Item 1. Business
General
Fingerhut Companies, Inc. (the "Company") is a direct-to-the- consumer marketing company that sells a broad range of products and services directly to consumers via catalogs, television and other media. The Company had 1994 revenues of $1.934 billion. Its principal subsidiaries are Fingerhut Corporation ("Fingerhut"), Figi's Inc. ("Figi's") and USA Direct Incorporated ("USA Direct"). Fingerhut has been in the direct mail marketing business for over 45 years and sells general merchandise using catalogs and other direct marketing solicitations. Fingerhut's merchandise includes a broad mix of quality brand name and private label products, many of which are specially manufactured or packaged to appeal to its customers. Fingerhut's net sales were $1.577 billion in 1994. Figi's markets specialty foods and other gifts, primarily through catalogs, and had net sales of approximately $70 million in 1994. USA Direct markets products through direct response television advertisements, typically 30 minutes long. USA Direct's 1994 net sales were $59 million. The Company, through subsidiaries, operates a joint venture with Montgomery Ward & Co., Incorporated. The joint venture does business as "Montgomery Ward Direct" and sells general merchandise using specialty catalogs. The Company accounts for its investment in Montgomery Ward Direct using the equity method of accounting.
During 1993, the Company sold certain subsidiaries that did not fit into its long-term strategic direction. The Company sold the assets of COMB Corporation in September 1993 and sold the assets of FDC, Inc., a subsidiary of Figi's, effective as of December 31, 1993. In December 1993, the Company signed a letter of intent to sell Figi's, but during the fourth quarter of 1994, the purchaser was unable to complete its financing. As a result, the Company reversed the impact of the sale. In November 1994, the Company announced that it would scale back the operations of USA Direct. In March 1995, USA Direct entered into an alliance with Guthy-Renker Corporation, under which Guthy-Renker will manage infomercial production, media placement and market distribution and USA Direct will provide product development and sourcing, customer service and fulfillment.
The Company is the successor to the business of several related companies, the first of which was a partnership formed in 1948. Fingerhut became a publicly held corporation in 1970 and was acquired by a predecessor of The Travelers Inc. ("Travelers") in 1979. The Company was incorporated in 1978 in connection with Travelers' acquisition of Fingerhut. In May 1990, the Company became a publicly held company upon completion of a public offering of a portion of the common stock held by Travelers (which at that time held substantially all of the Company's common stock). Travelers reduced its ownership to zero through subsequent public offerings and sales in 1991, 1992 and 1993.
Unless the context otherwise indicates, references to the Company refer to Fingerhut Companies, Inc. and its subsidiaries.
Fingerhut Corporation
Introduction
Fingerhut, one of the largest catalog marketers in the United States, sells general merchandise and financial service products to moderate income consumers. It is the only large general merchandise retailer that serves this market exclusively through catalog direct marketing. The median age of Fingerhut's customers is slightly lower than the national average and young families are a significant portion of its customer base. Fingerhut offers extended payment terms on all purchases under fixed term, fixed payment installment contracts and makes substantially all of its sales on credit utilizing its own closed-end credit. Fingerhut has used its extensive database, credit programs and proprietary database segmentation software to establish a dominant position in this market, with a large base of loyal, repeat customers. Fingerhut has an active customer base of approximately seven million established customers, which account for approximately 80% of Fingerhut's net sales.
Marketing
Marketing activities are divided into three primary programs: new customer acquisition, a transitional program and existing customer programs. During 1994, Fingerhut mailed approximately 558 million catalogs and other promotions to existing and prospective customers.
Fingerhut's new customer acquisition program is designed to identify and attract new customers on a cost-effective basis. The primary sources of new customers are rented lists, advertisements in magazines and newspapers, television, catalog requests and other direct marketing solicitations. Fingerhut mails catalogs and other multi-product offerings to prospective customers and adds them to its data base as responses are received. These programs are intended to identify and target new customers who will become long-term Fingerhut customers. New customers account for approximately 20% of Fingerhut's net sales.
The decisions on which prospective customers to solicit, which products to offer and which media to use are based upon the projected long-term profitability and internal rates of return of the program. Maintaining acceptable financial rates of return on new customers depends on balancing the cost of acquisition of new customers with their long-term profitability to Fingerhut. To determine whether the cost to obtain new customers is acceptable, Fingerhut maintains a system that monitors profitability by source of new customers, by type of product and by type of promotional media. Fingerhut also continuously tests various media, products, offerings and incentives and analyzes the results in order to maximize the effectiveness of its customer acquisition efforts.
After first-time buyers commence payments on their initial purchases, they are placed into a transitional program. The amount of time a first-time buyer remains in a transitional program and the number and type of products he or she is offered depends on the buyer's purchasing and payment practices. A customer is placed on Fingerhut's promotable customer list after demonstrating his or her creditworthiness.
Fingerhut reaches its existing customers through extensive promotional mailing efforts, primarily catalogs, and through telemarketing. In 1994, Fingerhut mailed 154 different catalogs and other promotions to its established customers. These mailings included general merchandise catalogs, specialty catalogs, small and large multi-product mailers and single product promotions.
Management believes that the key factors in maximizing the profitability of its existing customer list are developing long-term repeat buyers and balancing customer response with appropriate credit losses and customer return rates for each segment of its customer list. Fingerhut promotes customer satisfaction and loyalty by extending credit; by using a number of marketing devices, including targeted promotions, deferred payments, 30-day free home trials, a "satisfaction assured" policy, free gifts, merchandise giveaways, and personalized mailings; and by offering attractive brand name and private label merchandise.
