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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1999
/ / 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 0-12994
Nordstrom Credit, Inc.
______________________________________________________
(Exact name of Registrant as specified in its charter)
Colorado 91-1181301
________________________________ ___________________
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13531 East Caley, Englewood, Colorado 80111
_______________________________________________________
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 303-397-4700
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.50 par value
_______________________________
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
On April 21, 1999 Registrant had 10,000 shares of common stock ($.50 par
value) outstanding; all such shares are owned by Registrant's parent,
Nordstrom, Inc.
The Registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
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PART I
Item 1. Business.
- ------------------
The information required under this item is included in Note 1 to the
Financial Statements on page 15 of this report, which is incorporated herein
by reference.
Item 2. Properties.
- --------------------
The Company owns an office building in Englewood, Colorado where its
principal offices are located.
Item 3. Legal Proceedings.
- ---------------------------
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
Not required under reduced disclosure format.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
- ----------------------------------------------------------------------
The class of securities registered is the Company's common stock, $.50 par
value per share. There are 100,000 shares of authorized common stock, of
which 10,000 shares were issued and outstanding as of April 21, 1999. The
Company's common stock is owned entirely by Nordstrom, Inc. ("Nordstrom").
The stock has not been traded and, accordingly, no market value has been
established. A dividend of $50,000,000 was paid to Nordstrom on August 30,
1996, and a dividend of $50,000,000 was declared on January 30, 1997 and
paid to Nordstrom on February 3, 1997. Dividends of $25,000,000 were paid to
Nordstrom on each of January 30, 1998 and September 15, 1998.
Item 6. Selected Financial Data.
- ---------------------------------
Not required under reduced disclosure format.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- -------------------------------------------------------------------------
Service charge income decreased in 1998 as compared to 1997 due primarily to
a reduction in the accounts receivable balances on which the Company earns
service fees. The decrease was partially offset by market value gains on the
Company's investment in the VISA master trust in 1998, compared to losses in
1997.
Interest expense decreased in 1998 compared to 1997 due primarily to lower
levels of long-term debt outstanding and lower interest rates.
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The Company does not own any significant information technology systems or
related software. All significant systems utilized by the Company are owned
by its parent, Nordstrom and its affiliate, Nordstrom National Credit Bank
(the "Bank"), which services the customer accounts receivable of the Company.
Therefore, the impact on the Company of Year 2000 issues is primarily
dependent on the Year 2000 compliance efforts of Nordstrom and the Bank.
Nordstrom and the Bank are taking steps to avoid potential negative
consequences of Year 2000 software non-compliance and presently believe that
any such non-compliance will not have a material effect on the Company's
business, results of operations, or financial condition. However, if
unforeseen difficulties arise or the modification, conversion and replacement
activities that Nordstrom and the Bank have undertaken are not completed in
a timely manner, the Company recognizes that it may be negatively impacted
by Year 2000 issues.
Nordstrom and the Bank are currently evaluating, replacing or upgrading the
computer systems they use to provide services to the Company in an effort to
make them Year 2000 compliant, and expect to have remediation efforts
completed for critical computer systems around mid-1999. Testing is being
conducted based on criticality. Non-information technology systems, such as
microchips embedded in elevators, are also being evaluated, replaced or
upgraded as needed. Although Nordstrom's and the Bank's respective
assessments of Year 2000 compliance have been completed, reassessments are
conducted on an ongoing basis to provide reasonable assurance that all
critical risks have been identified and will be mitigated.
Nordstrom's cumulative Year 2000 expenses through January 31, 1999, were
approximately $13 million, including $1 million for the Bank. In 1998,
approximately $7 million of expenses were incurred including approximately
$700,000 for the Bank. Expenses in 1999 are expected to be about the same
amount. In order to meet Year 2000 compliance goals, Nordstrom and the Bank
have redeployed existing resources. While this reallocation of resources has
resulted in the deferral of certain information technology projects,
the impact of those deferral is not material to Nordstrom or the Bank.
The Company believes that all necessary Year 2000 compliance work will be
completed in a timely fashion. However, there can be no guarantee that
all systems will be compliant by the year 2000, that the estimated cost
of remediation will not increase, or that the systems of other companies
and government agencies on which the Company relies will be compliant.
Since 1996, Nordstrom and the Bank have been communicating with vendors to
determine their state of readiness with regard to the Year 2000 issue. Based
on its assessment to date, the Company has no indication that any third party
is likely to experience Year 2000 non-compliance of a nature which would have
a material impact on the Company. However, the risk remains that vendors or
other third parties may not have accurately determined their state of
readiness, in which case such parties' lack of Year 2000 compliance may have a
material adverse effect on the Company's results of operations. Nordstrom and
the Bank will continue to monitor the Year 2000 compliance of third parties
with which it does business.
