-----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, DgjdzPyYuRqxWLWpUP1NBtm1slswo6k5kHTirRgrBSSv6rdlAlmV2VQhjBZPAi8V pAVXZfGSmVWAEy5K1KRvuw== 0000912057-96-005532.txt : 19960401 0000912057-96-005532.hdr.sgml : 19960401 ACCESSION NUMBER: 0000912057-96-005532 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960329 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: 96540967 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 -------------- 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 30, 1995 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 (708) 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 22, 1996 was 14,604,844 and 93,141,654, 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." The Spiegel, Inc. catalog operations and related retail store operations are collectively referred to in this Form 10-K as "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. 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 99.8% 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 home furnishings at moderate price points. 2 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:
1995 1994 1993 ------ ------ ------ Wearing apparel 71% 73% 72% Household furnishings and other merchandise 29 27 28 ------ ------ ------ 100% 100% 100% ------ ------ ------ ------ ------ ------
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. 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: Spiegel, Eddie Bauer, Newport News and FCNB. SPIEGEL Spiegel offers apparel, household furnishings and other merchandise through its various catalogs and, to a lesser extent, Ultimate Outlet retail stores. Spiegel sales were $1,168,959 and $1,202,548 for the years ended December 30, 1995 and December 31, 1994, respectively. Spiegel is one of the largest catalog companies in the United States and in 1995 distributed over 203 million catalogs throughout the country. At December 30, 1995, Spiegel's customer base included 5.9 million active customers (customers who have purchased within the last 18 months). Spiegel's apparel merchandise, which represented 51% of its sales in 1995, includes private-label merchandise, developed by its in-house product design teams based on emerging fashion trends and customer. Spiegel also offers designer and branded apparel. Spiegel's household furnishings and other merchandise, which represented 49% of its sales in 1995, 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. Spiegel catalogs serve as a fashion resource for the busy working woman. These catalogs include Spiegel's trademark semi annual catalog, specialty catalogs targeted to distinct market segments, including E STYLE and For You from Spiegel, 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 addresses each of these markets with targeted specialty merchandise concepts, through specialty catalogs and through "shops" included in Spiegel's semi annual catalog. A shop is a focused merchandise assortment targeted to a specific group of customers. Shops are managed by teams within the Spiegel catalog organization, each comprised of representatives from different areas such as fashion, merchandising, marketing, and advertising. Spiegel believes that this specialty or niche marketing approach enables it to address the widely varying needs of a diverse customer base. 3 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 411 retail stores in addition to catalog operations. Total net sales were $1,427,422 and $1,231,306 for the years ended December 30, 1995 and December 31, 1994, respectively. 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 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 including Eddie Bauer HOME, which offers home furnishings through retail stores and catalogs; AKA EDDIE BAUER, featuring dress sportswear and tailored clothing, footwear and accessories for men and women through retail stores and catalogs; and the Eddie Bauer Sport Shop, a store-within-a-store concept which provides premier apparel, equipment and accessories for field and stream sports. 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 seven stores with eight more planned for 1996. 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. 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 365 retail and 46 outlet stores in the United States and Canada. At December 30, 1995, 26 of these stores were Eddie Bauer HOME Collection and 15 were AKA EDDIE BAUER stores. A typical Eddie Bauer store is approximately 6,500 gross square feet and is located in an upscale regional mall or a high traffic downtown location, because the Company believes that convenience is a primary consideration for its target customers. Most of Eddie Bauer's current stores are located in large metropolitan markets. Eddie Bauer has also begun to explore opportunities in certain smaller markets where it believes a concentration of 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 and to the growth in its existing stores. Comparable store sales were unchanged in 1995 and increased 4% in 1994. In 1996, the Company is planning approximately 27 new store openings for Eddie 4 Bauer. The average cost of opening a typical new Eddie Bauer store in 1995, including inventory, furniture and fixtures, pre-opening expenses and net leasehold improvements, was approximately $800,00. 