BLUESTEM GROUP INC Flying Cloud Drive Eden Prairie, Minnesota 55344

Transcription

1 7075 Flying Cloud Drive Eden Prairie, Minnesota Bluestem Group Inc. Report as of and for the 13- and 39-weeks ended and This report is issued December 20,

2 Table of Contents Business... Management's Commentary on Results of Operations, Liquidity and Capital Resources... Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets... Condensed Consolidated Statements of Comprehensive Loss... Condensed Consolidated Statements of Changes in Stockholders' Equity... Condensed Consolidated Statements of Cash Flows... Notes to Condensed Consolidated Financial Statements... Page

3 FORWARD-LOOKING STATEMENTS This report contains statements that are forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. All statements contained herein that are not clearly historical in nature are forward-looking. In some cases, you can identify these statements by use of forward-looking words, such as may, will, should, anticipate, estimate, expect, plan, believe, predict, potential, project, intend, could, or similar expressions. In particular, statements regarding Bluestem Group Inc. and its consolidated subsidiaries plans, strategies, prospects, and expectations regarding its business are forward-looking statements. You should be aware that these statements and any other forward-looking statements in this document only reflect Bluestem Group Inc. and its consolidated subsidiaries beliefs, assumptions, and expectations and are not guarantees of performance. These statements involve risks, uncertainties, and assumptions. Many of these risks, uncertainties, and assumptions are beyond Bluestem Group Inc. and its consolidated subsidiaries control and may cause actual results and performance to differ materially from Bluestem Group Inc. and its consolidated subsidiaries expectations. Important factors that could cause our actual results to be materially different from our expectations include the risks and uncertainties set forth in Risk Factors in the Bluestem Group Inc. and its consolidated subsidiaries report as of and for the years ended February 3, and January 29, (the Annual Report ) (available at Forward-looking statements are based on Bluestem Group Inc. and its consolidated subsidiaries beliefs, assumptions and expectations of its future performance, taking into account all information currently available to Bluestem Group Inc. and its consolidated subsidiaries. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to Bluestem Group Inc. and its consolidated subsidiaries or are within its control. If a change occurs, Bluestem Group Inc. and its consolidated subsidiaries business, financial condition, and liquidity may vary materially from those expressed in its forward-looking statements. Accordingly, you should not place undue reliance on the forward-looking statements contained in this report. These forward-looking statements are made only as of the date of this report. Bluestem Group Inc. and its consolidated subsidiaries undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

4 BUSINESS As used in this report: BGI, we, us, our, or the Company refers to Bluestem Group Inc. with its consolidated subsidiaries BGI Holding Company refers to the Bluestem Group Inc. legal entity, excluding its subsidiaries Bluestem refers to Bluestem Brands, Inc., an indirect subsidiary of BGI which consists of Northstar Portfolio, Orchard Portfolio and PayCheck Direct (which was exited in the first quarter of fiscal and currently is winding down) Northstar Portfolio, or Northstar, refers to the consolidated Fingerhut and Gettington retail brands Orchard Portfolio, or Orchard refers to the consolidated Appleseed s, Bedford Fair, Blair, Draper s & Damon s (retail stores were exited during the first quarter of fiscal ), Gold Violin, Haband, LinenSource (which was exited in the second quarter of fiscal ), Norm Thompson, Old Pueblo Traders, Sahalie, Solutions (which was exited in the fourth quarter of fiscal ), Tog Shop, and WinterSilks retail brands Capmark Portfolio or "Capmark" refers to the commercial real estate finance operations of BGI The Company Bluestem Group Inc. is a holding company whose businesses include Bluestem, a multi-brand, online retailer of a broad selection of namebrand and private label general merchandise serving the boomer and senior demographic, generally considered age 50 and over, and lowto middle-income consumers across all age group demographics through 13 retail brands that include: Appleseed s, Bedford Fair, Blair, Draper s & Damon s, Fingerhut, Gettington, Gold Violin, Haband, Norm Thompson, Old Pueblo Traders, Sahalie, Tog Shop and WinterSilks. Complementing each Northstar Portfolio brand are payment options that provide customers with the flexibility of paying over time while the Orchard Portfolio brands provide customers the ability to obtain credit through a third-party private label credit card. BGI also includes Capmark Portfolio which is focused on managing a commercial real estate-related business and existing assets, including monetizing these assets when appropriate. By combining proprietary marketing and credit decision-making technologies, Bluestem is able to tailor merchandise and credit offers to existing and prospective customers. Bluestem views merchandising, marketing and credit management within its Northstar Portfolio business model as strategically indivisible. Credit is offered to Northstar Portfolio customers to reasonably assist them in making merchandise purchases while enhancing customer loyalty and driving repeat orders. Bluestem offers a large selection of name-brand, private label, and non-branded merchandise through internet websites and catalogs to customers in the United States of America. Merchandise is continuously tailored across three key product categories: Home - including housewares, bed and bath, lawn and garden, home furnishings and hardware Entertainment - including electronics, video games, toys and sporting goods Fashion - including apparel, footwear, cosmetics, fragrances and jewelry Bluestem is a party to a series of transactions with WebBank and Santander Consumer USA Inc. ( SCUSA ) related to revolving Northstar Portfolio customer accounts receivable. WebBank is the originating bank for Northstar Portfolio customer revolving credit accounts. Except as described in Note 5, Serviced Credit Portfolio, of the Notes to Condensed Consolidated Financial Statements, Bluestem sells all new receivables originated under revolving credit accounts to SCUSA on the same day those receivables are purchased by Bluestem from WebBank. All receivables originated in revolving credit accounts are referred to as Standard Receivables. All receivables generated in accounts other than revolving credit accounts, are referred to as Nonstandard Receivables. Bluestem bears risk of loss due to uncollectibility on Nonstandard Receivables. SCUSA bears risk of loss due to uncollectibility of the Standard Receivables it purchases. Bluestem services all credit accounts and related receivables as WebBank s and/or SCUSA s agent. In consideration of Bluestem s servicing of the Standard Receivable portfolio owned by SCUSA, SCUSA pays a servicing fee to and shares a portion of the profits of the portfolio with Bluestem. Related to the Northstar Serviced Credit Portfolio, the following are the primary agreements executed by Bluestem (collectively the A/R Program Agreements ). Agreement Receivables Sales Agreement Standard Receivables Sales Agreement Program Agreement Counterparty WebBank SCUSA WebBank and SCUSA See Note 5, Serviced Credit Portfolio, of the Notes to Condensed Consolidated Financial Statements, for more information on SCUSAowned and Bluestem-owned accounts receivable. 1