The Company believes the most likely worst-case scenarios that it might
confront with respect to Year 2000 issues have to do with the possible
failure of third party systems over which the Company has no control, such
as, but not limited to, power and telecommunications services. Nordstrom and
the Bank each have business continuity plans in place that address recovery
from various kinds of disasters, including recovery from significant
interruption in conveyance of data within the Company's network information
systems. Nordstrom and the Bank are using these plans to assist in
development of more specific Year 2000 contingency plans, including plans
related to services they provide to the Company, which they expect to
complete around mid-1999.
Certain other information required under this item is included in Note 1 and
Note 6 to the Financial Statements on pages 15 and 17 respectively, of this
report, which are incorporated herein by reference.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ---------------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates. In
seeking to minimize risk, the Company manages exposure through its regular
operating and financing activities. The Company does not use financial
instruments for trading or other speculative purposes and is not party to any
leveraged financial instruments.
The Company manages interest rate exposure through its mix of fixed and
variable rate borrowings which finance customer accounts receivable.
Short-term borrowings generally bear interest at variable rates but because
they have maturities of three months or less, the Company believes that the
risk of material loss is low.
The table below presents principal amounts and related weighted average
interest rates by year of maturity. All items described in the table are
non-trading and are stated in U.S. dollars.
Fair Value
January 31,
Dollars in thousands 1999 2000 2001 2002 2003 Thereafter Total 1999
- ------------------------------------------------------------------------------------------------------------
INTEREST RATE RISK
ASSETS
Customer accounts
receivable $590,986 $590,986 $590,986
Fixed interest
rate* 21% 21%
LIABILITIES
Notes payable to
Nordstrom, Inc. $ 62,000 $ 62,000 $ 62,000
Average interest
rate 4.8% 4.8%
Commercial paper $ 78,784 $ 78,784 $ 78,784
Average interest
rate 5.2% 5.2%
Long-term debt - Fixed $ 58,000 $57,600 $11,000 $76,750 - $100,000 $303,350 $316,583
Average interest
rate 6.9% 7.6% 8.7% 7.3% - 6.7% 7.1%
* This is the Company's stated interest rate on customer accounts
receivable. The actual effective interest rate is lower due to accounts
which are paid off within 30 days and defaults.
Item 8. Financial Statements and Supplementary Data.
- ----------------------------------------------------
A) Financial Statements and Supplementary Data
The financial statements listed in the Index to Financial
Statements and Schedule on page 9 of this report are
incorporated herein by reference.
B) Other Financial Statements and Schedule
The schedule required under Regulation S-X is filed pursuant to
Item 14 of this report.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ------------------------------------------------------------------------
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------------------------------------------------------------
Not required under reduced disclosure format.
Item 11. Executive Compensation.
- --------------------------------
Not required under reduced disclosure format.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
Not required under reduced disclosure format.
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
Not required under reduced disclosure format.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- --------------------------------------------------------------------------
(a)1. Financial Statements
--------------------
The following financial statements of the Company and the
Independent Auditors' Report are incorporated by reference in Part
II, Item 8:
Independent Auditors' Report
Statements of Earnings
Balance Sheets
Statements of Investment of Nordstrom, Inc.
Statements of Cash Flows
Notes to Financial Statements
(a)2. Financial Statement Schedules
-----------------------------
The financial statement schedule listed in the Index to Financial
Statements and Schedule on page 9 of this report is incorporated
herein by reference.
5 of 20
(a)3. Exhibits
--------
(3.1) Articles of Incorporation of the Registrant are hereby incorporated
by reference from the Registrant's Form 10-K for the year ended
January 31, 1991, Exhibit 3.1.
(3.2) By-laws of the Registrant are hereby incorporated by reference from
the Registrant's Form 10-K for the year ended January 31, 1991,
Exhibit 3.2.
(3.3) Amendment to the Bylaws of the Registrant dated December 19, 1995,
are hereby incorporated by reference from the Registrant's Form 10-K
for the year ended January 31, 1996, Exhibit 3.3.
(4.1) Indenture between Registrant and Norwest Bank Colorado, N.A.,
as successor trustee, dated November 15, 1984, the First Supplement
thereto dated January 15, 1988, the Second Supplement thereto dated
June 1, 1989, and the Third Supplement thereto dated October 19, 1990
are hereby incorporated by reference from Registration No. 33-3765,
Exhibit 4.2; Registration No. 33-19743, Exhibit 4.2; Registration No.