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 1995, the Eddie Bauer catalog division distributed over 103 million catalogs and had approximately 3.1 million active customers (those who had 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. Eddie Bauer also actively pursues new customers within its target market through initiatives including list rentals and utilizing names of its retail store customers. NEWPORT NEWS Newport News (formerly New Hampton), acquired by the Company in August 1993, is a specialty catalog company whose catalog offers fashionable, moderately priced women's apparel. Merchandise categories currently include swimwear, dresses, casual wear, evening wear and career wear. In 1994, Newport News introduced home textiles and in 1996, mailed its first catalog dedicated primarily to home merchandise. Newport News' consolidated net sales were $289,843 for the year ended December 30, 1995, as compared to $272,937 for the year ended December 31, 1994. In 1995, Newport News mailed 174 million catalogs to active and prospective customers. Newport News catalogs have a customer base of 4.5 million active customers (those who had 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, which represent approximately 6% of its outstanding cards. Finance revenues generated by the credit operations were $208,304 in 1995, as compared to $232,267 in 1994. Approximately 50% of the Company's 1995 total net sales were made on the FCNB Preferred Charge card including approximately 76% of Spiegel catalog net sales, 27% of Eddie Bauer's net sales, and 59% of Newport News' net sales. The lower percentage of Eddie Bauer sales made on the Preferred Charge card is attributable primarily 5 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. 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, Eddie Bauer and Newport News. This system ensures rapid response to customer orders and inquiries and allow Spiegel, Eddie Bauer and Newport News operators to handle each other's calls when back-up support is necessary. In addition, Spiegel 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 new 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, is among the most technologically advanced catalog fulfillment systems in the United States, providing improved productivity and customer service. 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. 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 7,600 suppliers, none of which supplied as much as 5% of the merchandise purchased during 1995. 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, 6 if any, of the above; however, the Company believes this risk exists for many other retailers. 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 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 1995, the Company employed between approximately 13,600 and 18,800 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, 1996, the Company employed approximately 13,200 full- time equivalent employees. Spiegel is a party to three collective bargaining agreements. Approximately 500 full-time equivalent employees 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 expired on February 29, 1996, was affected by the closure, in 1995, of Spiegel's catalog 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. The Company has negotiated a new agreement with the union and believes it will be accepted by the general union membership. This agreement would expire on February 28, 1999. Approximately 140 full-time equivalent employees of certain Spiegel outlet stores 7 are covered by a separate agreement with Local 743. This agreement expires on May 31, 1997. Approximately 250 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 expired on January 31, 1996. A new agreement has been signed effective February 1, 1996, which will expire on January 31, 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 new 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 3 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 around Chicago, Illinois. These facilities are primarily owned, but as part of the transition to the new warehouse, most of them have closed and will be disposed of or sold. In 1995, the Company purchased a four million square-foot facility in Columbus, Ohio which replaces 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. Eddie Bauer built an addition to its headquarters in 1995. The Company also owns a building in San Francisco, but has closed the retail store which used to operate in it. Spiegel leases customer order centers in Reno, Nevada; Bensalem, Pennsylvania; and Wichita, Kansas, and customer service facilities in Rapid City, South Dakota and Oakbrook, 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. 8 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. 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 22, 1996, the closing market price of the Class A Non-Voting Common Stock, as quoted on the NASDAQ National Market System, was $10 per share. b. HOLDERS There were approximately 12,000 Class A Non-Voting Common Stockholders as of March 22, 1996. 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 four Class B Voting Common Stockholders. c. DIVIDENDS In December 1995, the Company announced it will discontinue payment of all cash dividends. The Company will continue to evaluate its dividend policy on an ongoing basis. Cash dividends per share paid for the years ended December 30, 1995 and December 31, 1994 are as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter Total ------- ------- ------- ------- ------ 1995 $.050 $.050 $.050 $.050 $.200 1994 $.050 $.050 $.050 $.050 $.200
9 ITEM 6. SELECTED FINANCIAL DATA Five-Year Selected Financial Data ($000s omitted, except per share amounts)
1995 1994 1993 (2) 1992 1991 ----------- ---------- ---------- ---------- ---------- EARNINGS DATA Net sales and other revenues $3,184,184 $3,015,985 $2,596,147 $2,218,732 $1,976,308 Earnings (loss) before income taxes (1) (15,807) 47,246 87,363 69,367 30,793 Net earnings (loss) (3) $ (9,481) $ 25,100 $ 48,705 $ 43,224 $ 16,921 Net earnings (loss) per common share(3,4) $ (.09) $ .23 $ .47 $ .42 $ .16 Cash dividends per common share (4) $ .20 $ .20 $ .20 $ .18 $ .18 BALANCE SHEET DATA Current assets $1,530,277 $1,908,402 $1,592,665 $1,302,838 $1,305,217 Total assets 2,273,982 2,560,287 2,210,591 1,785,213 1,728,163 Current liabilities 666,448 628,346 627,247 495,131 374,768 Long-term debt, excluding current maturities 1,014,692 1,300,364 971,683 764,235 841,196 Stockholders' equity $ 535,573 $ 579,217 $ 567,485 $ 478,345 $ 453,598
(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 1991 and 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 The following table sets forth certain items from the Company's consolidated financial statements as a percent of total revenues or net sales for the fiscal years 1995, 1994 and 1993.