Fingerhut is a leader in the development and use of information-based marketing concepts and management believes that Fingerhut's extensive data base and proprietary data base segmentation software afford it a significant competitive advantage within its market niche. The data base contains names, addresses, behavioral characteristics, general demographic information, information provided by the customer and information on the sources of the customers' initial responses. The data base is continually updated as new information is obtained.
Credit Management
Fingerhut generally does not require its customers to provide traditional credit information in order to approve purchases on credit. Instead of using traditional credit applications, Fingerhut has developed sophisticated and highly automated proprietary techniques for evaluating the creditworthiness of new and existing customers and for selecting those customers who will receive various categories of mailings. Management believes that Fingerhut's more than 45 years' experience in the mail order business, its data base containing purchase and payment histories of more than 30 million people and its significant investment in computer technology and proprietary analytical models give Fingerhut a unique ability to analyze the creditworthiness of customers in its market. The goal of the analysis is not to achieve the lowest possible credit losses but to balance credit losses and return rates with customer response, thereby optimizing profitability. Consequently, Fingerhut's planned credit losses typically are higher than other direct mail and retail companies.
Once a customer places an order, Fingerhut employs proprietary techniques designed to identify customers whose orders can be automatically shipped, customers from whom additional information, including credit applications, must be obtained and reviewed and customers to whom credit is declined. After purchases are shipped, customer payments are continuously monitored to identify credit problems as early as possible. Fingerhut has a flexible policy of working with certain delinquent customers, including adjusting their payment schedules, which Fingerhut believes reduces default rates and maintains customer loyalty.
Substantially all of Fingerhut's sales are made utilizing its own closed-end credit program, which uses fixed term, fixed payment installment plans. Monthly payments are made by customers and processed by Fingerhut through the use of coupons contained in payment books delivered with each order shipment. Payment terms to existing customers generally range from 4 to 32 monthly payments. In addition, a majority of sales are to customers who receive a deferred payment option, which extends the due date of the first payment by approximately four to five months. Many customers pay their accounts in full before the end of the scheduled payment term.
Merchandising
Fingerhut offers a broad mix of brand name and private label consumer products, including electronics, housewares, home textiles, apparel, furniture, home accessories, jewelry, sporting goods and toys, tools, automotive, lawn and garden, and financial service products. In 1994, Fingerhut offered nearly 15,000 different products. Fingerhut's sales mix by product category for 1994 is shown in the following table:
Fingerhut Corporation 1994 Product Mix
Percent of Gross Retail Sales
Electronics 20 Home Textiles 18 Housewares 17 Furniture/Home Accessories 11 Apparel 9 Jewelry 8 Leisure 8 Tools/Automotive/Lawn & Garden 6 Financial Service Products and Other 3 ==== 100%
Fingerhut selects merchandise to be offered to its customers by evaluating historical product and category demand and analyzing emerging merchandise trends in conjunction with proprietary marketing information. Fingerhut is constantly developing unique brand name and private label product groupings, such as coordinated kitchen ensembles, coordinated bed and bath ensembles and tool sets, targeted to appeal to its customers and to add value and/or style to its merchandise.
Fingerhut's general merchandise catalogs feature a wide array of products; they are updated and published throughout the year, including a 448-page holiday big book. Specialty catalogs mailed to targeted portions of Fingerhut's customer list permit Fingerhut to expand the product selection and intensify the growth opportunities for certain product categories. These specialty catalogs include outdoor living, jewelry, electronics, domestics/housewares, gifts, juvenile, seniors, home fitness, home improvement and Spanish-language catalogs.
Financial Services
Fingerhut also offers its customers various financial service products, including credit insurance for life, property and disability, extended property insurance, accidental death, hospital income, whole life, and term life insurance. Additionally, merchandise service contracts are sold to customers that extend a manufacturer's warranty on labor and parts. Additional programs are being tested and, if successful, will be expanded in the near future. During 1994, the Company tested and monitored the results of a Fingerhut co-branded MasterCard issued by a third party bank. In 1994, the Company formed Direct Merchants Credit Card Bank, N.A. to expand the types of financial services products that may be offered to its customers. During 1995, Direct Merchants Credit Card Bank, N.A. will offer the Fingerhut co-branded MasterCard on a rollout basis and will also offer its own MasterCard to individuals who may not already be Fingerhut customers. The Bank has a contract with First Data Resources for credit card processing.
Management Information Systems
Fingerhut pioneered the use of information-based marketing concepts in the mail order industry, using computer technology and related software developed by the Company. The Company continues to be highly dependent on information systems and its computer operations are among the largest and most sophisticated in the direct marketing industry. Management believes that these operations, combined with Fingerhut's extensive data base and advanced information systems, have been key factors in its growth and profitability.
Fingerhut's management information systems provide data processing capabilities to Fingerhut, Figi's, USA Direct and Montgomery Ward Direct and support all areas of the Company, including marketing, credit, order fulfillment, customer service, inventory control and finance. Fingerhut's management information systems currently operate on mainframe computers connected to on-line terminals and client-server systems used in all aspects of the Company's business.
Preparation and Mailing of Promotional Materials
Fingerhut performs a large portion of the production process for its promotional materials in house. The creative department uses desktop publishing for the design and production of all Fingerhut's mailings. A substantial portion of the color photographs used in Fingerhut's catalogs and other marketing materials are taken at the Company's in-house photo studio and Fingerhut prepares color separations for approximately 35% of its promotional materials. In addition, Fingerhut's eight-color web printing presses print more than half of its catalog "wraps", the personalized outside cover used on Fingerhut catalogs. Substantially all of the Company's promotional materials, except the wraps, are printed at outside vendors.