33-29193, Exhibit 4.3; and Registrant's Annual Report on Form 10-K
for the year ended January 31, 1991, Exhibit 4.2, respectively.
(4.2) Indenture between Registrant and Norwest Bank Colorado, N.A., as
trustee, dated April 22, 1997 is hereby incorporated by reference
from Registration No. 333-24757, Exhibit 4.1.
(10.1) Investment Agreement dated October 8, 1984 between Registrant and
Nordstrom, Inc. is hereby incorporated by reference from the
Registrant's Form 10, Exhibit 10.1.
(10.2) Operating Agreement dated August 30, 1991 between Registrant and
Nordstrom National Credit Bank is hereby incorporated by reference
from the Registrant's Form 10-Q for the quarter ended July 31,
1991, Exhibit 10.1, as amended.
(10.3) Operating Agreement for VISA Accounts and Receivables dated May 1,
1994 between Registrant and Nordstrom National Credit Bank is hereby
incorporated by reference from Registration No. 33-55905, Exhibit
10.1.
(10.4) Credit Agreement dated July 24, 1997 between Registrant and a group
of commercial banks is hereby incorporated by reference from the
Registrant's Form 10-Q for the quarter ended July 31,1997, Exhibit
10.1.
(10.5) Loan Agreement dated July 17, 1997 between Registrant and Nordstrom,
Inc. is hereby incorporated by reference from the Registrant's Form
10-Q for the quarter ended October 31, 1997, Exhibit 10.1.
(10.6) Amendment to the Loan Agreement dated July 17, 1997 between
Registrant and Nordstrom, Inc., dated September 3, 1997 is hereby
incorporated by reference from the Registrant's Form 10-Q for the
quarter ended October 31, 1997, Exhibit 10.2.
6 of 20
(10.7) Series 1996-A Supplement to Master Pooling and Servicing Agreement
dated August 14, 1996 between Registrant, Nordstrom National Credit
Bank, and Norwest Bank Colorado, N.A.,as trustee, is incorporated
by reference from the Registrant's Form 10-Q for the quarter ended
October 31, 1996, Exhibit 10.3.
(10.8) Amendment to the Series 1996-A Supplement to Master Pooling and
Servicing Agreement dated August 14, 1996 between Registrant,
Nordstrom National Credit Bank and Norwest Bank Colorado, N.A., as
trustee, dated December 10, 1997, is hereby incorporated by
reference from the Registrant's Form 10-K for the year ended January
31, 1998, Exhibit 10.13.
(10.9) Agreement to terminate the Operating Agreement for VISA Accounts
and Receivables dated May 1, 1994 between Registrant and Nordstrom
National Credit Bank, dated August 14, 1996 is hereby incorporated
by reference from the Registrant's Form 10-Q for the quarter ended
October 31, 1996, Exhibit 10.1.
(10.10) Receivables Purchase Agreement dated August 14, 1996 between
Registrant and Nordstrom, Inc. is hereby incorporated by reference
from the Registrant's Form 10-K for the year ended January 31, 1997,
Exhibit 10.10.
(10.11) Participation Agreement dated August 14, 1996 between Registrant and
Nordstrom National Credit Bank is hereby incorporated by reference
from the Registrant's Form 10-K for the year ended January 31, 1997,
Exhibit 10.11.
(10.12) Second Amendment to the Series 1996-A Supplement to Master Pooling
and Servicing Agreement dated August 14, 1996, between Registrant,
Nordstrom National Credit Bank and Norwest Bank Colorado, N.A.,
as trustee, dated July 23, 1998 is filed herein as an Exhibit.
(12.1) Computation of Ratio of Earnings Available for Fixed Charges to
Fixed Charges is filed herein as an Exhibit.
(23.1) Independent Auditors' Consent is filed herein as an Exhibit.
(27.1) Financial Data Schedule is filed herein as an Exhibit.
All other exhibits are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the last quarter of the
period for which this report is filed.
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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.
NORDSTROM CREDIT, INC.
(Registrant)
Date: April 29, 1999 by /s/ Michael A. Stein
_________________ ____________________________________________
Michael A. Stein
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ Michael A. Stein /s/ John J. Whitacre
_____________________________________ ___________________________________
Michael A. Stein John J. Whitacre
Director, Executive Vice President Director
and Chief Financial Officer
(Principal Accounting and Financial
Officer)
/s/ Kevin T. Knight
_____________________________________
Kevin T. Knight
Director and President
(Principal Executive Officer)
Date: April 29, 1999
_________________
8 of 20
NORDSTROM CREDIT, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Number
------
Independent Auditors' Report 10
Statements of Earnings 11
Balance Sheets 12
Statements of Investment of Nordstrom, Inc. 13
Statements of Cash Flows 14
Notes to Financial Statements 15
Additional financial information required to be furnished -
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 20
All other schedules have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial
statements or notes thereto.
