metris sold
$100.0 million of seven-year notes via a private placement. In
December 1997, the Company paid $25.0 million on its privately
placed senior notes. Thus, the Company had fixed rate notes
outstanding of $345.0 million as of December 26, 1997, compared
to fixed rate notes outstanding of $270.0 million as of December
27, 1996.
The Company generated $16.9 million of cash from operations in
1997 compared with $26.9 million generated from operations in
1996. This $10.0 million decrease in cash generated from
operations resulted from increased working capital requirements,
partially offset by the increase in earnings. The most
significant items affecting working capital were increases in
Metris' customer accounts receivable, other payables due to
credit card securitizations, net, and deferred income taxes. The
change in customer accounts receivable from a $157.0 million use
of cash in 1996 to a $227.2 million use of cash in 1997 resulted
primarily from the increase in the growth of retained receivables
associated with Metris credit card accounts issued or purchased
by Direct Merchants Bank, partially offset by the increase in
payables due to credit card securitizations, net. Deferred
income taxes increased primarily as a result of an increase in
Metris' reserve provisions for uncollectible accounts.
Net cash used by investing activities was $70.7 million in 1997
compared with $51.9 million in 1996. The increase was due to
goodwill recorded in the current year through Metris' portfolio
acquisitions. This increase was partially offset by a lower
level of capital spending in 1997. Higher capital expenditures
in 1996 included spending relating to the western distribution
center in Spanish Fork, Utah. In addition, the owner of certain
office and warehouse facilities leased to the Company exercised
its right to require the Company to repurchase those facilities
for approximately $14.1 million, which was completed in January
1996.
Net cash provided by financing activities was $138.2 million in
1997 compared with $19.9 million in 1996. This net $118.3
million increase was due primarily to the increase in borrowings
under the Revolving Credit Facilities and reduced repayments of
long-term debt.
During 1994, the Company's Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's common
stock that may be made from time to time at prevailing prices in
the open market or by block purchase and may be discontinued at
any time. The purchases are made within certain restrictions
relating to volume, price and timing in order to minimize the
impact of the purchase on the market for the Company's common
stock. During 1997, the Company repurchased at prevailing market
prices 231,900 shares of its common stock for an aggregate of
$3.4 million. Total purchases through December 26, 1997 were
1,612,200 shares for an aggregate of $24.9 million.
On October 9, 1997, the Company announced that its board of
directors had approved the filing of an application with the
Internal Revenue Service (IRS) for a ruling on a tax free
distribution of its stock in Metris. The Company filed the
ruling request with the IRS on October 23, 1997. The proposed
spin off of Metris is subject to receipt of a favorable ruling
from the IRS, to approval by Fingerhut's Board of Directors, and
to market conditions. If approved, the spin off is expected to
be completed during 1998. Should the spin off not occur, other
actions such as the Company's sale of Metris shares in the open
market and/or Metris' issuance of additional shares via a public
offering will be considered.
On January 22, 1998, the Company declared a cash dividend of $.04
per share, or an aggregate of $1.9 million, payable on February
19, 1998 to shareholders of record as of the close of business on
February 5, 1998.
The Company believes it will have sufficient funds available to
meet current and future commitments. For further discussion of
the above financing arrangements, see the Notes to Consolidated
Financial Statements.
MARKET RISK
The Company's principal market risk relates to interest rate
sensitivity, which is the risk that future changes in interest
rates will reduce net earnings or the net assets of the Company.
To manage the Company's direct risk to changes in market interest
rates, management actively monitors the interest sensitive
components of the Company's owned and managed balance sheet as
well as market interest rates in order to minimize the impact of
changes in interest rates on the fair market value of assets, net
earnings and cash flow.
The Company's primary owned and managed assets are installment
customer accounts receivable, which are at a fixed rate, and
revolving customer accounts receivable, which are virtually all
priced at rates indexed to the variable prime rate. On balance
sheet owned receivables are funded through a combination of the
Company's $500.0 million Revolving Credit Facilities, which are
indexed to the variable London Interbank Offered Rate (LIBOR),
$345.0 million in fixed rate long-term debt, and stockholders'
equity. The Company's off balance sheet managed accounts
receivables indexed to variable commercial paper rates, as well
as term certificates which are indexed to LIBOR or at fixed
rates.
Certificates issued from the trusts are either fixed or floating
rate. In the cases where fixed rate series are issued and backed
by floating rate assets, the Company has entered into interest
rate swap contracts with several bank counterparties in a hedged
(notional) amount equal to the total amount of the fixed rate
funding. This hedging activity offsets the impact of the fixed
rate funding of the Company's residual cash flow and income by
paying a floating LIBOR rate to the counterparties in exchange
for a fixed rate comparable to the rate of the trust's term
funding. Conversely, where floating rate series are issued and
backed by fixed rate assets, the Company has entered into
interest rate swap contracts with several bank counterparties.
This hedging activity minimizes the impact of the floating rate
trust funding of the Company's residual cash flow and income by
paying a fixed rate to the counterparties in exchange for a
floating rate which is comparable to the rate of the trust's term
funding.
The primary measure of interest rate risk is the simulation of
net income under different interest rate environments. An
approach used by management to quantify interest rate risk is a
sensitivity analysis. This approach calculates the impact on net
earnings, relative to a base case scenario, of rates increasing
or decreasing gradually over the next 12 months by 200 basis
points for Metris credit card receivables and by 300 basis points
for the Retail Segment. The aforementioned changes in interest
rates affecting the Company's financial instruments, including
both debt obligations and receivables, would result in
approximately a $2.0 million impact to net earnings. As interest
rates increase, net earnings increase; as interest rates
decrease, net earnings decrease.
YEAR 2000 ISSUE
The "Year 2000" issue developed because most computer systems and
programs were designed to record years (e.g. `1998') as two-digit
fields (e.g. `98'). When the year 2000 begins, these systems may
interpret "00" as the year 1900 and either stop processing date-
related computations or process them incorrectly. To prevent
this, companies need to examine their computer systems and
programs, fix the problem and test the results. Year 2000
compliance must be achieved on or before December 31, 1999.
Also, certain systems currently refer to dates beyond December
31, 1999 and, therefore, have required earlier compliance.
The Company, as with all database marketing companies, is heavily
dependent upon computer systems for all phases of its operations.
For this reason, it is aggressively addressing the Year 2000
issue to mitigate the effect on software performance. The
Company is also working with its significant suppliers and
service providers to assure that potential failures in these
organizations will have minimal impacts on the Company.
In early 1996, a comprehensive effort to identify and correct the
Year 2000 programming issues began. By mid-1996 the most
critical mainframe processing system was converted to be Year
2000 compliant and the Company initiated a large project to
address all remaining systems. This project consists of many sub-
projects which will span the remainder of 1998 and part of 1999.
In late 1997, a Year 2000 Project Office was created to oversee
the project, to address all related business issues and to
facilitate communication with significant suppliers and service
providers. As of December 26, 1997, the Company had spent
approximately $5 million on the project with an estimated expense
ranging from $11 to $13 million remaining. The Company believes
that it has allocated adequate resources to achieve Year 2000
compliance and believes that the cost of this effort will not
have a material effect on its financial position or liquidity.
EFFECTS OF INFLATION AND FOREIGN EXCHANGE
Since the Company's inventory turns approximately four times a
year, the product cost reported in the financial statements, on a
first-in, first-out basis, would not have been materially
different from the product cost at current prices. Also, since
the Company does not rely on any particular product group or
brand, management believes that the Company can adjust its
product mix to reduce the effects of price changes on its overall
merchandise base.
Due to the timing of the Company's promotions, the Company is
generally able to reflect cost increases and decreases resulting
from the effects of inflation and foreign currency fluctuations
in its selling prices. The Company imports certain products from
foreign countries. It is estimated that a 10 percent change in
exchange rates would cause less than a 1 percent change in
product cost.
Fingerhut Companies, Inc.
FORWARD LOOKING STATEMENTS
This annual report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements include statements regarding intent,
belief or current expectations of the Company and its management.
Shareholders and prospective investors are cautioned that any
such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties that
may cause the Company's actual results to differ materially from
the results discussed in the forward-looking statements,
including: general economic conditions affecting disposable
consumer income such as employment, business conditions, interest
rates and taxation; risks associated with unsecured credit
transactions; interest rate risks; seasonal variations in
consumer purchasing activities; increases in postal and paper
costs; competition in the retail and direct marketing industry;
dependence on the securitization of accounts receivable and
credit card loans to fund operations; state and federal laws and
regulations related to advertising, offering and extending
credit, charging and collecting state sales/use taxes; product
safety; adverse litigation costs; and risks of doing business
with foreign suppliers. Each of these factors is more fully
discussed in Exhibit 99 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 26, 1997.
