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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended March 30, 2002
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ............. to ...............
Commission file number 0-16126
SPIEGEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2593917
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 Lacey Road, Downers Grove, Illinois 60515-5432
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
630-986-8800
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of the issuer's classes of common
stock, as of February 10, 2003 are as follows:
Class A non-voting common stock, $1.00 par value
14,945,144 shares
Class B voting common stock, $1.00 par value
117,009,869 shares
SPIEGEL, INC. AND SUBSIDIARIES
Index to Quarterly Report on Form 10-Q
Thirteen Weeks Ended March 30, 2002
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets,
March 30, 2002, March 31, 2001 and December 29, 2001 4
Consolidated Statements of Operations
Thirteen Weeks Ended March 30, 2002 and March 31, 2001 5
Consolidated Statements of Cash Flows,
Thirteen Weeks Ended March 30, 2002 and March 31, 2001 6
Notes to Consolidated Financial Statements 7-16
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-27
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 6 - Exhibits and Reports on Form 8-K 28
Signatures 29
Certifications 30
2
EXPLANATORY NOTE
As reported in the Company's Form 8-K filed on February 5, 2003, the
Company's vice president and chief financial officer, James R. Cannataro,
recently resigned from his position. The Company is actively negotiating with,
and expects to announce shortly the appointment of, a new chief financial
officer. The Company's new chief financial officer, once appointed, will need to
perform the review necessary in order to give the certifications required by the
Sarbanes-Oxley Act of 2002.
Consequently, this Form 10-Q for the quarter ended March 30, 2002 is
filed by the Company without the CFO certifications required by Sections 302 and
906 of the Sarbanes-Oxley Act of 2002. Accordingly, KPMG LLP is unable to
complete its review, under Statement on Auditing Standards No. 71, of the
interim financial statements.
As soon as it is available, the Company will file an amendment to its
Quarterly Report on Form 10-Q for the quarter ended March 30, 2002 which is
expected to include: (1) the certifications required by Section 302 and 906 of
the Sarbanes-Oxley Act of 2002 of a chief financial officer and (2) an
indication of whether KPMG LLP has completed its review in accordance with
Statement on Auditing Standards No. 71.
3
Spiegel, Inc. and Subsidiaries
Consolidated Balance Sheets
($000s omitted, except share and per share amounts)
(unaudited) (unaudited)
---------------- --------------- ---------------
March 30, March 31, December 29,
2002 2001 2001
---------------- --------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,524 $ 15,486 $ 29,528
Receivables, net 645,435 748,680 638,206
Inventories 476,329 581,435 476,903
Prepaid expenses 86,485 97,047 88,434
Refundable income taxes 4,581 - 5,798
Deferred income taxes - 36,954 -
Assets of discontinued operations 394,003 492,545 365,767
---------------- --------------- ---------------
Total current assets 1,656,357 1,972,147 1,604,636
---------------- --------------- ---------------
Property and equipment, net 341,389 336,713 351,543
Intangible assets, net 135,357 140,615 135,357
Other assets 221,654 110,297 163,812
---------------- --------------- ---------------
Total assets $ 2,354,757 $ 2,559,772 $ 2,255,348
================ =============== ===============
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,140,857 $ 102,714 $ 1,001,857
Related party debt 160,000 - 50,000
Accounts payable and accrued liabilities 386,335 416,011 476,249
Liabilities of discontinued operations 495,923 216,916 512,639
Income taxes payable - 787 -
---------------- --------------- ---------------
Total current liabilities 2,183,115 736,428 2,040,745
---------------- --------------- ---------------
Long-term debt, excluding current portion - 929,143 -
Deferred income taxes - 87,307 -
---------------- --------------- ---------------
Total liabilities 2,183,115 1,752,878 2,040,745
---------------- --------------- ---------------
Stockholders' equity:
Class A non-voting common stock, $1.00 par value;
authorized 16,000,000 shares; 14,945,144,
14,864,744, and 14,945,144 shares issued and
outstanding at March 30, 2002, March 31, 2001
and December 29, 2001, respectively 14,945 14,865 14,945
Class B voting common stock, $1.00 par value;
authorized 121,500,000 shares;
117,009,869 shares issued and outstanding 117,010 117,010 117,010
Additional paid-in capital 329,489 329,060 329,489
Accumulated other comprehensive loss (9,784) (8,425) (10,162)
Retained earnings (accumulated deficit) (280,018) 354,384 (236,679)
---------------- --------------- ---------------
Total stockholders' equity 171,642 806,894 214,603
---------------- --------------- ---------------
Total liabilities and stockholders' equity $ 2,354,757 $ 2,559,772 $ 2,255,348
================ =============== ===============
See accompanying notes to consolidated financial statements.
4
Spiegel, Inc. and Subsidiaries
Consolidated Statements of Operations
($000s omitted, except share and per share amounts)
(unaudited)
Thirteen Weeks Ended
------------------------------------------
March 30, March 31,
2002 2001
------------------ ------------------
Net sales and other revenues:
Net sales $ 536,966 $ 611,679
Finance revenue 12,911 26,450
Other revenue 67,152 68,182
------------------ ------------------
617,029 706,311
Cost of sales and operating expenses:
Cost of sales, including buying and
occupancy expenses 343,057 397,674
Selling, general and administrative
expenses 303,432 331,270
------------------ ------------------
646,489 728,944
Operating loss (29,460) (22,633)
Interest expense 13,911 14,481
------------------ ------------------
Loss from continuing operations before income taxes
and minority interest (43,371) (37,114)
------------------ ------------------
Income tax benefit - (14,177)
------------------ ------------------
Minority interest in loss of consolidated subsidiary 32 174
------------------ ------------------
Loss from continuing operations (43,339) (22,763)
------------------ ------------------
Earnings from discontinued operations (net of tax expense of $6,887) - 10,521
------------------ ------------------
Net loss $ (43,339) $ (12,242)
================== ==================
Earnings (loss) per common share:
Net earnings (loss) per common share from:
Continuing operations:
Basic and diluted $ (0.33) $ (0.17)
Discontinued operations:
Basic and diluted - 0.08
Net loss per common share:
------------------ ------------------
Basic and diluted $ (0.33) $ (0.09)
================== ==================
Weighted average number of common
shares outstanding:
Basic 131,955,013 131,867,366
================== ==================
Diluted 131,955,013 131,867,366
================== ==================
See accompanying notes to consolidated financial statements.
5
Spiegel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
($000s omitted)
(unaudited)
Thirteen Weeks Ended
---------------------------------------------
March 30, March 31,
2002 2001
------------------- -------------------
Cash flows from operating activities:
Loss from continuing operations $ (43,339) $ (22,763)
Adjustments to reconcile loss from continuing operations to net
cash used in operating activities:
Depreciation and amortization 17,041 15,595
Net pretax (gains) losses on sale of receivables 4,969 (5,612)
Minority interest in loss of consolidated subsidiary (32) (174)
Change in assets and liabilities:
Increase in receivables, net (12,216) (6,606)
(Increase) decrease in inventories 529 (19,264)
Decrease in prepaid expenses 1,944 2,641
Decrease in accounts payable and other accrued liabilities (89,549) (175,377)
Decrease in refundable and payable income taxes, respectively 1,217 (25,850)
---------------------- -------------------
Net cash used in operating activities (119,436) (237,410)
---------------------- -------------------
Cash flows from investing activities:
Net additions to property and equipment (2,968) (7,012)
Net additions to other assets (61,724) (12,948)
---------------------- -------------------
Net cash used in investing activities (64,692) (19,960)
---------------------- -------------------
Cash flows from financing activities:
Issuance of debt 387,000 248,000
Payment of debt (138,000) (10,714)
Payment of dividends - (5,275)
Contribution from minority interest of
consolidated subsidiary 117 -
Exercise of stock options - 56
---------------------- -------------------
Net cash provided by financing activities 249,117 232,067
---------------------- -------------------
Net cash provided by (used in) discontinued operations (44,952) 5,320
---------------------- -------------------
Effect of exchange rate changes on cash (41) 353
---------------------- -------------------
Net change in cash and cash equivalents 19,996 (19,630)
Cash and cash equivalents at beginning of period 29,528 35,116
---------------------- -------------------
Cash and cash equivalents at end of period $ 49,524 $ 15,486
====================== ===================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 19,388 $ 15,557
====================== ===================
Income taxes $ 414 $ 19,214
====================== ===================
See accompanying notes to consolidated financial statements.
6
Spiegel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
($000s omitted, except per share amounts)
(unaudited)
(1) Basis of Presentation
The consolidated financial statements included herein are unaudited and have
been prepared from the books and records of the Company in accordance with
accounting principles generally accepted in the United States of America and the
rules and regulations of the Securities and Exchange Commission. All adjustments
(consisting only of normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of financial position and
operating results for the interim periods are reflected.
The consolidated financial statements include the accounts of Spiegel, Inc. and
its wholly owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Company's private-label
preferred credit card portfolio is serviced by First Consumers National Bank
("FCNB"), a wholly owned subsidiary. Costs for servicing the private-label
preferred portfolio are charged to the private-label preferred credit card
operation by FCNB. Although the Company plans to discontinue the bankcard
business, it plans to remain in the private-label credit card business. In the
future, the Company plans to issue its private-label credit cards through its
merchant operations, rather than FCNB, but also may consider seeking a
third-party credit provider. The Company is in the process of establishing an
in-house capability to service these receivables or otherwise it will seek to
secure a third-party credit provider. There can be no guarantees that upon sale
or liquidation of the bankcard segment (as discussed in Note 8) the Company will
be able to service the private-label preferred portfolio under a similar cost
structure internally or through a third party credit provider.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
most recent Annual Report on Form 10-K, which includes consolidated financial
statements for the fiscal year ended December 29, 2001. Due to the seasonality
of the Company's business, results for interim periods are not necessarily
indicative of the results for the year.
The Company was not in compliance with its financial and certain of its other
covenants contained in its debt agreements and, accordingly, all of the
Company's debt is currently due and payable. The Company has been unable to
successfully negotiate a new credit facility with its lending institutions, to
obtain an amended settlement agreement with MBIA Insurance Corporation ("MBIA"),
or to prevent early amortization events, or "Pay Out Events," from occurring
under its securitization transactions. These matters raise substantial doubt
about the Company's ability to continue as a going concern for a reasonable
period of time. (See Note 9.)