9 of 20
INDEPENDENT AUDITORS' REPORT
Board of Directors
Nordstrom Credit, Inc.
Englewood, Colorado
We have audited the accompanying balance sheets of Nordstrom Credit, Inc.(the
"Company") as of January 31, 1999 and 1998, and the related statements of
earnings, investment of Nordstrom, Inc. and cash flows for each of the three
years in the period ended January 31, 1999. Our audits also included the
financial statement schedule listed in the accompanying Index to Financial
Statements and Schedule. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying financial statements present fairly, in all
material respects, the financial position of Nordstrom Credit, Inc. as of
January 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended January 31, 1999, in
conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Seattle, Washington
March 12, 1999
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NORDSTROM CREDIT, INC.
STATEMENTS OF EARNINGS
(Dollars in thousands)
Year Ended January 31, 1999 1998 1997
- ---------------------- ------- ------- -------
Revenue:
Service charge income $106,734 $108,582 $128,240
Rental income from Nordstrom
National Credit Bank 1,285 1,285 1,225
------- ------- -------
Total revenue 108,019 109,867 129,465
Expenses:
Interest, net 31,547 36,392 40,649
Service fees paid to Nordstrom
National Credit Bank 27,378 29,122 30,381
Bad debts - - 7,520
Other general and administrative 1,522 1,394 1,539
------- ------- -------
Total expenses 60,447 66,908 80,089
------- ------- -------
Earnings before income taxes and
extraordinary item 47,572 42,959 49,376
Income taxes 17,100 15,900 17,800
------- ------- -------
Earnings before extraordinary item 30,472 27,059 31,576
Extraordinary charge related to the
early extinguishment of debt, net
of income taxes of $900 - - 1,452
------- ------- -------
Net earnings $ 30,472 $ 27,059 $ 30,124
======= ======= =======
Ratio of earnings available for
fixed charges to fixed charges 2.51 2.18 2.14
======= ======= =======
The accompanying Notes to Financial Statements are an integral part of these
statements.
11 of 20
NORDSTROM CREDIT, INC.
BALANCE SHEETS
(Dollars in thousands)
January 31, 1999 1998
- ----------- -------- --------
ASSETS
- ------
Cash and cash equivalents $ 91 $ 157
Customer accounts receivable, net 566,443 636,420
Other receivables 2,709 6,138
Land, buildings and equipment, net (at cost) 4,530 4,786
Deferred taxes and other assets 10,705 13,641
-------- --------
$584,478 $661,142
======== ========
LIABILITIES AND INVESTMENT OF NORDSTROM, INC.
- ---------------------------------------------
Notes payable to bank $ - $ 50,000
Commercial paper 78,784 108,020
Note payable to Nordstrom, Inc. 62,000 -
Accrued interest, taxes and other 10,030 24,930
Long-term debt 303,350 353,350
-------- --------
Total liabilities 454,164 536,300
Investment of Nordstrom, Inc. 130,314 124,842
-------- --------
$584,478 $661,142
======== ========
The accompanying Notes to Financial Statements are an integral part of these
statements.
12 of 20
NORDSTROM CREDIT, INC.
STATEMENTS OF INVESTMENT OF NORDSTROM, INC.
(Dollars in thousands except per share amount)
Common Stock, $.50 par value,
100,000 shares authorized
------------------------- Retained
Shares Amount Earnings Total
------ ------ -------- -------
Balance at
February 1, 1996 10,000 $55,058 $137,601 $192,659
Net earnings - - 30,124 30,124
Dividends declared
($10,000 per share) (100,000) (100,000)
------ ------- ------- --------
Balance at
January 31, 1997 10,000 55,058 67,725 122,783
Net earnings - - 27,059 27,059
Dividends declared
($2,500 per share) (25,000) (25,000)
------ ------- ------- --------
Balance at
January 31, 1998 10,000 55,058 69,784 124,842
Net earnings - - 30,472 30,472
Dividends declared
($2,500 per share) (25,000) (25,000)
------ ------- ------- --------
Balance at
January 31, 1999 10,000 $55,058 $ 75,256 $130,314
====== ======= ======== ========
The accompanying Notes to Financial Statements are an integral part of these
statements.