Fingerhut's mailing operations are designed to provide the flexibility and rapid response time required to keep pace with its changing marketing and merchandising needs. Fingerhut has two mailing facilities in Minnesota that cut, fold, insert, sort and deliver to the post office its single and multiple product promotions. For catalog mailings, Fingerhut personalizes the catalog wraps and delivers them to its outside printers pre-sorted for mailing.
The Company substantially reduces mailing costs by effectively using discounts offered by the United States Postal Service from the basic postal rates. For example, Fingerhut sorts mailings by zip code to the carrier route level and also prints the "zip plus four" barcode to obtain optimum postal discounts, resulting in savings not always available to smaller direct mail companies. In January 1995, the United States Postal Service increased its first class, third class and fourth class postage rates, which will increase the Company's overall postage rates by approximately 12%. In addition, the cost of paper has also increased. To reduce the effect of the postal and paper increases, Fingerhut will begin printing its catalogs on lighter weight paper, will work to improve the efficiency of its mailings by reviewing mailing depth and criteria and will also take steps to reduce its other operating expenses. The Company will adopt new innovations in mail processing techniques, as appropriate, and believes that the increasing cost and complexity of the postal rate structure will strengthen the long-term competitive position of larger, more sophisticated mail order firms such as Fingerhut.
Order Processing and Fulfillment
Fingerhut provides order processing and fulfillment services for USA Direct and Montgomery Ward Direct. Although most of Fingerhut's customer orders are received by mail, telephone ordering has become a more important part of Fingerhut's business. The majority of USA Direct's and Montgomery Ward Direct's customers place their orders by telephone. Fingerhut also offers its customers the option to place orders by telephone in selected promotions. In 1994, Fingerhut processed approximately 25 million Fingerhut, USA Direct and Montgomery Ward Direct orders and approximately 53 million Fingerhut, USA Direct and Montgomery Ward Direct customer payments.
In 1994, Fingerhut shipped approximately 30 million Fingerhut, USA Direct and Montgomery Ward Direct packages from its warehouse and distribution facilities in Minnesota and Tennessee. In order to minimize shipping costs, packages are trucked to drop points throughout the country where they enter the USPS or the United Parcel Service systems for delivery to the customer. In addition, Fingerhut offers optional express delivery in selected promotions.
Customer Service
Management has continued its strong emphasis on customer service and retention. In 1993, the Company implemented phase one of a new Customer Contact System. For inbound callers, the system consolidates data from several databases into one format that puts more information on the telephone representative's screen, facilitating faster order taking and better customer service. Fingerhut offers special customer services to the top segment of its customers and has other programs to monitor customer satisfaction. Management believes these measures have resulted in increased effectiveness in handling customer communications, a higher overall level of customer satisfaction and improved customer retention.
Figi's Inc.
Figi's is a mail order retailer of specialty food gifts (such as quality cheeses, smoked meats, candies and baked goods) and other gifts headquartered in Marshfield, Wisconsin. The Company acquired Figi's in 1981. Figi's is one of the largest direct mail food gifts marketers in the United States, with 1994 net sales of approximately $70 million.
New customers are acquired from sources similar to those used by Fingerhut, although Figi's customers include both moderate income consumers attracted by Figi's in-house credit terms and more affluent customers who use credit cards. Sales using Figi's interest-free, three payment credit terms constituted approximately 78% of its net sales in 1994.
Figi's offerings are made predominantly in catalogs mailed prior to holidays and other gift-giving occasions such as Christmas, Easter, Valentine's Day and Mother's Day. Figi's business is highly seasonal, with approximately 82% of its net sales in the fourth quarter. Like Fingerhut, Figi's seeks to develop repeat business from customers by offering a "satisfaction assured" policy. During 1994, Figi's sales mix by product category was as follows:
Figi's Inc. 1994 Product Mix
Percent of Gross Retail Sales
Cheese/Meat Selections 48% Baked Goods 14% Candy 8% Nuts/Snack Foods 7% Non-Food Gifts 7% Other Food Gifts 16% === 100%
Figi's uses marketing techniques similar to those developed by Fingerhut, such as sweepstakes and in-house credit terms, to improve customer response and expand its customer base. Figi's also uses mailing list evaluation and segmentation techniques similar to those used by Fingerhut. In addition, Figi's offers its customers the opportunity to place orders by telephone and accepts payment by major credit card.
In December 1993, the Company signed a letter of intent to sell Figi's, but during the fourth quarter of 1994, the purchaser was unable to complete its financing. As a result, the Company reversed the impact of the sale.
USA Direct Incorporated
USA Direct markets specially selected products primarily through 30-minute direct response television advertisements commonly known as "infomercials." These advertisements provide entertaining and informative product demonstrations and often feature a well known entertainer or other recognized individual. USA Direct's advertisements are distributed through cable networks and broadcast television stations. During 1994, these products included Body by Jake(R) Hip and Thigh Machine(TM), Bissell(R) Little Green Clean Machine(TM), Denise Austin(TM) Tone-up 1-2-3 and Body by Jake(R) Ab and Back Plus. USA Direct's sales mix by product category in 1994 was: 12% health and beauty, 72% fitness/leisure and 16% housewares. USA Direct's 1994 net sales were approximately $59 million.
