10-Q 1 nci10q73104.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 July 31, 2004 [ ] 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, 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 August 31, 2004 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 H(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. 1 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY ------------------------------------- INDEX -----

2 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands) (unaudited)

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 3 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited)

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 4 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements. 5 of 10 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 Notes to Consolidated Financial Statements contained in the Nordstrom Credit, Inc. 2003 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 year amounts to conform to the current year presentation. The interim financial information presented here is not necessarily indicative of the results to be expected for the fiscal year. Change in Fiscal Year --------------------- On February 1, 2004, our fiscal year-end changed from January 31 to the Saturday closest to January 31. Future fiscal years will consist of four 13 week quarters, with an extra week added onto the fourth quarter every five to six years. NOTE 2 - CUSTOMER ACCOUNTS RECEIVABLE Customer accounts receivable, net, consists of the following:

Restricted accounts receivable secure the $300,000 term note due 2006, and the variable funding note facility, which had no balance outstanding in 2004. 6 of 10 NORDSTROM CREDIT, INC. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) (unaudited) NOTE 3 - MASTER TRUST CERTIFICATES On March 31, 2004, we exchanged receivables due from Nordstrom fsb for two notes that represent undivided interests in a pool of Nordstrom co-branded VISA credit card receivables. The notes were purchased by us at par for a combined face amount of $200,000. Interest earned on the notes is based on one month LIBOR and a credit spread index. The maturity of the notes is subject to annual renewal by both parties. The principal balances of the notes can change subject to agreement between the parties and other approvals required by the governing transaction documents. Both parties agreed on June 30, 2004 to increase the face value of the notes by $50,000 to $250,000. The notes are accounted for as available-for-sale securities under SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Nordstrom fsb holds the related Seller Retained Interest and Interest Only Strip associated with the notes. NOTE 4 - 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 July 31, 2004. During the first quarter of 2004, we retired $973 of our 6.7% medium-term notes for a total cash payment of $1,033. In May 2004, we renewed our variable funding note backed by Nordstrom private label receivables and lowered the capacity by $50,000 to $150,000. This note is renewed annually and interest is paid based on the actual cost of commercial paper plus specified fees. We also pay a commitment fee for the note based on the amount of the facility. We did not make any borrowings under this note during the year. NOTE 5 - SUPPLEMENTARY CASH FLOW INFORMATION We purchased two notes that represent undivided interests in a pool of VISA credit card receivables. The notes have a combined face amount of $250,000 and were purchased by us at par. The notes were purchased by reducing our notes receivable from affiliates. Initial expenses related to the securitization of private-label receivables were capitalized and are amortized straight-line over the 60-month life of the trust agreement. Amortized costs are transferred to Nordstrom, Inc. monthly. 7 of 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations We earn service charge income on customer accounts receivable, which we purchase from an affiliate that is also a wholly-owned subsidiary of our parent, Nordstrom, Inc. Service charge income decreased for the quarter and year to date periods ended July 31, 2004 compared to the same periods in 2003, primarily due to a decrease in the average customer accounts receivable balances. Customer accounts receivable have declined approximately 3% over the past year for the quarter and year to date periods ended July 31, 2004 due to accelerated customer repayments. Other fees and charges consist primarily of late fees. Late fee income decreased for the quarter and year to date periods ended July 31, 2004 compared to the same periods in 2003, primarily due to decreases in the number of past due accounts. Late fee income was $1.7 million and $2.0 million for the second quarter in 2004 and 2003, respectively. For the year to date periods ended July 31, 2004 and 2003 late fee income was $3.3 million and $3.8 million, respectively. Net interest expense decreased for the quarter and year to date periods ended July 31, 2004 compared to the same periods in 2003, primarily due to an increase in interest income earned on the Master Trust certificates. The interest rate on the Master Trust certificates is higher than the rate on the receivables due from Nordstrom fsb, which we exchanged for the Master Trust certificates. The increase in Master Trust interest income was partially offset by an increase in intercompany interest expense and a decrease in intercompany interest income. The increase in intercompany interest expense is due to the higher average outstanding note payable balance to Nordstrom, Inc. during 2004 compared to the prior year. The decrease in intercompany interest income is due to the lower average outstanding note receivable balance from Nordstrom fsb during 2004 compared to the prior year. Servicing and marketing fees paid to Nordstrom fsb decreased for the quarter and year to date periods ended July 31, 2004 compared to the same periods in 2003, primarily due to a restructure of the marketing fees. The decrease is also due to a decline in the outstanding balances of the private label card portfolio. 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, our disclosure controls and procedures are effective in the timely recording, processing, summarizing and reporting of material financial and non-financial information. 8 of 10 In May 2004, our parent, Nordstrom, Inc. implemented a new human resources management system to replace all of the mainframe legacy systems relating to human resources. This system will enhance the integration with our existing financial systems and provide us with improved management and information on our labor and benefits. Many processes have been automated and the system lays the foundation for additional improvements in the future. This implementation has resulted in certain changes to business processes and internal controls impacting financial reporting. Management is taking the necessary steps to monitor and maintain appropriate internal controls during this period of change. These steps include testing before the implementation, deploying resources to mitigate internal control risks, implementing reviews to ensure the accuracy of our data and processes, and performing multiple levels of reconciliations and analysis. Other than as described above, 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. PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits 10.1 Omnibus Amendment Agreement dated June 30, 2004 between Nordstrom Credit Card Receivables, LLC and Registrant. 31.1 Certification of President required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Vice President and Treasurer required by Section 302(a) of the Sarbanes-Oxley Act of 2002. 32.1 Certification of President regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Vice President and Treasurer regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 9 of 10 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: September 9, 2004 -------------------------- 10 of 10 NORDSTROM CREDIT INC. AND SUBSIDIARY Exhibit Index Exhibit Method of Filing ------- ---------------- 10.1 Omnibus Amendment Agreement dated Filed herewith electronically June 30, 2004 between Nordstrom Credit Card Receivables, LLC and Registrant 31.1 Certification of President Filed herewith electronically required by Section 302(a) of the Sarbanes-Oxley Act of 2002 31.2 Certification of Vice President and Filed herewith electronically Treasurer required by Section 302(a) of the Sarbanes-Oxley Act of 2002 32.1 Certification of President Furnished herewith electronically regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Vice President and Furnished herewith electronically Treasurer regarding periodic report containing financial statements pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

NORDSTROM CREDIT INC 10-Q