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NORDSTROM CREDIT, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended January 31, 1999 1998 1997
- ---------------------- ------- ------- -------
OPERATING ACTIVITIES:
Earnings before extraordinary item $ 30,472 $ 27,059 $ 31,576
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Extraordinary charge related to the
early extinguishment of debt, net of
income taxes of $900 - - (1,452)
Depreciation and amortization 711 873 1,212
Change in:
Other receivables 3,429 7,736 (6,657)
Other assets 2,490 (1,456) 1,058
Accrued interest, taxes and other (14,900) 5,822 (1,929)
------- ------- -------
Net cash provided by operating activities 22,202 40,034 23,808
------- ------- -------
INVESTING ACTIVITIES:
Decrease (increase) in customer
accounts receivable, net 69,977 53,130 (17,580)
Sale of customer accounts
receivable to Nordstrom, Inc. - - 202,888
Additions to property and equipment, net (9) (6) -
------- ------- -------
Net cash provided by investing activities 69,968 53,124 185,308
------- ------- -------
FINANCING ACTIVITIES:
Payments of commercial paper, net (29,236) (5,750) (68,731)
Borrowings (payments) under notes payable
to Nordstrom, Inc., net 62,000 (54,000) (32,000)
Payments under notes payable to bank (50,000) - -
Proceeds from issuance of
long-term debt, net - 91,644 57,729
Principal payments on long-term debt (50,000) (50,000) (116,100)
Cash dividends paid to Nordstrom, Inc. (25,000) (75,000) (50,000)
------- ------- -------
Net cash used in financing activities (92,236) (93,106) (209,102)
------- ------- -------
Net (decrease) increase in cash and
cash equivalents (66) 52 14
Cash and cash equivalents at beginning
of year 157 105 91
------- ------- -------
Cash and cash equivalents at end of year $ 91 $ 157 $ 105
======= ======= =======
The accompanying Notes to Financial Statements are an integral part of these
statements.
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NORDSTROM CREDIT, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 - DESCRIPTION OF BUSINESS
Nordstrom Credit, Inc. (the "Company"), a wholly-owned subsidiary of
Nordstrom, Inc. ("Nordstrom") was incorporated in the State of Washington in
1982 and reincorporated in the State of Colorado in 1990. The primary
business of the Company is to finance customer accounts receivable generated
under revolving charge accounts through sales of merchandise in Nordstrom
stores ("Accounts") and until August 1996, through purchases by customers
using the Nordstrom National Credit Bank (the "Bank") VISA cards ("VISA
Accounts"). The Accounts and the VISA Accounts are originated through the
use of credit cards issued by the Bank, a national banking association
organized as a wholly-owned subsidiary of Nordstrom, effective August 30,
1991.
The Company and the Bank are parties to an Operating Agreement dated August
30, 1991 (the "Operating Agreement") pursuant to which the Company purchases
Accounts from the Bank for a price equal to the amount of Accounts originated
less an allowance for amounts to be written off (the "holdback allowance").
Under the terms of the Operating Agreement, the Bank performs the servicing
functions for the Accounts and the Company pays the Bank a servicing fee
based on the amount of such Accounts originated. The servicing fee rate
averaged 1.83% in 1996, and was increased to 2% in August, 1996, and to 2.3%
effective February 1, 1999.
Prior to August 1996, the Company and the Bank were also parties to an
Operating Agreement for VISA Accounts and Receivables dated May 1, 1994 (the
"VISA Operating Agreement"), under which the Company purchased VISA Accounts
from the Bank under the same terms and conditions as the Operating Agreement
except for the allowance for the amounts to be written off. Amounts written
off were charged to the Company, except amounts written off with respect to
sales occurring at Nordstrom stores, which were indemnified by Nordstrom.
Pursuant to the terms of the VISA Operating Agreement, the Bank performed the
servicing functions for the VISA Accounts and the Company paid the Bank a
servicing fee which was determined on the same basis as the servicing fee for
the Accounts.
As described more fully in Note 6, in August 1996, the Company sold
substantially all of its outstanding VISA receivables to Nordstrom in
connection with a securitization of the receivables. As a result of this
transaction, the VISA Operating Agreement was terminated. The Company no
longer purchases and finances receivables generated through the use of the
Bank's VISA card, and the Bank securitizes all new VISA receivables through
a trust.
The Company and Nordstrom are parties to an Investment Agreement dated
October 8, 1984 (the "Investment Agreement") which, among other things,
governs ownership of Company stock and the financial relationships between
Nordstrom and the Company.