USA Direct promotes payment by major credit card and also offers its customers the option to pay for their purchases by credit card installment billing. USA Direct features a 30-day refund policy on all of its products. Products featured in USA Direct's television advertisements are later included in Fingerhut's and Montgomery Ward Direct's catalogs and identified "As seen on TV." In addition, USA Direct may receive royalties on successful products later sold in non-affiliated retail stores.
In November 1994, the Company announced that it would scale back the operations of USA Direct in connection with cancellation of the startup of S The Shopping Network, a television shopping channel that was expected to support the operations of USA Direct. In March 1995, USA Direct entered into an alliance with Guthy-Renker Corporation, under which Guthy-Renker will manage infomercial production, media placement and market distribution and USA Direct will provide product development and sourcing, customer service and fulfillment.
Montgomery Ward Direct
The Company has a joint venture limited partnership with Montgomery Ward & Co., Incorporated ("Montgomery Ward"). The partnership is structured as a Delaware limited partnership in which the Company and Montgomery Ward, through subsidiaries, each have a 50% interest and conducts business under the name "Montgomery Ward Direct". Montgomery Ward Direct mails its catalogs primarily to Montgomery Ward credit card holders and certain outside rented lists and accepts payment through bank credit cards and the Montgomery Ward credit card. Receivables generated by sales made through the Montgomery Ward credit card are sold through Montgomery Ward to Montgomery Ward Credit Corporation in accordance with a previously existing agreement between Montgomery Ward and Montgomery Ward Credit Corporation.
Montgomery Ward and the Company have agreed that the partnership will be, subject to certain exceptions, the exclusive vehicle for each to conduct the business of the partnership. During such time as the Company or one of its subsidiaries is a partner and for a period of up to three years thereafter (depending on the circumstance), the Company's direct mail marketing activities will be limited, with certain exceptions, to the extent that they would compete with the partnership. The business conducted by the partnership is not expected to materially affect the businesses of Fingerhut, Figi's or USA Direct.
Montgomery Ward provides, without cost to the partnership, the use of the Montgomery Ward(R) tradename, certain information related to its active credit card account holders and has agreed to provide similar information with respect to future Montgomery Ward credit card account holders. Fingerhut provides certain customer names and certain creative, buying, order processing, customer service, computer services and warehousing services and facilities. During 1994, Fingerhut generally was reimbursed by the partnership for its costs incurred in providing the services and facilities.
The Company and Montgomery Ward each contributed an initial $5 million to the partnership's capital and from time to time, have made short-term working capital loans. At December 30, 1994, the Company's aggregate investment in Montgomery Ward Direct was $5 million. The Company accounts for Montgomery Ward Direct using the equity method of accounting; accordingly, 50% of Montgomery Ward Direct's profits or losses are recorded in administrative expenses included in "Administrative and selling expenses" in the Company's Consolidated Statements of Earnings contained in the Company's consolidated financial statements. In 1994, Montgomery Ward Direct mailed 124 million catalogs generating net sales of $188 million.
Other Business Activities
The Company derives additional revenues from manufacturing plastic products, wholesaling excess merchandise and list rental and package inserts. Taken together, such activities accounted for less than 3% of the Company's 1994 net sales.
Divested Subsidiaries
Certain assets and liabilities of COMB Corporation, a subsidiary of the Company, were sold on September 3, 1993. In addition, the Company sold certain assets and liabilities of FDC, Inc., a subsidiary of Figi's, effective as of December 31, 1993. These businesses did not fit into the Company's long-term strategic direction. In November 1994, the Company cancelled the launch of S The Shopping Network, its proposed 24-hour cable television shopping channel.
Competition
The direct marketing industry includes a wide variety of specialty and general merchandise retailers and is both highly fragmented and highly competitive. The Company sells its products to customers in all states of the United States and competes in the purchase and sale of merchandise with all retailers. Fingerhut's traditional principal competitor in the business of direct marketing general merchandise to moderate income customers is J.C. Penney Company, Inc., which operates a large number of retail stores in addition to its mail order businesses and generates substantial catalog sales at its retail premises in addition to direct mail marketing. In the direct marketing retail industry, Fingerhut also competes with television shopping marketers, such as QVC Network, Inc. and Home Shopping Network, Inc. Fingerhut also competes with retail department stores, discount department stores and variety stores, many of which are national chains, for the general merchandise spending of its customers.
The principal methods of competition within the direct marketing industry and in the Company's market segments include purchasing convenience, extension of credit, customer service, free trial and merchandise value. The Company believes that it is able to compete on the strength of its marketing strategy despite strong competitive pressures. Although barriers to entering the direct marketing business are minimal and many new companies have entered and may continue to enter the industry in competition with the Company, a substantial capital investment would be required to develop customer databases and software capabilities comparable to those of the Company. The Company believes that these assets are necessary to compete effectively in the Company's market niche, where the predictability of response rates and combined credit and return losses is critical.
Other Information
Seasonality
The Company's business is seasonal. In 1994, approximately 36% of the Company's net sales and approximately 49% of its net earnings (excluding unusual charges) occurred in the fourth quarter. In addition to seasonal variations, the Company experiences variances in quarterly results from year to year that result from changes in the timing of its promotions and the types of customers and products promoted and, to some extent, variations in dates of holidays and the timing of quarter ends resulting from a 52/53 week year. Accordingly, the results of interim periods are not necessarily indicative of the results for the year.