[Download Table]
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the fiscal year ended December 26, December 27, December 19,
(In thousands, except share and 1997 1996 1995
per share data)
Revenues:
Net sales $1,534,967 $1,652,869 $1,793,727
Finance income and other 263,650 109,996 21,126
securitization income, net
1,798,617 1,762,865 1,814,853
Costs and expenses:
Product cost 738,830 830,423 892,736
Administrative and selling 759,687 708,477 708,946
expenses
Provision for uncollectible 141,582 130,561 110,922
accounts
Interest expense, net 37,647 28,413 25,943
1,677,746 1,697,874 1,738,547
Earnings before income taxes and 120,871 64,991 76,306
minority interest
Provision for income taxes 45,092 23,852 25,448
Net earnings before minority 75,779 41,139 50,858
interest
Minority interest (6,450) (980) -
Net earnings $69,329 $ 40,159 $50,858
Earnings per share:
Basic $ 1.50 $ .87 $ 1.11
Diluted $ 1.40 $ .83 $ 1.05
Weighted average shares 49,377,695 48,628,308 48,478,971
outstanding
See accompanying Notes to Consolidated Financial Statements.
[Download Table]
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 26, December 27,
(In thousands) 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $145,418 $ 61,003
Accounts receivable 607,874 453,867
Retained interest in 406,650 329,926
securitized receivables
Less: reserve for
uncollectible accounts and
unearned finance income (190,777) (187,233)
Accounts receivable 823,747 596,560
Inventories 124,424 127,735
Promotional material 64,440 60,871
Deferred income taxes 197,355 166,879
Other 13,708 12,815
Total current assets 1,369,092 1,025,863
Property and equipment 272,190 285,182
Excess of cost over fair value of 77,161 42,601
net assets acquired
Customer lists 8,401 9,801
Other assets 24,912 26,251
$1,751,756 $ 1,389,698
LIABILITIES
Current liabilities:
Accounts payable $177,021 $ 164,557
Accrued payroll and employee 57,860 46,723
benefits
Other accrued liabilities 93,037 78,239
Revolving credit facility 144,000 73,000
Payables due to credit card 134,562 36,619
securitizations, net
Current portion of long-term 84 84
debt
Current income taxes payable 71,659 60,721
Total current liabilities 678,223 459,943
Long-term debt, less current 345,187 271,481
portion
Deferred income taxes 20,441 21,744
Other non-current liabilities 8,130 7,692
1,051,981 760,860
Minority interest 29,790 23,437
STOCKHOLDERS' EQUITY
Preferred stock - -
Common stock 463 462
Additional paid-in capital 292,407 288,793
Unearned compensation (738) (1,856)
Earnings reinvested 377,853 318,002
Total stockholders' equity 669,985 605,401
$1,751,756 $ 1,389,698
See accompanying Notes to Consolidated Financial Statements.
[Download Table]
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the fiscal year ended December 26, December 27, December 29,
(In thousands) 1997 1996 1995
Cash flows from operating
activities:
Net earnings $69,329 $40,159 $50,858
Adjustments to reconcile net
earnings to net cash
provided (used) by operating
activities:
Depreciation and 55,554 52,464 47,103
amortization
Amortization of unearned 1,118 2,922 -
compensation
Minority interest in 6,353 980 -
earnings
Change in assets and
liabilities:
Accounts receivable (227,187) (156,956) (87,999)
Inventories 3,311 28,617 2,696
Promotional material and (4,462) 30,213 (21,777)
other current assets
Accounts payable 12,464 (20,918) 29,354
Payables due to credit
card securitizations, net 97,943 61,191 (24,572)
Accrued payroll and 11,137 6,851 (19)
employee benefits
Accrued liabilities 14,798 4,902 (6,921)
Current income taxes 11,735 18,634 1,407
payable
Deferred and other income (31,779) (37,196) (12,946)
taxes
Other (3,448) (5,010) (6,267)
Net cash provided (used) by 16,866 26,853 (29,083)
operating activities:
Cash flows from investing
activities:
Additions to property and (32,327) (51,855) (94,442)
equipment
Excess of cost over fair
value of credit card (38,330) - -
portfolio acquisitions
Net cash used by investing (70,657) (51,855) (94,442)
activities
Cash flows from financing activities:
Proceeds from long-term debt 100,000 125,000 -
Repayments of long-term debt (26,294) (100,098) (381)
Revolving credit facility 71,000 (42,000) 115,000
Repurchase of common stock (3,385) (4,877) (7,862)
Issuance of common stock 4,272 1,881 4,829
Sale of minority interest in - 47,384 -
subsidiary
Cash dividends paid (7,387) (7,394) (7,334)
Net cash provided by financing 138,206 19,896 104,252
activities
Net increase (decrease) in 84,415 (5,106) (19,273)
cash and cash equivalents
Cash and cash equivalents at 61,003 66,109 85,382
beginning of year
Cash and cash equivalents at $145,418 $61,003 $66,109
end of year
Supplemental noncash investing and
financing activities:
Net tax benefit from exercise
of non-qualified stock
options, disqualified
dispositions of ESPP shares,
and vesting of restricted
stock $ 797 $ 293 $1,354
Issuance of restricted stock 204 $4,778 $ -
The Company included in cash and cash equivalents liquid
investments with maturities of 15 days or less.
See accompanying Notes to Consolidated Financial Statements.
[Enlarge/Download Table]
Fingerhut Companies, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common stock
Additional
Number of Par paid-in Earnings Unearned
(In thousands, shares value capital reinvested compensation Total
except share data)
Balance, December 30, 1994 45,572,655 $456 $253,926 $246,568 $ - $ 500,950
Stock repurchase (214,100) (2) (1,192) (1,974) - (3,168)
Exercise of stock options 471,599 4 4,718 - - 4,722
Employee stock purchase plan 119,568 1 1,465 (4) - 1,462
Cash dividends paid - - - (7,334) - (7,334)
Net earnings - - - 50,858 - 50,858
Balance, December 29, 1995 45,949,722 459 258,917 288,114 - 547,490
Stock repurchase (358,800) (3) (1,997) (2,877) - (4,877)
Exercise of stock options 109,900 1 1,012 - - 1,013
Employee stock purchase plan 100,141 1 1,160 - - 1,161
Issuance of restricted stock,
net of forefeitures 353,917 4 4,774 - (4,778) -
Compensation expense - - - - 2,922 2,922
Excess of market value over
book value of minority
interest sold - - 24,927 - - 24,927
Cash dividends paid - - - (7,394) - (7,394)
Net earnings - - - 40,159 - 40,159
Balance, December 27, 1996 46,154,880 462 288,793 318,002 (1,856) 605,401
Stock repurchase (231,900) (2) (1,292) (2,091) - (3,385)
Exercise of stock options 300,740 3 4,007 - - 4,010
Employee stock purchase plan 55,159 - 695 - - 695
Issuance of restricted stock,
net of forfeitures 13,582 - 204 - (204) -
Compensation expense - - - - 1,322 1,322
Cash dividends paid - - - (7,387) - (7,387)
Net earnings - - - 69,329 - 69,329
Balance, December 26, 1997 46,292,461 $463 $292,407 $377,853 $(738) $669,985
See accompanying Notes to Consolidated Financial Statements.
Fingerhut Companies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Fingerhut Companies, Inc. (the "Company") is a database
marketing company selling a broad range of products and
services to moderate to middle income consumers via catalogs,
telemarketing, television and other media.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of
the Company and its wholly owned and majority owned
subsidiaries, after elimination of all material intercompany
transactions and balances. Minority interest represents
minority stockholders' approximate 17 percent share of the
equity in Metris Companies Inc. ("Metris") (see Note 16). At
December 26, 1997 and December 27, 1996, the Company's
principal subsidiaries were Fingerhut Corporation
("Fingerhut"), Metris, Figi's Inc. ("Figi's") and Infochoice
USA, Inc. ("Infochoice").
Reclassifications have been made to prior years' Consolidated
Financial Statements whenever necessary to conform to the
current year's presentation.
Fiscal Year
The Company's fiscal year ends on the last Friday in December.
The fiscal years ended December 26, 1997, December 27, 1996
and December 29, 1995 included 52 weeks. The accounts of
Metris are on a calendar year basis.
Revenue Recognition
Substantially all of Fingerhut's sales are made on the
installment contract basis. Finance income on installment
contracts (net of estimated returns and exchanges, allowances,
uncollectible amounts and collection costs) is recognized using
an effective interest method over the weighted average of the
contract periods (which approximates eighteen months) or when
collected, whichever is faster. When accounts receivable are
sold (see Note 3), finance income, net, is recognized.
Sales are recorded at the time of shipment and a provision for
anticipated merchandise returns and allowances, net of
exchanges, is recorded based upon historical experience. The
provision charged against sales for 1997, 1996 and 1995
amounted to $216.0 million, $249.9 million and $295.9 million,
respectively.
Amounts billed to customers for shipping and handling of orders
are netted against the associated costs.
Interest income on credit card receivables is accrued and
earned based on the principal amount of the receivables
outstanding using the effective yield method. Accrued interest
is classified on the balance sheet with the related credit card
receivables. Interest income is generally recognized until a
loan is charged off.