5 MANAGEMENT S COMMENTARY ON RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES Our Management s Commentary on Results of Operations, Liquidity and Capital Resources is organized as follows: OVERVIEW AND BASIS OF PRESENTATION: This section provides a discussion of our consolidated company and the presentation of our segment results. RESULTS OF OPERATIONS: This section presents our consolidated results of operations, segment results, a detailed analysis of each segment s results of operations, and a discussion of information that we believe is meaningful to understand our results of operations. LIQUIDITY AND CAPITAL RESOURCES: This section provides an analysis of our liquidity and cash flows. OVERVIEW AND BASIS OF PRESENTATION Bluestem Group Inc. is a holding company whose businesses include Bluestem, a multi-brand, online retailer of a broad selection of namebrand and private label general merchandise serving the boomer and senior demographic, generally considered age 50 and over, and lowto middle-income consumers across all age group demographics through 13 retail brands. Bluestem Group Inc. also includes Capmark Portfolio which is focused on managing a commercial real estate-related business and existing assets, including monetizing these assets when appropriate. We review and present our business results based on the organizational structure we use to evaluate performance and make decisions on allocating resources and assessing performance. Beginning in fiscal, our consolidated business results are presented in three reportable segments (referred to herein as segments ): Northstar Portfolio, Orchard Portfolio and Corporate and other. The business results for the 13- and 39-weeks ended have been adjusted to reflect the changes in our segment presentation. Segment merchandise sales and shipping and handling revenue are recorded at the time of shipment to the customer and an adjustment to reduce sales by the estimated amount of orders in-transit to customers is recognized and reported in the Corporate and other segment. Northstar Portfolio The Northstar Portfolio consists of our Fingerhut and Gettington retail brands. These brands are national multi-channel retailers serving low- to middle-income consumers by offering products with customized payment plans through revolving credit lines or installment loans. While numerous retailers sell merchandise via the internet and catalogs focusing on low- to middle-income customers, Northstar Portfolio has created a differentiated business model by utilizing direct-marketing expertise to integrate proprietary credit offerings with broad general merchandise offerings including consumer electronics, domestics, housewares, and home furnishings. The majority of sales are on revolving customer credit accounts, originated through WebBank, reflecting Northstar Portfolio s ability to combine relevant merchandise offerings with an attractive consumer credit product aligned with the customer s ability to pay. Fingerhut also offers the FreshStart program, which provides the option of purchasing merchandise on installment credit terms after making a down payment. Important drivers of Northstar Portfolio s business performance include growth in new customer credit accounts, average order size, existing customer repurchase rates, the mix of merchandise sold, the overall performance and credit quality of the customer accounts receivable portfolio, and promotional performance. Orchard Portfolio The Orchard Portfolio consists of Appleseed s, Bedford Fair, Blair, Draper s & Damon s (retail stores were exited during the first quarter of fiscal ), Gold Violin, Haband, LinenSource (which was exited in the second quarter of fiscal ), Norm Thompson, Old Pueblo Traders, Sahalie, Solutions (which was exited in the fourth quarter of fiscal ), Tog Shop, and WinterSilks retail brands. These brands are national multi-channel retailers offering apparel, accessories, and home products for women and men principally in the boomer and senior demographic, generally considered age 50 and older. Orchard Portfolio offers its product assortments through various platforms including online and direct mail. Important drivers of Orchard Portfolio s business performance include growth in new customers, average order size, existing customer repurchase rates, the mix of merchandise sold, and promotional performance. The Orchard Portfolio has an extensive proprietary database of customer information, including customer demographics and purchasing history. Orchard Portfolio is able to design its marketing programs using this information. Marketing strategies are designed to grow lifetime value with customers by using the strength of its brand portfolio to meet more of its customers needs. Multiple Orchard Portfolio brand relationships are fostered through circulation strategies, the design of its web universal cart and its use of a third-party private label credit platform across all brands. Corporate and other The Corporate and other segment includes certain assigned costs consisting of indirect general and administrative expenses, amortization and depreciation not included in cost of goods sold, gains on derivatives in our own equity, loss on impairment, gain on debt extinguishment, the elimination of inter-segment activities as well as adjustments to net sales, cost of goods sold, selling and marketing expenses related to product estimated to be in-transit from shipping point to the customer. In addition, the segment includes the 2