(2) Reclassifications
Certain prior period amounts have been reclassified from amounts previously
reported to conform with the fiscal 2002 presentation. See Note 8.
(3) Intangible Assets
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," which supercedes APB Opinion No 17, "Intangible Assets,"
establishes financial accounting and reporting standards for acquired goodwill
and other intangible assets. Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives are not amortized but rather tested for impairment
annually, or more frequently if impairment indicators arise. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. The Company's
intangible assets represent principally goodwill and trademarks from businesses
acquired. Effective at the beginning of fiscal 2002, the Company ceased
amortization of
7
goodwill and trademarks. Upon adoption of SFAS No. 142, a transitional goodwill
impairment test is required. Effective for fiscal 2002, the Company adopted SFAS
No. 142.
The Company completed the transitional goodwill impairment test in the second
quarter of fiscal 2002. The fair value of the reporting unit was estimated using
both a discounted cash flow model and a market comparable approach (as
prescribed in SFAS No. 142), which resulted in no goodwill impairment. If
estimates of fair value or their related assumptions change in the future, the
Company may be required to write-off the impaired portion of the asset, which
could have a material adverse affect on the operating results in the period in
which the write off occurs.
The carrying amount for each intangible asset class with an indefinite life is
as follows:
March 30, March 31, December 29,
2002 2001 2001
------------------ ----------------- -------------------
Goodwill $ 76,601 $ 79,577 $ 76,601
Trademarks 58,756 61,038 58,756
------------------ ----------------- -------------------
$ 135,357 $ 140,615 $ 135,357
================== ================= ===================
The following table reflects net loss and net loss per share as if goodwill and
trademarks were not subject to amortization for the thirteen weeks ended March
30, 2002 and March 31, 2001.
March 30, March 31,
2002 2001
--------------- --------------
Reported net loss $ (43,339) $ (12,242)
Add back: goodwill amortization (net of tax benefit of $ 4) - 2
Add back: trademark amortization (net of tax benefit of $3)
- 2
--------------- --------------
Adjusted net loss $ (43,339) $ (12,238)
=============== ==============
Net loss per share (basic and diluted):
Reported net loss $ (0.33) $ (0.09)
Goodwill amortization - -
Trademark amortization - -
--------------- --------------
Adjusted net loss per share $ (0.33) $ (0.09)
=============== ==============
(4) Derivatives and Hedging Activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, establishes accounting and reporting standards for derivative
instruments and for hedging activities. All derivative financial instruments,
such as interest rate swap agreements and foreign currency forward contracts,
are required to be recorded on the balance sheet at fair value. If the
derivative is designated as a cash flow hedge, the effective portion of changes
in the fair value of the derivative are recorded in other comprehensive loss
(OCL) and are recognized in the income statement when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings.
The adoption of SFAS No. 133 on December 31, 2000, resulted in a cumulative
increase to OCL of $1,566 (net of income tax benefit of $919). The increase to
OCL was attributable to losses of $1,768 (net of income tax benefit of $1,037)
on interest rate swap agreements offset slightly by a $202 gain (net of taxes of
$118) on foreign currency forward contracts. See Note 5.
Use of derivative financial instruments:
The Company uses derivative financial instruments principally to manage the risk
that changes in interest rates will affect the amount of its future interest
payments, and to a lesser extent, to manage risk associated
8
with future cash flows in foreign currencies. The Company does not enter into
derivative financial instruments for any purpose other than cash flow hedging
purposes. The Company does not use derivative financial instruments for trading
or other speculative purposes.
Derivative financial instruments involve elements of market and credit risk not
recognized in the financial statements. The market risk that results from these
instruments relates to changes in interest rates and foreign currency exchange
rates. Credit risk relates to the risk of nonperformance by a counterparty to
one of the Company's derivative transactions. The Company believes that there is
no significant credit risk associated with the potential failure of any
counterparty to perform under the terms of any derivative financial instrument.
Interest rate risk management:
The Company uses a mix of fixed- and variable-rate debt to finance its
operations. Variable-rate debt obligations expose the Company to variability in
interest payments due to changes in interest rates. To limit the variability of
a portion of these interest payments, the Company will enter into
receive-variable, pay-fixed interest rate swaps. Under these interest rate
swaps, the Company receives variable interest rate payments and makes fixed
interest rate payments; thereby creating fixed-rate debt. The variable-rate of
interest received is based on the same terms, including interest rates, notional
amounts and payment schedules, as the hedged interest payments on the
variable-rate debt. These interest rate swaps were determined to be effective;
therefore, changes in fair value are reflected in OCL and not recognized in
earnings until the related interest payments are made.
As of March 30, 2002, the Company is party to interest rate swap agreements,
which are designated as cash flow hedges under SFAS No. 133 and are accounted
for by recording the net interest paid as interest expense on a current basis.
As of March 30, 2002 and March 31, 2001, the cumulative loss in OCL related to
interest rate swap agreements was $2,737 (net of tax benefit of $1,610) and
$2,318 (net of tax benefit of $1,362), respectively, which are reflected at fair
value of $4,347 and $3,680 in accrued liabilities, respectively. See Note 5. The
Company estimates that $1,989 will be reclassified into earnings during the
twelve months ended March 29, 2003.
At March 30, 2002, the Company had an interest rate swap agreement to hedge the
underlying interest risks on a term loan agreement with Berliner Bank with
effective and termination dates from March 1996 to December 2004. The notional
amount of the interest swap agreement as of March 30, 2002 and March 31, 2001
was $30,000. The fair value of the swap agreement at March 30, 2002 and March
31, 2001 was $(2,369) and $(2,289), respectively and was estimated by a
financial institution and represents the estimated amount the Company would pay
to terminate the agreement, taking into consideration current interest rates and
risks of the transactions. The counterparties are expected to fully perform
under the terms of the agreements, thereby mitigating the risk from these
transactions.
At March 30, 2002, the Company also had an interest rate swap agreement with
Bank of America to hedge the underlying interest risks on a portion of the
outstanding balance of the revolving credit agreement with an effective and
termination date of July 2003. The notional amount of the interest rate swap
agreement as of March 30, 2002 and March 31, 2001 was $35,000 and $22,857,
respectively. The fair value of this swap agreement at March 30, 2002 and March
31, 2001 was $(1,977) and $(1,391), respectively and was estimated by a
financial institution and represents the estimated amount the Company would pay
to terminate the agreement, taking into consideration current interest rates and
risks of the transactions. The counterparties are expected to fully perform
under the terms of the agreements, thereby mitigating the risk from these
transactions.
The Company assesses interest rate cash flow exposure by continually identifying
and monitoring changes in interest rate exposures that may adversely impact
expected future cash flows and by evaluating hedging opportunities. The Company
maintains risk management control systems to monitor interest rate cash flow
risk attributable to both the Company's outstanding and forecasted debt
obligations as well as the Company's offsetting hedge positions. The risk
management control systems involve the use of analytical techniques, including
cash flow sensitivity analysis, to estimate the expected impact of changes in
interest rates on the Company's future cash flows.
9
Foreign currency risk management:
The Company is subject to foreign currency exchange rate risk related to its
Canadian operations, as well as its joint venture investments in Germany and
Japan. The Company occasionally enters into foreign currency forward contracts
to minimize the variability caused by foreign currency risk related to certain
forecasted semi-annual transactions with the joint ventures that are denominated
in foreign currencies. The principal currency hedged is the Japanese yen.
At March 31, 2001, the fair value of the Company's foreign currency forward
contracts recorded in other assets was $181. Unrealized gains on derivative
financial instruments of $74 (net of taxes of $44) were reflected in OCL. Gains
or losses on foreign currency forward contracts are reclassified into earnings
from OCL at the time the revenue or expense is recognized. During the thirteen
weeks ended March 31, 2001, derivative gains of $40 (net of taxes of $23) were
reclassified to earnings as the revenue related to the hedged forecasted
transaction was recognized. There were no unrealized gains or losses related to
foreign currency forward contracts included in OCL as of March 30, 2002.
The Company monitors its foreign currency exposures on a continual basis to
maximize the overall effectiveness of its foreign currency hedge positions.
(5) Comprehensive Loss and Accumulated Other Comprehensive Loss
The components of comprehensive loss are as follows:
Thirteen Weeks Ended
March 30, March 31,
2002 2001
---------------------------------
Net loss $ (43,339) $ (12,242)
Cumulative effect of a change in
accounting for derivative financial
instruments (net of tax benefit of $919) - (1,566)
Unrealized gain (loss) on derivatives
(net of tax expense of $282 and tax
benefit of $399, respectively) 484 (678)
Foreign currency translation adjustment (106) (882)
---------------------------------
Comprehensive loss $ (42,961) $ (15,368)
=================================
The components of accumulated other comprehensive loss are as follows:
March 30, March 31, December 29,
2002 2001 2001
---------------- ----------------- -------------------
Accumulated loss on derivative
financial instruments (net of tax benefit
of $1,610, $1,318 and $1,892, respectively) $ (2,737) $ (2,244) $ (3,221)
Foreign currency translation adjustment (7,047) (6,181) (6,941)
---------------- ----------------- -------------------
$ (9,784) $ (8,425) $ (10,162)
================ ================= ===================
10
(6) Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
March 30, March 31, December 29,
2002 2001 2001
---------------- ---------------- ------------------
Trade payables $ 131,329 $ 163,904 $ 178,496
Gift certificates and other
customer credits 55,281 47,962 60,085
Salaries, wages and employee
benefits 47,077 45,577 55,475
General taxes 67,534 58,238 78,704
Allowance for future returns 19,598 24,157 30,491
Other liabilities 65,516 76,173 72,998
---------------- ---------------- ------------------
Total accounts payable and
accrued liabilities $ 386,335 $ 416,011 $ 476,249
================ ================ ==================
(7) Debt, Commitments and Contingencies
Total debt consists of the following:
March 30, March 31, December 29,
2002 2001 2001
--------------- -------------- ----------------
Revolving credit agreement $ 700,000 $ 534,000 $ 561,000
Otto Versand (GmbH & Co)* senior unsecured loan 60,000 - -
Otto Versand (GmbH & Co)* revolving credit agreement - - 50,000
Term loan agreements, 6.34% to 8.66%
due October 16, 2002 through July 31, 2007 392,857 437,857 392,857
Otto-Spiegel Finance G.m.b.H. & Co. KG
term loan agreement, 4% due December 31, 2002 100,000 - -
Secured notes, 7.25% to 7.35% due
November 15, 2002 through November 15, 2005 48,000 60,000 48,000
--------------- -------------- ----------------
Total debt $ 1,300,857 $ 1,031,857 $ 1,051,857
=============== ============== ================
* Otto Versand (GmbH & Co) ("Otto Versand"), a privately held German
partnership, acquired the Company in 1982. In April 1984, Otto Versand
transferred its interest in the Company to its partners and designees. In
October 2002, the German partnership changed its name from Otto Versand (GmbH &
Co) to Otto (GmbH & Co KG), hereinafter referred to as "Otto Versand (GmbH &
Co)" or "Otto Versand".
