-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K3k2ikZbr6e1OlhSxU2kw2uLmqsJZ+R3b0YnZfKPl+Lf+DNNjGql8QiJayI6NzvP I4KVs+2/ecyEybmiD1JV9w== 0000912057-97-010564.txt : 19970329 0000912057-97-010564.hdr.sgml : 19970329 ACCESSION NUMBER: 0000912057-97-010564 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPIEGEL INC CENTRAL INDEX KEY: 0000276641 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 362593917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-16126 FILM NUMBER: 97566234 BUSINESS ADDRESS: STREET 1: 3500 LACEY RD CITY: DOWNERS GROVE STATE: IL ZIP: 60515-5432 BUSINESS PHONE: 7089868800 MAIL ADDRESS: STREET 1: 3500 LACEY ROAD CITY: DOWNERS GROVE STATE: IL ZIP: 60515-5432 10-K405 1 10-K405 CONFORMED COPY -------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K405 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 28, 1996 -------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the transition period from to --------------------- ---------------------- Commission file number 0-16126 ----------------------- S P I E G E L, I N C. (Exact name of registrant as specified in its charter) DELAWARE 36-2593917 (State of Incorporation) (I.R.S. Employer Identification No.) 3500 LACEY ROAD 60515-5432 DOWNERS GROVE, ILLINOIS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (630) 986-8800 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A NON-VOTING COMMON STOCK, PAR VALUE, $1.00 PER SHARE (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. X ----- The Class B Voting Common Stock is not publicly traded. Therefore, no market value information is readily available on this class of stock. The number of the shares of Registrant's Class A Non-Voting Common Stock and Class B Voting Common Stock outstanding on March 17, 1997 was 14,622,104 and 103,483,298, respectively. DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I ITEM 1. BUSINESS A. GENERAL DEVELOPMENT OF BUSINESS Spiegel, Inc., a Delaware corporation, was incorporated in 1965. Spiegel, Inc. and its subsidiaries are sometimes referred to collectively in this Form 10-K as the "Company" or "Spiegel". The Company and its predecessors date from 1865. Since 1905, the Company has operated as a catalog merchandiser. In 1982, the Company was purchased by Otto Versand (GmbH & Co) ("Otto Versand"), a privately-held German partnership that is one of the largest catalog merchandisers in the world, selling its products in Europe and Asia. In 1984, all of the capital stock of the Company was transferred to the partners of Otto Versand or their designees resulting in common ownership for Spiegel and Otto Versand. In this transaction, 65% of the capital stock of the Company was transferred to Spiegel Holdings, Ltd., an Illinois limited partnership, whose general partner was Dr. Werner Otto. Since 1984, additional shares of the Company's capital stock have been acquired by Spiegel Holdings, Ltd. and its successor. In 1986, Spiegel Holdings, Ltd. was converted to Spiegel Holdings, Inc., a Delaware corporation ("SHI"). Prior to the Company's 1987 initial public offering of Class A non-voting common stock, all of Spiegel's existing capital stock was converted into Class B voting common stock. SHI holds 99.9% of the Company's Class B voting common stock, affording SHI control of the Company. In 1988, the Company acquired Eddie Bauer, Inc. and certain related Canadian assets (collectively, "Eddie Bauer"). Eddie Bauer is a leading specialty retailer serving the casual lifestyle needs of men and women through the sale of high quality apparel, home furnishings and accessories through catalogs and specialty retail stores. In 1990, the Company acquired First Consumers National Bank ("FCNB"). FCNB is a special purpose bank limited to the issuance of credit cards, primarily FCNB Preferred Charge cards for use by Spiegel, Eddie Bauer and Newport News customers. In 1993, the Company acquired substantially all of the assets of New Hampton, Inc. ("New Hampton") through a bankruptcy proceeding. In 1995, New Hampton's name was changed to Newport News, Inc. ("Newport News"). Newport News is a specialty catalog company offering fashionable women's apparel and household furnishings at moderate price points. C. NARRATIVE DESCRIPTION OF BUSINESS PRINCIPAL PRODUCTS, SERVICES, AND REVENUE SOURCES. The Company has two principal merchandise categories: apparel and household furnishings and other merchandise. The components of net sales by merchandise category for the last three years were: 1996 1995 1994 ---- ---- ---- Apparel 74% 72% 73% Household furnishings and other merchandise 26 28 27 ---- ---- ---- 100% 100% 100% ---- ---- ---- ---- ---- ---- 2 The Company's household furnishings range from traditional to contemporary styles, including accent pieces, decorative accessories, bedding and bath, home electronics, window treatments and rugs. The other merchandise category includes items such as fitness and personal care equipment, toys, cameras and luggage. The following is a discussion of the major operations of the Company: Eddie Bauer, Spiegel, Newport News and FCNB: ($000s omitted on sales data) EDDIE BAUER Eddie Bauer is a leading specialty retailer serving the casual lifestyle needs of men and women through the sale of high quality private-label apparel, home furnishings and accessories. Eddie Bauer operates 397 retail stores and 46 outlet stores in addition to catalog operations. Total net sales were $1,567,750 and $1,427,422 for the years ended December 28, 1996 and December 30, 1995, respectively. Nearly 3/4 of total net sales for Eddie Bauer are retail and outlet sales. A key strategy for Eddie Bauer is to leverage synergies between its retail and catalog channels of distribution, maximizing opportunities for cross-promotion. This strategy includes referring retail customers to catalog stations within stores for additional merchandise and size options; utilizing the catalog customer database to help identify potential store locations; using catalog space to advertise the retail concept; and utilizing retail store mailing lists to help build the catalog file. Eddie Bauer's principal retailing concept is its trademark Eddie Bauer sportswear stores and catalogs, which feature casual apparel and accessories. Eddie Bauer also has other specialty retail concepts that serve targeted niches through retail stores and catalogs, including Eddie Bauer HOME, which offers home furnishings; AKA EDDIE BAUER, featuring dress sportswear and tailored clothing, footwear and accessories for men and women; and EBTEK, a store-within-a-store concept which provides a line of performance active wear. In September 1993, Eddie Bauer entered into a joint-venture arrangement with Otto-Sumisho, Inc. to sell its full line of Eddie Bauer sportswear products through retail stores and catalogs in Japan. There are currently seventeen stores. During 1995, Eddie Bauer entered into an agreement with Handelsgesellschaft Heinrich Heine GmbH and Sport-Scheck Gmbh (both subsidiaries of Otto Versand) to form a joint venture to sell Eddie Bauer products through retail stores and catalogs in Germany. There are currently two such stores. In 1996, Eddie Bauer signed a letter of intent with Gratten PLC (a subsidiary of Otto Versand) to form a joint venture which will sell Eddie Bauer products through retail stores and catalogs in the United Kingdom. Eddie Bauer has also capitalized on selected licensing opportunities, including a current arrangement with Ford Motor Company, which uses the Eddie Bauer name and logo on special series Ford vehicles. EDDIE BAUER RETAIL DIVISION Eddie Bauer operates 397 retail and 46 outlet stores. There are 411 stores in the United States and 32 stores in Canada. At December 28, 1996, 29 of these stores were Eddie Bauer HOME Collection and 20 were AKA EDDIE BAUER stores. A typical Eddie Bauer store is approximately 6,500 gross square feet, and average net sales per gross square foot for the retail and outlet stores combined was $414 and $420 in 1996 and 1995, respectively. The retail stores are usually located in an upscale regional mall or a high traffic metropolitan location, because the Company believes that convenience is a primary consideration for its target customers. Most of Eddie Bauer's current retail stores are located in large metropolitan markets. Eddie Bauer has also begun to explore opportunities to open stores in certain smaller markets where it believes a concentration of 3 its target customers exists. Eddie Bauer believes that these markets have the potential to contribute store profit margins comparable to the existing store base. Eddie Bauer outlet stores, which offer overstock and end-of-season merchandise, are located predominantly in outlet malls and strip centers and generally in areas not served by its core specialty retail stores. Growth in the retail division has been due principally to new store openings. Net store openings in 1996 and 1995, respectively, were 32 and 58, and in 1997 the Company is planning approximately 70 new store openings for Eddie Bauer. The average cost of opening a typical new Eddie Bauer store in 1996, including inventory, furniture and fixtures, pre-opening expenses and net leasehold improvements, was approximately $900,000. Eddie Bauer's ability to open and operate new stores profitably is dependent on the availability of suitable store locations, the negotiation of acceptable lease terms, Eddie Bauer's financial resources and its ability to control the operational aspects and personnel requirements of its growth. EDDIE BAUER CATALOG DIVISION In 1996, the Eddie Bauer catalog division distributed over 96 million catalogs and had approximately 3.2 million active customers (customers who have purchased within the last 18 months.) As a corollary to its retail operations, Eddie Bauer catalog concepts include its trademark Eddie Bauer Sportswear catalog, Eddie Bauer HOME and AKA EDDIE BAUER, as well as its largest catalog, Eddie Bauer Resource, combining all of its specialty concepts in a single catalog, including EBTEK. Eddie Bauer also actively pursues new customers within its target market through initiatives including list rentals and utilizing names of its retail store customers. SPIEGEL CATALOG Spiegel Catalog offers apparel, household furnishings and other merchandise through its various catalogs and, to a lesser extent, Ultimate Outlet retail stores. Spiegel Catalog sales were $990,761 and $1,168,960 for the years ended December 28, 1996 and December 30, 1995, respectively. Sales through catalog offerings comprise approximately 90% of the total net sales. Spiegel Catalog is one of the largest catalog companies in the United States and in 1996 distributed over 197 million catalogs throughout the country. At December 28, 1996, Spiegel Catalog's customer base included 5.2 million active customers (customers who have purchased within the last 18 months). Spiegel Catalog's apparel merchandise, which represented 54% of its sales in 1996, includes private-label merchandise, developed by its in-house product design teams based on emerging fashion trends and customer research. Spiegel Catalog also offers designer and branded apparel. Spiegel Catalog's household furnishings and other merchandise, which represented 46% of its sales in 1996, are a mixture of private-label and branded merchandise ranging from traditional to contemporary styles, including accent pieces, decorative accessories, bedding and bath, home electronics, window treatments and rugs. The catalogs serve as a fashion resource for the busy woman. In 1996, Spiegel Catalog began implementation of its "Style for Life" strategy. Based on this approach, the catalog offerings are being arranged and tailored to various lifestyle patterns of women identified through extensive research. These lifestyle definitions are driven by the work and personal roles women play today. The 4 catalogs are being targeted to a more upscale segment. These catalogs include Spiegel Catalog's trademark semi-annual catalog, specialty catalogs targeted to distinct market segments, including E STYLE and Together!, and other catalog mailings throughout the year. The Company has used proprietary and other data from within and outside its existing customer base and its fashion and marketing expertise to identify an assortment of niche markets. Spiegel Catalog addresses each of these markets with targeted specialty merchandise concepts, through a variety of focused catalog offerings, specialty catalogs and the larger semi-annual catalog. NEWPORT NEWS Newport News, acquired by the Company in August 1993, is a specialty catalog company whose catalog offers fashionable, moderately priced women's apparel as well as home textiles. Newport News' consolidated net sales were $292,044 for the year ended December 28, 1996, as compared to $289,843 for the year ended December 30, 1995. In 1996, Newport News mailed 169 million catalogs to active and prospective customers. Newport News catalogs have a customer base of 3.9 million active customers (customers who have purchased within the last 18 months.) FCNB In an effort to build brand loyalty and to provide additional convenience for its customers, the Company offers a credit program for qualifying catalog and retail customers in the form of its FCNB Preferred Charge card. The card is imprinted with a Spiegel, Eddie Bauer, Newport News, or E STYLE logo depending on the source of the original application for credit. This card allows a customer to purchase products from any Company affiliate, regardless of the imprint on the card. FCNB is the issuer of the Preferred Charge card. The accounts are serviced through FCNB's Beaverton, Oregon headquarters. FCNB also issues MasterCard credit cards. At December 28, 1996, customer receivables serviced were approximately $1,865,000, of which 88% were Preferred charge receivables and 12% were FCNB MasterCard receivables. Approximately 42% of the Company's 1996 total net sales were made on the FCNB Preferred Charge card including approximately 69% of Spiegel Catalog net sales, 24% of Eddie Bauer's net sales, and 51% of Newport News' net sales. The lower percentage of Eddie Bauer sales made on the Preferred Charge card is attributable primarily to the relatively higher percentage of retail store sales at Eddie Bauer. Catalog sales generally have a higher percentage of sales made on credit compared to retail store sales. Deterioration in the credit market, increases in account charge-offs and interest rate fluctuations all represent risks to the profitability of the Company's credit operations. PRODUCT DEVELOPMENT AND SOURCING The Company's product development and sourcing teams are a significant element of its private label merchandise strategy. The Company selects manufacturers based on their ability to produce high quality product on a cost-effective basis. The Company's product design teams select and source fabrics to be delivered to manufacturers along with product patterns, specifications and templates used for cutting fabric and other pre-production work. Prototype samples are submitted to the Company for final production approval to ensure manufacturer compliance with specifications. 