The Investment Agreement requires that Nordstrom maintain the Company's ratio
of earnings available for fixed charges to fixed charges at not less than
1.25:1 and further requires that Nordstrom retain ownership of all the
outstanding shares of stock of the Company. This agreement does not,
however, represent a guarantee by Nordstrom of the payment of any obligation
of the Company.
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and expenses in the accompanying financial statements. Actual results could
differ from those estimates.
15 of 20
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, which establishes standards for the reporting and display
of comprehensive income and its components. The Company's net earnings and
comprehensive net income are the same for the year ended January 31, 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company plans to adopt SFAS 133 on February 1, 2000, as required.
Adoption of this standard is not expected to have a material impact on the
Company's consolidated financial statements.
NOTE 3 - RENTAL INCOME
The Company owns an office building in Englewood, Colorado, and leases space
in the building to the Bank under a month-to-month agreement. Monthly rent
was $87 in 1995, and increased to $107 in May 1996.
NOTE 4 - INTEREST, NET
The components of interest, net are as follows:
Year ended January 31, 1999 1998 1997
- ---------------------- ------- ------- -------
Notes payable to Nordstrom, Inc. $ 536 $ 767 $ 2,115
Notes payable to bank 1,624 2,789 2,705
Commercial paper 5,399 4,295 9,998
Long-term debt 24,027 28,624 25,884
------- ------- -------
Total interest cost 31,586 36,475 40,702
Less: Interest income (39) (83) (53)
------- ------- -------
Interest, net $31,547 $36,392 $40,649
======= ======= =======
NOTE 5 - INCOME TAXES
The Company files consolidated income tax returns with Nordstrom. Income
taxes have been provided on a separate return basis, and the difference
between the effective tax rate and the statutory Federal income tax rate is
due to the provision for state and local income taxes. At January 31, 1999
and 1998, amounts due to Nordstrom for income taxes totaled $1,900 and $4,500
and are included in Accrued interest, taxes and other. The components of
income taxes are as follows:
Year ended January 31, 1999 1998 1997
- ---------------------- ------- ------- -------
Current income taxes:
Federal $18,040 $14,770 $16,335
State and local 925 395 450
------- ------- -------
Total current income taxes 18,965 15,165 16,785
Deferred income taxes (1,865) 735 1,015
------- ------- -------
Total income taxes $17,100 $15,900 $17,800
======= ======= =======
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NOTE 5 (CONTINUED)
Deferred income tax assets result from temporary differences in the timing of
recognition of revenue and expenses for tax and financial reporting purposes.
At January 31, 1999 and 1998, deferred tax assets are primarily related to the
securitization of the VISA Accounts.
NOTE 6 -CUSTOMER ACCOUNTS RECEIVABLE
Customer accounts receivable, net, consists of the following:
January 31, 1999 1998
- ----------- -------- --------
Accounts $584,047 $651,515
Master Trust Certificates 6,939 15,289
-------- --------
590,986 666,804
Holdback allowance (24,543) (30,384)
-------- --------
Customer accounts receivable, net $566,443 $636,420
======== ========
The Company has no credit risk with respect to the Accounts, as Nordstrom
bears the risk of credit loss with respect to these Accounts.
In August 1996, the Company sold substantially all of its outstanding VISA
receivables to Nordstrom in connection with a securitization of the
receivables. Nordstrom then sold the receivables to the Bank, which
transferred the receivables to the Nordstrom Credit Card Master Trust (the
"Trust") in return for certificates representing undivided interests in the
Trust. A Class A certificate with a market value of $186,600 was sold to a
third party, and a Class B certificate was purchased by the Company at an
approximate market value of $9,000. The Class B certificate has a stated
principal amount of $9,900, bears interest at 6.5%, and is subordinated to
the Class A certificate. The Company also purchased from the Bank a portion
of its investment in the Trust (the "Seller's Interest") at an approximate
market value of $4,100. The Bank retains the remaining Seller's Interest, and
will continue to service all of the receivables on behalf of the Trust.
As a result of the securitization of the receivables, the Company no longer
purchases and finances VISA Accounts generated through the use of the Bank's
VISA card, except to the extent of its investment in the Class B certificate
and the Seller's Interest. The Bank securitizes all new VISA Accounts
through the Trust, and from time to time sells to the Company additional
portions of the Seller's Interest, depending on its cash flow needs. Master
Trust Certificates represent the Company's investment in the Class B
certificate and the Seller's Interest.
Pursuant to the terms of operative documents of the Trust, in certain events
the Company may be required to fund certain amounts pursuant to a recourse
obligation for credit losses. Based on current cash flow projections, the
Company does not believe any additional funding will be required.