For the reporting period December 29, 2001 and March 30, 2002, the Company was
not in compliance with its financial and certain other covenants in its debt
agreements and, accordingly, all of the Company's debt is currently due and
payable.
The Company has a $750,000 revolving credit agreement with a group of banks. The
commitment is comprised of two components, including a $600,000 long-term
agreement maturing in July 2003 and a $150,000 364-day agreement that matured in
June 2002. Borrowings under the Company's $600,000 long-term revolving credit
agreement were $600,000 at March 30, 2002. Borrowings under the $150,000 364-day
agreement were $100,000 at March 30, 2002. The revolving credit agreement
provides for restrictions on the availability of additional financing if a
"material adverse change" in the Company's business has occurred. In February
2002, the Company determined, with its lending institutions, that a material
adverse change had occurred due to the operating performance experienced in the
fourth quarter of fiscal 2001 and due to the estimated loss recorded on the sale
of the bankcard segment. Accordingly, on February 18, 2002, the borrowing
capacity under the revolving credit facility was capped at $700,000, which
represented the Company's borrowings outstanding on this date.
11
The Company's revolving and non-affiliated loan agreements provide for
restrictive covenants, including restrictions on the payment of dividends.
Financial covenants of these agreements establish minimum levels of tangible net
worth and require the maintenance of certain ratios, including fixed charge
coverage ("Coverage"), total debt to equity ("Leverage"), and adjusted debt to
earnings before interest, taxes, depreciation and amortization, and rents ("Debt
to EBITDAR"). Additionally, these and certain other debt agreements contain
cross default provisions. For the reporting period March 30, 2002, the Company
was in violation of its financial and certain of its other covenants.
Accordingly, the financial statements reflect all of the Company's debt
obligations under "current portion of long-term debt." (See Note 9.) The Company
is working with its lending group to restructure the existing credit facilities
and to enter into new credit facilities. However, there can be no assurances
that either a new credit facility or alternative sources of financing will be
available to the Company.
In September 2001, the Company entered into a revolving credit agreement with
Otto Versand (GmbH & Co), a related party. The initial availability under this
credit agreement was $75,000. The credit agreement bears interest at a variable
rate based on LIBOR plus a margin, comparable to the Company's other revolving
credit agreements. The initial agreement extended through December 15, 2001. In
November 2001, this revolving credit agreement with Otto Versand (GmbH & Co) was
increased from $75,000 to $100,000 and the maturity date was extended from
December 15, 2001 to June 15, 2002. As of February 2002, the balance outstanding
under the revolving credit agreement with Otto Versand (GmbH & Co) was $100,000.
This obligation was extinguished with the proceeds of new term loans in the
aggregate amount of $100,000 from Otto-Spiegel Finance G.m.b.H. & Co. KG, a
related party. These term loans had a maturity date of December 31, 2002, bear
interest at a rate of 4% per annum and may be subordinate to the borrowings
under any new credit facility. As of March 30, 2002, there was an additional
$60,000 senior unsecured loan from Otto Versand (GmbH & Co), which bears
interest at a rate of LIBOR plus a margin. Interest expense attributable to the
borrowings from Otto Versand (GmbH & Co) and Otto-Spiegel Finance G.m.b.H & Co.
KG during the thirteen weeks ended March 30, 2002 was $882. As of February 2003,
the related party borrowings outstanding consisted of the $100,000 term loans
from Otto-Spiegel Finance G.m.b.H. & Co. KG and the $60,000 senior unsecured
loan from Otto Versand (GmbH & Co).
The Company maintains a $150,000 letter of credit facility in addition to
off-balance sheet stand-by letters of credit, which are used for the purchase of
inventories. The total letter of credit facility commitments outstanding at
March 30, 2002 and March 31, 2001 were approximately $36,000 and $75,000,
respectively. However, the letter of credit facilities provide restrictions on
the availability of additional financing if a "material adverse change" in the
Company's business has occurred. In February 2002, the Company determined, with
our lending institutions, that a material adverse change had occurred due to the
operating performance experienced in the fourth quarter of fiscal 2001 and due
to the estimated loss recorded on the sale of the bankcard segment. Accordingly,
on February 18, 2002, no additional letter of credit facilities were available
to the Company. In March 2002, the Company entered into a Vendor Payment
Services Agreement with Otto International Hong Kong (OIHK), a related party.
Under the terms of the agreement, the Company has open account terms with
various vendors in certain countries in Asia. The duration of the agreement is
for one year, automatically continuing unless terminated by either party with
three months' written notice. OIHK will pay the vendors the purchase order value
less a fee within seven days of the purchase order receipt. The Company will
repay OIHK for 100% of the purchase order value for goods purchased by Spiegel
and Newport News sixty days from the date of sea shipments and thirty days from
the date of air shipments. Due to the larger volume of purchases made by Eddie
Bauer in comparison to Spiegel and Newport News, the Company will make weekly
advance payments to OIHK for 100% of the purchase order value of goods purchased
by Eddie Bauer prior to shipment. Finally, under the provisions of the Vendor
Payment Services Agreement, OIHK has a lien over each shipment of goods supplied
by vendors on behalf of the Company's merchant operations. The lien shall arise
at the time OIHK makes the vendor payments relevant to the shipment in question
and shall not be satisfied until receipt by OIHK of the repayment by the Company
of the Vendor Payments in question. Such right provides that, upon the receipt
of a notice from the Payment Servicer, the Merchant or the vendor would be
required to tender any goods, for which the Merchant has not reimbursed OIHK, to
OIHK.
Substantially all of the Company's credit card receivables are sold to trusts
that, in turn, sell certificates and notes representing undivided interests in
the trusts to investors. The receivables are sold without recourse. At present,
these trusts have issued six series (each a "Series") of asset backed securities
("ABS"), three of which are backed, on a revolving basis, by private-label
receivables and three of which are backed, also on a revolving basis, by
bankcard receivables. MBIA Insurance Corporation ("MBIA") insures the investors
in two of the private-label Series. Certain minimum performance requirements
must be achieved for each of the ABS Series. In the event that the financial
performance of the receivables falls below the required minimum threshold, an
early amortization event ("Pay out Event") will occur. A "Pay Out Event" would
12
divert monthly excess cash flow remaining after the payment of debt service and
other expenses to repay principal to noteholders on an accelerated basis, rather
than to pay the cash to the Company upon deposit of new receivables. This excess
cash flow would otherwise have been utilized by the Company to fund its existing
operations.
The Company forecasts that, for the reporting period ending on February 28,
2003, it will fail to meet these minimum performance requirements on two of the
Series that are backed by bankcard receivables and potentially on one of the
insured Series backed by private-label receivables. If the two bankcard Series
fail to meet these minimum performance requirements, there would be an automatic
Pay Out Event applicable to these two Series, as well as to the remaining
bankcard Series as a result of cross-default provisions, in early March 2003. In
addition, failure to meet the minimum performance requirements by the one
insured private-label Series would result in an automatic Pay Out Event
applicable to that Series as well as to the uninsured private-label Series in
early March 2003, which would entitle MBIA to declare a Pay Out Event on the
remaining insured private-label Series.
If these Pay Out Events were to occur, the Company may be required, for at least
a period of time, to transfer newly generated receivables from existing
customers to the securitization vehicles for the benefit of the investors,
without receiving payment in cash for these receivables. The Company would not
have sufficient cash or cash flow from operations to make up this shortfall.
Accordingly, the Company would need to obtain a new credit facility or some
other source of financing. Given the Company's current financial condition, it
may be unable to obtain this alternative financing.
On April 4, 2002, MBIA Insurance Corporation ("MBIA") issued a notice asserting
the occurrence of one "Pay Out Event" as a result of a dispute regarding the
proper calculation of the minimum performance requirements and the existence of
circumstances which, if not cured within 45 days following the date of such
notice, would result in the occurrence of a second "Pay Out Event," under the
two insured Series issued by the Spiegel Credit Card Master Note Trust (the
"Trust") and known as Series 2000-A and Series 2001-A. Those Series are
supported by private label credit card receivables originated by FCNB and for
which MBIA insures the payments to noteholders and The Bank of New York acts as
indenture trustee.
The Company and FCNB filed suit and obtained a temporary restraining order
against MBIA and The Bank of New York on April 11, 2002, in the Supreme Court of
the State of New York, County of New York. On May 16, 2002, the Company and MBIA
entered into a settlement agreement pursuant to which, among other things, MBIA
agreed to withdraw its April 4, 2002 letter. In addition, the Company and FCNB
agreed to dismiss the litigation and to obtain a backup servicer no later than
December 1, 2002. Finally, the Company agreed to increase the amounts required
to be on deposit in a reserve account established for the benefit of MBIA as
insurer of the notes. Amounts in that reserve account are available to cover the
shortfall in any period, if any, between available collections on the
receivables and the amounts owing in respect of principal and interest on the
notes, prior to a claim being made against the insurer for such amounts.