5 The Company does not have any manufacturing facilities; all production is done by third-party contractors. The product development and sourcing teams closely monitor the timeliness of manufacturers' delivery to the Company's distribution facilities and provide them with packaging information. The Company believes this strategy permits maximum flexibility, enhanced inventory management and consistent quality control without the risks associated with operating its own manufacturing facilities. MERCHANDISE The Company sells domestically produced and imported merchandise, which it purchases in the open market from approximately 4,000 suppliers, none of which supplied as much as 5% of the merchandise purchased during 1996. A significant amount of the dollar value of merchandise purchased by the Company is imported directly from the Far East and Europe. Consequently, the Company is subject to the risks generally associated with conducting business abroad. The Company's business could be affected by economic events or political instability that might affect imports, including duties, quotas and work stoppages. To date, these factors have not caused any material disruption of the Company's operations. As with other companies that denominate purchases in dollars, declines in the dollar relative to foreign currencies could over time increase the cost to the Company of merchandise purchased in foreign countries, which could adversely affect the Company's results of operations. The Company is unable to predict the effect, if any, of the above; however, the Company believes this risk exists for many other retailers. COMMON SYSTEMS STRATEGY By capitalizing on synergies between its subsidiaries, the Company continues to make significant progress toward its long-term goal of operating common systems for the businesses. The Company operates a common order-entry system for Spiegel Catalog, Eddie Bauer and Newport News. This system ensures rapid response to customer orders and inquiries and allows Spiegel Catalog, Eddie Bauer and Newport News operators to handle each other's calls when back-up support is necessary. In addition, Spiegel Catalog and Eddie Bauer share a common customer-satisfaction system and a common marketing system for managing their customer data base and creating marketing efficiencies and cost savings. The Company's transition to its catalog distribution facility in Groveport, Ohio and its common order processing systems is complete. The Company believes the new facility, which serves the catalog fulfillment needs of both Eddie Bauer and Spiegel Catalog, is among the most technologically advanced catalog fulfillment systems in the United States, providing improved productivity and customer service. LICENSES AND TRADEMARKS The Company utilizes its own trademarks and tradenames including "Spiegel", "Eddie Bauer", "AKA EDDIE BAUER", "Eddie Bauer HOME" and "Newport News." The Company is also licensed to sell goods under the "Together!" label. With the exception of the names "Spiegel", "Eddie Bauer", "AKA EDDIE BAUER", "Eddie Bauer HOME", "Newport News", and "Together!", the Company believes that loss or abandonment of any particular trademark would have no significant effect on its business. SEASONALITY OF BUSINESS The Company, like other retailers, has experienced and expects to continue to experience seasonal fluctuations in its merchandise sales and net income. Historically, a disproportionate amount of the Company's net sales and a majority of its net earnings have been realized during the fourth quarter. If the Company's sales were materially different 6 from seasonal norms during the fourth quarter, the Company's annual operating results could be materially affected. Accordingly, results for the individual quarters are not necessarily indicative of the results to be expected for the entire year. COMPETITION The markets in which the Company participates are highly competitive and served by a significant number of catalog companies and retailers including traditional department stores, so-called "off-price" and discount retailers and specialty chains. The Company's success is highly dependent upon its ability to maintain its existing customer lists, solicit new customers, identify distinct fashion trends and continue to address the needs and fashion tastes of its customers. EMPLOYEES During 1996, the Company employed between approximately 12,300 and 17,900 full-time equivalent employees, depending on the time of year, reflecting the seasonality of the Company's business and the variations in its workforce during the year. At February 28, 1997, the Company employed approximately 13,400 full-time equivalent employees. Spiegel is a party to three collective bargaining agreements. Approximately 240 full-time equivalent employees at Spiegel's headquarters are covered by an agreement between Spiegel and the Warehouse, Mail Order, Office, Technical and Professional Employees Union, Local 743, affiliated with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America ("Local 743"). This agreement which expires on January 31, 1999 was affected by the closure, in 1996, of Spiegel's last distribution facility in Chicago. The Company provided affected workers with all termination benefits called for by the agreement, as well as additional benefits such as early retirement enhancements, stay pay, job counseling and vocational training. Approximately 60 full-time equivalent employees of certain Spiegel outlet stores are covered by a separate agreement with Local 743. This agreement expires on May 31, 1997, but renegotiation is expected to be completed before then. Approximately 200 full-time equivalent employees are covered by an agreement with Teamsters Union 929 Philadelphia, affiliated with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America. This agreement expires on February 28, 1999. The Company considers its relations with its employees to be good and has never experienced any material interruption of operations due to labor disagreements with its employees. ITEM 2. PROPERTIES The Company's corporate headquarters is located in leased office space in Downers Grove, Illinois. In addition, all of the Company's retail store locations are leased, with the exception of a downtown Chicago Eddie Bauer store. A typical store lease is for a term of 10 years, with options for renewal. The Company's Groveport, Ohio catalog fulfillment and distribution facility, which was constructed on land owned by the Company, was completed in 1994 and consolidates the majority of catalog fulfillment and distribution functions of Spiegel and Eddie Bauer. The Company made provisions for the closing of certain of its previous catalog distribution facilities, as described in Note 2 to the Company's Consolidated Financial Statements. The principal properties and facilities formerly used in Spiegel's catalog operations consist of approximately 20 warehouses and office buildings located in and 7 around Chicago, Illinois. These facilities are primarily owned, but as part of the transition to the new warehouse, they have closed and are being disposed of or sold. In 1995, the Company purchased a four million square-foot facility in Columbus, Ohio, which replaced its previous retail distribution facilities and performs certain catalog distribution functions. Eddie Bauer occupies office space in 9 buildings located in and around Redmond, Washington, two of which are owned and seven of which are under lease. Spiegel leases customer order centers in Reno, Nevada; Bensalem, Pennsylvania; and Wichita, Kansas, and customer service facilities in Rapid City, South Dakota and Downers Grove, Illinois. The Company owns its Westmont, Illinois corporate data center. Newport News leases office space in New York, New York. Its order taking, customer service and administrative functions are performed in a leased facility, and its distribution function is performed in an owned facility, both of which are located in Hampton, Virginia. Newport News also owns approximately 62 acres of vacant land in Hampton, Virginia adjacent to its distribution facility. At present, there are no plans to either expand upon or dispose of this vacant land. FCNB's headquarters is located in leased office space in Beaverton, Oregon (suburban Portland). The Company considers its present space and facilities under development adequate for anticipated future requirements. ITEM 3. LEGAL PROCEEDINGS The Company is routinely involved in a number of legal proceedings and claims that cover a wide range of matters. In the opinion of management, the outcome of these matters is not expected to have any material adverse effect on the consolidated financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. MARKET INFORMATION. The Class A Non-Voting Common Stock is traded on NASDAQ's National Market System. The ticker symbol is SPGLA. Daily trading information is listed in the stock tables carried by major newspapers as "SPIEGEL". See Item 8 "Selected Quarterly Financial Data" for information on the high and low sales prices of the Class A Non-Voting Common Stock. On March 17, 1997, the closing market price of the Class A Non-Voting Common Stock, as quoted on the NASDAQ National Market System, was $7 3/4 per share. B. HOLDERS There were approximately 12,000 Class A Non-Voting Common Stockholders as of March 17, 1997. The Company believes that certain of the outstanding shares of Class A Non-Voting Common Stock are held by nominees for an unknown number of beneficial stockholders. The Class B Voting Common Stock of the Company is privately held and is not publicly traded. As of the date hereof, there were two Class B Voting Common Stockholders. C. DIVIDENDS In December 1995, the Company discontinued payment of all cash dividends. Certain restrictions on dividend payments exist under the Company's debt covenants based on financial results. The Company will evaluate its dividend policy on an ongoing basis. Cash dividends per share paid for the years ended December 28, 1996 and December 30, 1995 are as follows: First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------ 1996 $ - $ - $ - $ - $ - 1995 $.050 $.050 $.050 $.050 $.200 9 ITEM 6. FIVE-YEAR SELECTED FINANCIAL DATA ($000s omitted, except per share amounts)
1996 1995 1994 1993 (2) 1992 EARNINGS DATA ----------- ----------- ----------- ----------- ----------- Net sales and other revenues $ 3,014,620 $ 3,184,184 $ 3,015,985 $ 2,596,147 $ 2,218,732 Earnings (loss) before income taxes (1) (21,276) (15,807) 47,246 87,363 69,367 Net earnings (loss) (3) $ (13,389) $ (9,481) $ 25,100 $ 48,705 $ 43,224 Net earnings (loss) per common share(3,4) $ (.12) $ (.09) $ .23 $ .47 $ .42 Cash dividends per common share (4) $ - $ .20 $ .20 $ .20 $ .18 BALANCE SHEET AND CASH FLOW DATA Current assets $ 1,211,535 $ 1,530,277 $ 1,908,402 $ 1,592,665 $ 1,302,838 Total assets 1,945,625 2,273,982 2,560,287 2,210,591 1,785,213 Current liabilities 695,396 666,448 628,346 627,247 495,131 Long-term debt, excluding current maturities 676,656 1,014,692 1,300,364 971,683 764,235 Stockholders' equity $ 521,549 $ 535,573 $ 579,217 $ 567,485 $ 478,345 Net additions to property & equipment $ 45,698 $ 131,229 $ 84,191 $ 104,489 $ 58,779 Depreciation and amortization $ 95,278 $ 79,047 $ 60,555 $ 45,766 $ 54,994
(1) Operating income for 1993 included a $39,000 charge recorded in the third quarter to reflect the estimated impact of closing certain of the Company's existing catalog distribution facilities. (2) In August 1993, the Company purchased substantially all of the assets of Newport News, Inc. for approximately $40 million. The operating results and balance sheet data for Newport News are consolidated with the Company's from this time forward. (3) Net earnings for 1992 include income of $4,101, or $.04 per share, for the cumulative effect of accounting changes for postretirement health care benefits and inventory overhead capitalization. (4) Net earnings per common share and cash dividends per common share for 1992 have been restated to reflect the two-for-one split in the Company's outstanding common stock effected by the 100% stock dividend declared and paid in 1993. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($000s omitted) RESULTS OF OPERATIONS 1996 COMPARED WITH 1995 For the years ended December 28, 1996 and December 30, 1995, net sales were $2,850,555 and $2,886,225, respectively. Retail sales comprised 41% and 39% of total net sales for the company for the years 1996 and 1995, respectively. Eddie Bauer's retail store sales in 1996 were 8.3% higher than the year prior, primarily as a result of an increase in the average number of stores. Its comparable store sales were flat, due primarily to the effects of reductions in certain merchandise lines and less promotional activity. For the year ended December 28, 1996, total Company catalog sales comprised 59% of total net sales and were 4.6% lower than the catalog sales for the year ended December 30, 1995. This decrease was the result of planned catalog circulation reductions made to reduce the impact of previous paper price increases. Additionally, tighter credit policies and lower productivity rates on certain catalog media at Spiegel Catalog contributed to the decline. Finance revenue for the year ended December 28, 1996 was $111,274 compared to $208,304 for the same period of 1995. This decline is mainly the result of significantly lower average owned FCNB Preferred Card receivables due to sales of customer receivables. Other revenue was $52,791 and $89,655 for the years ended December 28, 1996 and December 30, 1995, respectively. Other revenue includes such items as handling charge income, consulting revenue from the Company's information technology subsidiary, and gains recognized on the sale of customer receivables. The decrease in other revenue was attributable to a decline in consulting revenue due to the sale of the Company's information technology subsidiary in the first quarter of 1996. In addition, a gain of $18,637 was recognized on the sale of customer receivables in the first quarter of 1995, and there was no comparable gain in 1996. The gross profit margin on net sales increased to 34.1% from 32.9% for the years ended December 28, 1996 and December 30, 1995, respectively. Significant margin improvement occurred at Eddie Bauer as a result of substantially less clearance and promotional markdown activity in the 1996 period compared to the 1995 period. Slightly offsetting this increase, Spiegel Catalog experienced lower margins in 1996 due to incremental markdowns, especially in the fourth quarter, that were taken to liquidate merchandise that no longer fit the targeted style assortment planned for the future. Improved inventory management has been a focus for the Company overall. The total inventory balance was down 12% at December 28, 1996 compared to December 30, 1995 despite the addition of 32 Eddie Bauer stores. Selling, general and administrative expenses as a