Beginning in 1997, the sale of receivables has been recorded in
accordance with Statement of Financial Accounting Standards No.
125 (FAS 125), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Upon
sale, the sold receivables are removed from the balance sheet
and the related financial and servicing assets controlled and
liabilities incurred are initially measured at fair value, if
practicable. FAS 125 also requires that servicing assets and
other retained interests in the transferred assets be measured
by allocating the previous carrying amount between the assets
sold, if any, and retained interests, if any, based on their
relative fair values at the date of the transfer. The adoption
of FAS 125 did not have a material effect on the Company's
financial statements.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
128 (FAS 128), "Earnings Per Share." The Company adopted the
provisions of FAS 128 in fiscal 1997. FAS 128 requires
disclosure of earnings per share in both Basic and Diluted
format. Basic earnings per share is computed by dividing net
earnings by the weighted average shares of common stock
outstanding during the year. Diluted earnings per share is
computed by dividing net earnings by the weighted average
shares of common stock and common stock equivalents outstanding
during the year. The dilutive effect of the potential exercise
of outstanding options to purchase shares of common stock is
calculated using the treasury stock method. A reconciliation
of the calculation is as follows:
[Download Table]
In thousands, except per For the Year Ended
share data December 26, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
Income available to common $69,329 46,167 $ 1.50
stockholders
Effect of Dilutive Securities:
Options - 3,211
Diluted EPS:
Income available to common
stockholders and assumed
conversion $69,329 49,378 $ 1.40
[Download Table]
In thousands, except per For the Year Ended
share data December 27, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
Income available to common $40,159 46,210 $ .87
stockholders
Effect of Dilutive Securities:
Options - 2,418
Diluted EPS:
Income available to common
stockholders and assumed
conversion $40,159 48,628 $ .83
[Download Table]
In thousands, except per For the Year Ended
share data December 29, 1995
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS:
Income available to common $50,858 45,835 $ 1.11
stockholders
Effect of Dilutive Securities:
Options - 2,644
Diluted EPS:
Income available to common
stockholders and assumed
conversion $50,858 48,479 $ 1.05
Inventories
Inventories, principally merchandise, are stated at the lower
of cost (as determined on a first-in, first-out basis) or
market. The Company has established a reserve for excess and
obsolete inventory, which is based on management's best
estimates of the amount of inventory that is slow moving or
subject to obsolescence. The estimates are subject to change
in the near term, depending on changes in economic conditions
and other factors.
Promotional Material
Promotional material primarily includes free gifts and items in
inventory associated with direct response advertising (paper,
printing and postage). The cost of direct response advertising
is deferred and expensed over the period during which the
orders are expected, generally one to four months. The amount
of direct response advertising included in the Consolidated
Statements of Financial Position is not material. The cost of
non-direct response advertising is expensed as incurred.
Credit Card Origination Costs
Metris defers direct credit card origination costs associated
with successful credit card solicitations that it incurs in
transactions with independent third parties, and certain other
costs that it incurs in connection with loan underwriting and
the preparation and processing of loan documents. These
deferred credit card origination costs are netted against the
related credit card annual fees, if any, and amortized on a
straight-line basis over the cardholder's privilege period,
generally 12 months, as an adjustment to "Finance income and
other securitization income, net."
Property and Equipment
Property and equipment are stated at cost and depreciated or
amortized on a straight-line basis over their estimated
economic useful lives (30 years for buildings; five years for
software; three to 10 years for machinery and equipment,
furniture and fixtures; and over the estimated useful life of
the property or the life of the lease, whichever is shorter,
for leasehold improvements). The Company capitalizes software
developed for internal use that represents major enhancements
and replacements of operating and management information
systems.
Intangible Assets
The excess of cost over fair value of net assets acquired is
amortized on a straight-line basis over 40 years.
The ongoing cost of developing and maintaining customer lists
is charged to operations as incurred. Customer lists obtained
by the acquisition of a business are capitalized at fair market
value and amortized over their estimated useful lives,
approximately 15 years.
At each balance sheet date, management assesses whether there
has been an impairment in the carrying value of intangible
assets, primarily by comparing current and projected sales,
operating income and annual cash flows with the related annual
amortization expense. Based on this assessment, management has
concluded that intangible assets are fully realizable.
Income Taxes
The Company provides for deferred taxes on the temporary
differences between the financial statement carrying amounts
and the tax bases of assets and liabilities that will result in
future taxable or deductible amounts. The Company provides for
deferred taxes at the enacted tax rate that is expected to
apply when the temporary differences reverse.
Pervasiveness of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock-Based Employee Compensation
Statement of Financial Accounting Standards No. 123 (FAS 123),
"Accounting for Stock-Based Compensation," encourages, but does
not require companies to record compensation cost for stock-
based employee compensation plans at fair value. The Company
has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at
the date of the grant over the amount an employee must pay to
acquire the stock. Compensation cost for restricted stock is
recorded over the vesting period of the awards based on the
fair market value of the Company's stock on the date of grant.
See Note 14.
Reclassifications
"Discount on sale of accounts receivable," the "Provision for
uncollectible accounts" and "Administrative and selling
expenses" (collection costs) associated with the receivables
sold, were reclassified to "Finance income and other
securitization income, net." All prior-period financial
information was restated to conform with the current period's
presentation, and the reclassifications had no effect on net
earnings.
Newly Issued Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 (FAS 130), " Reporting Comprehensive Income."
This statement is effective for fiscal years beginning after
December 15, 1997, and amends several FASB Statements. The
Company does not believe implementation will have a material
impact on the consolidated financial statements and the Company
intends to adopt this statement prospectively, in the first
quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (FAS 131), " Disclosures about Segments of an
Enterprise and Related Information." This statement is
effective for fiscal years beginning after December 15, 1997,
and supersedes and amends several FASB Statements, including
Statement of Financial Accounting Standards No. 14 (FAS 14), "
Financial Reporting for Segments of a Business Enterprise."
The Company does not believe implementation will have a
material impact on the consolidated financial statements and
the Company intends to adopt this statement prospectively, in
the first quarter of 1998.
3. SALE OF ACCOUNTS RECEIVABLE
Fingerhut Master Trust and Third Party Conduits
The Fingerhut Master Trust allows Fingerhut to sell, on a
continuous basis, an undivided interest in a pool of customer
accounts receivables, subject to meeting certain eligibility
requirements. In June 1994, the Fingerhut Master Trust issued
the Series 1994-1 certificates which raised $900.0 million of
proceeds. The Series 1994-1 certificates commenced controlled
amortization in December 1996. In November 1994, the Fingerhut
Master Trust issued the Series 1994-2 variable funding
certificates with maximum proceeds of $490.4 million. The
Series 1994-2 amortization period is currently scheduled to
begin in May 1999. In January 1997, the Fingerhut Master Trust
issued the Series 1997-1 variable funding certificates to
refinance $790.0 million of the amortizing certificates.
During 1998, the Company plans to refinance Series 1997-1 with
the proceeds from the issuance of approximately $900.0 million
of asset-backed term certificates.
In December 1997, the Company entered into an agreement that
allows the Company to sell, to a third party conduit on a
continuous basis, an undivided interest in a pool of revolving
receivables arising out of private label credit card accounts
originated by Fingerhut National Bank. Per the agreement,
amortization begins in May 1998, whereby collections on the
securitized receivables will be used to pay down the balance of
the pool. Management expects to amend the Fingerhut Master
Trust in 1998 to include the revolving receivables.
The proceeds from the sale of accounts receivable were $1.205
billion and $1.280 billion at December 26, 1997 and December
27, 1996, respectively. The acceleration of financing income
on sold receivables resulted in a 1997 gain on sale of $2.3
million.
Included in "Finance income and other securitization income,
net" is the discount on sale of accounts receivable which is
comprised of the interest, discount and administrative and
other fees paid or accrued to the purchasers of the accounts
receivables sold. The discount, determined under the Fingerhut
Master Trust, approximates the prevailing short-term London
InterBank Offered Rate (LIBOR) and commercial paper rates for
high grade unsecured notes plus a credit spread and
administrative fees. The rates (including administrative fees)
applicable to receivables sold as of December 26, 1997 and
December 27, 1996 were 6.5 percent and 6.4 percent,
respectively.
Prior to implementation of FAS 125, the Company had included in
"Other accrued liabilities" the estimated expenses related to
the subsequent collections of the receivables sold, which
amounted to $18.1 million for 1996. Under FAS 125, no
servicing asset or liability is recorded as fees charged are
expected to cover related expenses.
Metris Master Trust
In May 1995, the Company established the Metris Master Trust.