Costs of Mailing
In 1994, the Company spent an aggregate of $256 million on postage (including the cost of parcel shipments that were passed on to customers) of which 45% was attributable to parcel shipments, 47% was attributable to the mailing of promotional materials and 8% was attributable to various correspondence with customers. As is customary in the direct mail industry, the Company passes on the cost of parcel shipments directly to the customer as part of the shipping and handling charge. The costs of mailing promotional material and certain other correspondence (including postage) are not directly passed on to customers, but are considered in the Company's overall product pricing and mailing strategies.
In January 1995, the United States Postal Service increased its first class, third class and fourth class postage rates, which will increase the Company's overall postage rates by approximately 12%. In addition, the cost of paper has also increased. To reduce the effect of the postal increase, Fingerhut will begin printing its catalogs on lighter weight paper, will work to improve the efficiency of its mailings by reviewing mailing depth and criteria and will also take steps to reduce its other operating expenses. The Company will adopt new innovations in mail processing techniques, as appropriate.
Vendor Relations
The Company purchases products from approximately 2,500 different suppliers and maintains strong relations with its vendors. In 1994, the top ten vendors accounted for approximately 21% of the Company's total merchandise purchases, with Thomson Consumer Electric Inc. and Springs Industries Inc. each accounting for approximately 4% of the total merchandise purchases and Regency Bedspread Corporation and Diversified Products each accounting for approximately 2% of the total merchandise purchases.
The Company maintains close relations with overseas representatives in Hong Kong, Taiwan, Korea, Philippines, Thailand and Europe. In 1994, approximately 19% of the Company's merchandise was imported directly from foreign vendors and approximately an additional 30% was purchased through importers. Employees
As of December 30, 1994, the Company had approximately 9,000 employees, of whom approximately 3300 were represented by the Midwest Regional Joint Board or the Tennessee/Kentucky District _ Southern Regional Joint Board of the Amalgamated Clothing and Textile Workers Union. The Company's principal collective bargaining agreements expire on February 1, 1996 and February 2, 1997. The Company considers its relations with its employees and the union to be satisfactory.
Trademarks and Tradenames
The Company has registered and continues to register, when appropriate, various trademarks, tradenames and service marks used in connection with its business and for private label marketing of certain of its products. The Company considers its various trademarks and service marks to be readily identifiable with, and valuable to its business.
Governmental Matters
The Company's business is subject to regulation by a variety of state and federal laws and regulations related to, among other things, advertising, time payment pricing, offering and extending of credit, charging and collecting state sales and use taxes and product safety. The Company's practices in certain of these areas are subject to periodic inquiries and proceedings by various regulatory agencies. None of these actions has had a material adverse effect upon the Company. In addition, the operations of Fingerhut have been subject to certain federal and state consent decrees, the most recent dating back to 1978. These decrees regulate the manner in which products and gifts may be described by the Company and specific aspects of credit, advertising and merchandise substitution policies. The Company does not consider the existence of these decrees to be a significant impediment to its profitability or operations.
As a nationally chartered credit card bank, Direct Merchants Credit Card Bank, N.A. is subject to federal and certain state banking laws and regulations, as well as those relating to offering and extending credit.
From time to time the Company has received notices and inquiries from states with respect to collection of use taxes for sales to residents of these states. To the extent that any states are successful in such claims, the Company's cost of doing business could be increased, although it does not believe any increase would be material.
Fingerhut relies on the Minnesota "time-price" doctrine in establishing and collecting installment payments on products sold in many states. Under this doctrine, the difference between the time price and the cash price for the same goods is not treated as interest subject to regulation under laws governing the extension of credit. In other states, Fingerhut is subject to regulations that limit maximum finance charges and require refunding of finance charges to customers under certain circumstances. Fingerhut believes that its time payment pricing and credit practices are in compliance with applicable state requirements. Any change of law that would negatively affect Fingerhut's pricing policies could have an adverse effect on the Company's profitability.
Executive Officers of the Registrant
Name Age Present Office
Theodore Deikel 59 Chairman of the Board, Chief Executive Officer and President
Rakesh K. Kaul 43 Vice Chairman and Chief Operating Officer
Elizabeth A. Bothereau 43 Senior Vice President, Customer Services, Corporate and Environmental Affairs
John K. Ellingboe 44 Senior Vice President, Business Development, General Counsel and Secretary
Glenn L. Habern 50 Senior Vice President, Chief Information and Business Process Officer
Richard B. Hoffmann 48 Senior Vice President, Credit
Andrew V Johnson 39 Senior Vice President, Marketing
Daniel J. McAthie 44 Senior Vice President, Chief Financial Officer
James B. Moran 58 Senior Vice President, Operations and President, Fingerhut Fulfillment Services
Richard L. Tate 49 Senior Vice President, Merchandising
Ronald N. Zebeck 40 President, Fingerhut Financial Services Corporation
Robert W. Oberrender 35 Vice President, Treasurer
Thomas C. Vogt 48 Corporate Controller
Theodore Deikel has served as Chairman of the Board, Chief Executive Officer and President since 1989. From 1985 until rejoining the Company, Mr. Deikel served as Chairman and CEO of CVN Companies, Inc. ("CVN"), a direct marketing company using television and direct mail. From 1979 to 1983, Mr. Deikel was Executive Vice President of American Can Company (a predecessor to Travelers) and Chairman of American Can Company's specialty retailing division, which included the Company. In addition, Mr. Deikel was Chief Executive Officer of Fingerhut from 1975 to 1983.