percentage of total revenues were 35.7% and 36.4% for the years ended December 28, 1996 and December 30, 1995, respectively. The Company has continued to pursue cost saving measures in all areas of its businesses. The lower selling, general and administrative expense ratio reflected reductions in several operating units' expenses as well as efficiencies being realized from the Company's new fulfillment and distribution facilities. Additionally, activities in the Company's credit business helped improve the selling, general and administrative expense ratio. In general, the Company's credit business has a higher selling, general and administrative expense ratio than other areas of the Company and has been experiencing higher charge-offs. However, as a result of the receivable sales, finance revenues and selling, general and administrative expenses for the credit business decreased. This had a favorable impact on the Company's overall ratio. The 1996 ratio was also favorably impacted by the gain of approximately $8,000 realized on the sale of the Company's information technology 11 subsidiary in the first quarter and by approximately $23,800 on the reversal of the provision for doubtful accounts on the customer receivables sold in 1996. By comparison, the 1995 ratio was favorably impacted by the effects of customer receivable sales including the $18,637 gain recognized and a reversal of approximately $33,600 of the provision for doubtful accounts on the receivables sold. The Company recorded a $39,000 nonrecurring charge in the third quarter of 1993, to provide for the estimated impact of closing certain of the Company's existing catalog distribution facilities. The Company added $2,750 and $2,400 in 1996 and 1995, respectively, for additional costs in excess of the original reserve. Approximately $41,650 has been used to date, including certain termination benefits, the impact on net periodic pension cost, other incremental costs incurred for closing the existing facilities and the write-off of fixed assets. The remaining balance of the reserve is expected to be used in 1997. Interest expense was $82,677 and $103,177 for years ended December 28, 1996 and December 30, 1995, respectively. This decrease was mainly due to lower average debt levels resulting from a higher level of customer receivables sold and the Company's lower inventory levels. The effective tax rate was 37.1% for the year ended December 28, 1996 compared to 40.0% for the same period of 1995. This decrease is the result of a change in the relative impact of the amortization of nondeductible goodwill as a percentage of loss before taxes and the effect of tax credits. 1995 COMPARED WITH 1994 Net sales for the year ended December 30, 1995 increased 7% to $2,886,225 compared with $2,706,791 for the year ended December 31, 1994. For the year ended December 30, 1995, total Company catalog sales were 61% of total net sales and increased 1% compared with the year ended December 31, 1994, due primarily to higher average demand per order. This sales increase was achieved despite a 10% decline in the number of catalogs circulated to offset higher paper and postage costs. Retail sales comprised 39% and 36% of total net sales in the years 1995 and 1994, respectively. For the year ended December 30, 1995, retail sales increased 18% compared with the year ended December 31, 1994. This increase was due to a higher number of Eddie Bauer stores: 411 at December 30, 1995 compared to 353 at December 31, 1994, as Eddie Bauer's 1995 comparable store sales were unchanged compared to 1994. For the year ended December 30, 1995, finance revenue was $208,304 compared to $232,267 for the year ended December 31, 1994. This decrease was due to a 19% decline in average owned receivables outstanding offset by the effects of an increase in the late fees and other fees charged to proprietary credit customers as a result of a change in fee structure. Other revenue was $89,655 and $76,927 for the years ended December 30, 1995 and December 31, 1994, respectively. Gross profit margin on net sales for the year ended December 30, 1995 was 32.9% compared with 33.8% for the year ended December 31, 1994. The Company incurred significant markdowns in the first half of 1995 to liquidate merchandise overstocks created from soft demand for cold weather apparel in the fourth quarter of 1994. In addition, the Company continued to experience a shift in catalog sales from apparel merchandise, which has a relatively higher gross profit margin, to home merchandise with a relatively lower gross profit margin. The fourth quarter saw a significant improvement in gross profit margins, primarily from Eddie Bauer due to lower overstock positions resulting in lower markdowns as compared to 1994. 12 Selling, general and administrative expenses represented 36.4% of total revenues for the year ended December 30, 1995 as compared to 36.2% for the year ended December 31, 1994. There was a 14% increase in postal rates, and paper prices rose more than 40% for the Company in 1995. In an effort to minimize the effects of these increases, the Company took several measures including reducing the number of catalogs circulated, utilizing lower paper weights, and reducing the dimensions and page counts of the catalogs. In addition, there was an increase in the charge-off rate for the proprietary credit card portfolio resulting from industry trends toward higher charge-offs as well as a shift in the portfolio mix toward higher levels of new credit accounts, which typically carry a higher credit risk than the more matured segment of the portfolio. The effects of this increase were mitigated by the favorable impact of the sale of customer receivables in 1995 as compared to 1994. Finally, the Company incurred higher warehouse costs, especially in the first half of the year, related to the final transition to the new catalog distribution facility and the start-up of the new retail distribution facility. In the second half of the year, especially the fourth quarter, the Company experienced cost savings in its distribution operations as compared to prior years, and improvements in certain other operating units' selling, general and administrative expense ratios due to expense control programs. Through December 30, 1995, approximately $31,300 of expenditures had been made on the $39,000 reserve for the estimated impact of closing certain of the Company's existing catalog distribution facilities including certain termination benefits, the impact on net periodic pension cost, and other incremental costs incurred for closing the facilities. In 1995, the Company added $2,400 to the reserve for additional costs in excess of the original estimate. Interest expense for the year ended December 30, 1995 was $103,177, compared to $85,380 for the year ended December 31, 1994. The increase was due in almost equal proportions to higher debt levels and higher effective interest rates. The increase in debt was used primarily to finance capital expenditures and higher average inventory levels. The effective tax rate for 1995 was 40.0% as compared to 46.9% in 1994. This decrease was due to a reduction in the state effective tax rate, the relative impact of the amortization of nondeductible goodwill as a percentage of loss before taxes, and the effect of changes in estimates of previously provided taxes. LIQUIDITY AND CAPITAL RESOURCES The Company has historically met its operating and cash requirements through funds generated from operations, the sale of customer accounts receivable and the issuance of debt and common stock. Total customer receivables sold were $1,463,730 at December 28, 1996 and $1,180,000 at December 30, 1995. Net cash provided by operating activities was $470,614 and $441,493 for the years ended December 28, 1996 and December 30, 1995, respectively. The net cash proceeds from the sale of $283,730 and $700,000 of customer receivables were reported as operating cash flows in the 1996 and 1995 periods, respectively. Without the effects of the sale of customer receivables, net cash provided by operating activities would have been $186,884 for the year ended December 28, 1996 and net cash used by operating activities would have been $239,870 for the year ended December 30, 1995. This substantial improvement in cash flow from operations in 1996 compared to 1995 was primarily driven by changes in overall accounts receivable levels and lower inventory balances. Increases in accounts payable and other liabilities and a decrease in prepaid expenses also represented significant incremental sources of cash in 1996 compared to 1995. 13 Net additions to property and equipment for the year ended December 28, 1996 were $45,698, the majority of which was spent on Eddie Bauer retail store expansion with a lesser amount spent on the completion of the headquarters addition at Eddie Bauer. During the year ended December 30, 1995, the Company incurred $131,229 of net additions to property and equipment including the purchase and renovation of a new retail distribution facility, the addition to Eddie Bauer's headquarters, and the continued Eddie Bauer retail store expansion and remodeling. As of December 28, 1996, total debt was $785,948 compared with $1,126,364 as of December 30, 1995. This lower level of debt is primarily the result of payments made using the proceeds from the sale of customer receivables as well as the positive cash flow generated from operations including substantially lower inventory levels. On March 7, 1997, the Company issued 10.3 million shares of Class B voting common stock for $70,000 to its majority shareholder, Spiegel Holdings, Inc. The proceeds from this issuance will be used to fund capital needs, including the continued expansion of Eddie Bauer. In June 1996, Statement of Financial Accounting Standards No. 125, "Accounting for the Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" was issued. As required by the statement, the Company will adopt its provisions for any customer accounts receivable sales occurring after December 31, 1996. The effect of this statement on the Company's financial results will depend on the structure of future transactions. The Company believes that its cash on hand, together with cash flows anticipated to be generated from operations, and borrowings under its existing credit facilities and other available sources of funds, will be adequate to fund the Company's capital and operating requirements for the foreseeable future. FORWARD LOOKING STATEMENTS This report contains statements which are forward looking statements within the meaning of applicable federal securities laws and are based upon the Company's current expectations and assumptions. Such forward looking statements are subject to a number of risks and uncertainties which could cause actual results to materially differ from those anticipated including but not limited to, economic and market conditions, the impact of competitive activities, seasonal consumer demand, inventory risks due to shifts in market demand, risks associated with collections on the Company's credit card portfolios and interest rate fluctuation, as well as other risks indicated in filings with the Securities and Exchange Commission such as the Company's most recent Form 10-K. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS ($000s omitted, except per share amounts) December 28, December 30, 1996 1995 ASSETS ----------- ----------- Current assets: Cash and cash equivalents $ 86,917 $ 42,302 Receivables, net 485,242 742,480 Inventories 502,209 572,377 Prepaid expenses 84,634 101,324 Refundable income taxes 16,991 29,560 Deferred income taxes 35,542 42,234 ----------- ----------- Total current assets 1,211,535 1,530,277 Property and equipment, net 399,910 412,934 Intangible assets, net 166,275 173,088 Other assets 167,905 157,683 ----------- ----------- $1,945,625 $2,273,982 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 89,292 $ 86,672 Indebtedness to related parties 20,000 25,000 Accounts payable 270,973 256,527 Accrued liabilities: Salaries and wages 36,636 32,370 General taxes 127,170 125,504 Allowance for returns 41,691 31,927 Other accrued liabilities 109,634 108,448 ----------- ----------- Total current liabilities 695,396 666,448 Long-term debt, excluding current maturities 676,656 1,014,692 Deferred income taxes 52,024 57,269 ----------- ----------- Total liabilities 1,424,076 1,738,409 ----------- ----------- Stockholders' equity: Class A non-voting common stock, $1.00 par value; authorized 16,000,000 shares; 14,618,404 shares issued and outstanding at December 28, 1996; 14,604,844 shares issued and outstanding at December 30, 1995 14,618 14,605 Class B voting common stock, $1.00 par value; authorized 94,000,000 shares; 93,141,654 shares issued and outstanding at December 28, 1996 and December 30, 1995 93,142 93,142 Additional paid-in capital 211,828 211,761 Minimum pension liability (9,365) (8,650) Retained earnings 211,326 224,715 ----------- ----------- Total stockholders' equity 521,549 535,573 ----------- ----------- $1,945,625 $2,273,982 ----------- ----------- ----------- ----------- See accompanying notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF EARNINGS Years ended ($000s omitted, except per share amounts) December 28, December 30, December 31, 1996 1995 1994 ------------ ------------ ------------ NET SALES AND OTHER REVENUES Net sales $2,850,555 $2,886,225 $2,706,791 Finance revenue 111,274 208,304 232,267 Other revenue 52,791 89,655 76,927 ------------ ------------ ------------ 3,014,620 3,184,184 3,015,985 COST OF SALES AND OPERATING EXPENSES Cost of sales, including buying and occupancy expenses 1,877,859 1,936,366 1,790,722 Selling, general and administrative expenses 1,075,360 1,160,448 1,092,637 ------------ ------------ ------------ 2,953,219 3,096,814 2,883,359 Operating income 61,401 87,370 132,626 Interest expense 82,677 103,177 85,380 ------------ ------------ ------------ Earnings (loss) before income taxes (21,276) (15,807) 47,246 Income tax provision (benefit) (7,887) (6,326) 22,146 ------------ ------------ ------------ Net earnings (loss) $ (13,389) $ (9,481) $ 25,100 ------------ ------------ ------------ ------------ ------------ ------------ EARNINGS PER COMMON SHARE Net earnings (loss) per common share $ (0.12) $ (0.09) $ 0.23 ------------ ------------ ------------ ------------ ------------ ------------ See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ($000s omitted, except per share amounts)
