10-Q 1 nciq12005.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2005 [ ] 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 Avenue, Centennial, Colorado 80111 ---------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: 303-397-4700 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 whether the Registrant is an accelerated filer (as defined in Exchange Act 12b-2). YES NO X ----- ----- On May 27, 2005 Registrant had 10,000 shares of common stock ($0.50 par value) outstanding; all such shares are owned by Registrant's parent, Nordstrom, Inc. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. 1 of 12

NORDSTROM CREDIT, INC. AND SUBSIDIARY ------------------------------------- INDEX ----- Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Statements of Earnings Quarter ~~and Year to Date~~ ended ~~October~~April 30, ~~2004~~2005 and ~~October~~May 311, ~~2003~~2004 3 Condensed Consolidated Balance Sheets ~~October~~April 30, ~~2004~~2005, January 3129, ~~2004~~2005 and ~~October~~May 311, ~~2003~~2004 4 Condensed Consolidated Statements of Cash Flows ~~Year~~Quarter ~~to Date~~ ended ~~October~~April 30, ~~2004~~2005 and ~~October~~May 311, ~~2003~~2004 (Restated) 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 89 Item 4. Controls and Procedures 89 PART II. OTHER INFORMATION Item 6. Exhibits 910 SIGNATURES 1011 EXHIBIT INDEX 12

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~~Quarter~~NORDSTROM ~~Ended~~CREDIT, ~~Year~~INC. toAND ~~Date~~SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands) (unaudited) Quarter Ended ----------------------- ~~-----------------------~~April ~~October~~ 30, ~~October~~May ~~31,~~1 ~~October~~2005 ~~30, October 31,~~ 2004 ~~2003 2004 2003~~ ---------- ---------- ~~---------- ----------~~ Revenue: ~~Service~~Finance charge income $2322,~~539~~042 $2423,~~263~~515 ~~$70,566 $73,008~~ Other fees and charges 1,~~843~~683 21,~~074~~875 ~~5,740 6,478~~ ------- ------- ~~------- -------~~ Total revenue ~~$25~~23,~~382~~725 2625,~~337~~390 ~~76,306 79,486~~ Expenses: Interest expense (56,~~819~~248) (5,~~516~~561) ~~(16,980) (16,298)~~ Servicing and marketing fees paid to Nordstrom fsb (3,~~055~~090) (3,~~321~~162) ~~(9,204) (10,857)~~ Selling, general and administrative (~~251~~279) (~~257~~181) ~~(684) (896)~~ ------- ------- ~~------- -------~~ Total expenses (9,~~125~~617) (98,~~094~~904) ~~(26,868) (28,051)~~ Interest income 12,~~575~~413 ~~515~~435 ~~3,362 1,239~~ ------- ------- ~~------- -------~~ Operating income 1716,~~832~~521 1716,~~758~~921 ~~52,800 52,674~~ Other income ~~279~~282 ~~281~~286 ~~847 843~~ ------- ------- ~~------- -------~~ Earnings before income taxes 1816,~~111~~803 1817,~~039~~207 ~~53,647 53,517~~ Income ~~tax~~taxes ~~expense~~ (6,~~610~~133) (6,~~585~~281) ~~(19,581) (19,534)~~ ------- ------- ~~------- -------~~ Net earnings $1110,~~501~~670 $1110,~~454~~926 ~~$34,066 $33,983~~ ======= ======= ~~======= =======~~