6 PayCheck Direct business (which was exited during the first quarter of fiscal and is currently winding down), Capmark Portfolio and certain assigned costs. PayCheck Direct was a program that was offered directly through employers or organizations as a voluntary benefit to employees and members. It allowed customers to purchase products with the convenience of paying over 12 months through payroll deductions or automatic bank withdrawals. Capmark Portfolio is focused on managing a real estate-related business and existing assets, including monetizing these assets when appropriate. RESULTS OF OPERATIONS Consolidated Results of Operations The following table provides our consolidated results of operations (in thousands): Net sales and revenue Net sales... $ 399,798 $ 445,085 $ 1,266,314 $ 1,341,703 Commercial real estate revenue, net... 1, , Total net sales and revenue , ,248 1,268,836 1,342,461 Costs and expenses Cost of goods sold , , , ,338 Sales and marketing expenses , , , ,302 Net credit expense... 30,398 23,898 89,821 59,719 General and administrative expenses... 46,274 51, , ,755 Amortization and depreciation not included in cost of goods sold... 13,471 17,347 42,797 51,838 Loss on impairment Gain on derivatives in our own equity... (548) Gain on debt extinguishment... (2,509) (2,509) Total costs and expenses , ,001 1,305,793 1,378,325 Operating loss... (5,085) (20,753) (36,957) (35,864) Interest expense, net... 12,785 13,189 38,401 40,394 Loss before income taxes... (17,870) (33,942) (75,358) (76,258) Income tax (benefit) expense... (1,390) (1,509) (1,514) 1,219 Net loss... (16,480) (32,433) (73,844) (77,477) Other comprehensive loss Unrealized gain (loss) on interest rate swaps, net of tax (510) Net change in unrealized gains/losses on investment securities, net of tax... 4 (227) Comprehensive loss... $ (15,563) $ (32,183) $ (73,720) $ (78,214) 3

7 Results of Operations by Segment The following tables provide selected financial information by segment (in thousands): Net sales and revenue Northstar Portfolio Orchard Portfolio Corporate and other Net sales... $ 210,115 $ 201,703 $ (12,020) $ 399,798 Commercial real estate revenue, net... 1,115 1,115 Total net sales and revenue , ,703 (10,905) 400,913 Costs and expenses Cost of goods sold ,488 96,311 (7,136) 208,663 Sales and marketing expenses... 29,490 80,859 (3,157) 107,192 Net credit expense... 30, ,398 General and administrative expenses... 4,160 9,115 32,999 46,274 Amortization and depreciation not included in cost of goods sold... 13,471 13,471 Total costs and expenses , ,285 36, ,998 Operating income (loss)... $ 26,848 $ 15,418 $ (47,351) $ (5,085) Total Net sales and revenue Northstar Portfolio Orchard Portfolio Corporate and other Net sales... $ 218,333 $ 218,696 $ 8,056 $ 445,085 Commercial real estate revenue, net Total net sales and revenue , ,696 8, ,248 Costs and expenses Cost of goods sold , ,326 6, ,260 Sales and marketing expenses... 39,358 87,476 3, ,095 Net credit expense... 21,614 2,284 23,898 General and administrative expenses... 3,398 11,464 37,048 51,910 Amortization and depreciation not included in cost of goods sold... 17,347 17,347 Gain on debt extinguishment... (2,509) (2,509) Total costs and expenses , ,266 63, ,001 Operating income (loss)... $ 19,566 $ 15,430 $ (55,749) $ (20,753) Total 4

8 Net sales and revenue Northstar Portfolio Orchard Portfolio Corporate and other Net sales... $ 618,217 $ 652,408 $ (4,311) $ 1,266,314 Commercial real estate revenue, net... 2,522 2,522 Total net sales and revenue , ,408 (1,789) 1,268,836 Costs and expenses Cost of goods sold , ,026 (2,514) 661,190 Sales and marketing expenses... 92, ,766 (1,573) 343,636 Net credit expense... 85,436 4,385 89,821 General and administrative expenses... 12,009 28, , ,119 Amortization and depreciation not included in cost of goods sold... 42,797 42,797 Loss on impairment Total costs and expenses , , ,736 1,305,793 Operating income (loss)... $ 74,651 $ 60,917 $ (172,525) $ (36,957) Total Net sales and revenue Northstar Portfolio Orchard Portfolio Corporate and other Net sales... $ 624,166 $ 694,490 $ 23,047 $ 1,341,703 Commercial real estate revenue, net Total net sales and revenue , ,490 23,805 1,342,461 Costs and expenses Cost of goods sold , ,337 16, ,338 Sales and marketing expenses , ,350 9, ,302 Net credit expense... 53,693 6,026 59,719 General and administrative expenses... 12,810 36, , ,755 Amortization and depreciation not included in cost of goods sold... 51,838 51,838 Loss on impairment Gain on derivatives in our own equity... (548) (548) Gain on debt extinguishment... (2,509) (2,509) Total costs and expenses , , ,783 1,378,325 Operating income (loss)... $ 72,827 $ 72,287 $ (180,978) $ (35,864) Total 5