Class A Class B Additional Minimum non-voting voting paid-in Retained pension Total common stock common stock capital earnings liability -------- ------------ ------------ ---------- ---------- ----------- BALANCES AT DECEMBER 31, 1993 $567,485 $ 14,600 $ 93,142 $ 209,029 $252,313 $(1,599) Net earnings 25,100 - - - 25,100 - Cash dividends ($.20 per share) (21,637) - - - (21,637) - Issuance of 465,420 common shares 7,236 465 - 6,771 - - Adjustment to minimum pension liability 1,033 - - - - 1,033 -------- ------------ ------------ ---------- ---------- ----------- BALANCES AT DECEMBER 31, 1994 579,217 15,065 93,142 215,800 255,776 (566) Net loss (9,481) - - - (9,481) - Cash dividends ($.20 per share) (21,580) - - - (21,580) - Issuance of 39,600 common shares 243 40 - 203 - - Purchase & retirement of 500,000 common shares (4,742) (500) - (4,242) - - Adjustment to minimum pension liability (8,084) - - - - (8,084) -------- ------------ ------------ ---------- ---------- ----------- BALANCES AT DECEMBER 30, 1995 535,573 14,605 93,142 211,761 224,715 (8,650) Net loss (13,389) - - - (13,389) - Issuance of 13,560 common shares 80 13 - 67 - - Adjustment to minimum pension liability (715) - - - - (715) -------- ------------ ------------ ---------- ---------- ----------- BALANCES AT DECEMBER 28, 1996 $521,549 $ 14,618 $ 93,142 $ 211,828 $ 211,326 $ (9,365) -------- ------------ ------------ ---------- ---------- ----------- -------- ------------ ------------ ---------- ---------- -----------
See accompanying notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended ($000s omitted)
December 28, December 30, December 31, 1996 1995 1994 ------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ (13,389) $ (9,481) $ 25,100 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 95,278 79,047 60,555 Gain on sale of receivables - (18,637) (10,658) Change in assets and liabilities, net of effects of acquisition: Sale of customer accounts receivable 283,730 700,000 150,000 Increase in receivables, net (26,493) (316,752) (277,203) (Increase) decrease in inventories 70,168 25,404 (162,526) (Increase) decrease in prepaid expenses 16,691 (20,354) (21,125) Increase (decrease) in accounts payable 14,446 (9,224) 39,441 Increase in accrued liabilities 15,644 2,514 11,264 Increase (decrease) in income taxes 14,539 8,976 (54,749) ---------- ------------- ------------- Total adjustments 484,003 450,974 (265,001) ---------- ------------- ------------- Net cash provided by (used in) operating activities 470,614 441,493 (239,901) ---------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Net additions to property and equipment (45,698) (131,229) (84,191) Net (additions to) reductions of other assets (39,965) (21,002) 4,694 ---------- ------------- ------------- Net cash used in investing activities (85,663) (152,231) (79,497) ---------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of debt 111,250 116,250 399,000 Payment of debt (451,666) (370,570) (79,151) Dividends paid - (21,580) (21,637) Purchase and retirement of common shares - (4,742) - Issuance of common shares 80 243 7,236 ---------- ------------- ------------- Net cash provided by (used in) financing activities (340,336) (280,399) 305,448 ---------- ------------- ------------- Net change in cash and cash equivalents 44,615 8,863 (13,950) Cash and cash equivalents at beginning of year 42,302 33,439 47,389 Cash and cash equivalents ---------- ------------- ------------- at end of year $ 86,917 $ 42,302 $ 33,439 ---------- ----------- ----------- ---------- ----------- ----------- Supplemental cash flow information Cash paid during the year for: Interest $ 84,428 $ 104,426 $ 85,723 ------------- ------------- ------------- Income taxes $ 6,500 $ 6,092 $ 66,702 ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($000s omitted, except per share amounts) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Spiegel, Inc. is a multi-channel specialty retailer marketing fashionable apparel and home furnishings through catalogs, specialty retail stores and electronic media. The Company also operates a special purpose bank which offers a proprietary credit card to the Company's customers as well as a MasterCard credit program. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Spiegel, Inc. and its wholly-owned subsidiaries (the Company). All significant transactions and balances among the companies included in the consolidated financial statements have been eliminated in consolidation. The Company operates and reports financial results on a 52/53 week fiscal year ending on the Saturday closest to December 31. The Company's joint venture investments in Germany, Japan and the United Kingdom with affiliated companies of Otto Versand, a related party entity, are accounted for using the equity method as they are less than 50 percent owned. The results of these entities are not material to the consolidated Company. REVENUE RECOGNITION The Company records revenue at the point of sale for retail stores and at the time of shipment for catalog sales. The Company provides for returns at the time of sale based upon projected merchandise returns. Finance revenue on customer installment accounts receivable is recorded as income when earned. CASH EQUIVALENTS Cash equivalents consist principally of highly liquid institutional money market funds with original maturities of three months or less. INVENTORIES Inventories, principally merchandise available for sale, are stated at the lower of cost or market. Cost is determined primarily by the average cost method or by the first-in, first-out method. ADVERTISING COSTS Costs incurred for the production and distribution of direct response catalogs are capitalized and amortized over the expected lives of the catalogs, which are less than one year. Unamortized costs as of December 28, 1996 and December 30, 1995 were $52,795 and $65,343, respectively. All other advertising for both catalog and retail operations is expensed as incurred. Total advertising expense in the fiscal years 1996, 1995 and 1994 was $448,700, $439,380 and $430,180, respectively. STORE PREOPENING COSTS Preopening and start-up costs for new stores are charged to operations as incurred. 19 PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Depreciable lives range from 5 to 40 years for buildings and improvements and 2 to 10 years for furniture and equipment. Leasehold improvements are amortized over the lesser of the term of the lease or asset life. INTANGIBLE ASSETS Intangible assets represent principally trademarks and the excess of cost over the fair market value of net assets of businesses purchased. On an annual basis, the Company amortizes these intangibles on a straight-line basis in relation to the anticipated benefits to be derived from the businesses acquired, not to exceed 40 years. Total accumulated amortization of these intangibles was $70,272 and $64,099 at December 28, 1996 and December 30, 1995, respectively. Management periodically considers whether there has been a permanent impairment in the value of goodwill and trademarks by evaluating various factors, including current and projected future operating results and undiscounted cash flows. The Company does not believe there has been any material impairment in the carrying value of its goodwill and trademarks. DERIVATIVE FINANCIAL INSTRUMENTS The Company's current derivative positions consist of interest rate swaps. The accounting treatment for these interest rate swaps is to record the net interest paid as interest expense on a current basis. Gains or losses resulting from market movements are not recognized. SYSTEMS DEVELOPMENT COSTS Significant systems development costs are capitalized and amortized on a straight-line basis over a three-year period. Costs, net of amortization, included in other assets as of December 28, 1996 and December 30, 1995 were $29,511 and $33,661, respectively. Related amortization expense recognized in fiscal years 1996, 1995 and 1994 was $15,809, $8,887 and $4,069, respectively. EMPLOYEE PENSION PLANS Company policy is to, at a minimum, fund the pension plans to meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). STOCK BASED COMPENSATION In 1995, the Financial Accounting Standards Board issued statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock Based Compensation." The Company has elected to continue to apply the principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" as discussed in Note 6 to the consolidated financial statements. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is included in the consolidated federal income tax return of Spiegel, Inc.'s majority shareholder, Spiegel Holdings, Inc. EARNINGS PER SHARE Earnings per share are based on the weighted average number of both classes of common shares outstanding during the year. 20 RECLASSIFICATIONS Certain prior year amounts have been reclassified from amounts previously reported to conform with the 1996 presentation. 2. NONRECURRING CHARGES In 1993, the Company recorded a $39,000 nonrecurring charge to provide for the estimated costs for closure of certain of the Company's existing catalog distribution facilities. The facilities were replaced by a new distribution center in Groveport, Ohio, which consolidated the majority of the catalog distribution function of Spiegel and Eddie Bauer. The original charge to earnings consisted of estimates for termination benefits, disposal of certain fixed assets and other related costs. In 1996 and 1995, $2,750 and $2,400, respectively, were added to the reserve for additional costs in excess of the original reserve. Through December 28, 1996, approximately $35,150 of expenditures have been made, primarily for certain employee termination benefits, the impact of net periodic pension costs, and other incremental costs incurred for the closing of the existing facilities. In addition, $6,500 of the reserve has been used for the write-off of fixed assets from the closed facilities. The remaining balance of the reserve is expected to be used in 1997. 3. RECEIVABLES Receivables consist primarily of proprietary credit card receivables generated in connection with the sale of the Company's merchandise as well as receivable balances generated on the MasterCard credit cards offered by the Company's bank subsidiary. The Company's customer base is diverse in terms of both geographic and demographic coverage. Due to the revolving nature of the credit card portfolio, management believes that the current carrying value of credit card receivables approximates fair value. The average interest rate collected on the receivables approximates the current market rates on new accounts. The allowance for credit card losses is based upon management's evaluation of the collectability of credit card receivables after giving consideration to current delinquency data, historical loss experience and general economic conditions. This allowance is continually reviewed by management; however, the actual losses incurred may differ from these estimates. Receivables at December 28, 1996 and December 30, 1995 consist of the following: 1996 1995 ------------- ------------- Receivables serviced $ 1,865,040 $ 1,932,809 Receivables sold (1,463,730) (1,180,000) ------------- ------------- Receivables owned 401,310 752,809 Less allowance for returns on proprietary credit card sales (32,243) (37,769) Less allowance for doubtful accounts (12,270) (37,767) Other trade receivables, net 128,445 65,207 ------------- ------------- Receivables, net $ 485,242 $ 742,480 ------------- ------------- ------------- ------------- The Company routinely transfers portions of its customer receivables to trusts which, in turn, sell certificates representing undivided interests in the trusts to investors. As a 21 result of these transactions, other revenue increased by $18,637 and $10,658 in 1995 and 1994, respectively, representing the gain on only the sold receivables that existed at the date of the sale. The receivables were sold without recourse, and accordingly, no bad debt reserve related to the net receivables sold is maintained. Cash flows generated from the receivables in the trusts are, to the extent allocable to the investor percentage, applied to payment of interest on the certificates, reinvestment in additional receivables to maintain the investors' percentage, and payment of servicing fees to the Company. Excess cash flows revert to the Company. The Company owns the remaining undivided interest in the trusts not represented by the certificates and will continue to service all receivables for the trusts. At December 30, 1996, $495,000 of the total receivables sold were under asset backed commercial paper structures which have a floating rate of interest. In addition to the certificates sold, an additional class of investor certificates, currently held by the Company, was issued by the trust in certain transactions. The aggregate principle balances for these certificates was $188,298 and $294,500 as of December 28, 1996 and December 30 1995, respectively. The value of these certificates is included in the Company's balance sheet under "Receivables, net." Cash flows generated from the receivables in the trust are expected to be adequate to cover any losses which may be incurred on uncollectible amounts associated with the receivables supporting these retained certificates. Therefore, no bad debt reserve is maintained on these balances as of December 28, 1996. The Company also held a total of $55,670 at December 28, 1996 and $49,400 at December 30, 1995 in reserve funds used as credit enhancement for related receivables sold. Restricted cash accounts have been maintained for these reserve funds, none of which has been utilized as of December 28, 1996. The value of these funds has been included in the Company's balance sheet under "Other assets." 22 4. PROPERTY AND EQUIPMENT Property and equipment at December 28, 1996 and December 30, 1995 consist of the following: 1996 1995 ----------- ----------- Land $ 20,178 $ 22,957 Buildings and improvements 142,712 155,150 Equipment 233,554 232,147 Leasehold improvements 155,309 148,031 ----------- ----------- 551,753 558,285 Less accumulated depreciation and amortization (164,135) (171,791) ----------- ----------- 387,618 386,494 Construction in process 12,292 26,440 ----------- ----------- Property and equipment, net $399,910 $ 412,934 ----------- ----------- ----------- ----------- 5. LONG-TERM DEBT The following is a summary of the Company's long-term debt at December 28, 1996 and December 30, 1995: 1996 1995 ----------- ----------- Notes payable: Commercial paper, supported by stand-by credit commitment $ - $ 250,000 Term loan agreements, 3.00% to 9.71%, due February 10, 1997 through November 15, 2005 577,198 642,614 Indebtedness to related parties 20,000 45,000 Subordinated notes, 7.19% to 9.35%, due June 30, 2000 128,750 128,750 Secured notes, 7.25% to 7.35%, due November 15, 2001 through November 15, 2005 60,000 60,000 ------------ ------------ Total long-term debt 785,948 1,126,364 Less current maturities of debt (109,292) (111,672) ------------ ------------ Long-term debt, excluding current maturities $ 676,656 $ 1,014,692 ------------ ------------ ------------ ------------ In March 1996, the Company replaced certain of its existing credit arrangements with a new credit facility and modified certain conditions of other senior debt and subordinated term indebtedness. These changes were made to strengthen the Company's liquidity and provide for future growth. The Company established a new $600,000 revolving credit agreement with a group of 23 banks. The $600,000 commitment amount was permanently reduced to $520,000 in December, 1996 in conjunction with a sale of MasterCard receivable assets totaling $95,000. Simultaneously with the establishment of this new credit facility, the Company canceled a $600,000 commercial paper facility, a $300,000 revolving credit facility and uncommitted money market lines aggregating $75,000. 