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NOTE 7 - OTHER RECEIVABLES
Other receivables consists of amounts due from the Bank for net activity in
Accounts, less service fees due the Bank. These amounts are settled on a
second business day basis. At January 31, 1998, the amount also includes
funds advanced to the Bank totaling $2,500, at an interest rate of 5.5%, and
was repaid on February 20, 1998.
NOTE 8 - NOTES PAYABLE AND COMMERCIAL PAPER
The notes payable to bank were repaid in September 1998.
The note payable to Nordstrom, Inc. represents amounts borrowed under an
Agreement dated July 17, 1997. Borrowings under the Agreement bear interest
at floating rates based on a published LIBOR rate (4.8% and 5.5% at January
31, 1999 and January 31, 1998, respectively) and are due upon demand.
Commercial paper outstanding at January 31, 1999 bears interest at 4.9% to
5.5%, and matured in February 1999.
A summary of notes payable and commercial paper is as follows:
Year ended January 31, 1999 1998 1997
- ---------------------- -------- -------- --------
Average daily borrowings
outstanding:
Nordstrom $ 10,178 $ 13,991 $ 39,090
Other 127,853 126,501 234,191
Maximum amount outstanding:
Nordstrom 97,700 101,000 173,000
Other 198,754 191,102 338,597
Weighted average interest rate:
During the year:
Nordstrom 5.3% 5.5% 5.4%
Other 5.5% 5.6% 5.4%
At year-end:
Nordstrom 4.8% - 5.3%
Other 5.2% 5.5% 5.3%
The Company has a $300,000 unsecured line of credit with a group of
commercial banks which expires in July 2002. The line of credit agreement
contains restrictive covenants which, among other things, require the Company
to maintain a ratio of total debt to tangible net worth no greater than 7 to
1. Amounts due to Nordstrom, the Bank and other affiliates are subordinated
to borrowings under the line of credit agreement. The Company pays
commitment fees for the line based on the Company's debt rating.
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NOTE 9 - LONG-TERM DEBT
Long-term debt consists of the following:
January 31, 1999 1998
- ----------- -------- --------
Medium-term notes, 6.875% - 8.67%,
due 1999 - 2002 $203,350 $253,350
Notes payable, 6.7%, due 2005 100,000 100,000
-------- --------
Total long-term debt $303,350 $353,350
======== ========
Aggregate principal payments on long-term debt are as follows:
1999 - $58,000, 2000 - $57,600, 2001 - $11,000, 2002 - $76,750, and 2003 - $0
and after 2003 - $100,000.
NOTE 10 - SUPPLEMENTARY CASH FLOW INFORMATION
For purposes of the Statements of Cash Flows, the Company considers all
short-term investments with a maturity at date of purchase of three months
or less to be cash equivalents. The carrying amount approximates fair value
because of the short maturity of these instruments.
Supplementary cash flow information is as follows:
Year Ended January 31, 1999 1998 1997
- ---------------------- ------- ------- -------
Cash paid during the year for:
Interest $33,160 $35,210 $43,721
Income taxes paid to
Nordstrom, Inc. 19,700 13,300 16,200
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the notes payable and commercial paper approximates
fair value because of the short maturity of these instruments.
The fair value of long-term debt at January 31, 1999 and 1998, estimated
using quoted market prices of the same or similar issues with the same
remaining maturity, was approximately $317,000 and $363,000, respectively.
19 of 20
NORDSTROM CREDIT, INC.
SCHEDULE II - VALUATION AND
QUALIFYING ACCOUNTS
(Dollars in thousands)
Column A Column B Column C Column D Column E
Additions Deductions
- ----------- ---------- -------------------- -------------------- -------
Account
Balance Charged to Charged write-offs Balance
beginning costs and to other net of end of
Description of period expenses accounts recoveries period
- ----------- ----------- --------- -------- ---------- -------
Holdback allowance -
customer accounts
receivable
Year ended
January 31, 1997 $29,393 $ 7,520 $43,832* $53,952 $26,793
Year ended
January 31, 1998 $26,793 $ - $40,440* $36,849 $30,384
Year ended
January 31, 1999 $30,384 $ - $23,827* $29,668 $24,543
* The Company purchases Accounts net of this amount which represents the
allowance for uncollectible amounts. Bad debt expenses are reflected on the
books of Nordstrom for Accounts generated through sales at Nordstrom stores
and, prior to August 1996, VISA Accounts generated through sales at Nordstrom
stores.