Pursuant to the agreement, increases in the reserve account will be funded by
diverting excess receivables collections that would otherwise be available to
the Company; provided that during the first seven months following the date of
the agreement, such diversions were limited to a maximum of $9,000 per month and
an incremental $60,000 in the aggregate for the seven-month period. This
diversion of excess cash is measured based upon certain receivable portfolio
performance criteria. Accordingly, the actual reserve requirements may differ
from the dollar amounts disclosed above based upon actual receivable portfolio
performance. The agreement with MBIA contains other requirements, including the
requirement to file the Company's and FCNB's 2001 financial statements by
December 6, 2002. In addition, the Company agreed to appoint a backup servicer
for the servicing of its receivable portfolio and to execute a backup servicing
agreement by December 1, 2002. The Company is not presently in compliance with
the requirements of the MBIA agreement and is currently negotiating an amendment
to the MBIA agreement to extend the date of these requirements. There can be no
guarantees that MBIA will not exercise its remedies under the settlement
agreement, which would include declaring the occurrence of a "Pay Out Event", as
described above. See Note 9.
On May 15, 2002, FCNB entered into an agreement with the Office of the
Comptroller of the Currency ("OCC"), the primary federal regulator of FCNB. The
agreement calls for FCNB to comply with certain
13
requirements. The agreement, among other things, (i) contains restrictions on
transactions between the bank and its affiliates and requires the bank to
complete a review of all existing agreements with affiliated companies, and to
make necessary and appropriate changes; (ii) requires the bank to obtain an
aggregate of $198,000 in guarantees, which guarantees have been provided through
the Company's majority shareholder; (iii) restricts the bank's ability to
accept, renew or rollover deposits; (iv) places restrictions on the bank's
ability to issue new credit cards and make credit line increases; (v) requires
the bank within 30 days of the agreement to file with the OCC a disposition plan
to either sell, merge or liquidate the bank; (vi) requires the bank to maintain
sufficient assets to meet daily liquidity requirements; (vii) requires the bank
to complete a comprehensive risk management assessment; (viii) establishes
minimum capital levels for the bank; (ix) provides for increased oversight by
and reporting to the OCC; and (x) provides for the maintenance of certain asset
growth restrictions.
In October 2002, the Company submitted a revised disposition plan to the OCC.
The disposition plan generally provides for the sale or liquidation of the
bankcard portfolio by April 30, 2003 and a liquidation of FCNB thereafter. On
November 27, 2002, the OCC approved the disposition plan. Under the terms of
this plan, if FCNB did not receive an acceptable offer to buy the bankcard
portfolio in January 2003, it was required to implement plans to liquidate its
bankcard portfolio. FCNB, in addition to its own bankcard operations, issues
substantially all of the Company's private-label credit cards and services the
related receivables, including securitized receivables.
On February 14, 2003, the Company received a letter from the OCC requiring FCNB
to immediately begin the process of liquidating the bankcard portfolio and
indicating the steps it must take to do so. The OCC letter requires FCNB to: 1)
notify the trustee for each of the Company's bankcard Series that FCNB will
either amend the relevant securitization documents to replace FCNB with a
successor servicer and administrator or resign as servicer and administrator at
the earliest date permissible under the agreements, 2) cease all credit card
solicitations for its bankcards, 3) cease accepting new bankcard applications
and credit lines and offering credit line increases to any existing bankcard
account, 4) notify cardholders that FCNB will no longer honor bankcard charges
on or before March 31, 2003, and 5) cease accepting new charges on existing
bankcard accounts on or before April 1, 2003.
The Company has complied and continues to comply with the OCC requirements set
forth in its letter of February 14, 2003. The Company also continues to have
discussions with potential acquirers for the sale of the bankcard business. If
the Company is not able to sell the bankcard business before Apri1 1, 2003, a
Pay Out Event will occur with respect to each bankcard Series as a result of the
OCC's requirements that FCNB cease accepting new charges on existing bankcard
accounts.
In the third quarter of fiscal 2002, the Company was informed by one of the
rating agencies that it may downgrade the rating of the First Consumers Credit
Card Master Note Trust Series 2001-VFN Class A Notes and the Spiegel Credit Card
Master Note Trust Series 2001-VFN Class A Notes. Under the provisions of the
existing securitization agreements, a rating agency downgrade would result in a
"Pay Out Event" of the receivable securitizations. In order to avoid such a "Pay
Out Event", the Company agreed to increase its percentage of required collateral
accordingly. This had the impact of increasing the receivables retained by the
Company. The financing of these additional receivables will be generated from
existing cash flows from operations and through the Company's existing credit
facilities, if available.
In December 2002 and January 2003, four lawsuits were filed in the United States
District Court for the Northern District of Illinois, Eastern Division, against
the Company and certain current and former officers alleging violations of
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. The plaintiffs purport to represent shareholders who
purchased the Company's common stock between April 24, 2001 and April 19, 2002.
The Company believes these claims lack merit and intends to defend against them
vigorously.
The staff of the Securities and Exchange Commission has commenced an informal
investigation into the conduct of the Company and its officers and directors,
which focuses on the Company's compliance with its disclosure obligations under
the federal securities laws. For further information, see Item 1 of Part II of
this Report.
14
The Company is routinely involved in a number of other legal proceedings and
claims, which cover a wide range of matters. In the opinion of management, these
other legal matters are not expected to have any material adverse effect on the
consolidated financial position or results of operations of the Company.
(8) Discontinued Operations
Historically, the operating results of the Company were reported for two
segments: merchandising and bankcard. The merchandising segment included an
aggregation of the Company's three merchant divisions and the private-label
preferred credit operation. The bankcard segment included primarily the bankcard
operations of FCNB, the Company's special-purpose bank and Financial Services
Acceptance Corporation (FSAC). In the fourth quarter of fiscal 2001, the Company
formalized a plan to sell the bankcard segment. The Company continues to have
discussions with potential acquirers for the sale of the bankcard business.
However, there can be no guarantees that the outcome of these discussions will
result in the sale of the bankcard business in the time permitted by the OCC. To
the extent that the Company is unable to sell the bankcard segment, this segment
will be liquidated as part of the liquidation of FCNB in its entirety, as
required under an agreement with the OCC.
The disposition of the bankcard segment was accounted for in fiscal 2001 in
accordance with APB No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions." Accordingly, results of this
business have been classified as discontinued operations for all periods
presented. Interest expense was allocated to discontinued operations based upon
debt that could be specifically attributed to the bankcard segment. Effective at
the beginning of fiscal 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment and Disposal of Long-Lived Assets." Upon adoption, the Company
changed the presentation of net assets of discontinued operations for all
periods presented.
As a result of the Company's plan to sell the bankcard segment, the remaining
business segment is the merchandising segment, which includes the private-label
preferred credit card operations related to the sale of the Company's
merchandise. The merchandising segment is reflected in the Company's
Consolidated Financial Statements as continuing operations.
Discontinued operations include management's best estimates of the amounts to be
realized on the sale of the bankcard segment. In the fourth quarter of fiscal
2001, the Company recorded an estimated loss on disposal of the bankcard segment
of $319,297. This charge includes an estimate of severance and fees of $8,000,
and estimated losses from the bankcard segment of $40,000 from the measurement
date to the disposal date. If the Company were to sell the bankcard business for
less than these estimates or were required to liquidate the bankcard portfolio,
the Company will likely have to increase its estimated loss on the disposal of
the bankcard segment. Losses for the bankcard segment for the 13-week period
ending March 30, 2002 totaled $4,104, which were recorded against the Company's
loss on disposal accrual.
Assets and liabilities of the discontinued operations are as follows:
March 30, March 31, December 29,
2002 2001 2001
----------------- ---------------- ------------------
Current assets of discontinued operations $ 342,852 $ 476,939 $ 314,160
Long-term assets 51,151 15,606 51,607
----------------- ---------------- ------------------
Assets of discontinued operations 394,003 492,545 365,767
----------------- ---------------- ------------------
Current liabilities (including estimated
loss on disposal) 495,923 184,687 512,639
Long-term liabilities - 32,229 -
----------------- ---------------- ------------------
Liabilities of discontinued operations 495,923 216,916 512,639
----------------- ---------------- ------------------
Total net assets (liabilities) of
discontinued operations $ (101,920) $ 275,629 $ (146,872)
================= ================ ==================
15
(9) Going Concern
The Company's revolving and non-affiliate loan agreements contain covenants,
including restrictions on the payment of dividends and financial covenants that
require the Company to maintain minimum levels of tangible net worth and certain
ratios, including fixed charge coverage ("Coverage"), total debt to equity
("Leverage"), and adjusted debt to earnings before interest, taxes, depreciation
and amortization, and rents ("Debt to EBITDAR"). For the reporting periods ended
December 29, 2001, and March 30, 2002, the Company was in violation of its
financial covenants and certain other covenants contained in the Company's debt
agreement and, accordingly, all of the Company's debt is currently due and
payable. The Company is working with its lending group to restructure the
existing credit facilities and to enter into new credit facilities. However,
there can be no assurances that either a new credit facility or alternative
sources of financing will be available to the Company.
In addition, the Company has not complied with the provisions of the MBIA
settlement agreement as of February 2003. The Company is working with MBIA to
obtain amended settlement agreements. However, there can be no guarantees that
MBIA will not exercise its remedies under the settlement agreement, which would
include a "Pay Out Event".
Finally, the Company has forecasted that, for the reporting period ending
February 28, 2003, it will not meet certain minimum performance requirements on
two of its six Series of ABS securities, which relate to bankcard receivables
sold, and potentially on one of the insured Series, which relate to
private-label receivables sold. If these three Series fail to meet these minimum
performance requirements, there would be an automatic Pay Out Event, either
directly or as a result of cross-default provisions, on five of the six Series
and MBIA would be entitled to declare a Pay Out Event on the sixth Series.