9 Northstar Portfolio Northstar Portfolio s net sales, costs of goods sold, gross profit, order and new customer data are summarized below (in thousands, except average order size): Sales by category: Home... $ 90,395 $ 100,028 $ 284,831 $ 303,269 Entertainment... 89,453 90, , ,822 Fashion... 39,113 38, , ,462 Total Sales , , , ,553 Returns and allowances... (13,178) (15,926) (36,558) (44,722) Commissions and other revenues... 4,332 4,994 13,628 14,335 Net sales , , , ,166 Cost of goods sold , , , ,183 Gross profit... $ 90,627 $ 83,936 $ 264,539 $ 257,983 Gross profit percentage % 38.4% 42.8% 41.3% Orders filled ,022 2,761 2,849 Average order size... $ 232 $ 224 $ 232 $ 230 New revolving credit customers New Freshstart customers Net Sales Net sales for Northstar Portfolio for the 13- and 39-weeks ended decreased 3.8% and 1.0% compared to the 13- and 39-weeks ended, respectively, primarily due to efforts to improve our advertising expense to sales ratio. Contributing factors included the reduction of our least productive catalog circulation, discontinuing national television in September and the continued reductions from tighter underwriting standards. Gross Profit Northstar Portfolio's gross profit percentage for the 13-weeks ended increased from the 13-weeks ended, primarily due to pricing and cost optimization efforts, lower product returns and lower inventory obsolescence. For the 39-weeks ended, Northstar Portfolio's gross profit percentage increased from the 39-weeks ended, primarily due to lower product returns, lower fulfillment expense and lower inventory obsolescence. Sales and Marketing Expenses The following table presents sales and marketing expenses of Northstar Portfolio, by category (in thousands): Catalog direct mail... $ 18,491 $ 22,617 $ 56,383 $ 68,563 Television and digital marketing... 8,016 12,673 27,472 39,451 Order entry and customer service... 2,409 3,325 6,517 9,058 Premium (free gift with purchase) and other ,071 1,581 Sales and marketing expenses... $ 29,490 $ 39,358 $ 92,443 $ 118,653 Sales and marketing expenses as a percent of net sales % 18.0% 15.0% 19.0% Northstar Portfolio's sales and marketing expenses as a percentage of net sales for the 13- and 39-weeks ended decreased compared to the 13- and 39-weeks ended, primarily due to a reduction in catalog print and paper rates from our recently negotiated vendor contracts and lower use of television advertising. We continue to reduce our television advertising expenses in fiscal as part of our efforts to manage costs and the mix of customers in our serviced credit portfolio. 6

10 Net Credit Expense The following table presents net credit expenses of Northstar Portfolio, by category (in thousands): Credit management costs... $ 15,882 $ 18,694 $ 50,982 $ 55,945 Provision for doubtful accounts - Company-owned customer accounts receivable... 1,839 2,014 5,628 6,749 Provision for doubtful accounts - loss on sale of customer accounts receivable... 20,950 7,462 52,145 12,593 Provision for doubtful accounts... 22,789 9,476 57,773 19,342 Finance charge and fee income, net... (361) 2 (1,763) (1,425) Servicing fee income and portfolio profit sharing... (6,623) (6,558) (20,588) (20,169) Gain on servicing right... (1,558) (968) Net credit expense... $ 30,129 $ 21,614 $ 85,436 $ 53,693 Annualized net credit expense as a percent of average revolving customer accounts receivable % 6.4% 8.1% 5.2% Average revolving customer accounts receivable... $ 1,351,508 $ 1,342,888 $ 1,398,761 $ 1,376,102 Net credit expense includes credit management costs on all customer accounts receivable whether owned by the Company or SCUSA, a provision for doubtful accounts and finance charge and fee income on Company-owned accounts receivable, a provision for doubtful accounts needed to reduce the value of accounts receivable purchased from WebBank to the discounted value sold to SCUSA (see below for more information on the required merchant discount on receivables sold to (SCUSA), servicing fee income and portfolio profit sharing from SCUSA owned accounts receivable. We maintain an allowance for doubtful accounts at a level intended to absorb probable losses on Nonstandard Receivables as of the balance sheet date. SCUSA bears risk of loss due to uncollectibility of the Standard Receivables it owns. The Standard Receivables Sale Agreement states that if the Risk Adjusted Margin ("RAM") forecast projects RAM, as a percentage of forecasted average program receivables, to be less than 5% for the full fiscal year, then Bluestem shall implement a merchant discount rate on all Standard Receivables purchased by SCUSA for the remainder of the fiscal year. Sales of Standard Receivables to SCUSA were made at a discount to par of 9.51% or $21.0 million and 3.20% or $7.5 million during the 13-weeks ended and, respectively. Sales of Standard Receivables to SCUSA were made at a discount to par of 7.93% or $52.1 million and 1.88% or $12.6 million during the 39-weeks ended and, respectively. As of, total serviced customer accounts receivable were $1.3 billion, of which $21.8 million were Company-owned. As of February 3,, total serviced customer accounts receivable were $1.5 billion, of which $67.1 million were Company-owned. Northstar receives a servicing fee and shares in a portion of the profits as compensation for servicing customer accounts receivable owned by SCUSA. The compensation received from SCUSA did not approximate adequate compensation for services provided during the 13- and 39-weeks ended, therefore Northstar records a servicing liability for the estimated shortfall in compensation over the life of the receivable. Northstar recorded non-cash gains of $1.6 million and $1.0 million to adjust the fair value the servicing liability during the 13- and 39-weeks ended, respectively due to the decrease in receivables during that period. See Note 5, Serviced Credit Portfolio of the Notes to Condensed Consolidated Financial Statements, for more information. Net credit expense for the 13-weeks ended increased compared to the 13-weeks ended, due to a $13.3 million increase in provision for doubtful accounts primarily attributed to the $13.5 million increase in loss on sale of customer accounts receivable sold to SCUSA due to an increase in the merchant fee as a result of increased credit losses. For the 39-weeks ended net credit expense increased compared to the 39-weeks ended, primarily due to a $38.4 million increase in provision for doubtful accounts primarily attributed to $39.6 million increase in loss on sale of customer accounts receivable sold to SCUSA due to an increase in the merchant fee as a result of increased credit losses. 7