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 3 of 12

~~October~~NORDSTROM CREDIT, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited) April 30, January 3129, ~~October~~May 311, ~~2004~~2005 2005 2004 ~~2003~~ ----------- ----------- ---------- ASSETS ------ Cash and cash equivalents $ ~~432~~332 $ ~~338~~363 $ ~~320~~297 ~~Customer~~Retail ~~accounts~~charge ~~receivable~~card receivables, net ~~of allowance for doubtful accounts of $19~~524,~~534,~~774 ~~$20~~560,~~320~~102 ~~and $20~~542,~~746~~325 ~~535,597 575,792 552,672~~ Investment in master trust certificates ~~250~~300,000 -275,000 -200,000 Receivable from parent and affiliates and other receivables, net 2232,~~836~~123 2730,~~581~~086 14,~~163~~689 Notes receivable from affiliates 2922,~~185~~525 ~~205~~35,~~435~~335 ~~177~~15,~~835~~960 Land, ~~buildings~~leasehold improvements and equipment, net ~~438~~477 ~~279~~441 ~~284~~273 Deferred taxes and other assets 6,~~827~~299 76,~~554~~687 7,~~704~~088 -------- -------- -------- $~~845~~886,~~315~~530 $~~816~~908,~~979~~014 $~~752~~780,~~978~~632 ======== ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Payable to affiliates, net $ 23,~~905~~530 $ 93,~~450~~695 $ 122,~~472~~358 Note payable to Nordstrom, Inc. ~~120~~139,~~975~~650 ~~118~~171,~~850~~800 6679,~~825~~250 Accrued interest, taxes and other 6,~~981~~882 6,~~017~~455 26,~~317~~680 ~~Current~~Debt ~~portion of long-term debt 96~~396,027 ~~- - Long-term debt 300~~396,~~000~~027 ~~397~~396,~~500~~527 ~~397,500~~ Other liabilities 1413,~~104~~570 1413,~~905~~836 1514,~~178~~634 -------- ------- -------- Total liabilities ~~540~~559,~~992~~659 ~~546~~591,~~722~~813 ~~494~~499,~~292~~449 Common stock, $0.50 par value 100,000 shares authorized; 10,000 shares issued and ~~additional~~outstanding 5 5 5 Additional paid in capital 55,~~059~~054 55,~~059~~054 55,~~059~~054 Retained earnings ~~249~~271,~~264~~812 ~~215~~261,~~198~~142 ~~203~~226,~~627~~124 -------- -------- -------- Total shareholder's equity ~~304~~326,~~323~~871 ~~270~~316,~~257~~201 ~~258~~281,~~686~~183 -------- -------- -------- $~~845~~886,~~315~~530 $~~816~~908,~~979~~014 $~~752~~780,~~978~~632 ======== ======== ========

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 4 of 12

~~Year~~NORDSTROM toCREDIT, ~~Date~~INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) Quarter Ended ----------------------- ~~October~~April 30, ~~October~~May 311, 2005 2004 ~~2003~~(As Restated, See Note 7) ---------- ---------- OPERATING ACTIVITIES: Net earnings $3410,~~066~~670 $3310,~~983~~926 Adjustments to reconcile net earnings to net cash ~~used~~provided inby operating activities: Depreciation and amortization ~~104~~36 8732 Deferred income taxes ~~310~~97 ~~634~~99 Change in operating assets and liabilities: Receivable from parent and affiliates and other receivables, net (~~713) 21~~2,~~962 Notes receivable from affiliates (73,750~~037) ~~(93~~5,~~440)~~869 Other assets 10156 ~~287~~204 Payable to affiliates, net (~~756~~55) ~~4,153~~41 Accrued interest, taxes and other ~~964~~427 ~~1,364~~663 Other liabilities (~~801~~266) (~~692~~271) -------- -------- Net cash ~~used~~provided inby operating activities ~~(40~~9,~~566)~~028 ~~(31~~17,~~662)~~563 -------- -------- INVESTING ACTIVITIES: ~~Increase~~Decrease in ~~customer~~retail ~~accounts~~charge ~~receivable~~card receivables, net 4035,~~195~~328 4133,~~778~~467 Increase in notes receivable from affiliates (12,190) (10,498) Additions to property and equipment, net (~~187~~47) ~~(31)~~- -------- -------- Net cash provided by investing activities 4023,~~008~~091 4122,~~747~~969 -------- -------- FINANCING ACTIVITIES: ~~Borrowings~~Repayments ~~(repayments)~~ under note payable to Nordstrom, Inc., net 2(32,~~125~~150) (739,~~635~~600) Principal payments on long-term debt ~~(1,473)~~- (~~2,500~~973) -------- -------- Net cash ~~provided by (~~used in) financing activities ~~652~~(32,150) (1040,~~135~~573) -------- -------- Net ~~increase (~~decrease) in cash and cash equivalents 94(31) (5041) Cash and cash equivalents at beginning of period 363 338 ~~370~~ -------- -------- Cash and cash equivalents at end of period $ ~~432~~332 $ ~~320~~297 ======== ========