23 The new revolving credit agreement for $520,000 expires on March 26, 2000. Fees were 3/8 of one percent based on the total commitment. Borrowings under this commitment averaged $191,653 with a maximum of $375,000 during 1996. There was no outstanding usage under the facility at December 28, 1996. The effective annual interest rate was 6.5% in 1996, excluding the previously mentioned fees. In November 1995, the Company received a $45,000 term loan from its majority shareholder, Spiegel Holdings, Inc. The loan bears interest at a variable rate based on LIBOR plus a margin. The total outstanding principal, $20,000, will be repaid in 1997. The Company selectively uses interest rate swap contracts to hedge the underlying interest risks on various term loans. At December 28, 1996, these interest rate swap agreements had effective and termination dates from January 1993 to December 2009. At year-end 1996 and 1995, the notional principal amounts of these agreements totaled $80,000 and $87,500, respectively. At December 28, 1996 and December 30, 1995, the fair value of these swap agreements was $4,271 and $7,454, respectively. These values were obtained from financial institutions and represent the estimated amount the Company would pay to terminate the agreements, taking into consideration current interest rates and risk of the transaction. The counterparties are expected to fully perform under the terms of the agreements, thereby mitigating the risk from these transactions. These interest rate swaps in total increased interest expense by $910, $234 and $565 in 1996, 1995 and 1994, respectively. Additionally, the Company has letter of credit facilities to support the purchase of inventories. Letter of credit commitments outstanding were $130,149 and $109,572 at December 28, 1996 and December 30, 1995, respectively. At December 28, 1996, there was an additional $72,351 of commitments available for the issuance of letters of credit. Also at December 28, 1996, the Company had available undrawn standby letter of credit facilities totaling approximately $20,000 to support transactions such as leasing arrangements. The fair value of the Company's long-term debt, based upon the discounting of future cash flows using the Company's borrowing rate for loans of comparable maturity, approximates the carrying value of such debt at December 28, 1996. Aggregate maturities of long-term debt for the five years subsequent to December 28, 1996 are as follows: 1997, $109,292; 1998, $102,900; 1999, $110,714; 2000, $229,464; and 2001 and thereafter, $233,578. 6. EMPLOYEE BENEFIT PLANS PROFIT SHARING AND THRIFT PLANS Eligible salaried and hourly employees may participate in these plans. Employees may elect to contribute a maximum of 10% of their pre-tax base salary and 5% of their earnings after taxes, subject to limitations imposed by the Internal Revenue Service. The Company's annual contributions for the profit sharing plan are determined by applying a formula to earnings before income taxes. Expense under this plan was $8,395, $8,314 and $5,673 in 1996, 1995 and 1994, respectively. The Company has thrift plans for its eligible salaried employees in which it matches an employee's contribution dollar for dollar up to the first 3%, and 50 cents for each dollar contributed up to the next 3%. The Company also has separate thrift plans for certain eligible hourly employees. The Company contributes 25 cents for each dollar of employee 24 contributions. Expense under these plans was $5,388, $5,842 and $4,917 in 1996, 1995 and 1994, respectively. STOCK OPTION PLAN The Spiegel, Inc. Salaried Employees Incentive Stock Option Plan provides for the issuance of options to purchase up to 1,900,000 shares of Class A non-voting common stock to certain salaried employees. Under the plan, participants are granted options to purchase shares of the specified stock at the fair market value at the date of grant. The options are exercisable at the rate of 20% per year. The Company has adopted the disclosure provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for the stock option activity. Had compensation expense for the Company's stock option activity been calculated under the provisions of SFAS No. 123 and recognized in the Company's net income and earnings per share for the years ended December 28, 1996 and December 30, 1995, the effect would have been immaterial. During the phase-in period of SFAS No. 123, the estimation of compensation costs reflects only a partial vesting of options. In future years, the estimated pro-forma compensation costs may be higher depending upon, among other factors, the number of options granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. A risk-free discount rate of 6%, an expected life of 5 years for the grants and a volatility of 58% were assumed for grants in 1996 and 1995. Dividend yields of 1.6% and 1.5% were assumed for the 1996 and 1995 valuations, respectively. The weighted-average fair value of stock options granted during the years ended December 28, 1996 and December 30, 1995, respectively, were $3.63 and $3.17 calculated using the Black-Scholes option-pricing model. A summary of the changes in the options outstanding is as follows: Shares Amount Average Price ----------- ---------- -------------- Outstanding at December 31, 1993 1,190,640 $ 11,557 $ 9.71 Granted 128,800 1,288 10.00 Exercised (65,420) (343) 5.24 Canceled (1,200) (9) 7.85 ----------- ---------- ------------- Outstanding at December 31, 1994 1,252,820 12,493 9.97 Granted 274,500 2,222 8.09 Exercised (39,600) (243) 6.13 Canceled (124,460) (2,532) 20.34 ----------- ---------- ------------- Outstanding at December 30, 1995 1,363,260 11,940 8.76 Granted 195,500 1,526 7.80 Exercised (13,560) (80) 5.92 Canceled (28,880) (314) 10.85 ----------- ---------- ------------- OUTSTANDING AT DECEMBER 28, 1996 1,516,320 $ 13,072 $ 8.62 ----------- ---------- ------------- ----------- ---------- ------------- Total stock options authorized but unissued at December 28, 1996 were 218,640. 25 The following table summarizes information about options outstanding at December 28, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------- ------------------------------- Range of Number Weighted-Average Number Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average Prices at 12/28/96 Contractual Life Exercise Price at 12/28/96 Exercise Price - -------- ----------- ---------------- ----------------- ----------- ----------------- $5 to $7.99 840,280 5.3 years $6.39 572,280 $6.08 $8 to $11.99 581,240 5.8 years $9.62 387,400 $9.53 $12 to $23 94,800 6.1 years $22.25 63,480 $22.25 ----------- ----------- 1,516,320 5.5 years $8.62 1,023,160 $8.39 ----------- ----------- ----------- -----------
PENSION PLANS The Company also has defined benefit pension plans covering substantially all employees other than those eligible to participate in the savings and profit sharing plans and those hourly employees eligible to participate in the thrift plans. The unit credit actuarial cost method is used in developing the costs of the pension plans and the pension benefit obligation. The plan assets consist primarily of high quality common stock and bond funds. In 1996, due to consolidation of certain distribution operations, the Company recognized a curtailment of a related hourly pension plan. This resulted in $1,625 of periodic pension cost which is included in net amortization and deferral in 1996. The net periodic pension cost for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 is computed as follows: 1996 1995 1994 -------- -------- -------- Service cost $ 647 $ 397 $ 433 Interest cost 4,298 4,413 4,340 Return on plan assets (5,208) (7,049) 1,719 Net amortization and deferral 4,654 3,509 (5,517) -------- -------- -------- Net periodic pension cost $ 4,391 $ 1,270 $ 975 -------- -------- -------- -------- -------- -------- Weighted average assumptions used in accounting for obligations and assets were as follows: 1996 1995 -------- -------- Discount rate 8.0% 7.75% Expected long-term rate of return on assets 9.0% 9.0% 26 The following table sets forth the plans' funded status at December 28, 1996 and December 30, 1995: 1996 1995 Union Non-Union Union Non-Union Plan Plan Plan Plan --------- --------- --------- --------- Accumulated and projected benefit obligation: Vested $46,987 $11,983 $ 45,362 $ 10,968 Non-Vested 899 162 1,260 231 --------- --------- --------- --------- Total 47,886 12,145 46,622 11,199 Market value of plan assets 35,666 11,539 32,525 9,993 --------- --------- --------- --------- Under funded projected benefit obligation (12,220) (606) (14,097) (1,206) Unrecognized net transition liability 315 1,060 737 1,272 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 12,764 2,846 12,291 2,087 Additional liability required to recognize minimum liability (13,079) (3,906) (13,028) (3,359) Accrued pension cost --------- --------- --------- --------- in the balance sheet $(12,220) $ (606) $(14,097) $(1,206) --------- --------- --------- --------- --------- --------- --------- --------- 27 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to the benefits described above, the Company provides certain medical benefits for eligible retired employees until age 65. The following table presents the accumulated postretirement benefit obligation at December 28, 1996 and December 30, 1995: 1996 1995 ------- ------- Retirees $6,049 $5,290 Fully eligible active plan participants 1,153 1,186 Other active plan participants 3,753 4,959 ------- ------- Total 10,955 11,435 Unrecognized prior service cost (2,500) (1,727) Unrecognized loss (1,246) (2,379) ------- ------- Accrued postretirement benefit cost in the balance sheet $7,209 $7,329 ------- ------- ------- ------- The net periodic postretirement benefit cost for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 is computed as follows: 1996 1995 1994 -------- -------- -------- Service cost $ 727 $ 629 $ 616 Interest cost 827 804 583 Net amortization and deferral 236 141 56 -------- -------- -------- Net periodic postretirement benefit cost $1,790 $1,574 $1,255 -------- -------- -------- -------- -------- -------- For measurement purposes, a 10% and 11% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1996 and 1995, respectively. This rate was assumed to decrease 1% per year to 6% in 2000 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rate by 1 percentage point in each year would increase the accumulated postretirement benefit obligation as of December 28, 1996 by $787 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 28, 1996 by $144. The weighted average discount rates used in determining the accumulated postretirement benefit obligation were 8.0% and 7.75% at December 28, 1996 and December 30, 1995, respectively. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases office facilities, distribution centers, retail store space and data processing equipment. Lease terms are generally 10 years and many contain renewal options. Many of the retail store leases provide for minimum annual rentals plus additional rentals based upon percentage of sales, which range from 3% to 5%. Rental expense for all operating leases was $128,173 in 1996, $124,183 in 1995 and $100,394 in 1994. 28 The following is a schedule by year of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 28, 1996: Amount ---------- 1997 $124,732 1998 $112,376 1999 $102,593 2000 $ 95,253 2001 and thereafter $436,500 LITIGATION The Company is routinely involved in a number of legal proceedings and claims that cover a wide range of matters. In the opinion of management, the outcome of these matters is not expected to have any material adverse effect on the consolidated financial position or results of operations of the Company. 8. INCOME TAXES The components of income tax expense (benefit) for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 are as follows: 1996 1995 1994 -------- -------- -------- Current $(9,856) $(20,117) $11,506 Deferred 1,969 13,791 10,640 -------- -------- -------- $(7,887) $ (6,326) $22,146 -------- -------- -------- -------- -------- -------- The differences between the provision (benefit) for income taxes at the statutory rate and the amounts shown in the consolidated statements of earnings for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 are as follows:
1996 1995 1994 Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- Statutory rate $(7,447) (35.0)% $(5,532) (35.0)% $16,536 35.0% State income tax (net of federal income tax benefit) (1,391) (6.5) (1,027) (6.5) 3,728 7.9 Amortization of non- deductible goodwill 1,601 7.5 1,885 11.9 1,882 4.0 Changes in estimates of previously provided taxes - - (1,652) (10.4) - - Tax Credits (650) (3.1) - - - - -------- ------- -------- ------- -------- ------ Effective tax rate $(7,887) (37.1)% $(6,326) (40.0)% $22,146 46.9% -------- ------- -------- ------- -------- ------ -------- ------- -------- ------- -------- ------