The Company was not in compliance with its financial and certain other covenants
contained in its debt agreements and, accordingly, all of the Company's debt is
currently due and payable. The Company has been unable to successfully negotiate
a new credit facility with its lending institutions, to obtain an amended
settlement agreement with MBIA Insurance Corporation ("MBIA"), or to prevent Pay
Out Events from occurring under its securitization transactions. These matters,
among others, raise substantial doubt about the Company's ability to continue as
a going concern for a reasonable period of time. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. In addition, the Company is currently assessing the effect on
its financial statements of a Pay Out Event with respect to one or more of its
private-label Series. While it is likely that any such payout event would have a
material adverse effect on the Company's financial condition and results of
operations, the Company is unable, at this time, to quantify the effect on the
Company's financial statements.
The Company has taken actions to improve its cash flow through effective working
capital management, most notably the management of inventory levels across each
business unit. In addition, the Company is developing strategies to enhance its
marketing and merchandising initiatives while at the same time lowering its cost
structure. Finally, the Company continues to have discussions with its lending
institutions and its majority shareholder regarding additional financing. There
can be no assurances that any or all of these matters will be resolved
satisfactorily, or if resolved satisfactorily, will provide resources sufficient
to sustain the Company's operations. As a result, the Company may not have
sufficient funds to finance its operations beginning in the near future and
thereafter. In light of the Company's existing operating and financing
challenges, the Company is exploring a range of strategic options, in
conjunction with its ongoing discussions with lenders and other parties, to
restructure its debt obligations and securitization arrangements and provide for
the Company's continued operations.
16
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations ($000s omitted, except per share amounts)
RESULTS OF OPERATIONS
The Company, like other retailers, experiences seasonal fluctuations in its
revenues and net earnings. Historically, a significant amount of the Company's
net sales and a majority of its net earnings have been realized during the
fourth quarter. Accordingly, the results for the first quarter are not
necessarily indicative of the results to be expected for the entire year.
The following table sets forth the statement of operations data for the 13 weeks
ended March 30, 2002 and March 31, 2001 ("first quarter" or "13-week period").
Certain prior year amounts have been reclassified to conform with the fiscal
2002 presentation.
Thirteen Weeks Ended
March 30, March 31,
($000's omitted) 2002 2001
- ------------------------------------------------------------------- ------------- -------------
Net sales $ 536,966 $ 611,679
Finance revenue 12,911 26,450
Other revenue 67,152 68,182
Cost of sales (including buying and occupancy expenses) 343,057 397,674
Selling, general and administrative expenses 303,432 331,270
Operating loss (29,460) (22,633)
Interest expense 13,911 14,481
Income tax benefit -- (14,177)
Minority interest in loss of consolidated subsidiary 32 174
Loss from continuing operations (43,339) (22,763)
Earnings from discontinued operations
(net of tax expense of $6,887) -- 10,521
Net loss $ (43,339) $ (12,242)
Other information:
- -----------------
Gross profit margin (% of total net sales) 36.1% 35.0%
SG&A expenses (% of total revenue) 49.2% 46.9%
Net sales: Net sales decreased by $74,713 or 12.2% to $536,966 for the 13 weeks
ended March 30, 2002 from net sales of $611,679 for the 13 weeks ended March 31,
2001. The decrease in net sales was driven by lower catalog and retail net
sales, partially offset by an increase in e-commerce net sales. Weak customer
demand for the product offer, as well as, lower catalog circulation and less
promotional activity were primary reasons for the sales decrease in the current
year. Eddie Bauer's comparable store sales decreased 16% for the 13-week period
ended March 30, 2002. Approximately 37% of the Company's net sales for the 13
weeks ended March 30, 2002 were made with the Company's private-label credit
cards. If one or more Pay Out Events occur under the Company's private-label
securitization arrangements, the Company's net sales may decline substantially
if the Company were required to significantly reduce its use of private-label
credit cards.
Finance revenue: Finance revenue decreased by $13,539 or 51.2% to $12,911 for
the 13 weeks ended March 30, 2002 from $26,450 for the 13 weeks ended March 31,
2001. Net pretax gains (losses) on the securitization of credit card receivables
included in finance revenue totaled $(4,969), which represented a decrease in
finance revenue of $10,581 versus the comparable period of the prior year
period. The decline in net pretax gains resulted primarily from an increase in
charge-offs compared to the prior year. In addition, declines in finance revenue
were also due to lower cash flows received from the trust resulting
17
from higher actual charge off rates in the current year. If one or more Payout
Events occur under the Company's securitization arrangements, the Company's
finance revenues would decline sharply.
Other revenue: Other revenue decreased by $1,030 or 1.5% to $67,152 for the 13
weeks ended March 30, 2002 from $68,182 for the 13 weeks ended March 31, 2001.
This decrease resulted from lower delivery income at Spiegel and Newport News
driven by lower order volume. This was partially offset by increased delivery
and royalty income at Eddie Bauer.
Cost of sales: Cost of sales decreased by $54,617 or 13.7% to $343,057 for the
13 weeks ended March 30, 2002, from $397,674 for the 13 weeks ended March 31,
2001. As a percentage of net sales, cost of sales decreased to 63.9% for the 13
weeks ended March 30, 2002 from 65.0% in the comparable period of the prior
year. This decrease was primarily due to lower inventory markdowns at Eddie
Bauer due to lower inventory levels in 2002 versus the comparable period in the
prior year.
Selling, general and administrative expenses ("SG&A"): SG&A expenses decreased
$27,838 or 8.4%, to $303,432 for the 13 weeks ended March 30, 2002 from $331,270
for the 13 weeks ended March 31, 2001. As a percentage of total revenue, SG&A
expenses increased to 49.2% for the 13 weeks ended March 30, 2002 from 46.9% in
the comparable period of the prior year. This increase was partially due to
lower advertising productivity, which resulted in higher advertising costs as a
percentage of net sales. In addition, higher SG&A expenses as a percentage of
net sales at Eddie Bauer occurred due to higher relative fixed store operations
expense. Also contributing to the increase in SG&A as a percentage of total
revenue was increased operating expenses associated with the private-label
preferred portfolio due to an increase in net charge-offs in comparison to the
prior year period.
Operating loss: The Company recorded an operating loss of $29,460 for the 13
weeks ended March 30, 2002 compared to an operating loss of $22,633 for the
comparable period of the prior year. The increased operating loss in the current
year was due to lower net sales at each merchant company, lower finance revenue
from the private-label preferred credit card operation and increased operating
expenses for the private-label preferred portfolio due to an increase in net
charge-offs in comparison to the prior year period.
Interest expense: Interest expense totaled $13,911 and $14,481 for the 13 weeks
ended March 30, 2002 and March 31, 2001, respectively. Lower borrowing rates on
the Company's debt obligations resulted in lower interest expense despite the
increased average debt levels in comparison to the prior year period. Funding
requirements, primarily to support the private-label preferred credit card
operations, drove average debt to $1,209,040 for the first quarter compared to
$956,007 for the prior year period. (See Note 7 to the Consolidated Financial
Statements.)
Income tax benefit: The Company has recorded no tax benefits associated with its
pretax losses incurred for the 13-week period ending March 30, 2002 due to
substantial doubt about the Company's ability to continue as a going concern
(see Note 9 to the Consolidated Financial Statements). The Company's
consolidated effective tax rate was 38.2% for the 13-week period ended March 31,
2001. The Company assesses its effective tax rate on a continuous basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its operating and cash requirements through
funds generated from operations, the securitization of credit card receivables
and the issuance of debt and common stock. However, the Company has been unable
to successfully negotiate a new credit facility with its lending institutions,
to obtain an amended settlement agreement with MBIA Insurance Corporation
("MBIA"), and to assure the future achievement of minimum performance
requirements under its securitization transactions. These matters raise
substantial doubt about the Company's ability to continue as a going concern for
a reasonable period of time.
Net cash used in operating activities totaled $119,436 for the 13-week period
ended March 30, 2002 compared to $237,410 for the 13-week period ended March 31,
2001. Net cash used in operations declined $117,974 compared to the prior year
period. The decrease in cash utilized for accounts payable and accrued
liabilities reflects lower inventory levels in the current year relative to the
prior year period as a
18
result of the Company's commitment to tightly manage inventory in response to
the decline in net sales. Inventory levels were 18% lower at March 30, 2002 as
compared to March 31, 2001. A decrease in bonus and long-term incentive payments
in comparison to the prior year period also contributed to the decline in net
cash used in operating activities.
Net cash used in investing activities totaled $64,692 for the 13-week period
compared to $19,960 in the same period last year. Expenditures in the current
period were comprised primarily of Eddie Bauer retail store expansion and
remodeling, the purchase of an administrative building for Newport News and
information technology purchases for equipment and development. In addition, the
cash reserve requirements for private-label preferred credit card receivable
securitizations increased $59,968 due to unfavorable private-label preferred
credit card portfolio performance driven by higher charge-offs. The Company
maintains cash reserve accounts as necessary, representing reserve funds used as
credit enhancement for specific classes of investor certificates. Cash reserve
requirements are determined based upon the actual performance of the credit card
portfolio. The performance of the credit card portfolio is measured based
primarily upon actual finance yield and charge-off rates.
Net cash used in discontinued operations totaled $44,952 compared to net cash
provided by discontinued operations of $5,320 in the same period last year. The
increase in cash used in discontinued operations in the current year period was
due to lower operating results and increases in other assets including credit
card accounts receivable.
As of March 30, 2002, total debt was $1,300,857 compared to $1,031,857 as of
March 31, 2001. The increase in total debt compared to the prior year period was
primarily driven by a decline in operating results and increased funding
requirements for the private-label preferred credit card operations primarily to
support collateral requirements due to weak portfolio performance. The Company
has a $750,000 revolving credit agreement with a group of banks. Borrowings
under the agreement are comprised of a $600,000 long-term component maturing
July 2003 and a $150,000 364-day component that matured in June 2002. Borrowings
under the Company's $600,000 long-term revolving credit agreement were $600,000
at March 30, 2002. Borrowings under the $150,000 364-day agreement were $100,000
at March 30, 2002. However, the revolving credit agreement provides for
restrictions on the availability of additional financing if a "material adverse
change" in the Company's business has occurred. In February 2002, the Company
determined, with its lending institutions, that a material adverse change had
occurred due to the operating performance experienced in the fourth quarter of
fiscal 2001 and due to the estimated loss recorded on the sale of the bankcard
segment. Accordingly, on February 18, 2002, the borrowing capacity under the
revolving credit facility was capped at $700,000, which represented the
Company's borrowings outstanding on this date.