11 General and Administrative Expenses The following table presents general and administrative expenses of Northstar Portfolio, by category (in thousands): Compensation and benefits... $ 3,773 $ 2,995 $ 10,733 $ 11,316 Professional fees Rents and occupancy costs Other General and administrative expenses... $ 4,160 $ 3,398 $ 12,009 $ 12,810 General and administrative expenses as a percent of net sales 2.0% 1.6% 1.9% 2.1% As a percent of net sales, general and administrative expenses for the 13-weeks ended increased compared to the 13- weeks ended, due to an increase in incentive compensation, partially offset by decreased compensation as a result of a workforce reduction completed in March. As a percent of net sales, general and administrative expenses for the 39-weeks ended decreased compared to the 39-weeks ended, due to decrease compensation as a result of a workforce reduction completed in March offset by an increase in incentive compensation. Orchard Portfolio Orchard Portfolio s net sales, cost of goods sold, gross profit order and gross customer data are summarized below (in thousands, except average order size): Sales by category: Fashion... $ 205,089 $ 219,402 $ 658,451 $ 701,270 Home... 12,266 19,743 48,706 65,241 Total Sales , , , ,511 Returns and allowances... (29,630) (32,773) (98,631) (110,729) Commissions and other revenues... 13,978 12,324 43,882 38,708 Net sales , , , ,490 Cost of goods sold... 96, , , ,337 Gross profit... $ 105,392 $ 114,370 $ 342,382 $ 375,153 Gross profit percentage % 52.3% 52.5% 54.0% Orders filled... 3,225 3,480 10,006 10,657 Average order size... $ 67 $ 70 $ 71 $ 73 Gross new customers ,603 1,844 Gross active customers... 7,533 7,624 7,533 7,624 Net Sales Net sales for Orchard Portfolio for the 13-weeks ended decreased 7.8% compared to the 13-weeks ended, primarily due to the exit of the Solutions business during the fourth quarter of ($2.0 million), exit of Draper's and Damon's retail stores during the first quarter of ($3.4 million), exit of LinenSource during the third quarter of ($3.1 million), along with lower sales as a result of lower catalog advertising. For the 39-weeks ended, net sales decreased 6.1% compared to the 39-weeks ended, primarily due to the exit of the Solutions business during the fourth quarter of ($7.7 million), exit of Draper's and Damon's retail stores during the first quarter of ($7.5 million), reduced new customer acquisition catalog circulation and increased shipping promotions. Gross Profit Orchard Portfolio's gross profit percentage for the 13-weeks ended was consistent with the 13-weeks ended October 28,. For the 39-weeks ended, Orchard Portfolio's gross profit percentage decreased compared to the 39-weeks ended, primarily due to higher promotional activities, increased shipping and fulfillment expenses and increased inventory obsolescence costs. 8

12 Sales and Marketing Expenses The following table presents sales and marketing expenses of Orchard Portfolio, by category (in thousands): Catalog direct mail... $ 66,182 $ 69,436 $ 204,310 $ 208,839 Digital marketing... 4,091 3,875 13,406 12,891 Order entry and customer service... 6,307 6,949 19,589 21,396 Retail Store ,752 2,774 9,439 Premium (free gift with purchase) and other... 4,231 4,464 12,687 13,785 Sales and marketing expenses... $ 80,859 $ 87,476 $ 252,766 $ 266,350 Sales and marketing expenses as a percent of net sales % 40.0% 38.7% 38.4% Orchard Portfolio's sales and marketing expenses as a percentage of net sales for the 13-weeks ended was consistent with the 13-weeks ended. Orchard Portfolio's sales and marketing expenses as a percentage of net sales for the 39- weeks ended increased compared to the 39-weeks ended, primarily due to less efficient catalog expense, partially offset by the exit of Draper's and Damon's retail stores during the first quarter of. General and Administrative Expenses The following table presents general and administrative expenses of Orchard Portfolio, by category (in thousands): Compensation and benefits... $ 7,040 $ 8,391 $ 22,497 $ 28,681 Professional fees ,307 2,021 Rents and occupancy costs ,204 2,698 3,396 Other ,163 1,197 2,418 General and administrative expenses... $ 9,115 $ 11,464 $ 28,699 $ 36,516 General and administrative expenses as a percent of net sales 4.5% 5.2% 4.4% 5.3% Orchard Portfolio's general and administrative expenses as a percent of net sales for the 13- and 39-weeks ended decreased compared to the 13 and 39-weeks ended, primarily due to lower compensation as a result of the workforce reduction completed in March. CORPORATE AND OTHER Net Sales and revenues Corporate and other's net sales and revenues are summarized below (in thousands): Net sales... $ (12,020) $ 8,056 $ (4,311) $ 23,047 Commercial real estate revenue, net... 1, , Net sales and revenues... $ (10,905) $ 8,219 $ (1,789) $ 23,805 Net sales and revenues for Corporate and other for the 13- and 39-weeks ended decreased compared to the 13- and 39-weeks ended, due to exit of PayCheck Direct business and timing of in-transit sales. 9