29 Significant components of the Company's deferred tax assets and liabilities at December 28, 1996 and December 30, 1995 are as follows: 1996 1995 ---------- ----------- Deferred tax assets: Allowance for doubtful accounts $ 6,240 $ 15,324 Allowance for the gross profit on estimated future returns 14,633 13,191 Reserve for distribution facility and store closings 5,220 6,541 Compensated absences accruals 4,429 4,523 Reserve for self insurance 1,338 1,338 Pension liability 6,243 5,720 Reserve for Inventory Losses 5,232 - Postretirement benefit obligation 3,052 3,038 Capitalized overhead in inventory 4,157 4,366 Other 1,675 3,514 ----------- ---------- 52,219 57,555 ----------- ---------- Deferred tax liabilities: Property and equipment 45,309 49,171 Prepaid and deferred expenses 7,934 6,250 Gain on sale of accounts receivable 7,192 10,531 Earned but unbilled finance charges 5,997 5,871 Deferred rent obligation 1,135 - Other 1,134 767 ----------- ---------- 68,701 72,590 ----------- ---------- Net deferred tax liabilities $(16,482) $(15,035) ----------- ---------- ----------- ---------- 9. STOCKHOLDERS' EQUITY In December 1995, the Company discontinued payment of all cash dividends. Certain restrictions on dividend payments exist under the Company's debt covenants based on financial results. The Company will evaluate its dividend policy on an ongoing basis. During the first six months of 1995, the Company purchased and retired 500,000 shares of Class A non-voting common stock at market value for a total cost of $4,742. Accordingly, common stock was decreased by $500 representing the par value of the shares and additional paid-in capital was decreased by approximately $4,242 for the difference between the purchase price and the par value. On January 5, 1994, the Company issued 400,000 shares of Class A non-voting common stock. Accordingly, common stock was increased by $400 representing the par value of the shares, and additional paid-in capital was increased by approximately $6,500 for the difference between the proceeds from the issuance and the par value. This issuance was related to the 3,600,000 share of Class A common stock issued in December, 1993. 30 10. SUBSEQUENT EVENT On March 7, 1997, the Company issued 10.3 million shares of Class B voting common stock for $70,000 to its majority shareholder, Spiegel Holdings, Inc. The proceeds from this issuance will be primarily used to fund capital needs, including the continued expansion of Eddie Bauer. 31 STATEMENT OF MANAGEMENT RESPONSIBILITY We have prepared the accompanying consolidated financial statements and related information for the years 1996, 1995 and 1994. The opinion of the Company's independent auditors, KPMG Peat Marwick LLP, on those financial statements follows. The primary responsibility for the integrity and objectivity of the financial information included in this annual report rests with management. Such information was prepared in accordance with generally accepted accounting principles appropriate in the circumstances, based on our best estimates and judgments and giving due consideration to materiality. The Company maintains an internal control structure that is adequate to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and that produces records adequate for preparation of financial information. There are limits inherent in all systems of internal control structures based on the recognition that the cost of such a structure should not exceed the benefits to be derived. In addition, the Company maintains an internal audit department to review the adequacy, application and compliance of the internal control structure. KPMG Peat Marwick LLP, independent auditors, has been engaged to audit the financial statements and to render an opinion as to their conformity with generally accepted accounting principles. They conducted their audit in accordance with generally accepted auditing standards. Those standards require that they plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. KPMG Peat Marwick LLP is a member of the SEC Practice Section of the American Institute of Certified Public Accountants. The Board of Directors pursues its responsibility for these financial statements through its audit committee, composed of directors who are not employees of Spiegel or its subsidiaries, which meets periodically with both management and the independent auditors to assure that each is carrying out its responsibilities. KPMG Peat Marwick LLP and the internal audit department have free access to the audit committee, with and without the presence of management. 32 INDEPENDENT AUDITORS' REPORT THE STOCKHOLDERS AND BOARD OF DIRECTORS OF SPIEGEL, INC.: We have audited the accompanying consolidated balance sheets of Spiegel, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 28, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Spiegel, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 1996 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Chicago, Illinois February 10, 1997 33 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) ($000s omitted, except per share amounts)
1996 First Second Third Fourth Total Year - ------------------ ------------ ------------ ------------ ------------ ----------- Net sales and other revenues $ 634,681 $ 668,601 $ 620,916 $1,090,422 $3,014,620 Operating income (loss) (3,842) 13,911 (7,800) 59,132 61,401 Net earnings (loss) $ (14,321) $ (3,297) $ (15,558) $ 19,787 $ (13,389) Net earnings (loss) per common share $ (.13) $ (.03) $ (.14) $ .18 $ (.12) Weighted average common shares outstanding 107,746,498 107,746,760 107,752,989 107,757,531 107,750,945 MARKET PRICE DATA High $ 11 1/8 $ 12 1/4 $ 13 1/4 $ 9 1/8 $ 13 1/4 Low $ 6 7/8 $ 8 5/8 $ 6 1/2 $ 6 1/2 $ 6 1/2 1995 First Second Third Fourth Total Year - ------------------ ------------ ------------ ------------ ------------ ----------- Net sales and other revenues $679,627 $699,280 $685,923 $1,119,354 $3,184,184 Operating income (loss) 9,661 (2,873) (13,773) 94,355 87,370 Net earnings (loss) $ (9,415) $(14,860) $(22,618) $ 37,412 $ (9,481) Net earnings (loss) per common share $ (.09) $ (.14) $ (.21) $ .35 $ (.09) Weighted average common shares outstanding 108,152,162 107,716,627 107,736,680 107,746,498 107,837,992 MARKET PRICE DATA High $ 10 1/2 $ 13 7/8 $ 13 5/8 $ 11 $ 13 7/8 Low $ 8 7/8 $ 8 3/4 $ 10 $ 6 7/8 $ 6 7/8
34 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The following persons are the directors of the Company. Year Elected as Name Age Offices with Registrant or Other (4) Director - ---------------------- --- --------------------------------------------------- Dr. Michael Otto (1) 53 Chairman of the Board of Directors 1982 and Chairman of the Board of Directors of Otto Versand (GmbH & Co) John J. Shea (1)(3) 58 Vice Chairman of the Board of Directors, 1983 President and Chief Executive Officer Thomas Bohlmann 51 Board of Directors and Director - Planning 1989 and Control of Otto Versand (GmbH & Co) (1989) Dr. Michael E. Cruesemann (2)(3) 51 Board of Directors and Director-Finance of Otto Versand (GmbH & Co) and Chief Financial 1994 Officer of Otto Versand Group (1994); Deputy Director of Finance of Otto Versand (GmbH & Co) (1985) Harold S. Dahlstrand 52 Senior Vice President - Human Resources 1994 Richard T. Fersch 47 President of Eddie Bauer 1996 Hans-Jorg Hammer 57 Board of Directors and Director - 1991 Personnel of Otto Versand (GmbH & Co)(1991); Deputy Director - Personnel of Otto Versand (GmbH & Co)(1988) Horst R. Hansen (2) 62 Retired. Prior to March 1994 was a member 1982 of the Board of Directors and Director - Finance and Chief Financial Officer of Otto Versand Group Karl-August Hopmann (2) 61 Retired. Prior to March 1991 was a member 1982 of the Board of Directors and Director - Personnel of Otto Versand (GmbH & Co)(1988) John W. Irvin 49 President of Spiegel Catalog 1996 Dr. Peter Mueller (1) 55 Board of Directors and Director - 1985 Advertising and Marketing of Otto Versand (GmbH & Co) for at least the last five years 35 Dr. Peer Witten 51 Board of Directors and Director - 1991 Operations of Otto Versand (GmbH & Co) for at least the last five years Martin Zaepfel 53 Board of Directors and Director - 1996 Merchandise of Otto Versand (GmbH & Co) for at least the last five years (1) Member of Board Committee (Executive Committee) (2) Member of Audit Committee (3) Member of Finance Committee (4) The business experience during the last five years of directors who are executive officers of the Company is detailed along with the listing of executive officers that follows. The terms of all the above-named directors expire on the date of the next annual meeting of the stockholders which is to be held in April, 1997. Dr. Michael Otto was a member of the Board of Directors and Director - Merchandise of Otto Versand for ten years prior to March 1, 1981. There is no family relationship between any of the directors. 36 EXECUTIVE OFFICERS The following persons are the executive officers and certain significant employees of the Company: Positions and Offices Held (all positions and offices are of the Company Name Age unless otherwise indicated) - ---------------------- --- -------------------------------------------------- Executive Officers of Spiegel, Inc.: - ------------------------------------ John J. Shea 58 Vice Chairman (1989), President and Chief Executive Officer (1985) and Director (1983) James W. Sievers 54 Senior Vice President - Finance (1995) and Chief Financial Officer (1994); Vice President - Finance (1990) Harold S. Dahlstrand 52 Senior Vice President - Human Resources (1993); Vice President - Human Resources (1985); and Director (1994) Richard T. Fersch 47 President of Eddie Bauer (1992); Executive Vice President - Merchandising and Marketing of Eddie Bauer (1992); Senior Vice President - Stores of Eddie Bauer (1989); and Director (1994) John W. Irvin 49 President of Spiegel Catalog (1996); Senior Vice President, General Merchandise Manager of Mervyn's (a division of Dayton Hudson Corporation) (1992); Vice President, Stores of Mervyn's (1992); President of Maison Blanche (a 24 store retail chain)(1990); and Director (1996) George D. Ittner 53 President of Newport News (1992); Executive Vice President and General Manager - Avon Fashions (1985) Michael R. Moran 50 Senior Vice President, Secretary & General Counsel (1996); Vice President, Secretary & General Counsel (1988) Jon K. Nordeen 41 Vice President and Chief Information Officer (1996); Director of Application Development of Dayton Hudson Corporation (1995); Director of Application Development - Department Store Division of Dayton Hudson Corporation (1987) John R. Steele 44 Vice President and Treasurer (1995); Treasurer (1993); Vice President of Deutsche Bank (1988) 37 Certain Significant Employees: - ------------------------------ Gregory R. Aube 44 President of FCNB (1995); General Counsel and Corporate Secretary (1989) James R. Cannataro 44 Executive Vice President - Finance and Administration of Eddie Bauer (1996); Senior Vice President Finance of Eddie Bauer (1993); Vice President Finance Eddie Bauer (1990) Georgia Shonk-Simmons 45 Executive Vice President - Merchandising and Marketing of Newport News (1994); Vice President - Merchandise of Spiegel (1993); Vice President - Merchandise Product Development of Spiegel (1992); Vice President - Corporate Fashion Director of Spiegel (1990) Karl A. Steigerwald 50 Executive Vice President - Administration of Spiegel Catalog (1996); Vice President - Marketing (1992); Vice President - Marketing and Information Services (1991) Ken A. Wherry 64 Senior Vice President - Customer Satisfaction and Sales of Eddie Bauer (1996); Senior Vice President - Catalog of Eddie Bauer (1993); Senior Vice President - Operations of Eddie Bauer (1991) Michael L. Wilson 42 President of DFS (1996); Director - Logistics of Eddie Bauer (1995); Vice President - Retail Distribution of DFS (1993); Director - Retail Distribution of Eddie Bauer (1991) The terms of all the above-named officers expire on the date of the next annual meeting of the Board of Directors which is to be held in April, 1997. There is no family relationship between any of the officers. 38 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth all compensation paid or accrued by the Company for the years ended December 28, 1996, December 30, 1995 and December 31, 1994 to or on behalf of each of the five most highly compensated key policy-making executive officers of the Company.
Stock Name and Annual Compensation Options All Other Principal Salary Bonus Granted Compensation(3) Position Year ($) ($) (#) ($) ------------------- ------ -------- -------- ------- --------------- John J. Shea 1996 $700,000 $ 23,464 - $198,200 Vice Chairman 1995 600,000 - 100,000(1) 157,732 President, Chief 1994 600,000 236,250 - 145,667 Executive Officer and Director Richard T. Fersch 1996 $600,000 $702,000 10,000 $150,387 President of 1995 415,000 466,875 50,000 68,789 Eddie Bauer 1994 400,000 150,000 10,000 79,741 and Director John W. Irvin (2) 1996 $300,000 $100,000 60,000 $ 88,649 President of 1995 - - - - Spiegel Catalog 1994 - - - - and Director James R. Cannataro 1996 $233,077 $334,880 5,000 $ 71,637 Executive Vice 1995 190,000 171,000 5,000 34,276 President - Finance 1994 170,000 51,000 3,000 30,651 and Administration of Eddie Bauer Ken A. Wherry 1996 $228,461 $252,221 5,000 $ 97,493 Senior Vice 1995 180,000 162,000 5,000 34,384 President - Customer 1994 180,000 51,000 2,000 32,348 Satisfaction and Sales of Eddie Bauer
(1) The options granted to John J. Shea in 1995 represent a repricing of 100,000 of the options granted to him in 1993. (2) John W. Irvin joined Spiegel Catalog in April 1996. (3) The following tables summarize all other compensation for the years ended December 28, 1996, December 30, 1995 and December 31, 1994: 39
Retirement Car Allowance/ Life Insurance Name Benefits Other Premiums Paid Total -------------------- ------------ --------------- -------------- ------------ 1996 John J. Shea $ 86,663 $ 56,918 $ 54,619 $ 198,200 Richard T. Fersch 53,700 41,710 54,977 150,387 John W. Irvin (a) - 49,476 39,173 88,649 James R. Cannataro 20,310 20,763 30,564 71,637 Ken A. Wherry 19,890 20,253 57,350 97,493 1995 John J. Shea $ 86,151 $ 38,168 $ 33,413 $ 157,732 Richard T. Fersch 35,275 33,514 - 68,789 John W. Irvin - - - - James R. Cannataro 18,627 15,649 - 34,276 Ken A. Wherry 17,158 17,226 - 34,384 1994 John J. Shea $ 84,904 $ 36,368 $ 24,395 $ 145,667 Richard T. Fersch 46,449 33,292 - 79,741 John W. Irvin - - - - James R. Cannataro 15,835 14,816 - 30,651 Ken A. Wherry 15,835 16,513 - 32,348
(a) Car Allowance/Other for John W. Irvin in 1996 represents a $28,685 moving allowance and a $20,791 car allowance. OPTION GRANTS TABLE The following table sets forth grants of stock options to the named executive officers during the year ended December 28, 1996 and the potential realizable value of the grants assuming that the market price of the underlying stock appreciates in value from the date of grant to the end of the option term at the stipulated annual rates of 5% and 10%:
Number of Potential Realizable Securities Percent of Value at Assumed Under- Total Options Annual Rates of Stock lying Granted to Price Appreciation Options Employees Exercise Expiration for Option Name Granted in 1996 Price Date 5% ($) 10% ($) - ------------------ --------- ------------- -------- ----------- -------- -------- John J. Shea - - $ - - $ - $ - Richard T. Fersch 10,000 5% 7.10 12/31/06 44,652 113,156 John W. Irvin 50,000 26% 10.00 04/01/06 314,447 796,871 10,000 5% 7.10 12/31/06 44,652 113,156 James R. Cannataro 5,000 3% 7.10 12/31/06 22,326 56,578 Ken A. Wherry 5,000 3% 7.10 12/31/06 22,326 56,578
The stock options granted become exercisable at the rate of 20% per year from the date of the grant. 40 AGGREGATED OPTION EXERCISES IN 1996 AND DECEMBER 28, 1996 OPTION VALUES The following table sets forth shares acquired on exercise and stock option values at December 28, 1996:
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at at Acquired December 28, 1996 December 28, 1996 On Value Exercise- Unexercise- Exercise- Unexercise- Name Exercise Realized able able able able - ------------------ -------- -------- --------- ----------- ----------- ----------- John J. Shea - - 280,000 78,000 $129,898 $ - Richard T. Fersch - - 36,600 58,800 4,375 2,500 John W. Irvin - - - 60,000 - - James R. Cannataro - - 15,800 11,800 65,875 28,000 Ken A. Wherry - - 9,800 11,200 36,025 28,000
COMPENSATION OF DIRECTORS The Company pays an annual fee of $10,000 to its independent directors and reimburses any reasonable out-of-pocket expenses incurred by all directors in attending meetings. REPORT OF REPRICING OF OPTIONS The following table sets forth a 1995 transaction which in effect repriced certain options granted. This transaction was approved by the Board of Directors and the Stock Option Committee.