Rakesh K. Kaul was appointed Chief Operating Officer in March 1995 and has been Vice Chairman since May 1994; he was Executive Vice President and Chief Administrative Officer from January 1992 to May 1994. Prior to joining the Company, Mr. Kaul held several positions at Shaklee Corporation, a direct marketing company: he was Chief Financial and Strategy Officer from 1990 to April 1991 and Senior Vice President, Corporate Development and Planning from 1989 to 1990.
Elizabeth A. Bothereau has been Senior Vice President, Customer Services, Corporate and Environmental Affairs of the Company since October 1993. Prior to that time, she held the positions of Vice President, Consumer and Environmental Affairs of the Company from January 1991 to October 1993; and Director, Business Development of Fingerhut from June 1990 to January 1991. Ms. Bothereau was Senior Vice President, Administration of MedTrac, a health care cost containment company, from July 1989 to June 1990.
John K. Ellingboe has been Senior Vice President, Business Development, since October 1993, General Counsel of the Company since June 1990 and Secretary of the Company since April 1990. Prior to that time he was a shareholder of Briggs and Morgan, Professional Association, a law firm, from 1987 to April 1990.
Glenn L. Habern has been Senior Vice President and Chief Information Officer of the Company since April 1991. Mr. Habern was a Partner and was Director of Retail Systems Consulting of Ernst & Young, independent accountants, from 1987 to April 1991.
Richard B. Hoffmann has been Senior Vice President, Credit of the Company since October 1993 and in March 1995 was also given responsibility for New Ventures. Prior to that time, he was Vice President, Credit of the Company from November 1989 to October 1993.
Andrew V Johnson has been Senior Vice President, Marketing of the Company since January 1993. Prior to that time, he was Vice President, Marketing of the Company from November 1989 to January 1993 and held various marketing positions at Fingerhut prior to 1989.
Daniel J. McAthie became Senior Vice President, Chief Financial Officer of the Company in January 1994. Prior to that time he was Vice President and Treasurer of the Company from June 1990 to December 1993 and Vice President and Treasurer of CVN from 1987 to 1990. Mr. McAthie has resigned effective as of April 1, 1995.
James B. Moran has been Senior Vice President, Operations since January 1992 and was Senior Vice President, Subsidiaries from September 1991 to January 1992. From 1988 until joining the Company, Mr. Moran was President and Chief Executive Officer of Tru-Part Manufacturing, a wholesale distribution company.
Richard L. Tate has been Senior Vice President, Merchandising of the Company since October 1993. Prior to that time he was Vice President, Merchandising of the Company from December 1989 to October 1993. He was Vice President, Merchandising of CVN from March to December, 1989.
Ronald N. Zebeck was hired as President of Fingerhut Financial Services Corporation in March 1994 and is also a Senior Vice President of the Company. He was Managing Director, GM Card Operations of General Motors Corporation from 1991 to 1993 and director of marketing of Advanta Corporation from 1987 to 1991.
Robert W. Oberrender has been Vice President, Treasurer of the Company since July 1994. Prior to that time, he was Assistant Treasurer of the Company from February 1993 to July 1994 and was Vice President, Corporate Finance & Banking Group of Chemical Bank for more than five years prior to February 1993.
Thomas C. Vogt has been Corporate Controller since November 1994. Prior to that time, he was Assistant Controller, Operations of the Company from August 1991 to October 1994 and was Vice President and Controller of Hanover Direct, Inc. from April 1989 to July 1991. He held various financial positions at Fingerhut from October 1973 to March 1989.
Officers of the Company are elected by, and hold office at the will of, the Board of Directors and do not serve a "term of office" as such.
Item 2.
Item 2. Properties
The Company's executive and administrative offices and warehouse and distribution facilities are located in a number of facilities in Minnesota, Tennessee, Utah and Wisconsin. The total facilities presently used by the Company's continuing operations have an aggregate of approximately 4.9 million square feet, including a 547,000 square foot expansion to its St. Cloud warehouse and distribution center that became operational in the fourth quarter of 1994. Of these, Fingerhut owns buildings in St. Cloud with an aggregate of approximately 1.5 million square feet, in Alexandria with an aggregate of approximately 53,000 square feet, and in Mora with approximately 160,000 square feet. Figi's owns buildings in Marshfield, Wisconsin with an aggregate of approximately 317,000 square feet. Tennessee Distribution, Inc., a subsidiary of the Company, owns a one million square foot warehouse and distribution facility near Bristol, Tennessee.
The Company leases the remainder of the facilities it uses, which consist of office, operations and warehouse space, including a 188,000 square foot office building in Minnetonka. The lessor of such facilities has exercised its right to require the Company to purchase those facilities for approximately $15 million in 1995.
In order to improve efficiency and accommodate future growth, the Company is constructing a new 185,000 square foot data and technology center in Plymouth, Minnesota, which is expected to open in mid-1995. In addition, the Company has begun constructing a one million square foot warehouse and distribution center in Spanish Fork, Utah.
Item 3.