1995 1994 1993 -------- -------- -------- Net sales and other revenues: Net sales 90.7% 89.7% 90.0% Finance revenue 6.5% 7.7% 7.5% Other revenue 2.8% 2.6% 2.5% -------- -------- -------- 100.0% 100.0% 100.0% Gross profit as a percent of net sales 32.9% 33.8% 34.3% Selling, general and administrative expenses as a percent of total revenues 36.4% 36.2% 33.2%
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 $1,751,526, an increase of 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 of $1,134,699 for the year ended December 30, 1995 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, and primarily comprises consulting revenue from the Company's computer consulting subsidiary, handling charge fees, and gains recognized on the sale of customer receivables. 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 continues 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 11 profit margin. The fourth quarter saw a significant improvement in gross profit margins, primarily for Eddie Bauer due to lower overstock positions resulting in lower markdowns as compared to last year. 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 has been 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. 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. Approximately $31,300 of expenditures have been made to date, including certain termination benefits, the impact on net periodic pension cost, and other incremental costs incurred for closing the existing facilities. The Company added $2,400 to the reserve in 1995 for additional costs in excess of the original estimate. The total remaining reserve at December 30, 1995 include the noncash write-off of property and equipment with an approximate book value of $5,000. 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. 12 1994 COMPARED WITH 1993 Net sales for the year ended December 31, 1994 increased 16% to $2,706,791 compared with $2,337,235 for the year ended December 31, 1993. Total Company catalog sales of $1,742,131 increased 16% for the year ended December 31, 1994 compared with the year ended December 31, 1993, due in part to increases in the home areas and certain categories of women's apparel as well as the effect of a whole year of Newport News sales. Retail sales of $964,660 for the year ended December 31, 1994 increased $124,488 or 15%, compared with the year ended December 31, 1993, due primarily to an increase in the number of Eddie Bauer stores to 353 at December 31, 1994 from 294 at December 31, 1993. Additionally, Eddie Bauer's comparable store sales increased 4%. Despite the increases noted above, total company sales fell below management expectations, especially in the critical fourth quarter, due to lack of demand for cold weather apparel and accessories, and softness in certain women's apparel categories. Finance revenue increased $37,283 or 19.1% for the year ended December 31, 1994 compared to the year ended December 31, 1993, due to a larger FCNB Preferred Charge card receivable portfolio throughout the 1994 period compared to 1993. This increase was attributable to an increase in the number of Preferred Charge accounts as a result of the successful introduction of the Preferred Card to Newport News customers in 1994 and significant credit customer acquisition efforts at Spiegel and Eddie Bauer. Other revenue for the years ended December 31, 1994 and 1993 was $76,927 and $63,928, respectively, and primarily comprises handling charge fees, consulting revenue and, in 1994, a gain recognized on the sale of customer receivables. Gross profit margin on net sales for the year ended December 31, 1994 was 33.8% compared with 34.3% for the year ended December 31, 1993. This decline was primarily due to a higher level of promotional and markdown activity, especially in the fourth quarter of 1994 as compared to the same period of 1993. These markdowns were taken in an effort to dispose of potential overstock inventory as sales were below expectations during this critical period of the Company's operating cycle. Selling, general and administrative expenses as a percent to total revenues for the year ended December 31, 1994 and 1993 were 36.2% and 33.2%, respectively. This increase reflected the higher advertising and circulation costs associated with the Company's planned strategy of increasing market share through aggressive new catalog customer acquisition programs. Results also reflect the incremental expenses incurred from the conversion to a new common order fulfillment system and dual operating expenses associated with the start-up of and transition to a new catalog distribution facility for Eddie Bauer and Spiegel. Eddie Bauer completed its transition to the new facility during the third quarter of 1994. Spiegel began initial shipments out of the facility in 1994 and completed its transition during 1995. Through December 31, 1994, approximately $23,000 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 and the impact on net periodic pension cost. Interest expense for the year ended December 31, 1994 was $85,380 compared to $72,225 for the year ended December 31, 1993. The increase was due to higher 13 debt levels and by slightly higher effective interest rates. The increase in debt was used primarily to finance higher average levels of customer accounts receivable, higher average inventory levels and capital expenditures. The effective tax rate for 1994 was 46.9% as compared to 44.2% in 1993. This increase was due to an increase in state income tax rates as well as the relative impact of the amortization of non-deductible goodwill as a percentage of earnings before taxes. LIQUIDITY AND CAPITAL RESOURCES The Company has historically met its operating and cash requirements through funds generated from operations, the sale of customer receivables and the issuance of debt. Customer accounts receivable sold were $1,180,000 and $480,000 at December 30, 1995 and December 31, 1994, respectively. Net cash provided by operating activities was $438,601 for the year ended December 30, 1995 as compared to net cash used in operating activities of $245,849 in the comparable prior year period. The most significant source of operating cash in 1995 was the sale of $700,000 of customer receivables, which was offset by a $316,752 increase in customer accounts receivable