The Metris Master Trust allows Metris to sell, on a continuous
basis, an undivided interest in a pool of credit card
receivables generated or acquired by Direct Merchants Credit
Card Bank, a subsidiary of Metris. In May 1995, the Metris
Master Trust issued the Series 1995-1 variable funding
certificates with maximum proceeds of $512.6 million and an
amortization period scheduled to begin in May 1999. In
September 1996, the Company amended Series 1995-1 to increase
the maximum proceeds to $1.025 billion. In April 1996, the
Metris Master Trust issued the Series 1996-1 certificates with
a principal amount of $655.5 million, generating proceeds of
$653.9 million, of which $400.0 million was used to pay down
asset-backed commercial paper supported by the Class A Variable
Funding Certificate issued under Series 1995-1. The Series
1996-1 certificates begin to amortize in August 1998.
In May 1997, the Metris Master Trust issued Series 1997-1
certificates with a principal amount of $794.8 million,
generating proceeds of $792.2 million of which $667.7 million
was used to reduce the Class A Variable Funding Certificate
issued under Series 1995-1. The Series 1997-1 certificates are
scheduled to begin accumulating principal collections in March
2001, however, the accumulation period could potentially begin
at a later date. The expected final payment date for these
certificates is in April 2002.
In September 1997, Metris acquired a $317 million credit card
portfolio from Key Bank USA, National Association. In October
1997, Metris acquired a $405 million credit card portfolio from
Mercantile Bank, National Association. These credit card
receivables were securitized and sold to investors with a
portion retained, which is included in "Retained interest in
securitized receivables."
In November 1997, the Metris Master Trust issued Series 1997-2
certificates to third parties with a principal amount of $654.5
million, generating net proceeds of $652.0 million of which
$478.0 million was used to reduce the Class A Variable Funding
Certificate issued under Series 1995-1. The Series 1997-2
certificates are scheduled to begin accumulating principal
collections in October 2001, however, the accumulation period
could potentially begin at a later date. The expected final
payment date for these certificates is in November 2002.
Net proceeds generated from the sale of credit card receivables
to the Metris Master Trust were $3.057 billion at December 31,
1997 and $1.397 billion at December 31, 1996, of which $29.3
million and $17.0 million, respectively, was deposited in an
investor reserve account held by the trustee of the Metris
Master Trust for the benefit of the Trust's certificate-
holders.
A credit risk exists for losses on receivables in which the
certificate purchasers have an undivided interest, up to the
amount of the Company's retained interest in the Fingerhut
Master Trust, the Metris Master Trust, and the third party
conduits. Any losses beyond that level are the responsibility
of the certificate purchasers.
4. ACCOUNTS RECEIVABLE
Substantially all of the Company's accounts receivable
were generated by Fingerhut National Bank, Direct Merchants
Credit Card Bank and Figi's. Fingerhut uses fixed-term, fixed-
payment installment plans with terms up to 36 months (excluding
deferred billing periods of up to five months) and finance
charge rates of 24.9 percent. Beginning in 1996, Fingerhut
began converting its customers from existing fixed payment
installment plans to revolving credit plans with finance charge
rates of prime plus 16.4 percent (24.9 percent at December 26,
1997). Direct Merchants Bank grants credit card revolving
lines of credit which typically include an annual fee and
floating rates of interest ranging from 14.9 percent to 26.5
percent, excluding current year portfolio acquisitions. Figi's
uses fixed-term, fixed-payment plans with terms up to three
months (excluding deferred billing periods of up to
approximately three months) with no finance charge.
Accounts receivable are classified as current assets and
include some which are due after one year, consistent with
industry practice. Accounts receivable, net of
amounts sold, consists of the following:
[Download Table]
For the fiscal year ended
(In thousands) 1997 1996
Customer receivables (Retail) $339,553 $389,394
Retained interest in 178,652 171,537
securitized receivables
Reserve for uncollectible
accounts, net
of anticipated recoveries (100,901) (117,296)
Reserve for returns and (12,322) (13,319)
exchanges
Other reserves (22,765) (19,820)
Net collectible amount 382,217 410,496
Unearned finance income (22,750) (23,969)
Accounts receivable 359,467 386,527
Credit card and other 268,321 64,473
receivables (Metris)
Retained interest in 227,998 158,389
securitized receivables
Reserve for uncollectible
accounts, net of anticipated
recoveries (32,039) (12,829)
Credit card and other 464,280 210,033
receivables
Accounts receivable $823,747 $596,560
Other reserves for customer receivables consist primarily of
allowances for anticipated adjustments of finance charges
billed to customers (due to earlier than scheduled payment) and
anticipated costs required to collect customer accounts.
Credit card and other receivables, net consist primarily of
credit card loans held for securitization, unbilled interest
and fees, and other amounts due from or to the trust as a
result of securitizations. These amounts include interest-
bearing deposits, which constitute amounts subject to liens by
the certificate-holders of the individual securitizations under
the Metris Master Trust and amounts deposited in investor
reserve accounts held by the trustee for the benefit of the
Metris Master Trust's certificate-holders.
Reserves for credit card receivables consist primarily of
allowances for anticipated adjustments of finance charges
billed to certain customers (due to unemployment and
disability) and adjustments to principal and finance charges
billed to certain customers (due to death) under a debt waiver
plan offered by Direct Merchants Bank. These reserves are
treated as a reduction of receivables in the Consolidated
Statements of Financial Position as payments under the plan are
generally used to reduce outstanding receivables.
The above reserves represent management's best estimates of the
amounts not expected to be collected. A change in economic
conditions could have a significant impact on the Company's
target market, which consists of moderate to middle income
consumers. As such, the reserve estimates are subject to
change in the near term.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
[Download Table]
For the fiscal year ended
(In thousands) 1997 1996
Land and improvements $ 7,449 $ 7,444
Buildings and leasehold 117,676 112,173
improvements
Construction in progress 66,845 74,828
Machinery and equipment 139,539 130,029
Software 132,541 115,700
Other, principally furniture 26,233 19,988
and fixtures
490,283 460,162
Less: Accumulated (136,382) (111,219)
depreciation
Accumulated amortization
of software (81,711) (63,761)
Property and equipment $272,190 $285,182
Software amortization expense recorded in 1997, 1996 and 1995
was $18.0 million, $19.3 million, and $16.8 million,
respectively.
6.REVOLVING CREDIT FACILITY
In September 1996, the Company restructured its bank credit
facilities. The Company's existing revolving credit facility
was amended and restated to, among other things, reduce the
aggregate commitments for revolving borrowings and letters of
credit from $400 million to $200 million (the "Amended
Revolving Credit Facility"). The Amended Revolving Credit
Facility will continue to be guaranteed by certain subsidiaries
of the Company and expires in September 2001. The proceeds
from borrowings under the Amended Revolving Credit Facility are
to be used by the Company to provide for working capital and
other general corporate purposes. At December 26, 1997, the
Company had no outstanding balance. At December 27, 1996, the
Company had an outstanding revolving credit balance of $23.0
million. The weighted-average interest rate on borrowings was
5.9 percent at December 27, 1996. The outstanding portion of
open letters of credit, primarily established to facilitate
international merchandise purchases, was not reflected in the
accompanying financial statements and aggregated $32.8 million
at December 26, 1997 and $29.1 million at December 27, 1996.
In September 1996, Metris entered into a revolving credit
facility with the same group of lenders as in the Amended
Revolving Credit Facility. Metris' facility (the "Metris
Revolving Credit Facility") provides for aggregate commitments
of $300 million and is used by Metris for working capital and
other general corporate purposes. Metris' obligations under
the Metris Revolving Credit Facility are secured by a pledge of
the capital stock of all of Metris' subsidiaries except Direct
Merchants Bank. In addition, the Metris Revolving Credit
Facility is guaranteed by Fingerhut Companies, Inc., Fingerhut
Corporation, and all other subsidiaries that guarantee the
Amended Revolving Credit Facility. The Metris Revolving Credit
Facility expires in September 2001. At December 31, 1997,
Metris had an outstanding revolving credit balance of $144.0
million and the weighted-average interest rate on borrowings
was 6.5 percent. At December 31, 1996, Metris had an
outstanding revolving credit balance of $50.0 million and the
weighted-average interest rate on borrowings was 5.9 percent.
The outstanding portion of open letters of credit was not
reflected in the accompanying financial statements and
aggregated $1.5 million at December 26, 1997.
7.LONG-TERM DEBT
In September 1996, the Company closed the private placement of
$125.0 million of three-year senior notes. In February 1997,
the Company completed an exchange offer whereby substantially
all of the $125.0 million of unregistered notes were exchanged
for registered notes with substantially identical terms.
In November 1997, Metris privately issued and sold $100.0
million of seven-year senior notes (the "Metris Senior Notes")
pursuant to an exemption under the Securities Act of 1933, as
amended. In January 1998, Metris commenced an exchange offer
of the Metris Senior Notes pursuant to a registration
statement. The terms of the new Metris Senior Notes are identical
in all material respects to the original private issue. The
Metris Senior Notes are unconditionally guaranteed on a senior
basis, jointly and severely, by Metris Direct, Inc. (the
"Guarantor"), and all future subsidiaries of Metris that
guarantee any of Metris' indebtedness, including the Metris
Revolving Credit Facility.