Item 3. Legal Proceedings
The Company is a party to various claims, legal actions, sales/use tax disputes and other complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur are adequately covered by insurance, are provided for in the financial statements, or are without merit and the ultimate outcome of these matters will not have a material effect on the financial position or operations of the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended December 30, 1994.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The information required by this item is set forth in "Quarterly Financial and Stock Data" on page 31 of the Company's Annual Report to Shareholders for the fiscal year ended December 30, 1994 (the "1994 Annual Report") and is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
The information required by this item is set forth under the caption "Five Year Summary of Selected Consolidated Financial Data" on page 14 of the 1994 Annual Report and is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required by this item is set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 15 to 18 of the 1994 Annual Report and is incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The audited Consolidated Financial Statements of the Registrant and independent auditors' report thereon and the unaudited Quarterly Financial and Stock Data set forth on pages 19 to 31 of the 1994 Annual Report are incorporated herein by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to directors is set forth under "Proposal 1: Election of Directors" in the Company's proxy statement for the annual meeting of shareholders to be held on May 18, 1995, which will be filed within 120 days of December 30, 1994 (the "Proxy Statement") and is incorporated herein by reference. The information required by this item with respect to executive officers is, pursuant to instruction 3 of Item 401(b) of Regulation S-K, set forth in Part I of this Form 10-K under "Business--Executive Officers of the Registrant." The information required by this item with respect to reports required to be filed under Section 16(a) of the Securities Exchange Act of 1934 is set forth under "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement and is incorporated by reference.
Item 11.
Item 11. Executive Compensation
The information required by this item is set forth under "Executive Compensation" in the Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under "Arrangements and Transactions with Related Parties" in the Proxy Statement and is incorporated herein by reference.
With the exception of the information incorporated by reference in Items 10-13 above, the Proxy Statement is not to be deemed filed as part of this Form 10-K. PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are made part of this report:
1. Consolidated Financial Statements.
The following consolidated financial statements, the related notes and the report of the Company's independent auditors are incorporated herein by reference from the 1994 Annual Report as part of this report at Item 8 hereof:
Independent Auditors' Report dated January 23, 1995.
Consolidated Statements of Earnings for the three fiscal years ended December 30, 1994.
Consolidated Statements of Financial Position at December 30, 1994 and December 31, 1993.
Consolidated Statements of Changes in Stockholders' Equity for the three fiscal years ended December 30, 1994.
Consolidated Statements of Cash Flows for the three fiscal years ended December 30, 1994.
Notes to Consolidated Financial Statements.
With the exception of the foregoing information and the information incorporated by reference in Items 5- 8 of this Part II, the 1994 Annual Report is not to be deemed filed as part of this Form 10-K.
2. Financial Statement Schedule: The following schedule for the three years ended December 30, 1994 is included in this Form 10-K:
Independent Auditors' Report on consolidated financial statement schedule dated January 23, 1995.
Schedule VIII - Valuation and Qualifying Accounts.
Certain schedules have been omitted because they are not required under the related instructions or are inapplicable, or because the required information is included elsewhere in the financial statements or related notes.
(b) Reports on Form 8-K: None
(c) Exhibits: See Exhibit Index on page 20 of this Report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 29th day of March, 1995.
FINGERHUT COMPANIES, INC. (Registrant)
By /s/ Theodore Deikel Theodore Deikel Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Fingerhut Companies, Inc., the Registrant, and in the capacities and on the dates indicated.
Signature Title Date
Principal executive Chairman of the Board, March 29, 1995 officer and director: Chief Executive Officer and President
/s/ Theodore Deikel Theodore Deikel
Principal financial officer: Senior Vice President, March 29, 1995 Chief Financial Officer
/s/ Daniel J. McAthie Daniel J. McAthie
Principal accounting officer:Corporate Controller March 29, 1995
/s/ Thomas C. Vogt Thomas C. Vogt
Directors:
/s/ Wendell R. Anderson Director March 29, 1995 Wendell R. Anderson
/s/ Edwin C. Gage Director March 29, 1995 Edwin C. Gage
/s/ Stanley S. Hubbard Director March 29, 1995 Stanley S. Hubbard
/s/ Rakesh K. Kaul Director March 29, 1995 Rakesh K. Kaul
/s/ Richard M. Kovacevich Director March 29, 1995 Richard M. Kovacevich
/s/ Dudley C. Mecum Director March 29, 1995 Dudley C. Mecum
EXHIBIT INDEX
Exhibit Number Description of Exhibit
Articles of Incorporation and Bylaws
3.a Amended and Restated Articles of Incorporation of the Registrant (restated in electronic format as amended to July 29, 1993)(Incorporated by reference to Exhibit 3.a to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 31, 1993).
3.b Bylaws of the Registrant (restated in electronic format as amended to July 29, 1993)(Incorporated by reference to Exhibit 3.b to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 31, 1993).
Material Contracts
10.a Pooling and Servicing Agreement dated as of June 29, 1994 among Fingerhut Receivables, Inc., as Transferor, Fingerhut Corporation, as Servicer, and The Bank of New York (Delaware), as Trustee (Incorporated by reference to Exhibit 10.b to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended July 1, 1994).
(i) Series 1994-1 Supplement dated as of June 29, 1994 (Incorporated by reference to Exhibit 10.b(i) to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended July 1, 1994).
(ii)Series 1994-2 Supplement dated as of November 15, 1994.
10.b Purchase Agreement dated as of June 29, 1994 between Fingerhut Receivables, Inc., as Buyer, and Fingerhut Corporation, as Seller (Incorporated by reference to Exhibit 10.a. to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended July 1, 1994).
10.c Six Lease and Option Agreements, each effective January 1, 1990, and each between the Registrant and Transport Life Insurance Company (Incorporated by reference to Exhibit 10(c) to Registrant's Registration Statement on Form S-1 (No. 33-33923)).
10.d* Fingerhut Corporation Profit Sharing Plan 1989 Revision (Incorporated by reference to Exhibit 10(d) to Registrant's Registration Statement on Form S-1 (No. 33-33923)).