before the current year's receivable sales. In 1994, there was significant use of cash for an increase in customer receivables of $277,203 and an increase in inventories of $162,526. These were partially offset by proceeds from the sale of $150,000 customer receivables in 1994. In the past three years, the Company has incurred substantial capital expenditures to improve its infrastructure. Capital expenditures for 1995 and 1994 were $131,229 and $84,191, respectively. In 1994, the expenditures were primarily related to the new catalog distribution center and the continued expansion and remodeling of Eddie Bauer stores. In 1995, the Company's capital expenditures were primarily related to the expansion of Eddie Bauer including the purchase and renovation of a new retail distribution facility, the construction of a headquarters addition, and continued expansion and remodeling of Eddie Bauer stores. The majority of those projects are completed and spending levels will be reduced significantly in the coming years. As of December 30, 1995, total debt was $1,126,364, compared with $1,380,684 as of December 31, 1994. This lower level of debt was primarily the result of payments made on commercial paper using the proceeds from the sale of customer receivables. In March 1995, Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, was issued. This statement establishes accounting standards for the recognition of losses resulting from impairment of long-lived assets to be held and used or to be disposed of. The statement will be adopted by the Company in the 1996 fiscal year, as required. Management believes that the effects of adoption of this statement will be immaterial. In October 1995, Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, was issued. This statement establishes financial accounting and reporting standards for stock based 14 employee compensation plans on a fair value based method. As allowed by the new Statement, the Company plans to continue to use Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock options and will supplementally make pro forma disclosures as if the fair value based method of accounting had been applied according to the Statement. The Company will adopt the provisions of the statement in 1996, as required. The Company believes that its cash on hand, together with cash flow anticipated to be generated from operations, borrowings under its existing credit facilities and other available sources of credit will be adequate to fund the Company's capital and operating requirements for the foreseeable future. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS ($000s omitted, except per share amounts)
December 30, December 31, 1995 1994 ------------ -------------- ASSETS Current assets: Cash and cash equivalents $ 42,302 $ 33,439 Receivables, net 742,480 1,125,728 Inventories 572,377 597,781 Prepaid expenses 101,324 80,970 Refundable income taxes 29,560 24,904 Deferred income taxes 42,234 45,580 ------------- -------------- Total current assets 1,530,277 1,908,402 Property and equipment, net 412,934 335,103 Intangible assets, net 173,088 180,446 Other assets 157,683 136,336 ------------- -------------- $2,273,982 $2,560,287 ------------- -------------- ------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 111,672 $ 80,320 Accounts payable 256,527 265,752 Accrued liabilities: Salaries and wages 32,370 31,114 General taxes 125,504 118,266 Other accrued liabilities 140,375 132,894 ------------- -------------- Total current liabilities 666,448 628,346 Long-term debt, excluding current maturities 994,692 1,300,364 Indebtedness to related parties 20,000 - Deferred income taxes 57,269 52,360 ------------- -------------- Total liabilities 1,738,409 1,981,070 ------------- -------------- Stockholders' equity: Class A non-voting common stock, $1.00 par value; authorized 16,000,000 shares; 14,604,844 shares issued and outstanding at December 30, 1995; 15,065,244 shares issued and outstanding at December 31, 1994 14,605 15,065 Class B voting common stock, $1.00 par value; authorized 94,000,000 shares; 93,141,654 shares issued and outstanding at December 30, 1995 and December 31, 1994 93,142 93,142 Additional paid-in capital 211,761 215,800 Minimum pension liability (8,650) (566) Retained earnings 224,715 255,776 ------------- -------------- Total stockholders' equity 535,573 579,217 ------------- -------------- $2,273,982 $2,560,287 ------------- -------------- ------------- --------------
See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF EARNINGS Years ended ($000s omitted, except per share amounts)
December 30, December 31, December 31, 1995 1994 1993 ------------ ------------ ------------ NET SALES AND OTHER REVENUES Net sales $2,886,225 $2,706,791 $2,337,235 Finance revenue 208,304 232,267 194,984 Other revenue 89,655 76,927 63,928 ------------ ------------ ------------ 3,184,184 3,015,985 2,596,147 COST OF SALES AND OPERATING EXPENSES Cost of sales, including buying and occupancy expenses 1,936,366 1,790,722 1,536,642 Selling, general and administrative expenses 1,160,448 1,092,637 860,917 Nonrecurring charge - - 39,000 ------------ ------------ ------------ 3,096,814 2,883,359 2,436,559 Operating income 87,370 132,626 159,588 Interest expense 103,177 85,380 72,225 ------------ ------------ ------------ Earnings (loss) before income taxes (15,807) 47,246 87,363 Income tax provision (benefit) (6,326) 22,146 38,658 ------------ ------------ ------------ Net earnings (loss) $ (9,481) $ 25,100 $ 48,705 ------------ ------------ ------------ ------------ ------------ ------------ EARNINGS PER COMMON SHARE Net earnings (loss) per common share $ (0.09) $ 0.23 $ 0.47 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ($000s omitted, except per share amounts)