Long-term debt and related maturity dates are as follows:
[Download Table]
(In thousands) Maturity Interest 1997 1996
date rate
Privately Placed Senior
Notes
Series B Dec. 1997 10.12% $ - $25,000
Series A Unsecured June 2002 8.92% 60,500 60,500
Series B Unsecured June 2004 8.92% 14,500 14,500
Series C Unsecured Aug. 2000 6.83% 45,000 45,000
Senior Notes Sept. 1999 7.38% 125,000 125,000
Metris Senior Notes Nov. 2004 10.00% 100,000 -
Other indebtedness (due in various
installments through November 2010;
interest at varying rates ranging
from 7.5% to 8.0% at December 26, 1997) 271 1,565
345,271 271,565
Current portion of long-term debt (84) (84)
Long-term debt, less current portion $345,187 $271,481
Scheduled annual maturities due on long-term debt at December
26, 1997 were as follows:
(In thousands)
1998 $ 84
1999 125,067
2000 45,057
2001 14
2002 60,503
Thereafter 114,546
$345,271
The Privately Placed Senior Notes contain covenants restricting
the payment of dividends. The maximum amount of dividends the
Company was permitted to pay at December 26, 1997 was $137.5
million.
8. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
This footnote discloses the fair value of all financial
instruments, both assets and liabilities, recognized and not
recognized, in the Consolidated Statements of Financial
Position for which it is practicable to estimate fair value.
Quoted market prices generally are not available for all of the
Company's financial instruments. Accordingly, fair values are
based on judgments regarding current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates involve uncertainties and matters of
judgment, and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the
estimates.
A description of the methods and assumptions used to estimate
the fair value of each class of the Company's financial
instruments is as follows:
Cash and cash equivalents, accounts payable, accrued payroll
and employee benefits, and other accrued liabilities
The carrying amounts approximate fair value due to the short
maturity of these instruments.
Accounts receivable
Customer installment receivables:
Since the average collection period exceeds 90 days, the
discounted present value of expected future cash flows from the
collection of the receivables and related deferred finance
income was calculated and it was determined that the carrying
amount approximates fair value.
Credit card receivables and revolving credit receivables:
Currently, credit card and revolving credit receivables are
originated with variable rates of interest, with interest rate
spreads that differ based on the related risk of such
receivables. Thus, the carrying value approximates market
value. However, this valuation does not include the value that
relates to estimated cash flows generated from new loans from
existing customers over the life of the cardholder
relationship. Accordingly, the aggregate fair value of the
credit card and revolving credit receivables does not represent
the underlying value of the established cardholder
relationships.
Retained interest in securitized receivables:
When the Company securitizes receivables, it exchanges its
receivables for certificates representing undivided interests
in such receivables. Due to the short-term revolving nature of
the portfolio, the carrying amount of the Company's "Retained
interest in securitized receivables" in the Fingerhut Master
Trust, the Metris Master Trust, and third party conduits
approximates fair value.
Long-term debt
The fair value of the Company's long-term debt was estimated
based on the amount of future cash flows associated with each
instrument discounted using the current rates offered to the
Company for similar debt instruments of comparable maturity.
The fair value of Metris' long-term debt was obtained from an
independent third party.
Interest rate cap and swap agreements
The fair values of interest rate cap and swap agreements were
obtained from dealer quoted prices. These values represent the
estimated amount the Company would pay to terminate the
agreements, taking into consideration current interest rates
and the current creditworthiness of the counterparties.
The estimated fair values of the Company's financial
instruments are summarized as follows:
[Download Table]
December 26, 1997 December 27, 1996
Carrying Estimate Carrying Estimate
(In thousands) amount fair value amount fair value value
Cash and cash equivalents $145,418 $145,418 $61,003 $61,003
equivalents
Accounts receivable $823,747 $823,747 $596,560 $596,560
Long-term debt $345,271 $353,925 $271,565 $278,218
Interest rate swap agreements
in a net receivable
(payable) position $ - $21,894 $ - $2,683
Interest rate cap $ 6,053 $ 249 $ 7,291 $2,899
agreements
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES
OTHER THAN TRADING
The Company enters into interest rate cap and swap agreements
to hedge its economic exposure to fluctuating interest rates
currently associated with the floating rate certificates issued
by the Fingerhut Master Trust and the fixed rate certificates
issued by the Metris Master Trust. Any premiums paid for these
agreements are amortized to "Finance income and other
securitization income, net" where the economic exposure to
fluctuating interest rates exists.
The Fingerhut Master Trust Series 1994-2 certificates,
initially issued in November 1994, required a six-year
agreement which effectively capped LIBOR exposure at 11.2
percent on a hedged (notional) amount varying up to $490.4
million over the life of the agreement. In connection with an
amendment of Series 1994-2 in May 1995, an additional two and
one-half year, 11.2 percent interest rate cap was required for
up to a notional amount of $209.7 million.
As a result of the issuance of the $512.6 million Metris Master
Trust Series 1995-1 certificates in May 1995, the Company
entered into an eight-year agreement effectively capping short-
term LIBOR exposure at 11.2 percent for the floating notional
amount of the certificates. In connection with the amendment
of Series 1995-1 in September 1996, two additional six and two-
thirds year, 11.2 percent interest rate caps were required for
up to a notional amount of $513.0 million.
In June and July 1995, the Company entered into several
interest rate corridor swap agreements with total notional
amounts of $900.0 million. These agreements exchange an
obligation to pay floating LIBOR of up to 11.2 percent for an
obligation to pay fixed interest rates. The fixed interest
rate obligation is approximately 5.8 percent on a $400.0
million notional amount and approximately 5.7 percent on the
remaining $500.0 million notional amount. These agreements
expire in July 1998.
In connection with the issuance of the $655.5 million Metris
Master Trust Series 1996-1 certificates in April 1996, the
Company entered into two interest rate corridor swap agreements
with total notional amounts of $605.5 million. These
agreements exchange an obligation to pay fixed interest rates
of approximately 6.3 percent for an obligation to pay floating
LIBOR rates. These agreements expire in February 2000.
In connection with the issuance of the $850.0 million Metris
Master Trust Series 1997-1 certificates in May 1997, Metris
entered into three interest rate corridor swap agreements with
total notional amounts of $722.5 million. These agreements
exchange an obligation to pay fixed interest rates of
approximately 6.7 percent for an obligation to pay floating
LIBOR rates. These agreements expire in April 2002.
In connection with the planned issuance of the $450.0 million
Fingerhut Master Trust Series 1998-1 certificates and the
$450.0 million Fingerhut Master Trust Series 1998-2
certificates in April 1998, the Company entered into an
interest rate swap agreement in October 1997 with an initial
notional amount of $415.0 million. This agreement has a
forward start date of April 1998 and amortizes down to $0 in
October 1999. This agreement exchanges an obligation to pay
floating LIBOR rates for an obligation to pay fixed interest
rates of approximately 5.95 percent. The Company also cash
settled (at fair market value) the final three payments of an
interest rate swap corridor agreement with a notional amount of
$400.0 million set to expire in July 1998.
For interest rate cap and swap transactions, the contract or
notional amounts do not represent exposure to credit loss.
Entering into interest rate cap and swap agreements involves
the risk of dealing with counterparties and their ability to
meet the terms of the contracts. Notional principal amounts
often are used to express the volume of these transactions, but
the amounts potentially subject to credit risk are much
smaller.
9. INTEREST EXPENSE
Net interest expense was as follows:
[Download Table]
(In thousands) 1997 1996 1995
Interest expense $40,156 $30,073 $27,120
Interest income (2,509) (1,660) (1,177)
Net interest expense $37,647 $28,413 $25,943
The Company paid interest of $38.5 million in 1997, $35.0
million in 1996 and $24.2 million in 1995.
10.OPERATING LEASES
Rental expense for both cancelable and non-cancelable operating
leases, (principally for office and warehouse facilities and
computer equipment) for fiscal years 1997, 1996 and 1995 was
$32.9 million, $35.9 million, and $38.6 million, respectively.
Future minimum annual rentals and payments under non-cancelable
operating leases at December 26, 1997 are as follows:
(In thousands)
1998 $29,081
1999 $19,415
2000 $6,734
2001 $2,279
2002 $1,138
Thereafter $4,536
The Company leased certain office and warehouse facilities (the
"properties") from a former affiliated company. Annual rental
expense for the properties in 1995 was $1.7 million. The lessor
exercised its right to require the Company to purchase the
properties for approximately $14.1 million. The Company
completed the purchase in January 1996.
The Company also leased office space for one of its
telemarketing centers and warehouse space from a partnership
owned by various members of the immediate family of one of the
Company's Directors. Rental expense for 1996 and 1995 was $.6
million and $1.9 million, respectively.