10.e* Fingerhut Companies, Inc. and Subsidiaries 1994 Key Management Incentive Bonus Plan for Designated Corporate Officers (Incorporated by reference to Exhibit 10.e to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 31, 1993).
10.f* Fingerhut Corporation Pension Plan 1990 Revision (Incorporated by reference to Exhibit 10(f) to Registrant's Registration Statement on Form S-1 (No. 33-33923)).
10.g* Fingerhut Companies, Inc. Stock Option Plan (Incorporated by reference to Exhibit 10(h) to Registrant's Registration Statement on Form S-1 (No. 33-33923)).
10.h* Executive Tax Planning/Preparation and Financial Planning Policy.
10.i Intentionally left blank.
10.j* Fingerhut Companies, Inc. 1992 Long-Term Incentive and Stock Option Plan. (Incorporated by reference to (Exhibit 10(j) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 25, 1992).
10.k* Fingerhut Companies, Inc. and Subsidiaries Annual Incentive Bonus Plan for Designated Corporate Officers (Incorporated by reference to Exhibit 10.k to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 31, 1993).
10.l* Fingerhut Companies, Inc. Performance Enhancement Investment Plan. (Incorporated by reference to Exhibit 10(l) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 25, 1992).
10.m* Fingerhut Companies, Inc. Directors' Retainer Stock Deferral Plan (Incorporated by reference to Exhibit 10.m to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 31, 1993).
10.n Amended and Restated Revolving Credit and Letter of Credit Facility dated as of October 17, 1994, among Fingerhut Companies, Inc., the Guarantors party thereto, the Lenders party thereto, the Issuing Banks party thereto, Chemical Bank as Agent and NationsBank of North Carolina N.A., as Co-Agent (Incorporated by reference to Exhibit 10.n to Registrant's Quarterly Report on Form 10-Q (File No. 1-8668) for the fiscal quarter ended September 30, 1994).
10.o Form of Purchase Agreement dated as of January 14, 1991, relating to the sale of $65,000,000 of 9.81% Senior Notes, Series A, due June 30, 1996 and $25,000,000 of 10.12% Senior Notes, Series B, due December 30, 1997 (Incorporated by reference to Exhibit 10(o) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 28, 1990).
(i) First Amendment Agreement dated as of March 1, 1992. (Incorporated by reference to Exhibit 10(o)(i) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 27, 1991).
(ii) Second Amendment Agreement dated as of June 17, 1994.
10.p Purchase Agreement dated as of February 15, 1991, relating to the sale of $20,000,000 of 9.74% Senior Notes, Series C, due August 15, 1996 (Incorporated by reference to Exhibit 10(p) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 28, 1990).
(i) First Amendment Agreement dated as of March 1, 1992. (Incorporated by reference to Exhibit 10(p)(i) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 27, 1991).
(ii) Second Amendment Agreement dated as of June 17, 1994. This document is being omitted from filing pursuant to Instruction 2 to Item 601 of Regulation S-K.
10.q Purchase Agreement dated as of January 15, 1992, relating to the sale of $15,000,000 of 6.96% Senior Notes, Series D, due August 15, 1996. (Incorporated by reference to Exhibit 10(q) to Registrant's Annual Report on Form 10-K (File No. 1-8668) for the fiscal year ended December 27, 1991).
(i) First Amendment Agreement dated as of March 1, 1992. (Incorporated by reference to Exhibit 10(q)(i) to Registrant's Annual Report on From 10-K (File No. 1-8668) for the fiscal year ended December 27, 1991).
(ii) Second Amendment Agreement dated as of June 17, 1994. This document is being omitted from filing pursuant to Instruction 2 to Item 601 of Regulation S-K.
10.r Pledge Agreement dated as of March 20, 1992, securing the Company's obligations under the Credit Agreement and its Senior Notes, Series A, B, C and D. (Incorporated by reference to Exhibit 10(r) to Registrant's Annual Report on Form 10-K (File No. 1-8668 for the fiscal year ended December 27, 1991).
10.s Purchase Agreement dated as of June 15, 1992, relating to the sale of $60,500,000 of 8.92% Senior Unsecured Notes, Series A, due June 15, 2002 and $14,500,000 of 8.92% Senior Unsecured Notes, Series B, due June 15, 2004 (Incorporated by reference to Exhibit 10(s) to Registrant's Quarterly Report on form 10-Q (File No. 1-8668) for the fiscal quarter ended June 26, 1992.
(i) First Amendment Agreement dated as of June 17, 1994. This document is being omitted from filing pursuant to Instruction 2 to Item 601 of Regulation S-K.
10.t Purchase Agreement dated as of August 1, 1993, relating to the sale of $45,000,000 of 6.83% Senior Unsecured Notes, Series C, due August 1, 2000 (Incorporated by reference to Exhibit 10.t to Registrant's Quarterly Report on Form 10-Q (File 1-8668) for the fiscal quarter ending September 24, 1993).
(i) First Amendment Agreement dated as of June 17, 1994. This document is being omitted from filing pursuant to Instruction 2 to Item 601 of Regulation S-K.
Other Exhibits
11 Computation of Earnings per Share
13 Pages 14 to 31 of the 1994 Annual Report to Shareholders. The 1994 Annual Report shall not be deemed to be filed with the Commission except to the extent that information is specifically incorporated herein by reference. Exhibit 13 also includes a financial statement schedule, and independent auditors' report thereon, that was not part of the 1994 Annual Report.
22 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedules ______ * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.