Treasury stock - Class A Class B Additional class A Minimum non-voting voting paid-in Retained non-voting pension Total common stock common stock capital earnings common stock liability ------- ------------ ------------ ---------- ---------- ------------ --------- BALANCES AT DECEMBER 31, 1992 $478,345 $ 12,000 $ 93,142 $154,333 $223,906 $ (5,036) $ - Net earnings 48,705 48,705 Cash dividends ($.20.per share) (20,298) (20,298) Issuance of 3,627,600 common shares 61,705 3,628 58,077 Issuance of 109,220 treasury shares 627 144 483 Retirement of 1,027,776 treasury shares - (1,028) (3,525) 4,553 Adjustment to minimum pension liability (1,599) (1,599) ------- ------------ ------------ ---------- ---------- ------------ --------- BALANCES AT DECEMBER 31, 1993 567,485 14,600 93,142 209,029 252,313 - (1,599) Net earnings 25,100 25,100 Cash dividends ($.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) ------- ------------ ------------ ---------- ---------- ------------ --------- ------- ------------ ------------ ---------- ---------- ------------ ---------
See accompanying notes to consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended ($000s omitted)
December 30, December 31, December 31, 1995 1994 1993 ------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ (9,481) $ 25,100 $ 48,705 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 76,155 54,607 45,766 Gain on sale of receivables (18,637) (10,658) - Write-down of property and equipment of certain distribution facilities - - 6,500 Change in assets and liabilities, net of effects of acquisition: Sale of customer accounts receivable 700,000 150,000 32,756 Increase in receivables, net (316,752) (277,203) (209,800) (Increase) decrease in inventories 25,404 (162,526) 2,447 Increase in prepaid expenses (20,354) (21,125) (1,272) Increase (decrease)in accounts payable (9,224) 39,441 44,553 Increase in accrued liabilities 2,514 11,264 59,678 Increase (decrease) in income taxes 8,976 (54,749) (6,707) ------------ ------------- ------------- Total adjustments 448,082 (270,949) (26,079) ------------ ------------- ------------- Net cash provided by (used in) operating activities 438,601 (245,849) 22,626 ------------ ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Newport News,net of cash acquired - - (39,492) Net additions to property and equipment (131,229) (84,191) (104,489) Net (additions to) or reductions of other assets (18,110) 10,642 (61,944) ------------ ------------- ------------- Net cash used in investing activities (149,339) (73,549) (205,925) ------------ ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of debt 116,250 399,000 241,600 Payment of debt (370,570) (79,151) (56,550) Dividends paid (21,580) (21,637) (20,298) Purchase and retirement of common shares (4,742) - - Issuance of common shares and other 243 7,236 62,332 ------------ ------------- ------------- Net cash provided by (used in) financing activities (280,399) 305,448 227,084 ------------ ------------- ------------- Net change in cash and cash equivalents 8,863 (13,950) 43,785 Cash and cash equivalents at beginning of year 33,439 47,389 3,604 Cash and cash equivalents ------------ ------------- ------------- at end of year $ 42,302 $ 33,439 $ 47,389 ------------- ------------- ------------- ------------- ------------- ------------- Supplemental cash flow information Cash paid during the year for: Interest $ 104,426 $ 85,723 $ 69,242 ------------- ------------- ------------- Income taxes $ 6,092 $ 66,702 $ 41,035 ------------- ------------- -------------
See accompanying notes to consolidated financial statements. 19 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 speciality retailer marketing fashionable apparel and home furnishings through catalogs, specialty retail stores and electronic media. The Company also operates a special purpose bank which issues a proprietary credit card to the Company's customers. 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. In 1994, the Company modified its year for financial reporting purposes from calendar periods to a 52/53 week fiscal year. REVENUE RECOGNITION Sales made under installment accounts represent a substantial portion of net sales. Finance revenue on customer installment accounts receivable is recorded as income when earned. The Company provides for returns at the time of sale based upon projected merchandise returns. CASH EQUIVALENTS Cash equivalents consist principally of highly liquid government securities 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 30, 1995 and December 31, 1994 were $65,343 and $51,524, respectively. All other advertising for both catalog and retail operations is expensed as incurred. Total advertising expense in the fiscal years 1995, 1994 and 1993 was $439,380, $430,180, and $290,460, respectively. STORE PREOPENING COSTS Preopening and start-up costs for new stores are charged to operations as incurred. 20 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. Annual depreciation rates range from 4% to 20% for buildings and improvements and 10% to 50% 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 $64,099 and $55,843 at December 30, 1995 and December 31, 1994, 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. 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 an adjustment to 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 30, 1995 and December 31, 1994 were $33,661 and $30,760, respectively. Related amortization expense recognized in fiscal years 1995, 1994 and 1993 was $8,887, $4,069, and $2,736, 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). 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. RECLASSIFICATIONS Certain prior year amounts have been reclassified from amounts previously reported to conform with the 1995 presentation. 2. ACQUISITION On August 27, 1993, the Company acquired substantially all of the assets of Newport News, Inc. (formally New Hampton, Inc.) through a bankruptcy proceeding for approximately $40 21 million in cash. Newport News, Inc. is a specialty catalog company offering fashionable, moderately priced women's apparel. The fair value of assets acquired approximated the purchase price. Accordingly, goodwill has not been recorded. The operating results of Newport News, Inc. subsequent to the acquisition date are included in the consolidated financial statements of the Company. 3. NONRECURRING CHARGES During 1994 and 1995, the Company relocated certain of its catalog distribution operations to a new facility in Groveport, Ohio, which consolidated the majority of catalog distribution functions of Spiegel and Eddie Bauer. Included in operating results for the third quarter of 1993 was a $39,000 nonrecurring charge for the estimated costs for closure of certain of the Company's existing catalog distribution facilities. The charge to earnings consisted of estimates for termination benefits, disposal of certain fixed assets and other related costs. Approximately $31,300 of expenditures have been made to date, primarily for certain employee termination benefits, the impact on net periodic pension costs, and other incremental costs incurred for closing the existing facilities. Included in the original reserve was $6,500 for the closing of certain warehouse facilities and $1,500 of this was used in 1995. The remaining $5,000 is expected to be used in 1996. In 1995, $2,400 was added to the reserve for additional costs expected in excess of the original reserve. 4. RECEIVABLES Receivables consist principally of proprietary credit card receivables generated in connection with the sale of the Company's merchandise. 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 collectibility 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 30, 1995 and December 31, 1994 consist of the following:
1995 1994 ------------ -------------- Receivables serviced $2,001,081 $1,683,444 Receivables sold (1,180,000) (480,000) ------------ -------------- Receivables owned 821,081 1,203,444 Less allowance for returns (37,769) (27,762) Less allowance for doubtful accounts (40,832) (49,954) ------------ -------------- Receivables, net $ 742,480 $1,125,728 ------------ -------------- ------------ --------------
During 1995, 1994, and 1992, the Company transferred portions of its customer receivables to trusts which, in turn, sold certificates representing undivided interests in the trusts to investors. Certificates sold were $700,000 in 1995, under two separate transactions of $350,000 each, and $150,000 and $330,000 in 1994 and 1992, respectively. As a 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 22 of the sale. The receivables were sold without recourse, and the bad debt reserve related to the net receivables sold has been reduced accordingly. 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. In addition to the certificates sold, an additional class of investor certificates, currently held by the Company, was issued by the trust in each of the transactions in 1995 and 1994. The aggregate principle balances for these certificates was $294,500 and $55,000 as of December 30, 1995 and December 31, 1994, respectively. The value of these certificates is included in the Company's balance sheet under "Receivables, net." The Company also held a total of $49,400 at December 30, 1995 and December 31, 1994 in reserve funds used as credit enhancement for related receivables sold during 1992. Restricted cash accounts have been maintained for these reserve funds, none of which has been utilized as of December 30, 1995. The value of these funds has been included in the Company's balance sheet under "Other assets." 5. PROPERTY AND EQUIPMENT Property and equipment at December 30, 1995 and December 31, 1994 consist of the following:
1995 1994 ----------- ----------- Land $ 22,957 $ 19,685 Buildings and improvements 155,150 123,512 Equipment 232,147 182,921 Leasehold improvements 148,031 130,958 ----------- ----------- 558,285 457,076 Less accumulated depreciation and amortization (171,791) (147,160) ----------- ----------- 386,494 309,916 Construction in process 26,440 25,187 ----------- ----------- Property and equipment, net $ 412,934 $335,103 ----------- ----------- ----------- -----------
23 6. LONG-TERM DEBT The following is a summary of the Company's long-term debt at December 30, 1995 and December 31, 1994:
1995 1994 ----------- ----------- Notes payable: Commercial paper, supported by stand-by credit commitment $ 250,000 $504,000 Term loan agreements, 3.00% to 10.25%, due March 22, 1996 through March 31, 2005 642,614 687,934 Indebtedness to related parties 45,000 - Subordinated notes, 6.56% to 9.625%, due June 28, 1996 through 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 1,126,364 1,380,684 Less current maturities of long-term debt (111,672) (80,320) ----------- ----------- Long-term debt, excluding current maturities $1,014,692 $1,300,364 ----------- ----------- ----------- -----------
The Company has a commercial paper program which is supported by an irrevocable stand-by credit commitment of $600,000 with a group of 13 banks. The credit agreement expires in September 1997 and is subject to annual extension upon mutual agreement of the Company and banks. If the Company elects to borrow under certain provisions of the credit agreement, the loans would be payable on the expiration date of this agreement. Fees paid to the banks do not exceed 3/8 of 1% per year of outstanding borrowings and 1/4 of 1% of the total commitment. The effective annual interest rates were 6.8% in 1995 and 5.2% in 1994, including previously mentioned fees. At December 30, 1995, outstanding commercial paper of $250,000 has been included in long-term debt, as the amount of the borrowings that will be outstanding throughout the period covered by the commitment is not expected to fall below this level or will be replaced with other long-term financing. The Company also borrows funds under a letter of credit and revolving credit facility of $300,000 with a group of 11 banks. The credit agreement expires in March 1998. Certain provisions of the credit agreement limit availability of these funds through a specified time period. This time period generally coincides with peak cash flows generated by operations of the Company. Fees are currently 3/8 of 1% per year based on the total commitment. Borrowings under this commitment were an average of $118,547 and a maximum of $206,000 during 1995 and an average of $47,844 and a maximum of $200,000 during 1994. There was no outstanding usage under this facility at December 30, 1995 or December 31, 1994. 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. Of the total outstanding principal $25,000 will be paid in 1996 and $20,000 in 1997. The amount to be repaid in 1996 is included in the Company's balance sheet under "current maturities of debt." 24 The Company selectively uses interest rate swap contracts to hedge the underlying interest risks on various term loans. At December 30, 1995, these interest rate swap agreements had effective and termination dates from January 1993 to December 2009. At year-end 1995 and 1994, the notional principal amounts of these agreements totaled $87,500 and $27,500, respectively. At December 30, 1995, the fair value of these swap agreements, $7,454, was obtained from financial institutions and represents the estimated amount the Company would pay to terminate the agreements, taking into consideration current interest rates and risk of the transaction. The fair value at December 31, 1994 was not material. 