The Company's revolving and non-affiliate loan agreements provide for
restrictive covenants, including restrictions on the payment of dividends.
Financial covenants contained in the revolving and term loan agreements
establish minimum levels of tangible net worth and require the maintenance of
certain ratios, including fixed charge coverage ("Coverage"), total debt to
equity ("Leverage"), and adjusted debt to earnings before interest, taxes,
depreciation and amortization, and rents ("Debt to EBITDAR"). Additionally,
these and certain other debt agreements contain cross default provisions. For
the reporting period March 30, 2002, the Company was in violation of its
financial covenants and certain other covenants. Accordingly, the financial
statements reflect all of the Company's debt obligations under "current portion
of long-term debt". (See Note 9). The Company is working with its lending group
to restructure the existing credit facilities and to enter into new credit
facilties. However, there can be no assurances that a new credit facility will
be available to the Company.
If the Company is not able to enter into a new credit facility, alternative
sources of financing will be required to obtain the necessary liquidity to
continue to operate the business. While the Company is presently considering its
alternatives, given its current financial condition, it may be unable to obtain
this alternative financing. These matters raise substantial doubt about the
Company's ability to continue as a going concern for a reasonable period of
time. See Note 9 to the consolidated financial statements.
19
Otto Versand (GmbH & Co) ("Otto Versand"), a privately held German partnership,
acquired the Company in 1982. In April 1984, Otto Versand transferred its
interest in the Company to its partners and designees. In October 2002, the
German partnership changed its name from Otto Versand (GmbH & Co) to Otto (GmbH
& Co KG), hereinafter referred to as "Otto Versand (GmbH & Co)" or "Otto
Versand".
In September 2001, the Company entered into a revolving credit agreement with
Otto Versand (GmbH & Co), a related party. The initial availability under this
credit agreement was $75,000. The credit agreement bears interest at a variable
rate based on LIBOR plus a margin, comparable to the Company's other revolving
credit agreements. The initial agreement extended through December 15, 2001. In
November 2001, this revolving credit agreement with Otto Versand (GmbH & Co) was
increased from $75,000 to $100,000 and the maturity date was extended from
December 15, 2001 to June 15, 2002. At December 29, 2001, borrowings under this
agreement totaled $50,000. As of February 2002, the balance outstanding under
the revolving credit agreement with Otto Versand (GmbH & Co) was $100,000. This
obligation was extinguished with the proceeds of new term loans in the aggregate
amount of $100,000 from Otto-Spiegel Finance G.m.b.H. & Co. KG, a related party.
These term loans had a maturity date of December 31, 2002, bear interest at a
rate of 4% per annum and may be subordinate to borrowings under any new credit
facility. As of March 30, 2002, there was an additional $60,000 senior unsecured
loan from Otto Versand (GmbH & Co), which bears interest at a rate of LIBOR plus
a margin. Interest expense attributable to the borrowings from Otto Versand
(GmbH & Co) and Otto-Spiegel Finance G.m.b.H & Co. KG during the thirteen weeks
ended March 30, 2002 was $882. As of February 2003, the related party borrowings
outstanding consisted of the $100,000 term loans from Otto-Spiegel Finance
G.m.b.H. & Co. KG and the $60,000 senior unsecured loan from Otto Versand (GmbH
& Co).
A principal source of liquidity for the Company has been its ability to
securitize substantially all of the credit card receivables that it generates.
Many of the customers at the Company's merchant companies have received credit
through private-label credit cards issued by FCNB, the Company's special-purpose
bank. Approximately 41% of the Company's total net sales in fiscal 2001 were
made with the Company's private-label credit cards. FCNB also has issued
MasterCard and VISA bankcards to the general public.
The Company securitizes the receivables generated by the use of its
private-label cards and bankcards by selling them to securitization vehicles,
which, in turn, sell asset backed securities ("ABS") to investors. The
receivables are sold without recourse. At present, these vehicles have issued
six series (each a "Series") of ABS securities. The Spiegel Credit Card Master
Note Trust Series 2000-A notes, the Spiegel Credit Card Master Note Trust Series
2001-A notes and the Spiegel Credit Card Master Note Trust Series 2001-VFN notes
are backed, on a revolving basis, by private-label receivables. The First
Consumers Master Trust Series 1999-A certificates, the First Consumers Credit
Card Master Note Trust Series 2001-A notes and the First Consumers Credit Card
Master Note Trust Series 2001-VFN notes are backed, also on a revolving basis,
by bankcard receivables. MBIA Insurance Corporation ("MBIA") insures the
investors in the Spiegel 2000-A Series and the Spiegel 2001-A Series. Under
these arrangements, the securitization vehicles had outstanding an aggregate of
approximately $2.2 billion of notes and certificates at the end of December
2002.
Each Series requires that the revolving pool of receivables supporting the
Series achieve certain minimum performance requirements. If the receivables pool
cannot achieve these minimum performance requirements, a "Pay Out Event" will
occur. A Pay Out Event, which is also known as an early amortization event,
would divert monthly excess cash flow remaining after the payment of debt
service and other expenses to repay principal to investors on an accelerated
basis, rather than to pay the cash to the Company upon deposit of new
receivables. These cash payments would have been utilized by the Company to fund
its operations.
20
The following table reflects facility amounts and the maturity dates of the
Company's off-balance sheet facilities:
($000's omitted) 2002 2003 2004 2005 2006 Thereafter
- ------------------------- ------------ ------------ -------------- --------------- -------------- -------------
First Consumers
Master Trust Series
1999-A $ - $ - $ 250,000 $ - $ - $ -
First Consumers
Credit Card Master
Note Trust Series
2001-A - - - - 600,000 -
Spiegel Credit Card
Master Note Trust
& First Consumers
Credit Card
Master Note Trust
Series 2001-VFN - - - 1,500,000 - -
Spiegel Credit Card
Master Note Trust
Series 2000-A - - - 600,000 - -
Spiegel Credit Card
Master Note Trust
Series 2001-A - - - 600,000 - -
------------ ------------ -------------- --------------- -------------- -------------
Total Securitizations $ - $ - $ 250,000 $ 2,700,000 $ 600,000 $ -
============ ============ ============== =============== ============== =============
As previously reported, the Company had forecasted that, in the next several
months, receivable pools would not meet the minimum performance requirements. As
a result of a new forecast, the Company presently expects that, for the
reporting period ending on February 28, 2003, it will fail to meet these minimum
performance requirements on the First Consumers 1999-A Series and the First
Consumers 2001-A Series that are backed by bankcard receivables and potentially
on the Spiegel 2000-A Series backed by private-label receivables. If the two
bankcard Series fail to meet these minimum performance requirements, there would
be an automatic Pay Out Event applicable to these two Series, as well as to the
First Consumers 2001-VFN Series as a result of cross-default provisions, in
early March 2003. In addition, failure to meet the minimum performance
requirements by the Spiegel 2000-A Series would result in an automatic Pay Out
Event applicable to that Series as well as to the Spiegel 2001-VFN Series in
early March 2003, which would entitle MBIA to declare a Pay Out Event on the
Spiegel 2001-A Series. If the Company is not able to restructure its existing
credit facilities or enter into new credit facilities with its lending
institutions, an insolvency event under all three private-label Series of ABS
securities would be deemed to have occurred which would constitute a Pay Out
Event applicable to the three Series.
If these Pay Out Events were to occur, the Company may be required, for at least
a period of time, to transfer newly generated receivables from existing
customers to the securitization vehicles for the benefit of the investors,
without receiving payment in cash for these receivables. The Company would not
have sufficient cash or cash flow from operations to make up this shortfall.
Accordingly, the Company would need to obtain a new credit facility or some
other source of financing. The Company has been in default on its existing
revolving credit facility since fiscal 2001 and, accordingly, the Company is not
permitted to borrow additional amounts under this facility and all existing
borrowings thereunder are currently due and payable. As a result, the Company
may be unable to obtain this alternative financing.
21
In the third quarter of fiscal 2002, the Company was informed by one of the
rating agencies that it may downgrade the rating of the First Consumers Credit
Card Master Note Trust Series 2001-VFN Class A Notes and the Spiegel Credit Card
Master Note Trust Series 2001-VFN Class A Notes. Under the provisions of the
existing securitization agreements, a rating agency downgrade would result in a
"Pay Out Event" of the receivable securitizations. In order to avoid such a "Pay
Out Event", the Company agreed to increase its percentage of required collateral
accordingly. This had the impact of increasing the receivables retained by the
Company. The financing of these additional receivables will be generated from
existing cash flows from operations and through the Company's existing credit
facilities, if available.
On April 4, 2002, MBIA issued a notice asserting the occurrence of one "Pay Out
Event" as a result of a dispute regarding the proper calculation of the minimum
performance requirements and the existence of circumstances which, if not cured
within 45 days following the date of such notice, would result in the occurrence
of a second "Pay Out Event," under Spiegel Series 2000-A and Series 2001-A.
Those Series are supported by private label credit card receivables originated
by FCNB and for which MBIA insures the payments to noteholders and The Bank of
New York acts as indenture trustee.
The Company and FCNB filed suit and obtained a temporary restraining order
against MBIA and The Bank of New York on April 11, 2002, in the Supreme Court of
the State of New York, County of New York. On May 16, 2002, the Company and MBIA
entered into a settlement agreement pursuant to which, among other things, MBIA
agreed to withdraw its April 4, 2002 letter. In addition, the Company and FCNB
agreed to dismiss the litigation and to obtain a backup servicer no later than
December 1, 2002. Finally, the Company agreed to increase the amounts required
to be on deposit in a reserve account established for the benefit of MBIA as
insurer of the notes. Amounts in that reserve account are available to cover the
shortfall in any period, if any, between available collections on the
receivables and the amounts owing in respect of principal and interest on the
notes, prior to a claim being made against the insurer for such amounts.