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EXHIBIT INDEX
EXHIBIT METHOD OF FILING
- ------------------------------------------ -----------------------------------
3.1 Articles of Incorporation Incorporated by reference from the
Registrant's Form 10-K for the year
ended January 31, 1991, Exhibit 3.1.
3.2 By-laws Incorporated by reference
from the Registrant's Form
10-K for the year ended January
31, 1991, Exhibit 3.2.
3.3 Amendment to the By-laws dated Incorporated by reference from
December 19, 1995 Registrant's Form 10-K for the year
ended January 31, 1996, Exhibit 3.3.
4.1 Indenture between Registrant and Incorporated by reference from
Norwest Bank Colorado, N.A., Registration No. 33-3765, Exhibit
as successor trustee, dated 4.2; Registration No. 33-19743,
November 15, 1984, the First Sup- Exhibit 4.2; Registration No.
plement thereto dated January 15, 33-29193, Exhibit 4.3; and
1988, the Second Supplement thereto Registrant's Annual Report on Form
dated June 1, 1989, and the Third 10-K for the year ended January 31,
Supplement thereto dated October 1991, Exhibit 4.2, respectively.
19, 1990
4.2 Indenture between Registrant and Incorporated by reference from
Norwest Bank Colorado, N.A., as Registration No. 333-24757,
trustee, dated April 22, 1997 Exhibit 4.1.
10.1 Investment Agreement dated October Incorporated by reference from
8, 1984 between Registrant and Registrant's Form 10, Exhibit 10.1.
Nordstrom, Inc.
10.2 Operating Agreement dated August Incorporated by reference from
30, 1991 between Registrant and Registrant's Form 10-Q for the
Nordstrom National Credit Bank quarter ended July 31, 1991,
Exhibit 10.1, as amended.
10.3 Operating Agreement for VISA Incorporated by reference from
Accounts and Receivables Registration No. 33-55905, Exhibit
dated May 1, 1994 between 10.1.
Registrant and Nordstrom
National Credit Bank
10.4 Credit Agreement dated July 24, 1997 Incorporated by reference from
between Registrant and a group of Registrant's Form 10-Q for the
commercial banks quarter ended July 31, 1997,
Exhibit 10.1.
10.5 Loan Agreement dated July 17, Incorporated by reference from
1997 between Registrant and Registrant's Form 10-Q for the
Nordstrom, Inc. quarter ended October 31, 1997,
Exhibit 10.1.
10.6 Amendment to the Loan Agreement Incorporated by reference from
dated July 17, 1997 between Registrant's Form 10-Q for the
Registrant and Nordstrom, Inc., quarter ended October 31, 1997,
dated September 3, 1997 Exhibit 10.2.
10.7 Series 1996-A Supplement to Master Incorporated by reference from
Pooling and Servicing Agreement Registrant's Form 10-Q for the
dated August 14, 1996 between quarter ended October 31, 1996,
Registrant, Nordstrom National Exhibit 10.3.
Credit Bank and Norwest Bank
Colorado, N.A., as trustee
10.8 Amendment to the Series 1996-A Incorporated by reference from
Supplement to Master Pooling and Registrant's Form 10-K for the
Servicing Agreement dated August year ended January 31, 1998,
14,1996 between Registrant, Exhibit 10.13.
Nordstrom National Credit Bank, and
Norwest Bank Colorado, N.A., as
trustee, dated December 10, 1997
10.9 Agreement to terminate the Oper- Incorporated by reference from
ating Agreement for VISA Accounts Registrant's Form 10-Q for the
and Receivables dated May 1, 1994 quarter ended October 31, 1996,
between Registrant and Nordstrom Exhibit 10.1.
National Credit Bank, dated August
14, 1996
10.10 Receivables Purchase Agreement dated Incorporated by reference from
August 14, 1996 between Registrant Registrant's Form 10-K for the
and Nordstrom, Inc. year ended January 31, 1997,
Exhibit 10.10.
10.11 Participation Agreement dated Incorporated by reference from
August 14, 1996 between Registrant Registrant's Form 10-K for the
and Nordstrom National Credit Bank year ended January 31, 1997,
Exhibit 10.11.
10.12 Second Amendment to the Series Filed herewith electronically.
1996-A Supplement to Master Pooling
and Servicing Agreement dated
August 14, 1996, between Registrant,
Nordstrom National Credit Bank and
Norwest Bank Colorado, N.A. as
trustee, dated July 23, 1998
12.1 Computation of Ratio of Earnings Filed herewith electronically.
Available for Fixed Charges to
Fixed Charges
23.1 Independent Auditors' Consent Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.