11.EMPLOYEE BENEFIT PLANS
The Company maintains four non-contributory, defined benefit
pension plans which together cover substantially all full-time
non-union employees. The plans provide monthly retirement
benefits to eligible participants based upon years of service
and level of compensation. The Company's funding policy is to
make an annual contribution equal to, or exceeding, the minimum
required by the Employee Retirement Income Security Act of
1974. The actuarial present value of the benefit obligation
and the funded status of the plans were as follows:
[Download Table]
(In thousands) 1997 1996
Actuarial present value of benefit
obligations:
Vested benefits $24,199 $18,932
Non-vested benefits 4,616 2,097
Accumulated benefit obligation 28,815 21,029
Effect of future compensation 10,615 9,437
increases
Projected benefit obligation 39,430 30,466
Plan assets at fair value 31,187 24,770
Unfunded projected benefit 8,243 5,696
obligation
Unrecognized prior service cost (2,436) (1,345)
Unrecognized net gain 6,670 6,170
Additional liability 2,305 327
Accrued pension cost $14,782 $10,848
Plan assets at December 26, 1997 and December 27, 1996 were
primarily invested in an equity fund.
The actuarial present value of the projected benefit
obligations represents the present value of benefits to be paid
in the future under current provisions of the plan based on
accumulated service to date and assuming future annual pay
increases of 6.0 percent and 5.5 percent in 1997 and 1996,
respectively. Projected benefits have been discounted using
rates of 7.25 percent and 7.75 percent for 1997 and 1996,
respectively. In determining pension expense, the assumed long-
term rate of return on plan assets was 10.5 percent for 1997
and 9.5 percent for 1996 and 1995. The Company's non-union
pension plans have vesting periods of five years.
The components of pension expense for non-union employees were
as follows:
[Download Table]
(In thousands) 1997 1996 1995
Benefit earned during $2,436 $2,942 $1,990
the period
Interest accrued on
projected benefit
obligation 2,627 2,366 1,828
Actual return on assets (6,525) (4,291) (4,360)
Deferred gain 4,230 2,519 2,875
Amortization of prior 140 76 7
service cost
Amortization of net (72) 1 (85)
(gain) loss
Pension expense for $2,836 $3,613 $2,255
the period
Additionally, the Company participates in a multi-employer
pension plan for all union employees. The plan provides
monthly retirement benefits to eligible participants based upon
years of service. The plan is funded with contributions made
in accordance with negotiated labor contracts. The pension
expense related to this plan for 1997, 1996 and 1995 was $1.0
million, $.9 million, and $1.5 million, respectively.
The Company maintains four defined contribution plans, which
together cover substantially all non-union employees. Three of
the plans have a 401(k) provision, including one which provides
for an employer matching contribution only; another which
provides for an employer matching contribution as well as a
profit sharing contribution; and the third which provides for
an employer profit sharing contribution only. Each of the
profit sharing contributions are discretionary and are
determined by the board of directors for each of the individual
companies. The maximum profit sharing contribution is 11
percent of each participant's eligible compensation. The
fourth defined contribution plan is a money purchase plan and
provides for a non-discretionary employer contribution of 4
percent of each participant's eligible compensation. The cost
to the Company of these plans was $12.2 million, $10.8 million,
and $11.7 million for 1997, 1996 and 1995, respectively.
Additionally, the Company maintains one defined contribution
plan (with a 401(k) provision and employer matching
contribution) and participates in another multi-employer
defined contribution plan (with a 401(k) provision only) for
all union employees. The cost to the Company of these plans
was not material for each of the years presented.
In January 1997, Metris adopted a defined contribution profit
sharing plan (the "Metris Retirement Plan") that provides
retirement benefits for eligible employees. During 1997,
Metris' employees participated in the Metris Retirement Plan,
which provides savings and investment opportunities. The
Metris Retirement Plan stipulates that eligible employees with
at least one year of service may elect to contribute to the
Metris Retirement Plan. Metris matches a portion of employee
contributions and makes discretionary contributions based upon
Metris' financial performance. For the year ended December 31,
1997, Metris contributed $.9 million to the Metris Retirement
Plan.
12.INCOME TAXES
The provision for income taxes consisted of the following:
[Download Table]
(In thousands) 1997 1996 1995
Currently payable:
Federal $69,651 $65,682 $36,072
State 6,903 2,537 1,750
Deferred (31,462) (44,367) (12,374)
Provision for income $45,092 $23,852 $25,448
taxes
The Company's effective income tax rate differed from the U.S.
federal statutory rate as follows:
[Download Table]
(In thousands) 1997 1996 1995
U.S. federal statutory 35.0% 35.0% 35.0%
rate
State income taxes, net of
federal tax benefit 3.0 2.0 1.4
Merchandise donations (1.6) (1.5) (3.1)
Other, net .9 1.2 -
Effective income tax rate 37.3% 36.7% 33.3%
The "Other, net" tax rate in 1997, 1996 and 1995 was composed
of miscellaneous items, none of which were individually
significant.
The current and long-term deferred income tax assets and
liabilities included in the Consolidated Statements of
Financial Position as of December 26, 1997 and December 27,
1996 were composed of the following:
[Download Table]
(In thousands) 1997 1996
Current and long-term deferred
income tax assets resulting
from future deductible temporary
differences are:
Accounts receivable reserves $258,939 $234,566
Yield reserve 14,702 14,557
Unearned income 15,341 -
Inventory obsolescence reserves 6,368 6,635
Other 27,003 18,366
Total deferred income tax $322,353 $274,124
assets
Current and long-term deferred
income tax liabilities resulting
from future taxable temporary
differences are:
Accelerated depreciation and $(27,786) $(24,125)
amortization
Finance income deferred (105,688) (97,284)
Deferred advertising (9,782) (6,140)
Other (2,183) (1,440)
Total deferred income tax $(145,439) $(128,989)
liabilities
Management believes the Company's prior operating earnings, on
a tax basis, will allow for full utilization of the deferred
tax assets included in its consolidated financial statements.
The Company paid income taxes (net of refunds) of $65.4
million, $42.7 million, and $37.1 million, during 1997, 1996
and 1995, respectively.
13.RELATED PARTY TRANSACTIONS
Related party transactions, detailed by subject and Note
reference are as follows:
Operating leases Note 10
Stockholders' equity Note 14
14.STOCKHOLDERS' EQUITY
The Company currently has 100,000,000 authorized shares of
$.01 par value common stock of which 46,292,461 and 46,154,880
were issued and outstanding as of December 26, 1997 and
December 27, 1996, respectively. The Company is authorized to
issue 5,000,000 shares of $.01 par value preferred stock, none
of which have been issued.
During 1994, the Company's Board of Directors authorized the
repurchase of up to 2.5 million shares of the Company's common
stock that may be made from time to time at prevailing prices
in the open market or by block purchase and may be
discontinued at any time. The purchases will be made within
certain restrictions relating to volume, price and timing in
order to minimize the impact of the purchase on the market for
the Company's stock. To date, the Company has repurchased
1,612,200 shares of its common stock at prevailing market
prices for an aggregate of $24.9 million.
Fingerhut 1994 Employee Stock Purchase Plan
Effective July 1, 1994, the Company made available to certain
employees the Fingerhut 1994 Employee Stock Purchase Plan
under which eligible employees have the opportunity to
purchase Company common stock at a discounted market value
determined on the first or last business day of the calendar
quarter, whichever is lower. A maximum of 750,000 shares are
authorized, of which 200,000 shares are subject to shareholder
approval. During 1997, 55,159 shares were issued at an
average price of $12.60. During 1996, 100,141 shares were
issued at an average price of $11.59 per share. During 1995,
119,568 shares were issued at an average price of $12.19 per
share.
Fingerhut Companies, Inc. Stock Option Plan
The Fingerhut Companies, Inc. Stock Option Plan provides
certain management of the Company with options to purchase up
to 7,768,000 shares of common stock of which 3,625 were
available for grant at December 26, 1997. The options are
granted at the fair market value on the date of grant. The
options become exercisable in five equal annual installments
beginning on the first anniversary of the date of grant.
Unexercised options will be canceled 10 years and one month
after the date of grant.
Fingerhut Companies, Inc. 1995 Long-Term Incentive and Stock
Option Plan
The Fingerhut Companies, Inc. 1995 Long-Term Incentive and
Stock Option Plan provides for the granting of 4,250,000 stock
options (either incentive stock options or non-qualified stock
options), stock appreciation rights or restricted stock to
officers and other employees. At December 26, 1997, 1,272,546
shares were available for grant. The Compensation Committee
of the Board has the authority to determine the exercise
prices, vesting dates, expiration dates and other material
conditions upon which options or awards may be exercised,
except that the option price of incentive stock options may
not be less than 100 percent of the fair market value of the
common stock on the date of grant, and not less than 110
percent of the fair market value in the case of an incentive
stock option granted to any employee owning more than 10
percent of the Company's common stock (a "Ten Percent
Employee"), and the term of non-qualified stock options may
not exceed 15 years from the date of grant (not more than 10
years for incentive stock options and five years for incentive
stock options granted to a Ten Percent Employee). During 1997
and 1996, the Compensation Committee granted a total of
985,445 and 687,973 options, respectively. In 1997 and 1996,
15,000 and 353,917 shares of restricted stock were issued,
respectively. The grant date fair value of each of these
awards was $14.88 and $13.50. For restricted shares granted
in 1997, 5,000 shares vested May 12, 1997 and, subject to
continued employment, 5,000 shares vest on May 12, 1998 with
the remaining 5,000 shares vesting on May 12, 1999. For
restricted shares granted in 1996, 25 percent of the shares
vested on March 31, 1996, 25 percent vested on March 31, 1997
and, subject to continued employment, the remaining 50 percent
will vest on August 31, 1998. The unearned portion of the
awards is being amortized as compensation expense on a
straight-line basis over the related vesting period.