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 5 of 12 NORDSTROM CREDIT, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 1 - Summary of Significant Accounting Policies Basis of Presentation --------------------- The accompanying condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Nordstrom Credit, Inc. 2004 Annual Report on Form 10-K. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. In management's opinion, all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows have been included and are of a normal, recurring nature. We reclassified certain prior period amounts to conform to the current period presentation. The condensed consolidated statement of cash flow for the quarter ended May 1, 2004 has been restated. See Note 7 for a reconciliation of the amounts previously reported. The interim financial information presented here is not necessarily indicative of the results to be expected for the fiscal year. Note 2 - Related Party Transactions Interest expense includes $892 and $235 of affiliate interest expense for the first quarter of 2005 and 2004, respectively. Interest income includes $163 and $428 of affiliate interest income for the first quarter of 2005 and 2004, respectively.

~~October~~April 30, January 3129, ~~October~~May 311, ~~2004~~Receivable ~~2004~~From ~~2003~~Parent and Affiliates 2005 2005 2004 ---------- ----------- ------------------------------------------------------------- ~~Private~~Due ~~label~~from ~~trade~~Nordstrom, ~~receivables:~~Inc., ~~Unrestricted~~net ~~accounts~~ $ 1019,~~155~~867 $ 612,~~120~~767 $ 62,~~022~~781 ~~Restricted~~Due ~~accounts~~from ~~544,976~~Nordstrom ~~589,992~~fsb ~~567~~8,~~396~~405 ~~Allowance for doubtful accounts (19~~14,~~534)~~351 ~~(20~~9,~~320)~~229 ~~(20,746)~~ -------~~---~~ -------~~----~~ -------~~---~~ ~~Private label trade receivables, net~~ $~~535~~28,~~597~~272 $~~575~~27,~~792~~118 $~~552~~12,~~672 ========== =========== ==========~~010

The amounts above are included in the balance of receivable from parent and affiliates and other receivables, net.

Note 3 - Retail Charge Card Receivables Retail charge card receivables, net, consists of the following:

6 of 12 NORDSTROM CREDIT, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 3 - Retail Charge Card Receivables (Cont.) Our restricted receivables relate to the Nordstrom, Inc. retail charge card which support the $300,000 receivable-backed securities and the $50,000 variable funding note. The unrestricted trade receivables consist primarily of certain receivables that are not eligible to support the $300,000 receivable backed securities such as foreign and employee receivables exceeding a contractual threshold. Note 4 - Investment in Master Trust Certificates In 2004, we exchanged affiliate receivables from Nordstrom fsb (the "Bank") for an investment in master trust certificates ("2004 Notes") issued by a trust (the "Trust") that owns Nordstrom co-branded VISA credit card receivables. The 2004 Notes were purchased at par. Interest earned is based on one month LIBOR and a credit spread index (3.4% at April 30, 2005). Maturity is subject to annual renewal by the Bank and us. The principal balances can change subject to agreement and other approvals required by the governing transaction documents. Under these terms, we increased the face value of the 2004 Notes on March 31, 2005 by $25,000 to $300,000 by exchanging additional affiliate receivables. The 2004 Notes are accounted for as available-for-sale securities under Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The coupon is structured to equal the yield on the valuation date. Consequently, we believe fair value approximates par value on the balance sheet date. Note 5 - Debt The agreement for our 6.7% medium-term notes contains restrictive covenants, which include maintaining a ratio of Earnings to Fixed Charges of at least 1.25 to 1.00. We are in full compliance with these restrictive covenants at April 30, 2005. We did not make any borrowings under our variable funding note backed by restricted retail charge card receivables during 2005 and 2004. Note 6 - Supplementary Cash Flow Information As described above in Note 4, we exchanged notes receivable from affiliates for the 2004 Notes that represent undivided interests in a pool of VISA credit card receivables. The 2004 Notes have a face amount of $300,000 and were priced at par. Initial expenses of $2,206 related to the securitization of retail charge card receivables were capitalized in other assets in November 2001. On a monthly basis, the amortized costs are recorded by Nordstrom, Inc. using the straight- line method over the 60-month life of the trust agreement. Quarter to date amortization of $110 for both 2005 and 2004 was offset in receivable from parent and affiliates and other receivables, net. 7 of 12 NORDSTROM CREDIT, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) Note 7 - Restatement Subsequent to issuance of our 2004 quarterly financial statements, we have corrected an error in our condensed consolidated statement of cash flows for the quarter ended May 1, 2004. We historically recognized amounts loaned to the Bank in our condensed consolidated statements of cash flows as a separate line item in operating activities. However, we determined that the amounts loaned to the Bank should be classified in investing activities and, accordingly, have restated the accompanying condensed consolidated statement of cash flows for the quarter ended May 1, 2004. The following table summarizes the impact of the restatement:

8 of 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations All dollar amounts are in millions. Total revenue decreased $1.7 in the quarter ended April 30, 2005 compared to the same period in 2004 primarily due to a $1.5 decrease in finance charge income. We earn finance charge income on retail charge card receivables, which we purchase from an affiliate that is also a wholly-owned subsidiary of our parent, Nordstrom, Inc. Finance charge income decreased due to a $18.0 reduction in the average outstanding retail charge card receivable balance and from card holders repaying their outstanding balances more quickly. The additional decrease in total revenues of $0.2 relates to other fees, which consist primarily of late fees. Late fee income was $1.4 and $1.6 for the first quarter in 2005 and 2004, respectively. Total expenses increased $0.7 in the first quarter of 2005 compared to the same period in 2004 due to an increase in interest expense. Interest expense has increased due to a $44.8 increase in on our average short-term debt outstanding payable to our parent, Nordstrom, Inc. The increase in total assets due to our investment in master trust certificates requires us to make additional borrowings to fund those assets. Interest income increased $2.0 for the quarter ended April 30, 2005 compared to the same period in 2004, primarily due to an increase in interest income earned on the 2004 Notes. The current year interest rate on the 2004 Notes is higher than the prior year rate on the receivables due from Nordstrom fsb (the "Bank"), which we exchanged for the 2004 Notes. Also, the interest earning receivable balance is higher in the current quarter than the prior quarter. The increase in interest income related to the 2004 Notes was partially offset by a decrease in intercompany interest income. The decrease in intercompany interest income is due to the lower average outstanding note receivable balance due from the Bank during 2004 compared to the prior year. Net earnings remained relatively flat for the quarter ended April 30, 2005 compared to the same quarter in the prior year. The increase in interest income was offset by the decrease in total revenue and an increase in expenses. Item 4. Controls and Procedures As of the end of the period covered by this Quarterly Report on Form 10-Q, we performed an evaluation under the supervision and with the participation of management, including our President and Vice President and Treasurer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities and Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our President and our Vice President and Treasurer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 9 of 12 PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits Exhibits are incorporated herein by reference or are filed with this report as set forth in the Index to Exhibits on page 12 hereof. 10 of 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORDSTROM CREDIT, INC. AND SUBSIDIARY (Registrant) /s/ Michael G. Koppel --------------------------------------- Michael G. Koppel Vice President and Treasurer (Principal Financial Officer) Date: June 14, 2005 -------------------------- 11 of 12 NORDSTROM CREDIT INC. AND SUBSIDIARY

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