13 Cost of Goods Sold The following table presents cost of goods sold of Corporate and other (in thousands): Cost of goods sold... $ (7,136) $ 6,537 $ (2,514) $ 16,818 Corporate and other's cost of goods sold for the 13- and 39-weeks ended decreased compared to the 13- and 39- weeks ended, due to exit of PayCheck Direct business and timing of cost of goods sold related to in-transit sales. Sales and Marketing Expenses The following table presents sales and marketing expenses of Corporate and other (in thousands): Sales and marketing expenses... $ (3,157) $ 3,261 $ (1,573) $ 9,299 Corporate and other's sales and marketing expenses for the 13- and 39-weeks ended decreased compared to the 13- and 39-weeks ended, due to exit of PayCheck Direct business and the timing of promotional and advertising expenses related to in-transit sales. Net Credit Expense The following table presents net credit expense of Corporate and other (in thousands): Net credit expense... $ 269 $ 2,284 $ 4,385 $ 6,026 Corporate and other's net credit expense for the 13- and 39-weeks ended decreased compared to the 13- and 39- weeks ended, due to exit of PayCheck Direct business. General and Administrative Expenses The following table presents general and administrative expenses of Corporate and other, by category (in thousands): Compensation and benefits... $ 19,084 $ 18,679 $ 70,158 $ 68,146 Professional fees and contract labor... 6,581 6,642 27,307 24,112 Rents and occupancy costs... 6,249 6,402 23,335 19,315 Other... 1,085 5,325 6,611 11,856 General and administrative expenses... $ 32,999 $ 37,048 $ 127,411 $ 123,429 Corporate and other's general and administrative expenses for the 13-weeks ended decreased compared to the 13- weeks ended, primarily due to lower salaries as a result of the workforce reduction and exit of PayCheck Direct business during the first quarter of, non-recurring gain on sale of certain assets and lower litigation charges, partially offset by higher incentive compensation for the 13- and 39-weeks ended as a result of a non-recurring downward incentive accrual adjustment in the prior year. For the 39-weeks ended, general and administrative expenses increased compared to the 39-weeks ended, primarily due to $15.7 million of restructuring costs, which primarily consist of severance and lease termination costs and higher incentive compensation, partially offset by lower compensation as a result of the workforce reduction and exit of PayCheck Direct business during the first quarter of. See Note 8, Restructuring Costs, of the Notes to Condensed Consolidated Financial Statements, for more information. 10

14 Amortization and Depreciation not Included in Costs of Goods Sold The following table presents amortization and depreciation expenses not included in cost of goods sold reported under the Corporate and other segment (in thousands): Amortization and depreciation not included in costs of goods sold... $ 13,471 $ 17,347 $ 42,797 $ 51,838 Amortization and depreciation expenses not included in cost of goods sold for the 13- and 39-weeks ended, decreased compared to the 13- and 39-weeks ended, primarily due to decreased Fingerhut amortization as a result of the impairment charge during the fourth quarter of fiscal and decline in capital expenditures. Gain on Derivatives in Our Own Equity The following table presents gain on derivatives in our own equity reported under the Corporate and other segment (in thousands): Gain on derivatives in our own equity... $ $ $ $ (548) The Company issued warrants to purchase shares of common stock ("Warrants") to certain affiliates of Centerbridge Partners, L.P. (collectively, "Centerbridge") on May 8, Gain on derivatives in our own equity reflects the subsequent changes in the estimated fair value of the outstanding Warrants that met the definition of a derivative. In May, the exercise price became fixed, subject to customary anti-dilution adjustments. The Adjusted Book Value exercise price of the Warrants no longer contains variables and is considered to be fixed-for-fixed. The outstanding Warrants no longer meet the criteria to be accounted for as a derivative. As of and February 3,, there was no derivative liability in our own equity. Loss on Impairment The following table presents loss on impairment reported under the Corporate and other segment (in thousands): Loss on impairment... $ $ $ 230 $ 430 We recorded a non-cash impairment charge during the 39-weeks ended related to the LinenSource tradename as a result of the Company's decision to exit the brand. For the 39-weeks ended, we recorded a non-cash impairment charge related to the Solutions tradename as a result of the decision to discontinue the brand during fiscal. The overall financial performance for the 39-weeks ended of the Orchard Portfolio is below management's expectations. We have experienced a decline in our Orchard customer file due to a decline in rebuy rates and declining new customer acquisition. Management is taking and evaluating actions to improve financial performance by pursuing further enhancements to gross margin and continued evaluation of under-performing brands. As the financial performance in the third quarter is below management's expectations, we have begun to re-assess the assumptions in our long term financial plan. This re-assessment has led us to conclude that there is an indicator of possible goodwill, intangible and long-lived asset impairment relating to the Orchard Portfolio. Due to the significant effort that is required to determine the current fair values of Orchard's intangible and long-lived assets, we are unable to reasonably estimate the amount of impairment, if any, during the third quarter. The Company expects to complete its impairment test in the fourth quarter and the amount of an impairment, if any, that is determined could be material to the consolidated financial statements. 11