Length of Number of Market Price Exercise Original Securities of Stock at Price at Option Term Underlying Time of Time of Remaining at Options Repricing or Repricing or New Date of Repriced or Amendment Amendment Exercise Repricing or Name Date Amended (#) $ $ Price ($) Amendment - ---- ---- ------------ ------------- ------------ --------- ------------ John J. Shea 5/10/95 100,000 $10.00 $22.75 $10.00 8 years
INDEBTEDNESS OF MANAGEMENT John W. Irvin, President of Spiegel Catalog, received a $120,000 non-interest bearing loan from the Company to provide for financial assistance during his relocation associated with joining the Company. The entire balance was outstanding as of March 17, 1997. The loan will be repaid in 1997. 41 EMPLOYMENT AGREEMENT The Company has an employment agreement with John J. Shea, President and Chief Executive Officer of the Company, the term of which extends through December 31, 1998. The current annual base salary under this agreement is $750,000. The agreement entitles Mr. Shea to receive an annual bonus based on a sliding-scale percentage of the Company's consolidated net income before taxes. Mr. Shea is also eligible to receive certain other benefits. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board Committee, which determines executive officer compensation, consists of Dr. Michael Otto, Dr. Peter Muller and John J. Shea. Mr. Shea also serves as President and Chief Executive Officer of the Company. EMPLOYEE BENEFITS STOCK OPTION PLAN. The Spiegel, Inc. Salaried Employees Incentive Stock Option Plan is administered by a Stock Option Committee consisting of three members of the Company's Board of Directors who are not salaried employees of the Company or its participating subsidiaries and who are appointed to the Committee from time to time. Certain salaried employees of Spiegel and its subsidiaries are eligible to participate in the plan. Options are granted to those eligible employees as the Stock Option Committee shall select from time to time. The Stock Option Committee also has authority to determine the number of shares and terms consistent with the Plan with respect to each option. Options granted under the plan relate to the Class A Non-Voting Common Stock of the Company. The maximum number of shares which may be issued under options granted is 1,900,000 shares. The participants' options become exercisable at the rate of 20% per year. The options expire ten years after the date of grant of options. The option price upon exercise of the option is the fair market value of the shares on the date of grant of the option. Options granted under the plan are not transferable or assignable other than by will or by the laws of descent and distribution. The average per share price of stock options granted during the year was $7.80. Net cash realized with respect to the exercise of options during the year was approximately $80,000. SPIEGEL GROUP VALUE IN PARTNERSHIP PROFIT SHARING AND 401(K) SAVINGS PLAN The Company maintains two consolidated Profit Sharing and 401(k) Savings Plans for employees of Spiegel, Eddie Bauer, FCNB and Distribution Fulfillment Services ("DFS"). Participation commences on the beginning of a quarter following one year of continuous service. The Company and participating subsidiaries contribute annually to the plan 7% of the first $100 million of Spiegel consolidated earnings before income taxes, plus 6% of the second $100 million of Spiegel consolidated earnings before income taxes, plus 4% of Spiegel consolidated earnings before income taxes in excess of $200 million plus any other amounts determined by the Company's Board of Directors. A minimum total contribution of 4% of eligible considered compensation will be made, but in no event will the total contribution exceed the maximum amount deductive for Federal income tax purposes. Company contributions and forfeitures are allocated among eligible participants in proportion to considered compensation. A participant can make nondeductible after-tax contributions to the plan of up 42 to 5% of their considered compensation, subject to special limitations imposed by the Internal Revenue Code thereon. Employees may also contribute up to 10% of their base compensation to the 401(k) Plan through payroll deductions. Employee contributions are made on a pretax basis under Section 401(k) of the Internal Revenue Code. The Company matches salaried employee contributions dollar for dollar up to the first 3% of base compensation and 50 cents for each dollar contributed up to the next 3%. The Company matches hourly employee contributions 25 cents for each dollar contributed up to 6% of base compensation. The Company's matching contributions, however, may not exceed the amount deductible under the Internal Revenue Code. All contributions and investments are held in a trust for the benefit of plan participants. All employees who participate in the plan after one year of service are 100% vested in their contributions and earnings thereon but become vested in the Company's matching contribution and earnings thereon at a rate based on years of service, with full vesting after a maximum of seven years. Participants are permitted to borrow from their account, but may have only one outstanding loan at a time. Repayment is made through payroll deductions. Participants who suffer a financial hardship as defined by the Internal Revenue Code and who are not eligible for a loan may withdraw amounts from the plan while still employed. In addition, participants may annually receive a distribution of their after-tax contributions. All participants receive the full value of their accounts under the plan upon retirement or permanent disability and the vested portion of their accounts on other termination of employment. The full value of a deceased participant's account is distributable to his beneficiaries. Distributions are made in a lump sum. SPIEGEL, INC., SUPPLEMENTAL RETIREMENT BENEFIT PLAN. The Company maintains an unfunded supplemental retirement plan for the benefit of its employees and those of its participating subsidiaries covered by the Spiegel Group Value in Partnership Profit Sharing and 401(k) Savings Plan described above (the "profit sharing and thrift plans") whose benefits under the profit sharing and thrift plans are reduced by application of Sections 415, 401(k) and 401(a)(17) of the Internal Revenue Code. If a participant's annual additions under the profit sharing and thrift plans are reduced by reason of special limitations of the Internal Revenue Code, the Company will make an annual contribution to the trust in the amount of the reduction. Supplemental benefits under the supplemental retirement plan are payable in cash at the same time and in the same manner as the participant's employer account under the profit sharing and thrift plans except no payments are made prior to death, disability or reaching retirement age. 43 SPLIT DOLLAR LIFE INSURANCE PROGRAM. The Company maintains a split dollar life insurance program covering certain executives of the Company. A covered employee may apply for an individual life insurance policy on his life in a face amount up to three times his base salary. The employee pays a portion of the annual premium equal to the after tax cost of an equivalent amount of term life insurance. The balance of the premium due (if any) is paid by the Company. The Company owns a part of the cash value equal to its payments and is beneficiary for that amount. The employee names his own beneficiary and collaterally assigns the policy to the Company to the extent of the Company's payments. Cash value and dividends accumulate tax-free and all amounts in excess of the Company's payments belong to the employee. On the death of the employee, the Company receives any amounts due it with the balance of the proceeds payable as directed by the employee. EXECUTIVE BONUS AND INCENTIVE PLANS. The Company maintains various bonus plans for certain of its executives, designed to reward performance. The Company's annual payment of bonuses is based upon the attainment of pre-determined operating, financial and individual performance objectives. For 1996, approximately $14,250,000 was earned under these bonus plans. NEWPORT NEWS, INC. RETIREMENT SAVINGS PLAN Newport News has a retirement savings plan covering its associates. Associates become eligible as of the beginning of the calendar quarter following completion of one year of service. Associates may elect to contribute up to 10% of their compensation to the plan on a pre-tax basis under Section 401(k) of the Internal Revenue Code. The associate may also elect to make nondeductible after-tax contributions to the plan of up to 5% of their compensation. The company matches contributions at a rate of 50% of the first 4% of compensation contributed. The company matching contributions, however, may not exceed the amount deductible under the Internal Revenue Code. Contributions are held in trust for the benefit of the plan participants. A participant receives the full amount in this account under the plan (including investment earnings) on termination of employment by reason of retirement (as defined in the plan document), or disability. Upon death, the full value of the participant's account is distributable to their beneficiary. On any other termination of employment, a participant is 100% vested at all times in the portion of his account attributable to pre-tax contributions, and is vested in the company's matching contributions and earnings thereon, at a rate based on years of service, with full vesting after a maximum of five years. Distributions are made on a lump sum basis. Participants are permitted to borrow from their account, but may only have one loan outstanding at a time. Participants suffering certain financial hardships may request an inservice withdrawal of prior contributions. 44 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT a. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Spiegel Holdings, Inc. (SHI) holds 99.9% of the Company's Class B Voting Common Stock. The following table sets forth certain information with respect to the number of shares of Class B Voting Common Stock owned by SHI, which is the only stockholder beneficially owning more than 5% of the Class B Voting Common Stock. SHI is a holding company whose principal asset is stock of the Company. The total number of holders of the Company's Class B voting Common Stock as of March 17, 1997, was two. Percentage of Outstanding Number of Title of Class B Voting Name and Address Shares(1) Class Common Stock - ------------------------- ----------- -------- -------------- Spiegel Holdings, Inc.(2) 103,483,298 Class B 99.9% The Corporation Voting Trust Center Common 1209 Orange Street Stock Wilmington, DE 19801 (1) The shares are owned of record and beneficially, with sole investment and voting power. However, see note (2) below. (2) In excess of 50% of the common stock of SHI is beneficially owned by Dr. Michael Otto who controls the manner in which SHI votes its Class B Voting Common Stock of the Company in all matters, including the election of directors. Under rules and regulations promulgated by the Securities and Exchange Commission, Dr. Otto may be deemed to beneficially own all the shares of the Company owned by SHI. Dr. Otto is a director of the Company. No officers or other directors of the Company are stockholders of record or beneficial stockholders thereof. b. SECURITY OWNERSHIP OF MANAGEMENT As of March 17, 1997, certain members of the Company's Board of Directors, and the directors and officers of the Company as a group, owned shares of the Company's Class A Non-Voting Common Stock as indicated in the following table: As shown in Column II, in the case of Company officers, portions of the shares indicated as beneficially owned are actually shares attributable to unexercised and unexpired options for Class A Non-Voting Common Stock granted by the Company to such officers, which are exercisable as of, or first become exercisable within 60 days after, March 17, 1997. 45 Amount and Name of Nature of Title Beneficial Beneficial Acquirable Percent of Class Owner Ownership (1) Within 60 Days of Class - -------- -------------------- ------------- -------------- ------------ (I) (II) (III) Class A Gregory A. Aube 400 400 * Class A James R. Cannataro 16,800 15,800 * Class A Harold S. Dahlstrand 57,950 40,800 * Class A Richard T. Fersch 40,200 36,600 * Class A Karl-August Hopmann 15,000 0 * Class A George D. Ittner 5,400 3,000 * Class A Michael R. Moran 61,100 49,100 * Class A Dr. Peter Muller 10,000 0 * Class A John J. Shea 392,000 280,000 2.7% Class A Georgia Shonk-Simmons 30,700 30,700 * Class A James W. Sievers 38,600 32,600 * Class A John R. Steele 650 400 * Class A Karl A. Steigerwald 43,800 30,600 * Class A Ken A. Wherry 9,800 9,800 * Class A All directors and 1,133,475 652,000 7.8% officers as a group (26 persons) (1) Includes shares which may be acquired within 60 days under the Company's Stock Option Plan. * Less than 1%. 