Pursuant to the agreement, increases in the reserve account will be funded by
diverting excess receivables collections that would otherwise be available to
the Company provided that during the first seven months following the date of
the agreement, such diversions were limited to a maximum of $9,000 per month and
an incremental $60,000 in the aggregate for the seven-month period. This
diversion of excess cash is measured based upon certain receivable portfolio
performance criteria. Accordingly, the actual reserve requirements may differ
from the dollar amounts disclosed above based upon actual receivable portfolio
performance. The agreement with MBIA contains other requirements, including the
requirement to file the Company's and FCNB's 2001 financial statements by
December 6, 2002. In addition, the Company agreed to appoint a backup servicer
for the servicing of its receivable portfolio and to execute a backup servicing
agreement by December 1, 2002. The Company is not presently in compliance with
the requirements of the MBIA agreement and is currently negotiating an amendment
to the MBIA agreement to extend the date of these requirements. There can be no
guarantees that MBIA will not exercise its remedies under the settlement
agreement, which would include declaring the occurrence of a "Pay Out Event", as
described above. See Note 9 to the consolidated financial statements.
On May 15, 2002, FCNB entered into an agreement with the Office of the
Comptroller of the Currency ("OCC"), the primary federal regulator of FCNB. The
agreement calls for FCNB to comply with certain requirements. The agreement,
among other things, (i) contains restrictions on transactions between the bank
and its affiliates and requires the bank to complete a review of all existing
agreements with affiliated companies, and to make necessary and appropriate
changes; (ii) requires the bank to obtain an aggregate of $198,000 in
guarantees, which guarantees have been provided through the Company's majority
shareholder; (iii) restricts the banks ability to accept, renew or rollover
deposits; (iv) places restrictions on the bank's ability to issue new credit
cards and make credit line increases; (v) requires the bank within 30 days of
the agreement to file with the OCC a disposition plan to either sell, merge or
liquidate the bank; (vi) requires the bank to maintain sufficient assets to meet
daily liquidity requirements; (vii) requires the bank to complete a
comprehensive risk management assessment; (viii) establishes minimum capital
levels for the bank; (ix) provides for increased oversight by and reporting to
the OCC; and (x) provides for the maintenance of certain asset growth
restrictions.
22
In October 2002, the Company submitted a revised disposition plan to the OCC.
The disposition plan generally provides for the sale or liquidation of the
bankcard portfolio by April 30, 2003 and a liquidation of FCNB thereafter. On
November 27, 2002, the OCC approved the disposition plan. Under the terms of
this plan, if FCNB did not receive an acceptable offer to buy the bankcard
portfolio in January 2003, it was required to implement plans to liquidate its
bankcard portfolio. FCNB, in addition to its own bankcard operations, issues
substantially all of the Company's private-label credit cards and services the
related receivables, including securitized receivables.
On February 14, 2003, the Company received a letter from the OCC requiring FCNB
to immediately begin the process of liquidating the bankcard portfolio and
indicating the steps it must take to do so. The OCC letter requires FCNB to: 1)
notify the trustee for each of the Company's bankcard Series that FCNB will
either amend the relevant securitization documents to replace FCNB with a
successor servicer and administrator or resign as servicer and administrator at
the earliest date permissible under the agreements, 2) cease all credit card
solicitations for its bankcards, 3) cease accepting new bankcard applications
and credit lines and offering credit line increases to any existing bankcard
account, 4) notify cardholders that FCNB will no longer honor bankcard charges
on or before March 31, 2003, and 5) cease accepting new charges on existing
bankcard accounts on or before April 1, 2003.
The Company has complied and continues to comply with the OCC requirements set
forth in its letter of February 14, 2003. The Company also continues to have
discussions with potential acquirers for the sale of the bankcard business. If
the Company is not able to sell the bankcard business before Apri1 1, 2003, a
Pay Out Event will occur with respect to each bankcard Series as a result of the
OCC's requirements that FCNB cease accepting new charges on existing bankcard
accounts.
Although the Company plans to discontinue the bankcard business, it plans to
remain in the private-label credit card business. In the future, it plans to
issue its private-label credit cards through its merchant operations, rather
than FCNB, but also may consider seeking a third-party credit provider. The
Company is in the process of establishing an in-house capability to service
these receivables or otherwise it will seek to secure a third-party credit
provider.
23
Overall, aggregate maturities under the Company's cash obligations as of March
30, 2002 are as follows:
($000s omitted) 2002 2003 2004 2005 2006 Thereafter
- --------------------- ------------ -------------- -------------- -------------- ------------ -------------
Revolving credit
agreement $ - $ 700,000 $ - $ - $ - $ -
Otto Versand
(GmbH & Co)
Senior
unsecured loan - 60,000 - - - -
Term loan
agreements - 392,857 - - - -
Otto-Spiegel
Finance G.m.b.H
& Co KG
Term loan
agreements - 100,000 - - - -
Secured notes - 48,000 - - - -
Operating leases 94,609 122,266 111,923 100,719 84,076 273,461
Total
------------ -------------- -------------- -------------- ------------ -------------
cash obligations $ 94,609 $ 1,423,123 $ 111,923 $ 100,719 $ 84,076 $ 273,461
============ ============== ============== ============== ============ =============
The Company was not in compliance with its financial covenants and certain other
covenants contained in its debt agreements and, accordingly, all of the
Company's debt is currently due and payable. The above table has reflected the
Company's credit obligations with its lending institutions as payable in 2003.
See Note 9 to the consolidated financial statements.
In addition, the Company has other commercial commitments as of March 30, 2002
as follows:
($000s omitted) 2002 2003 2004 2005 2006 Thereafter
- ---------------------- ------------- ------------- ------------- ------------ ------------- -------------
Letter of credit
facilities $ 30,000 $ - $ - $ - $ - $ -
Standby letters of
credit 2,500 3,500 - - - -
Total commercial
------------- ------------- ------------- ------------ ------------- -------------
commitments $ 32,500 $ 3,500 $ - $ - $ - $ -
============= ============= ============= ============ ============= =============
The Company maintains a $150,000 letter of credit facility in addition to
off-balance sheet stand-by letters of credit, which are used for the purchase of
inventories. The total of letter of credit facility commitments outstanding at
March 30, 2002 and March 31, 2001 were approximately $36,000 and $75,000,
respectively. However, the letter of credit facilities provide restrictions on
the availability of additional financing if a "material adverse change" in the
Company's business has occurred. In February 2002, the Company determined, with
our lending institutions, that a material adverse change had occurred due to the
operating performance experienced in the fourth quarter of fiscal 2001 and due
to the estimated loss recorded on the sale of the bankcard segment. Accordingly,
on February 18, 2002, no additional letter of credit facilities were available
to the Company. In March 2002, the Company entered into a Vendor Payment
Services Agreement with Otto International Hong Kong (OIHK), a related party.
Under the terms of the agreement, the Company has open account terms with
various vendors in certain countries in Asia. The duration of the agreement is
for one year, automatically continuing unless terminated by either party with
three months' written notice. OIHK will pay the vendors the purchase order value
less a fee within seven days of the
24
purchase order receipt. The Company will repay OIHK for 100% of the purchase
order value for goods purchased by Spiegel and Newport News sixty days from the
date of sea shipments and thirty days from the date of air shipments. Due to the
larger volume of purchases made by Eddie Bauer in comparison to Spiegel and
Newport News, the Company will make weekly advance payments to OIHK for 100% of
the purchase order value for goods purchased by Eddie Bauer prior to shipment.
Finally, under the provisions of the Vendor Payment Services Agreement, OIHK has
a lien over each shipment of goods supplied by vendors on behalf of the
Company's merchant operations. The lien shall arise at the time OIHK makes the
vendor payments relevant to the shipment in question and shall not be satisfied
until receipt by OIHK of the repayment by the Company of the Vendor Payments in
question. Such right provides that, upon the receipt of a notice from the
Payment Servicer, the Merchant or the vendor would be required to tender any
goods, for which the Merchant has not reimbursed OIHK, to OIHK.
The Company was not in compliance with its financial covenants and certain other
covenants contained in its debt agreements and, accordingly, all of the
Company's debt is currently due and payable. The Company's ability to satisfy
debt obligations and to pay principal and interest on debt, fund working capital
and make anticipated capital expenditures will depend on the occurrence and
effect of Pay Out Events applicable to its private-label securitizations, the
outcome of its negotiations with its lenders, resolution of the uncertainty
relating to the sale or liquidation of the bankcard segment, the Company's
ability to service private-label preferred credit programs and any other changes
in market conditions that are beyond the Company's control, as well as the
Company's future performance. There can be no assurances that any or all of
these matters will be resolved satisfactorily, or if resolved satisfactorily,
will provide resources sufficient to sustain the Company's operations. These
matters raise substantial doubt about the Company's ability to continue as a
going concern for a reasonable period of time.
As a result of these matters, the Company may not have sufficient funds to
finance its operations beginning in the near future and thereafter. In light of
the Company's existing operating and financing challenges, the Company is
exploring a range of strategic options, in conjunction with its ongoing
discussions with lenders and other parties, to restructure its debt obligations
and securitization arrangements and provide for the Company's continued
operations. As part of these efforts, the Company is taking steps to engage the
services of restructuring advisors.
RELATED PARTY TRANSACTIONS
Otto Versand (GmbH & Co) ("Otto Versand"), a privately held German partnership,
acquired the Company in 1982. In April 1984, Otto Versand transferred its
interest in the Company to its partners and designees. Otto Versand and the
Company have entered into certain agreements seeking to benefit both parties by
providing for the sharing of expertise. In October 2002, the German partnership
changed its name from Otto Versand (GmbH & Co) to Otto (GmbH & Co KG),
hereinafter referred to as "Otto Versand (GmbH & Co)" or "Otto Versand". The
following is a summary of such agreements and certain other transactions:
The Company utilizes the services of Otto Versand International (GmbH) as a
buying agent for the Company in Hong Kong, Taiwan, Korea, India, Italy,
Indonesia, Singapore, Thailand, Poland, Brazil and Turkey. Otto Versand
International (GmbH) is a wholly owned subsidiary of Otto Versand. Buying agents
locate suppliers, inspect goods to maintain quality control, arrange for
appropriate documentation and, in general, expedite the process of procuring
merchandise in these areas. Under the terms of its arrangements, the Company
paid $679 and $1,948 for the 13 weeks ended March 30, 2002 and March 31, 2001,
respectively. The arrangements are indefinite in term but may generally be
canceled by either party upon one year written notice.