15 Gain on Debt Extinguishment The following table presents gain on debt extinguishment reported under the Corporate and other segment (in thousands): Gain on debt extinguishment... $ $ (2,509) $ $ (2,509) The $2.5 million gain relates to the purchase of $21.5 million of Bluestem's Term Loan by BGI Holding Company in the third quarter fiscal. The net gain represents the difference in the amount paid and the net carrying value of the extinguished debt, including debt issuance costs. Interest Expense, net The following table presents interest expense by category, weighted average borrowings outstanding and weighted average interest rates (in thousands except for weighted average interest rates): Interest on debt... $ 11,237 $ 11,566 $ 33,660 $ 35,704 Interest on capital lease obligation Interest on swaps Amortization of deferred charges ,274 2,355 Amortization of original issue discount ,779 1,857 Interest income... (3) (2) (7) (48) Total interest expense, net... $ 12,785 $ 13,189 $ 38,401 $ 40,394 Weighted average borrowings outstanding... $ 512,003 $ 548,604 $ 529,270 $ 550,530 Weighted average interest rate % 8.2% 8.0% 8.3% The Company's interest expense is primarily related to interest expense on the outstanding balances of the Term Loan and asset-backed line of credit. Interest expense for the 13- and 39-weeks ended decreased compared to 13- and 39-weeks ended, due to decreased weighted average interest rate due to higher borrowings on the asset-backed line of credit and a lower Term Loan debt balance resulting from the debt repurchase completed during the third quarter of fiscal and scheduled principal debt payments. See the Liquidity and Capital Resources section below for additional information. Income Tax (Benefit) Expense The following table presents income tax (benefit) expense (in thousands): Income tax (benefit) expense... $ (1,390) $ (1,509) $ (1,514) $ 1,219 Income tax benefit for the 13- and 39-weeks ended was recognized on $17.9 million and $75.4 million of loss before income taxes, respectively. The income tax benefit includes the release of an unrecognized tax benefit liability, partially offset by state and foreign taxes. For the 13- and 39-weeks ended, $1.5 million income tax benefit and $1.2 million income tax expense was recognized on $33.9 million and $76.3 million of loss before income taxes, respectively. For the 13-weeks ended, the income tax benefit related to the release of unrecognized tax benefit liability, for the 39-weeks ended the expense was primarily related to state and foreign taxes. Based on our historical and cumulative losses, a tax benefit was not recognized for current year losses or carryforwards offsetting future year income. Tax benefits from net operating loss carryforwards are limited to current year income and temporary differences expected to generate future taxable income. Tax benefits from carryforwards offsetting additional income beyond the current year may be recognized in the future which could be material. 12

16 LIQUIDITY AND CAPITAL RESOURCES Liquidity and Capital Resources As of, we had $119.1 million in total cash and cash equivalents on hand. Our primary sources of liquidity are (1) proceeds from the sales of customer accounts receivables to SCUSA, (2) cash flows from operations, (3) availability under our Asset Backed Line of Credit, (4) cash and cash equivalents on hand, and (5) collections on our owned accounts receivable portfolio. Our retail operations require a significant amount of capital to grow and fund operations. Ensuring adequate liquidity is, and will continue to be, at the forefront of our business objectives. Our primary uses of cash are (1) purchases of inventory, (2) purchases and production of promotional materials, and (3) other general working capital needs. The majority of Northstar Portfolio s sales occur on customer credit accounts. We sell all of the eligible Northstar Portfolio revolving customer accounts receivable to SCUSA on the day we purchase the customer accounts receivable from WebBank. As a result, working capital is improved due to the quicker turn around than if those accounts receivable were held by Bluestem. Orchard offers its customers financing through its private label credit cards, which are issued and managed by a third-party bank. Approximately 31% of Orchard s sales occurred on these cards during the 39-weeks ended November 3, with the remaining sales primarily occurring on third-party debit and credit cards, resulting in a short-term use of working capital until the receivables are collected. We manage payable terms with vendors in an effort to achieve a balance between working capital and liquidity. The Northstar Portfolio s cash requirements are seasonal, with peak needs occurring from September through November as marketing efforts increase and inventory grows in advance of the holiday season. The Orchard Portfolio s cash requirements are also seasonal in nature, peaking in the first and third fiscal quarters due to the purchase of inventory and the production of promotional materials in advance of the Spring and Fall seasons. During these peaks, we increase utilization of our Asset Backed Line of Credit. Availability is dependent on eligible collateral for the borrowing base (primarily comprised of inventory and non-customer receivables) and outstanding borrowings. Cash flows from Capmark Portfolio are dependent, in part, on our ability to monetize assets, as well as on the changes in the value of our real estate-related assets, which impact the levels of net gains or losses that we recognize. We use the cash for Capmark Portfolio operating, general and administrative expenses. The gains or losses realized on sales of assets are subject to various factors. These factors include changes in the interest rate environment, commercial real estate prices, the level of supply and demand for commercial real estate and real estate-related investments and the condition of local and national economies. As of and February 3,, net commercial real estate assets were $8.9 million and $23.0 million, respectively. Cash is invested approximately 50% in commercial paper and approximately 50% in money market funds. We purchase money market funds that invest in U.S. dollar-denominated money market securities of domestic and foreign issuers rated in the highest categories or in diversified portfolios of high quality, short-term dollar-denominated debt securities issued or guaranteed by the U.S. government or its agencies. Additional cash requirements relate to debt service for the Term Loan, capital investments in our business and other general working capital needs. Excess Cash Flow (as defined in the Term Loan agreement) is used to pay down our Term Loan, and we may also use cash to pay down outstanding amounts under our Asset Backed Line of Credit. On February 3,, the Board of Directors declared a special cash dividend of $0.60 per share of the Company's outstanding common stock and Series A Participating Convertible Preferred Stock (the "Special Dividend"). The Special Dividend resulted in an $80.2 million payment to holders of record as of February 15,. During fiscal following the exit of the PayCheck Direct business, Bluestem sold $43.3 million PayCheck Direct accounts receivable to BGI Holding Company under an arms-length transaction for an 8.6% discount of net book value for proceeds of $29.8 million in order to accelerate the cash collection of PayCheck Direct receivables to Bluestem. On September 1,, Bluestem sold the Irvine Distribution Center to BGI Holding Company under an arms-length transaction for net proceeds of $24.3 million which will be reinvested in the business over the course of the twelve months following the transaction. Substantially all of the Company s existing debt obligations have been incurred by Bluestem which is and is expected to continue to be, required to comply with certain financial covenants and ratios contained within the Term Loan agreement and Asset Backed Line of Credit agreement ("Lender Requirements"), as well as separate financial covenants and ratios under the Program agreement ("Program Requirements"). The Lender Requirements are based on Bluestem s stand-alone financial results excluding unrestricted subsidiaries while the Program Requirements are based on Bluestem s stand-alone financial results including all subsidiaries. Unrestricted subsidiaries are designated by Bluestem based on qualifications defined by the loan agreements. 13