46 ITEM 13. CERTAIN TRANSACTIONS Since its acquisition of the Company in 1982, and following the transfer of its interest therein to its partners and designees in April 1984, Otto Versand and the Company have entered into certain agreements seeking to benefit both parties by providing for the sharing of expertise. The following is a summary of such agreements and certain other transactions. The Company utilizes the services of Otto Versand International (GmbH) as a buying agent for the Company in Hong Kong, Taiwan, Korea, India, Italy, Indonesia, Singapore, Thailand and Turkey. Otto Versand International (GmbH) is a wholly-owned subsidiary of Otto Versand. Buying agents locate suppliers, inspect goods to maintain quality control, arrange for appropriate documentation and, in general, expedite the process of procuring merchandise in these areas. Under the terms of its arrangements, the Company paid $3,917,000 in 1996, $3,720,000 in 1995, and $4,445,000 in 1994. The arrangements are indefinite in term but may generally be canceled by either party upon one year's written notice. The Company has an agreement with Together, Ltd., a United Kingdom company, which gives the Company the exclusive right to market "Together!" merchandise by catalog and in retail stores. Otto Versand owns Together, Ltd. Commission expenses incurred on this account were $3,870,000, $5,755,000 and $8,012,000 in 1996, 1995 and 1994, respectively. These expenses include certain production services, the cost of which would normally be borne by the Company, including design of the product, color separation, catalog copy and layout, identification of suggested manufacturing sources and test marketing information. In 1993, the Company formed a joint venture with Otto-Sumisho, Inc. (a joint venture company of Otto Versand and Sumitomo Corporation) and entered into license agreements to sell Eddie Bauer products through retail stores and catalogs in Japan. The Company believes that the terms of the arrangement are no less favorable to Eddie Bauer than would be the case in an arrangement with an unrelated third party. There were seventeen stores open in Japan as of December 28, 1996. To date, Eddie Bauer has contributed $9,290,436 to the project and in 1994, received a $2,500,000 licensing fee for the use of its name. Eddie Bauer received $3,981,000, $3,243,000 and $670,000 in royalty income on retail and catalog sales during 1996, 1995 and 1994, respectively. Eddie Bauer recorded approximately $406,000 of income and $673,000 and $780,000 of losses for its equity share of the joint venture during 1996, 1995 and 1994, respectively. During 1995, Eddie Bauer formed a joint venture with Handelsgesellschaft Heinrich Heine GmbH and Sport-Scheck Gmbh (both subsidiaries of Otto Versand) and entered into license agreements to sell Eddie Bauer products through retail stores and catalogs in Germany. The Company believes that the terms of the arrangement are no less favorable to Eddie Bauer than would be the case in an arrangement with an unrelated third party. There were two stores open in Germany as of December 28, 1996. Eddie Bauer has contributed $2,330,000 to the project and has received $1,000,000 in licensing fees for the use of its name. Eddie Bauer received $773,000 and $295,000 in royalty income on retail and catalog sales during 1996 and 1995, respectively. Eddie Bauer recorded approximately $707,000 and $98,000 for its share of equity losses of the joint venture during 1996 and 1995. During 1996, Eddie Bauer signed a letter of intent with Gratten PLC (a subsidiary of Otto Versand) to form a joint venture to sell Eddie Bauer products through retail stores and catalogs in the United Kingdom. The agreement is expected to be signed in the first half of 1997, and stores are expected to open in the second half of 1997. In 1993, Eddie Bauer entered into an agreement with Eddie Bauer International, Ltd., (a subsidiary of Otto Versand) whereby the latter acts as buying agent in Asia and contacts 47 suppliers, inspects goods and handles shipping documentation for Eddie Bauer. The Company believes that the terms of the arrangement are no less favorable to Eddie Bauer than would be the case in an arrangement with an unrelated third party. The Company paid $14,476,000, $13,907,000 and $11,056,000 for these services in 1996, 1995 and 1994, respectively. In March 1994, Newport News issued 113 shares of non-voting preferred stock to ten directors and ten other executive officers of the Company and nine executive officers and directors of Newport News and Otto Versand for $40,000 per share. Each participant was eligible to purchase up to four shares. Of the initial issuance, 93 shares remain outstanding held by the following individuals with the number of shares each own indicated by parentheses following each name: Dr. Michael Otto (4); Thomas Bohlmann (3); Hans-Christoph Fischer (4); Hans-Jorg Hammer (4); Dr. Peter Muller (4); Peer Witten(4); John J. Shea (4); Harold S. Dahlstrand (4); James J. Broderick (4); Robert E. Conradi (4); Davia L. Kimmey (4); Stanley D. Leibowitz (4); Michael R. Moran (4); Georgia L. Shonk-Simmons (4); James W. Sievers (4); Karl A. Steigerwald (4); George D. Ittner (4); James W. Brewster (4); Geralyn M. Madonna (2); Gerhard Hocht (4); Siegfried Kockmann (4); Gert Rietz (4); Martin Zaepfel (4) and Dr. Michael Crusemann (4). In December, 1995, an additional seven shares were offered to four executive officers from Newport News and Eddie Bauer at $43,000 per share. These individuals and the number of shares each owns, indicated in parenthesis following each name, include: Martin Smith (1); David Knoll (1); Charles Krieg (1); and Richard Fersch (4). The redemption price of the preferred stock prior to December 31, 1997 is $40,000 per share. Subsequent to December 31, 1997, the redemption price is fair market value. All shares of Newport News non-voting preferred stock must be redeemed by December 31, 1999, but may be redeemed as early as December 31, 1997 at the option of the holder. On March 7, 1997, the Company issued 10.3 million shares on Class B voting common stock for $70,000,000 to its majority shareholder, Spiegel Holdings, Inc. The proceeds from the issuance will be used to fund capital needs, including the continued expansion of Eddie Bauer. The Company is included in the consolidated federal income tax return of SHI. Pursuant to a tax reimbursement agreement with SHI, the Company records provisions for income tax expense as if it were a separate taxpayer. 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K Page ---- A. 1. FINANCIAL STATEMENTS Consolidated Balance Sheets 15 Consolidated Statements of Earnings 16 Consolidated Statements of Stockholders' Equity 17 Consolidated Statements of Cash Flows 18 Notes to Consolidated Financial Statements 19- 31 Independent Auditors' Report 33 Selected Quarterly Financial Data 34 2. FINANCIAL STATEMENT SCHEDULE Independent Auditors' Report on Schedule 51 Schedule II--Valuation and Qualifying Accounts 52 Schedules not listed above are omitted because of absence of conditions under which they are required or because the required information is included in the financial statements submitted. 49 3. EXHIBITS Exhibit Number Description of Exhibit 3(a) Restated Certificate of Incorporation of the Registrant (i) 3(b) By-Laws of the Registrant (i) 4 Revised Specimen Stock Certificate (ii) 10(a) Spiegel, Inc., Semi-Monthly Salaried Employees Incentive Stock Option Plan (File No. 33-15936) and post-effective Amendment No. 1 thereto, and the Company's registration statements on Form S-8 and post-effective amendments thereto (File No. 33-19663, 33-32385, 33-38478, 33-44780, 33-56200, 33-51755 and 33-65469) (iii) 10(b) Spiegel, Inc., Supplemental Retirement Benefit Plan (iv) 21 List of subsidiaries of the Registrant 23 Consent of KPMG Peat Marwick LLP 24 Powers of Attorney (iv) 27 Financial Data Schedule (i) Filed as an Exhibit to or part of the Company's Registration Statement on Form S-3 (File No. 33-50739) and hereby incorporated by reference herein. (ii) Filed as an Exhibit to the 1988 10-K. (iii) Filed as an Exhibit to or part of the Company's Registration Statement on Form S-8 (File No. 33-19663, 33-32385, 33-38478, 33-44780, 33-56200 and 33-51755) and hereby incorporated by reference herein. (iv) Filed as an Exhibit to or part of the Company's Registration Statements on Form S-1 (File No. 33-15936) and hereby incorporated by reference herein. B. REPORTS ON FORM 8-K None. 50 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholders Spiegel, Inc.: Under date of February 10, 1997, we reported on the consolidated balance sheets of Spiegel, Inc., and subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 28, 1996, which are included elsewhere herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /S/ KPMG PEAT MARWICK LLP Chicago, Illinois February 10, 1997 51 SCHEDULE II SPIEGEL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED ($000s omitted)
December 28, December 30, December 31, 1996 1995 1994 ---------- ----------- ---------- ACCOUNTS RECEIVABLE VALUATION ACCOUNTS Allowance for doubtful accounts - ------------------------------- Balance at beginning of year $40,832 $49,954 $46,855 Charged to earnings 22,593 91,612 79,183 Reduction for receivables sold (23,861) (33,600) (6,300) Accounts written off, net of recoveries (24,734) (67,134) (69,784) ---------- ----------- ---------- Balance at end of year $14,830 $40,832 $49,954 ---------- ----------- ---------- ---------- ----------- ---------- Allowance for returns on proprietary credit card sales - ------------------------------------ Balance at beginning of year $37,769 $27,762 $28,238 Charged to earnings 322,023 274,331 266,700 Amounts written off (327,549) (276,390) (267,176) Other (1) - 12,066 - ---------- ----------- ---------- Balance at end of year $32,243 $37,769 $27,762 ---------- ----------- ---------- ---------- ----------- ---------- ALLOWANCE FOR RETURNS Balance at beginning of year $31,927 $47,752 $40,256 Charged to earnings 368,623 418,697 445,096 Amounts written off (358,859) (434,522) (437,600) ---------- ----------- ---------- Balance at end of year $41,691 $31,927 $47,752 ---------- ----------- ---------- ---------- ----------- ----------
(1) Other represents an adjustment to the allowance for returns to provide for the effect of an increase in the sales activity on the Company's proprietary credit card. 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Spiegel, Inc., has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 1997. SPIEGEL, INC. By: /s/ John J. Shea John J. Shea, President and Chief Executive Officer (Principal Operating Executive 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 Spiegel, Inc., and in the capacities indicated on March 28, 1997. Signature Title - -------------------------- --------------------------------------------- /s/ John J. Shea Vice Chairman, President, Chief Executive John J. Shea Officer and Director (Principal Operating Executive Officer) /s/ James W. Sievers Senior Vice President - Finance and Chief James W. Sievers Financial Officer (Principal Financial and Accounting Officer) /s/ Thomas Bohlmann Director Thomas Bohlmann /s/ Dr. Michael E. Cruesemann Director Dr. Michael E. Cruesemann /s/ Harold S. Dahlstrand Director Harold S. Dahlstrand /s/ Richard T. Fersch Director Richard T. Fersch /s/ John W. Irvin Director John W. Irvin /s/ Dr. Peter Mueller Director Dr. Peter Mueller 53 EX-21 2 EX-21 EXHIBIT 21 SPIEGEL, INC. LISTING OF SUBSIDIARIES December 28, 1996 Name of Corporation Incorporated In - ----------------------------------------------- ----------------- Catalog 1, Inc. Delaware Distribution Fulfillment Services, Inc. Delaware Eddie Bauer, Inc. Delaware Eddie Bauer of Canada, Inc. (1) Canada Eddie Bauer International, Inc. (1) Delaware Equity Cash Benefit Insurance Agency, Inc. Illinois Equity Cash Benefit Insurance Agency, Inc. Nevada First Consumers National Bank Federal Charter For You, Inc. Delaware Hampton Realty Acquisition Corporation (2) Delaware Kids Stores, Inc. Delaware Newport News, Inc. (formerly New Hampton, Inc.) Delaware S.I. Reinsurance Limited Turks & Caicos Spiegel Acceptance Corporation Delaware Spiegel Credit Corporation II Delaware Spiegel Credit Corporation III Delaware Spiegel International, Inc. Delaware Spiegel Management Group, Inc. Delaware Spiegel of Philadelphia, Inc. Pennsylvania Spiegel Properties Inc. Delaware Spiegel Publishing Company Illinois Spiegel Teleservice, Inc. Illinois Spiegel Teleservice, Inc. Nevada Together Retail U.S.A., Inc. Delaware Ultimate Outlet Inc. Delaware (1) Wholly-owned subsidiary of Eddie Bauer, Inc., a wholly-owned subsidiary of Spiegel, Inc. (2) Wholly-owned subsidiary of Newport News, Inc., a wholly-owned subsidiary of Spiegel, Inc. 54 EX-23 3 EX-23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Spiegel, Inc.: We consent to incorporation by reference in the registration statements No. 33-19663, 33-32385, 33-38478, 33-44780, 33-56200 and 33-51755 on Form S-8 of Spiegel, Inc. of our reports dated February 10, 1997, relating to the consolidated balance sheets of Spiegel, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows and related financial statement schedule for each of the years in the three-year period ended December 28, 1996, which reports appear in the December 28, 1996 annual report on Form 10-K of Spiegel, Inc. /S/ KPMG PEAT MARWICK LLP Chicago, Illinois March 21, 1997 55 -----END PRIVACY-ENHANCED MESSAGE-----