In March 2002, the Company entered into a Vendor Payment Services Agreement with
Otto International Hong Kong (OIHK), a related party. Under the terms of the
agreement, the Company has open account terms with various vendors in certain
countries in Asia. The duration of the agreement is for one year, automatically
continuing unless terminated by either party with three months written notice.
OIHK will pay the vendors the purchase order value less a fee within seven days
of the purchase order receipt. The Company will repay OIHK for 100% of the
purchase order value for goods purchased by Spiegel and Newport News sixty days
from the date of sea shipments and thirty days from the date of air shipments.
Due to the larger volume of purchases made by Eddie Bauer in comparison to
Spiegel and Newport News, the Company will make weekly advance payments to OIHK
for 100% of the purchase order value for goods purchased by Eddie Bauer prior to
shipment. Finally, under the provisions of the Vendor Payment Services
Agreement, OIHK has a lien over each shipment of goods supplied by vendors on
behalf of the Company's merchant operations. The lien shall arise at the time
OIHK makes the vendor payments relevant to the shipment in question and shall
not be satisfied until receipt by OIHK of the repayment by the Company of the
Vendor Payments in question. Such right provides that, upon the receipt of a
notice from the Payment Servicer, the Merchant or the vendor would be required
to tender any goods, for which the Merchant has not reimbursed OIHK, to OIHK.
In September 2001, the Company entered into a revolving credit agreement with
Otto Versand. The initial availability under this credit agreement was $75,000.
The credit agreement bears interest at a variable rate based on LIBOR plus a
margin, comparable to the Company's other revolving credit agreements. The
25
initial agreement extended through December 15, 2001. In November 2001, this
revolving credit agreement with Otto Versand was increased from $75,000 to
$100,000 and the maturity date was extended from December 15, 2001 to June 15,
2002. As of February 2002, the balance outstanding under the revolving credit
agreement with Otto Versand was $100,000. This obligation was extinguished with
the proceeds of new term loans in the aggregate amount of $100,000 from
Otto-Spiegel Finance G.m.b.H. & Co. KG. These term loans had a maturity date of
December 31, 2002, bear interest at a rate of 4% per annum and may be
subordinate to borrowings under any new credit facility. As of March 30, 2002,
there was an additional $60,000 senior unsecured loan from Otto Versand (GmbH &
Co), which bears interest at a rate of LIBOR plus a margin. Interest expense
attributable to the borrowings from Otto Versand (GmbH & Co) and Otto-Spiegel
Finance G.m.b.H & Co. KG during the thirteen weeks ended March 30, 2002 was
$882. As of February 2003, the related party borrowings outstanding consisted of
the $100,000 term loans from Otto-Spiegel Finance G.m.b.H. & Co. KG and the
$60,000 senior unsecured loan from Otto Versand (GmbH & Co).
ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002,
with early application encouraged.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123.
This Statement amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
Statement is effective for fiscal years ending after December 15, 2002. Earlier
application of the transition provisions is permitted for entities with a fiscal
year ending prior to December 15, 2002, provided that financial statements for
the 2002 fiscal year have not been issued as of the date this Statement is
issued. Early application of the disclosure provisions is encouraged. The
Company does not expect the adoption of SFAS No. 148 to have a material effect
on its consolidated results of operations or financial position.
OTHER
As previously disclosed, the Company's executive vice president and chief
financial officer, James R. Cannataro, resigned from his position in early
February 2003. The Company is actively negotiating with, and expects to announce
shortly, the appointment of, a new chief financial officer. The Company cannot
predict whether there will be further changes in the composition of its board of
directors or management.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward-looking within the meaning of
applicable federal securities laws and are based upon the Company's current
expectations and assumptions. You should not place undue reliance on those
statements because they speak only as of the date of this report.
Forward-looking statements include information concerning the Company's possible
or assumed future results of operations. These statements often include words
such as "expect," "plan," "believe," "anticipate", "intend," "estimate," or
similar expressions. As you read and consider this report, you should understand
that these statements are not guarantees of performance or results. They involve
risks, uncertainties and assumptions. Although the Company believes that these
forward-looking statements are based on reasonable assumptions, you should be
aware that many factors could affect our actual financial results and actual
results could differ materially from the forward-looking statements. These
factors include, but are not
26
limited to, the uncertainty regarding the Company's ability to enter into new
credit facilities with its lending institutions, uncertainty regarding the
Company's ability to amend its existing agreement with MBIA, the occurrence of
events that may result in an early amortization ("Pay Out Event") of the
Company's asset-backed securities, the uncertainty relating to the sale or
liquidation of the bankcard segment; increased oversight or restrictions by the
OCC on the bankcard segment which could reduce the market value of the bankcard
segment; the risk associated with fulfilling the obligations set forth in the
Bank's disposition plan; the availability of future liquidity support from the
Company's majority stockholder; reduction in cash available from the Company's
securitization transactions; the financial strength and performance of the
retail and direct marketing industry; changes in consumer spending patterns;
dependence on the securitization of credit card receivables to fund operations;
state and federal laws and regulations related to offering and extending credit;
risks associated with collections on the Company's credit card portfolio;
interest rate fluctuations; postal rate increases; paper or printing costs; the
success of planned merchandising, advertising, marketing and promotional
campaigns; and various other factors beyond the Company's control.
All future written and oral forward-looking statements made by the Company or
persons acting on the Company's behalf are expressly qualified in their entirety
by the cautionary statements contained or referred to above. Except for the
Company's ongoing obligations to disclose material information as required by
the federal securities laws, we do not have any obligation or intention to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances in the future or to reflect the occurrence of
unanticipated events.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
($000s omitted)
The Company is exposed to market risk from changes in interest rates, the
securitization of credit card receivables and, to a lesser extent, foreign
currency exchange rate fluctuations. In seeking to minimize risk, the Company
manages exposure through its regular operating and financing activities and,
when deemed appropriate, through the use of derivative financial instruments.
The Company does not use financial instruments for trading or other speculative
purposes and is not party to any leveraged financial instruments.
Interest rates:
The Company manages interest rate exposure through a mix of fixed and
variable-rate financings. The Company is generally able to meet certain targeted
objectives through its direct borrowings. Substantially all of the Company's
variable-rate exposure relates to changes in the one-month LIBOR rate. If the
one-month LIBOR rate had changed by 50 basis points, the Company's first quarter
2002 interest expense would have changed by approximately $954. Interest rate
swaps may be used to minimize interest rate exposure when appropriate based on
market conditions. The notional amounts of the Company's interest rate swap
agreements totaled $65,000 at March 30, 2002.
The Company believes that its interest rate exposure management policies,
including the use of derivative financial instruments, are adequate to manage
material market risk exposure.
Securitizations:
In conjunction with its asset-backed securitizations, the Company recognizes
gains representing the present value of estimated future cash flows that the
Company expects to receive over the liquidation period of the receivables. These
future cash flows consist of an estimate of the excess of finance charges and
fees over the sum of the interest paid to certificate holders, contractual
servicing fees and charge-offs along with the future finance charges and
principal collections related to retained interests in securitized receivables.
Changes in interest rates and certain estimates inherent in determining the
present value of these estimated future cash flows are influenced by factors
outside the Company's control, and as a result, could materially change in the
near term.
Foreign currency exchange rates:
27
The Company is subject to foreign currency exchange risk related to its Canadian
operations, as well as its joint venture investments in Germany and Japan. The
Company is party to certain transactions with the above joint ventures that are
denominated in foreign currencies. The Company monitors the exchange rates
related to these currencies on a continual basis and will enter into forward
derivative contracts for foreign currency when deemed advantageous based on
current pricing and historical information. The Company believes that its
foreign exchange risk and the effect of this hedging activity are not material
due to the size and nature of the above operations. There were no foreign
currency hedging contracts outstanding at March 30, 2002.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 2003, the staff of the Securities and Exchange Commission (the "SEC")
commenced an informal investigation into the conduct of the Company and its
officers and directors, which focuses on the Company's compliance with its
disclosure obligations, including (i) the Company's failure to file when due
required reports with the SEC under the Securities Exchange Act of 1934,
beginning with its Form 10-K for fiscal year 2001, (ii) allegedly inaccurate
statements made by the Company in its notices that these reports would be filed
late, and (iii) the Company's alleged failure to publicly disclose material
information in violation of Rule 10b-5, including that its auditors believed
that the audit report on the Company's 2001 financial statements would have to
contain a "going concern" qualification absent the Company addressing certain
financial issues. The SEC staff has advised the Company that it will promptly
recommend to the SEC that an action be brought against the Company seeking
preliminary injunctive relief to prevent future violations and to impose other
procedures to ascertain whether there have been other violations of the
securities laws. Moreover, the SEC may also seek monetary remedies against the
Company, as well as pursue a formal investigation into the conduct of directors,
officers and certain other individuals involved in the Company's affairs.
The Company has established a special committee of its Board of Directors
including Dr. Winfried Zimmermann, Hans-Otto Schrader and Dr. Rainer Hillebrand
that are overseeing the Company's response to the investigation. The Company has
advised the SEC staff that it intends to cooperate with the investigation.
The Company cannot predict when or on what terms the SEC investigation or
possible enforcement actions will be concluded, nor can the Company predict what
effect the investigation or its conclusion will have on the Company's financial
condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description of Exhibit
-------------- ----------------------
99 Section 906 Certifications
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the first quarter
of fiscal 2002.
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 25, 2003
SPIEGEL, INC.
/s/ Martin Zaepfel
- ----------------------------------------------
Martin Zaepfel
Vice Chairman, President and Chief Executive Officer
(Principal Operating Executive Officer and
duly authorized officer of Registrant)
29
CERTIFICATIONS
I, Martin Zaepfel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Spiegel, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
No other officers of the Company have certified this report.
See Explanatory Note.
Date: February 25, 2003
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/s/ Martin Zaepfel
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Martin Zaepfel
Chief Executive Officer
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