Compensation expense related to the restricted stock awards
totaled $1.1 million and $3.6 million for the years ended
December 26, 1997 and December 27, 1996, respectively, which
included tax assistance payments made by the Company with
respect to the first 25 percent of the awards that vested.
Fingerhut Companies, Inc. Nonemployee Director Stock Option
Plan
The Fingerhut Companies, Inc. Nonemployee Director Stock
Option Plan provides for the granting of 100,000 stock options
to directors of the Company who are not officers or employees.
At December 26, 1997, 40,000 shares were available for grant.
A committee of members of the Board of Directors who are
officers or employees of the Company has the authority to
determine the exercise prices, vesting dates, expiration dates
and other conditions upon which options may be exercised,
except that the term of such options may not exceed 15 years from
the date of the grant.
Fingerhut Companies, Inc. Performance Enhancement Investment
Plan
The Fingerhut Companies, Inc. Performance Enhancement
Investment Plan ("PEIP Plan") provided certain management of
the Company with the right to purchase options to acquire up
to 3,000,000 shares of common stock. Under the PEIP Plan,
management was offered the opportunity to purchase option
units, each consisting of four options to purchase common
stock, with exercise prices of 110 percent, 120 percent, 130
percent and 140 percent, respectively, of the fair market
value at the time of grant. The options were offered at
prices determined by the Company on the grant date. During
1995, the Company discontinued the PEIP Plan and canceled the
remaining ungranted shares. No shares were repurchased during
1997. During 1996 and 1995, the Company repurchased 251,000
and 1,724,956 options, respectively, granted under the PEIP
Plan at or below the original purchase price paid by the
option holders, and the repurchase had no impact on the
Company's net earnings. As of December 26, 1997, 91,244
options remained outstanding and will be repurchased, if
unexercised, at an amount equal to or less than the purchase
price on the earlier of the optionee's termination of
employment or the seventh anniversary of the grant date. The
remaining obligation to repurchase outstanding options has
been accrued and is included in "Accrued payroll and employee
benefits" in the Consolidated Statements of Financial
Position.
Fingerhut Companies, Inc. 1992 Stock Option and Long-Term
Incentive Plan
The Fingerhut Companies, Inc. 1992 Stock Option and Long-Term
Incentive Plan provides certain management of the Company with
options to purchase up to 523,382 shares of common stock. In
1992, the Company granted the Chairman and Chief Executive
Officer non-qualified options to purchase 523,382 shares of
common stock with an option price of $15.00, the fair market
value at the date of grant. In November 1993, 50 percent of
these options became exercisable, 50 percent became
exercisable in November 1994 and all expire in December 1999.
The Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (FAS 123),
"Accounting for Stock- Based Compensation." Accordingly, no
compensation cost has been recognized with respect to the
Company's stock option grants or the Employee Stock Purchase
Plan. Had compensation cost for these plans been determined
based on the fair value methodology prescribed by FAS 123, the
Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
[Download Table]
(In thousands, except per share 1997 1996
data)
Net earnings - as reported $69,329 $40,159
Net earnings - pro forma $66,376 $37,549
Earnings per share diluted - as $ 1.40 $ .83
reported
Earnings per share diluted - pro $ 1.34 $ .77
forma
The above pro forma amounts may not be representative of the
effects on reported net earnings for future years. The fair
value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997
and 1996.
[Download Table]
1997 1996
Dividend yield 1.1% 1.1%
Expected volatility 44.72% 44.32%
Risk-free interest rate 6.38% 6.65%
Expected lives 7.32 years 7.38 years
Information regarding the Company's stock option plans for
1997, 1996 and 1995 is as follows:
[Download Table]
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options
outstanding,
beginning
of year 7,024,885 $9.57 6,833,547 $9.88 7,943,878 $13.08
Options
exercised (300,740) $11.36 (109,900) $6.55 (471,599) $7.16
Options
granted 1,155,445 $19.58 968,973 $13.44 1,474,800 $15.13
Options
canceled/
forfeited (84,868) $14.16 (667,735) $18.86 (2,113,532) $26.20
Options
outstanding,
end of
year 7,794,722 $10.93 7,024,885 $9.57 6,833,547 $9.88
Weighted-average
fair value of
options, granted
during the year $10.10 $7.28 $8.09
Weighted-average
exercise price of
options, exercisable
at end of year $8.65 $7.98 $7.87
The following table summarizes information about stock options
outstanding at December 26, 1997:
[Download Table]
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractural Exercise Exercisable Exercise
Exercise Prices at 12/26/97 Life Price at 12/26/97 Price
$5.455 3,735,820 1.9 Years $ 5.455 3,735,820 $ 5.455
$6.750 to 175,500 2.4 Years $ 8.734 175,500 $ 8.540
$10.875
$11.250 to 1,252,380 8.1 Years $13.640 457,855 $13.520
$14.875
$15.000 1,445,427 6.6 Years $15.000 1,142,821 $15.000
$15.063 to 1,052,497 9.3 Years $20.223 81,184 $18.610
$20.438
$21.140 to 133,098 5.8 Years $24.647 97,699 $25.170
$35.690
$5.455 to 7,794,722 5,690,879
$35.690
15.OTHER DISCLOSURES
Administrative and selling expenses included promotional
material and advertising expenses of $375.6 million, $413.1
million, and $488.6 million for 1997, 1996 and 1995,
respectively.
Amortization expense relating to the excess of cost over fair
value of net assets acquired was $1.3 million for 1997, $1.4
million for 1996 and $1.3 million for 1995. Accumulated
amortization was $11.8 million and $10.5 million at December
26, 1997 and December 27, 1996, respectively.
Amortization expense relating to customer lists was $1.4
million for 1997, 1996 and 1995. Accumulated amortization was
$12.6 million and $11.2 million at December 26, 1997 and
December 27, 1996, respectively.
16.SALE OF STOCK BY SUBSIDIARY
In October 1996, Metris, a then wholly owned subsidiary,
completed an initial public offering of 3,258,333 of its
common shares at $16 a share. The transaction reduced the
Company's ownership interest to approximately 83 percent.
Metris realized net cash proceeds of approximately $47.4
million from the sale of shares, after underwriting discounts
and commissions and expenses of the offering. The sale
resulted in an increase of approximately $24.9 million in the
Company's proportionate share of Metris' equity, which is
included in "Additional paid-in capital" in the Company's
Consolidated Statements of Financial Position.
17.CONTINGENCIES
The Company is a party to various claims, legal actions, sales
tax disputes and other complaints arising in the ordinary
course of business. In the opinion of management, any losses
which may occur are adequately covered by insurance, are
provided for in the consolidated financial statements, or are
without merit and the ultimate outcome of these matters will
not have a material effect on the consolidated financial
position or operations of the Company.
At December 26, 1997, the Company had unused credit line
commitments on its Credit Advantage Card(SM) accounts of $75.8
million. At December 31, 1997, Metris had unused credit line
commitments on open credit card accounts of $1.2 billion. The
Company does not anticipate that all of its customers will
exercise this entire available credit at any one time.
Commitments on credit card lines are cancelable at any time.
18.SEGMENT OF BUSINESS REPORTING
The operations of the Company are divided into the following
business segments for financial reporting purposes:
Retail: Sells a broad range of products and services directly
to consumers via catalogs, television and other media. The
segment's primary subsidiaries consist of Fingerhut, Figi's
and Fingerhut National Bank (FNB). Fingerhut has been in the
direct mail marketing business for 50 years and sells general
merchandise using catalogs and other direct marketing
solicitations. Figi's markets specialty foods and other
gifts, primarily through catalogs. FNB provides credit for
customers' purchases from Fingerhut, in the form of closed-end
and revolving credit card loans.
Financial Services (Metris): Metris is an information-based
direct marketer of consumer credit products, extended service
plans and fee-based products and services to moderate income
consumers. Currently, the segment operates two core business
lines: (1) consumer credit products, which presently consist
of credit card lending through various credit card products
issued by Direct Merchants Bank and (2) sales of extended
service plans to the Company's customers and fee-based
products and services, which presently include debt waiver
programs, card registration, third-party insurance and
membership clubs.