17 Bluestem's performance against covenants as of were as follows (net liquidity in thousands): Leverage Ratio Net Liquidity Results Requirement Position Requirement Term Loan agreement and Asset Backed Line of Credit agreement < 4.50 $70,476 > $ 40,000 Program agreement < 5.00 $70,506 > $ 40,000 Bluestem s cash flow is highly dependent on the volume of its sales and the performance of the receivables sold to SCUSA. Bluestem reported losses in fiscal and the 39-weeks ended driven by decreasing net sales and an increasing merchant discount on receivables sold to SCUSA due to challenging and competitive credit and retail environments. As a result, Bluestem has taken and continues to evaluate and take actions to improve the performance and stability of the business. To date, actions have included a workforce reduction, exiting certain businesses that were neither accretive nor consistent with our strategic goals and eliminating redundant facilities. We expect our performance relative to our financial covenants to be tight for the foreseeable future and there can be no assurance that Bluestem s operating results will improve or that any actions taken will allow Bluestem to remain in compliance with the Lender Requirements or Program Requirements. Sources and Uses of Cash The following table represents a comparison of the net cash provided by operating activities, investing activities, and financing activities (in thousands): Net cash provided by operating activities... $ 52,228 $ 18,707 Net cash used in investing activities... $ (69,213) $ (22,693) Net cash used in financing activities... $ (76,893) $ (19,693) The increase in cash provided by operating activities for the 39-weeks ended compared to the 39-weeks ended was due to an increase in earnings adjusted for non-cash charges to net losses from operations and decreased working capital. The increase in cash used in investing activities for the 39-weeks ended compared to the 39-weeks ended was primarily as a result of decreased proceeds from sale of customer accounts receivable due to an increase in the merchant discount, partially offset by decreased purchases of software and leasehold improvements as we moved into our new Eden Prairie, MN headquarters in the second quarter of fiscal. The increase in cash used in financing activities for the 39-weeks ended compared to the 39-weeks ended was primarily due to an $80.2 million dividend payment and lower borrowings on our Asset Backed Line of Credit, partially offset by no repurchase of BGI Holding Company stock in fiscal year and no partial extinguishment of debt on the Term Loan. Transfers and Servicing of Financial Assets - Customer Accounts Receivable Information regarding transfers and servicing of financial assets - customer accounts receivable is included in Management s Commentary on Financial Condition and Results of Operations - Liquidity and Capital Resources of our Annual Report. During the 39-weeks ended, there were no material changes to this previously disclosed information outside of the ordinary course of business. Debt and Financing Arrangements Information regarding debt and financing arrangements is included in Management s Commentary on Financial Condition and Results of Operations - Liquidity and Capital Resources of our Annual Report. During the 39-weeks ended, there were no material changes to this previously disclosed information outside of the ordinary course of business. Contractual Obligations and Commitments A summary of future contractual obligations and commitments is included in Management s Commentary on Financial Condition and Results of Operations - Liquidity and Capital Resources of our Annual Report. During the 39-weeks ended, there were no material changes to this previously disclosed information outside of the ordinary course of business. Off Balance Sheet Arrangements Information regarding derivative liabilities in our own equity is included in Note 15, Fair Value of Assets and Liabilities of the Notes to Condensed Consolidated Financial Statements. We do not have any guarantee contracts, contingent interest in assets transferred, or variable interest entities that qualify as off-balance sheet arrangements. 14

18 Condensed Consolidated Balance Sheets (in thousands, except share data) ASSETS Current assets: February 3, Cash and cash equivalents... $ 119,123 $ 212,942 Restricted cash... 27,109 15,797 Customer accounts receivable, net of allowance of $8,176 and $17, ,628 50,053 Merchandise inventories , ,970 Promotional material inventories... 64,034 49,730 Other current assets... 33,860 39,135 Total current assets , ,627 Property and equipment, net , ,065 Intangibles, net , ,563 Goodwill , ,556 Other assets... 10,471 41,926 Total Assets... $ 1,011,672 $ 1,180,737 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable... $ 209,769 $ 221,539 Accrued costs and other liabilities... 84, ,095 Short-term debt... 75,411 47,500 Total current liabilities , ,134 Long-term debt , ,924 Deferred income taxes... 37,988 37,474 Other long-term liabilities... 33,807 37,470 Total liabilities , ,002 Stockholders' equity: Series A participating convertible preferred stock, $0.01 par value, $5,000 stated value; shares authorized 10,000,000 at and February 3, ; shares issued and outstanding 1,000 at and February 3,... 5,000 5,000 Common stock, $0.01 par value, shares authorized - 350,000,000 at and February 3, ; shares issued - 133,186,691 and 132,348,295 at and February 3,, respectively; shares outstanding - 132,326,876 at and February 3, 1,332 1,323 Treasury stock, at cost, 21,419 shares at and February 3,... (131) (131) Additional paid-in capital , ,789 Accumulated deficit... (156,858) (82,867) Accumulated other comprehensive income, net of tax Total stockholders' equity , ,735 Total Liabilities and Stockholders' Equity... $ 1,011,672 $ 1,180,737 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements 15