Revenues, earnings before income taxes and minority interest,
identifiable assets, capital expenditures and depreciation and
amortization pertaining to the business segments in which the
Company operates are presented below:
[Download Table]
(In thousands) 1997 1996 1995
Revenues
Retail $1,519,351 $1,615,002 $1,764,792
Metris 284,064 155,434 58,212
Intercompany (4,798) (7,571) (8,151)
$1,798,617 $1,762,865 $1,814,853
Earnings before income taxes
and minority interest
Retail $58,988 $32,445 $68,857
Metris 61,883 32,546 7,449
$120,871 $64,991 $76,306
Identifiable assets
Retail $1,229,501 $1,224,181 $1,115,035
Metris 673,221 286,616 174,606
Intercompany (150,966) (121,099) (8,564)
$1,751,756 $1,389,698 $1,281,077
Capital expenditures
Retail $20,622 $47,742 $93,089
Metris 11,705 4,113 1,353
$32,327 $51,855 $94,442
Depreciation and
amortization
Retail $51,392 $54,960 $46,976
Metris 5,280 426 127
$56,672 $55,386 $47,103
19.SUBSEQUENT EVENTS
On January 22, 1998, the Company declared a cash dividend of
$.04 per share, or an aggregate of $1.9 million, payable on
February 19, 1998 to shareholders of record as of the close of
business on February 5, 1998.
Fingerhut Companies, Inc.
REPORT OF MANAGEMENT
To the Shareholders of Fingerhut Companies, Inc.:
The Company is responsible for the information presented in this
annual report. The consolidated financial statements contained
herein were prepared in accordance with generally accepted
accounting principles and were based on informed judgments and
management's best estimates where appropriate. Financial
information elsewhere in this annual report is consistent with
that contained in the consolidated financial statements.
The Company maintains a system of internal controls designed to
provide reasonable assurance, at suitable costs, that assets are
safeguarded and transactions are executed in accordance with
established procedures. The system of internal controls includes
Standards of Ethical Business Conduct, widely communicated to
employees, which are designed to require them to maintain high
ethical standards in their conduct of Company affairs, written
procedures that provide for appropriate evidence of authority and
a program of internal audit with management follow-up.
The Company's consolidated financial statements have been audited
by KPMG Peat Marwick LLP, independent certified public
accountants. Their audit was conducted in accordance with
generally accepted auditing standards. As part of their audit of
the Company's 1997 consolidated financial statements, our
independent accountants considered the Company's internal
controls to the extent they deemed necessary to determine the
nature, timing and extent of their audit tests.
The Audit Committee of the Board of Directors is composed
entirely of independent directors. This Committee supervises and
reviews the Company's accounting practices; recommends to the
Board the independent auditors; reviews the audit plans, scope,
findings, reports and recommendations; and reviews the Company's
financial controls, procedures and practices. The independent
public accountants and the internal auditors have free access to
the Audit Committee without management present.
Theodore Deikel
Chairman of the Board,
Chief Executive Officer and President
Peter G. Michielutti
Executive Vice President and
Chief Operating Officer
Gerald T. Knight
Senior Vice President and
Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Fingerhut
Companies, Inc.:
We have audited the accompanying consolidated statements of
financial position of Fingerhut Companies, Inc. and subsidiaries
(the "Company") as of December 26, 1997 and December 27, 1996
and the related consolidated statements of earnings, changes
in stockholders' equity and cash flows for each of the fiscal
years in the three-year period ended December 26, 1997. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Fingerhut Companies, Inc. and subsidiaries
as of December 26, 1997 and December 27, 1996, and the results of
their operations and their cash flows for each of the fiscal years
in the three-year period ended December 26, 1997 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 21, 1998
[Download Table]
Fingerhut Companies, Inc.
Quarterly Financial and Stock Data (unaudited)
Quarterly Financial -
Fiscal Year 1997
Summaries
(In thousands, except
per share data) First Second Third Fourth Total
Revenues $350,014 $396,215 $403,041 $649,347 $1,798,617
Gross Margin $143,243 $163,288 $164,993 $324,613 $796,137
Net earnings $2,561 $9,909 $12,993 $43,866 $69,329
Earnings per share:
Basic $ .06 $ .22 $ .28 $ .95 $ 1.50
Diluted $ .05 $ .20 $ .26 $ .88 $ 1.40
[Download Table]
1996
First Second Third Fourth Total
Revenues $358,092 $385,961 $383,891 $634,921 $1,762,865
Gross Margin $160,192 $168,364 $170,769 $323,121 $822,446
Net (loss) earnings $ (2,051) $2,145 $8,565 $31,500 $40,159
(Loss) earnings per
share:
Basic $(.04) $ .05 $ .19 $ .68 $ .87
Diluted $(.04) $ .04 $ .18 $ .65 $ .83
The Company's common stock is traded under the symbol "FHT" on
the New York Stock Exchange. As of February 28, 1998, there were
568 holders of record of the Company's common stock.
[Download Table]
1997
First Second Third Fourth Total
Common stock price:
High $15-7/8 $18-1/8 $23 $23-1/2 $23-1/2
Low $11-3/4 $13-1/4 $17-1/8 $18-13/16 $11-3/4
Dividends paid $ .04 $ .04 $ .04 $ .04 $ .16
[Download Table]
1996
First Second Third Fourth Total
Common stock price:
High $15-1/8 $ 17-1/8 $16 $14-7/8 $17-1/8
Low $12-1/8 $ 12-3/8 $12-3/4 $11-1/4 $11-1/4
Dividends paid $ .04 $ .04 $ .04 $ .04 $.16
Dividend Policy The Company intends to pay regular quarterly
cash dividends and expects to retain a substantial portion of its
net earnings to fund future growth. The declaration and payment
of dividends will be subject to the discretion of the Board of
Directors, and there can be no assurance that any dividends will
be paid in the future. In determining whether to pay dividends
(as well as the amount and timing thereof), the Board of
Directors will consider a number of factors including the
Company's results of operations, financial condition, future
capital requirements and any applicable restrictive provisions in
any financing agreements. See Note 7 for dividend restrictions.
SCHEDULE II
FINGERHUT COMPANIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 26,1997; DECEMBER 27, 1996;
AND DECEMBER 25, 1995
(In thousands of dollars)
Balance Additions
at charged Balance
Description beginning to cost, Deductions at end of
of period expenses, period
revenues
Accounts
receivable
reserves:
1997 $166,449 $810,286 $806,961(a) $169,775
1996 $144,680 $845,595 $823,826(a) $166,449
1995 $113,383 $851,229 $819,932(a) $144,680
Inventory
reserves:
1997 $ 18,620 $ 24,664 $ 27,034(b) $ 16,258
1996 $ 12,303 $ 28,175 $ 21,858(b) $ 18,620
1995 $ 18,102 $ 22,756 $ 28,555(b) $ 12,303
(a) Primarily represents reductions in the reserves for
actual returns and exchanges, allowances, uncollectible
amounts (net of recoveries) and collection costs. And
also, includes the reserves related to the accounts
receivable sold under the Fingerhut Master Trust, the Metris
Master Trust, third party conduits, and the Receivables
Transfer Agreement.
(b) Primarily represents inventory sold to liquidators and
returned to vendors.
Independent Auditors' Report
The Board of Directors and Stockholders
Fingerhut Companies, Inc.
Under date of January 21, 1998, we reported on the
consolidated statements of financial position of Fingerhut
Companies, Inc. and subsidiaries as of December 26, 1997 and
December 27, 1996, and the related consolidated statements
of earnings, changes in stockholders' equity and cash flows
for each of the years in the three-year period ended
December 26, 1997, as contained in the 1997 annual report to
stockholders. These consolidated financial statements and
our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1997. In connection
with our audits of the aforementioned consolidated financial
statements, we have also audited the related financial
statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statements schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 21, 1998
Dates Referenced Herein and Documents Incorporated by Reference
| This ‘10-K’ Filing | | Date | | Other Filings |
|---|
| |  |
| | 12/31/99 |
| | 5/12/99 |
| | 8/31/98 | | 8-K |
| | 5/12/98 |
| Filed on: | | 3/25/98 |
| | 2/28/98 |
| | 2/19/98 |
| | 2/5/98 |
| | 1/22/98 |
| | 1/21/98 |
| For Period End: | | 12/31/97 |
| | 12/26/97 |
| | 12/15/97 |
| | 10/23/97 |
| | 10/9/97 |
| | 5/12/97 | | 10-Q |
| | 3/31/97 | | DEF 14A |
| | 12/31/96 | | S-4/A |
| | 12/27/96 | | 10-K405 |
| | 3/31/96 |
| | 12/31/95 |
| | 12/29/95 | | 10-K405 |
| | 12/25/95 |
| | 12/30/94 | | 10-K |
| | 7/1/94 | | 10-Q |
| | 12/31/93 | | 10-K |
| List all Filings |
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