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 had an unfavorable impact on interest expense of $234 and $565 in 1995 and 1994, respectively. The Company has available uncommitted money market lines aggregating $75,000. Usage under these lines averaged $5,832 during 1995 at various floating rates of interest. Additionally, the Company has letter of credit facilities to support the purchase of inventories. Letter of credit commitments outstanding were $109,572 and $140,173 at December 30, 1995 and December 31, 1994, respectively. 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 30, 1995. Aggregate maturities of long-term debt for the five years subsequent to December 30, 1995 are as follows: 1996, $111,672; 1997, $375,542; 1998, $162,900; 1999, $140,000; and 2000 and thereafter, $336,250. 7. 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 $8,314, $5,673 and $9,001 in 1995, 1994 and 1993, 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 contributions. Expense under these plans was $6,612, $4,917 and $4,092 in 1995, 1994 and 1993, 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. A summary of the changes in the options outstanding is as follows: 25
Shares Amount Average Price ----------- ---------- -------------- Outstanding at December 31, 1992 1,139,080 $ 7,905 $ 6.94 Granted 206,500 4,595 22.25 Exercised (136,820) (786) 5.75 Canceled (18,120) (157) 8.64 ----------- ---------- -------------- 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 ----------- ---------- ------------- ----------- ---------- ------------- EXERCISABLE AT DECEMBER 30, 1995 866,820 $ 6,975 $ 8.05 ----------- ---------- ------------- ----------- ---------- -------------
Total stock options authorized but unissued at December 30, 1995 were 182,260. 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. Due to the relocation of certain of its catalog distribution operations, the Company recognized a curtailment of a related hourly pension plan. The impact on net periodic pension cost for 1993 was a charge to operating income of $12,100, which was included in the $39,000 nonrecurring charge in the consolidated statements of earnings. The net periodic pension cost for the years ended December 30, 1995, December 31, 1994 and December 31, 1993 is computed as follows:
1995 1994 1993 --------- -------- -------- Service cost $ 397 $ 433 $ 940 Interest cost 4,413 4,340 3,562 Return on plan assets (7,049) 1,719 (7,448) Net amortization and deferral 3,509 (5,517) 16,046 --------- -------- -------- Net periodic pension cost $ 1,270 $ 975 $13,100 --------- -------- -------- --------- -------- --------
Weighted average assumptions used in accounting for obligations and assets were as follows:
1995 1994 -------- -------- Discount rate 7.75% 9.0% Expected long-term rate of return on assets 9.0% 9.0%
26 The following table sets forth the plans' funded status at December 30, 1995 and December 31, 1994:
1995 1994 Union Non-Union Union Non-Union Plan Plan Plan Plan --------- --------- --------- --------- Accumulated and projected benefit obligation: Vested $ 45,362 $ 10,968 $ 41,145 $ 8,519 Non-Vested 1,260 231 1,864 207 --------- --------- --------- --------- Total 46,622 11,199 43,009 8,726 Market value of plan assets 32,525 9,993 39,079 9,504 --------- --------- --------- --------- Over (under) funded projected benefit obligation (14,097) (1,206) (3,930) 778 Unrecognized net transition liability 736 1,272 1,106 1,484 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 12,291 2,087 923 68 Additional liability required to recognize minimum liability (13,028) (3,359) (2,029) - --------- --------- --------- --------- Prepaid (accrued) pension cost in the balance sheet $(14,098) $(1,206) $(3,930) $2,330 --------- --------- --------- --------- --------- --------- --------- ---------
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 30, 1995 and December 31, 1994:
1995 1994 ------- ------- Retirees $5,290 $1,394 Fully eligible active plan participants 1,186 2,124 Other active plan participants 4,959 4,041 ------- ------- Total 11,435 7,559 Unrecognized prior service cost (1,727) (715) Unrecognized gain (loss) (2,379) 154 ------- ------- Accrued postretirement benefit cost in the balance sheet $7,329 $6,998 ------- ------- ------- -------
The net periodic postretirement benefit cost for the years ended December 30, 1995, December 31, 1994 and December 31, 1993 is computed as follows:
1995 1994 1993 -------- -------- -------- Service cost $ 629 $ 616 $ 352 Interest cost 804 583 496 Net amortization and deferral 141 56 - -------- -------- -------- Net periodic postretirement benefit cost $1,574 $1,255 $ 848 -------- -------- -------- -------- -------- --------
For measurement purposes, an 11% and 12% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1995 and 1994, 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 30, 1995 by $864 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 30, 1995 by $178. The weighted average discount rates used in determining the accumulated postretirement benefit obligation were 7.75% and 9.0% at December 30, 1995 and December 31, 1994, respectively. 28 8. INCOME TAXES The components of income tax expense (benefit) for the years ended December 30, 1995, December 31, 1994 and December 31, 1993 are as follows:
1995 1994 1993 -------- -------- -------- Current $(20,117) $11,506 $67,223 Deferred 13,791 10,640 (28,565) -------- -------- -------- $ (6,326) $22,146 $38,658 -------- -------- -------- -------- -------- --------
The differences between the provision for income taxes at the statutory rate and the amounts shown in the consolidated statements of earnings for the years ended December 30, 1995, December 31, 1994 and December 31, 1993 are as follows:
1995 1994 1993 Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- Statutory rate $(5,532) (35.0)% $16,536 35.0% $30,577 35.0% State income tax (net of federal income tax benefit) (1,027) (6.5) 3,728 7.9 5,851 6.7 Amortization of non- deductible goodwill 1,885 11.9 1,882 4.0 1,970 2.2 Changes in estimates of previously provided taxes (1,652) (10.4) - - - - Change in statutory rate - - - - 260 0.3 -------- ------- -------- ------- -------- ------- Effective tax rate $(6,326) (40.0)% $22,146 46.9% $38,658 44.2% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- -------- -------
29 Significant components of the Company's deferred tax assets and liabilities at December 30, 1995 and December 31, 1994 are as follows:
1995 1994 ---------- ---------- Deferred tax assets: Allowance for doubtful accounts $15,324 $ 18,491 Allowance for the gross profit on estimated future returns 13,191 12,872 Reserve for distribution facility and store closings 6,541 7,251 Compensated absences accruals 4,523 5,053 Reserve for self insurance 1,338 960 Pension liability 5,720 184 Deferred rent obligation 159 740 Postretirement benefit obligation 3,038 3,003 Capitalized overhead in inventory 4,366 9,471 Other 3,355 2,028 ---------- ---------- Total deferred tax assets 57,555 60,053 ---------- ---------- Deferred tax liabilities: Property and equipment 49,171 47,715 Prepaid and deferred expenses 6,250 7,035 Gain on sale of accounts receivable 10,531 7,075 Earned but unbilled finance charges 5,871 3,694 Other 767 1,314 ---------- ---------- Total deferred tax liabilities 72,590 66,833 ---------- ---------- Net deferred tax liabilities $(15,035) $(6,780) ---------- ---------- ---------- ----------
9. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases office facilities, distribution centers, retail store space and data processing equipment. Lease terms generally range from 10 to 25 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 $124,183 in 1995, $100,394 in 1994 and $87,177 in 1993. 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 30, 1995:
Amount --------- 1996 $121,199 1997 $112,010 1998 $102,652 1999 $ 92,966 2000 and thereafter $446,425
30 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. 10. STOCKHOLDERS' EQUITY In December 1995, the Company announced it will discontinue payment of all cash dividends. The Company will continue to 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. On October 11, 1993, the holders of a majority of Class B voting common stock of the Company adopted an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of Class A non-voting common stock of the Company from 8,000,000 to 16,000,000 shares and Class B voting common stock from 47,000,000 to 94,000,000 shares. On October 11, 1993, the Board of Directors declared a 100% stock dividend to stockholders of record on October 22, 1993, payable on November 2, 1993. The par value of these additional shares was capitalized by a transfer from retained earnings to common stock of $6,000 for Class A non-voting and $46,571 for Class B voting common stock. All 1993 and prior year common share and per share disclosures have been restated to reflect the stock dividend. On October 22, 1993, the Board of Directors approved the retirement of the 1,027,776 shares of Class A non-voting common stock held in treasury with a carrying value of $4,553. Accordingly, common stock was reduced by $1,028 representing the par value of the shares, and additional paid-in capital was reduced by $3,525 for the difference between the carrying value of the treasury shares and the par value. On December 20, 1993, the Company issued an additional 3,600,000 shares of Class A non-voting common stock through a public offering. Accordingly, common stock was increased by $3,600 for the par value of the shares and additional paid-in capital was increased by $57,946 for the difference between the proceeds from the issuance and the par value. 31 STATEMENT OF MANAGEMENT RESPONSIBILITY We have prepared the accompanying consolidated financial statements and related information for the years 1995, 1994 and 1993. 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 auditing 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 REPORT OF INDEPENDENT AUDITORS 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 30, 1995 and December 31, 1994, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 30, 1995. 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 30, 1995 and December 31, 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 30, 1995 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Chicago, Illinois February 9, 1996 33 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) ($000s omitted, except per share amounts)
1995 First Second Third Fourth Year End - ------------------ ------------ ------------ ------------ ------------ ----------- 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 1994 - ------------------ Net sales and other revenues $ 622,134 $ 675,077 $ 649,364 $1,069,410 $3,015,985 Operating income 29,350 31,365 27,013 44,898 132,626 Net earnings $ 6,544 $ 6,504 $ 2,798 $ 9,254 $ 25,100 Net earnings per common share $ .06 $ .06 $ .03 $ .09 $ .23 Weighted average common shares outstanding 108,152,215 108,191,064 108,197,629 108,206,898 108,187,069 MARKET PRICE DATA High $ 26 3/4 $ 24 3/8 $ 19 3/4 $ 18 1/4 $ 26 3/4 Low $ 17 3/4 $ 17 $ 13 1/2 $ 8 3/4 $ 8 3/4
34 PART III ITEM 11. 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) 52 Chairman of the Board of Directors 1982 and Chairman of the Board of Directors of Otto Versand (GmbH & Co). John J. Shea (1)(3) 57 Vice Chairman of the Board of Directors, 1983 President and Chief Executive Officer Kenneth A. Bochenski 53 Senior Vice President - Operations and 1987 Information Services Thomas Bohlmann 50 Board of Directors and Director - Planning 1989 and Control of Otto Versand (GmbH & Co) Dr. Michael E. Crusemann (2)(3) 50 Board of Directors and Chief Financial 1994 Officer of Otto Versand Group (1995); Deputy Director of Finance of Otto Versand (GmbH & Co) (1985) Harold S. Dahlstrand 51 Senior Vice President - Human Resources 1994 Hans-Christoph Fischer 57 Board of Directors and Director - 1982 Merchandise of Otto Versand (GmbH & Co) Hans-Jorg Hammer 56 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) 61 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) 60 Retired. Prior to March 1991 was a member 1982 of the Board of Directors and Director - Personnel of Otto Versand (GmbH & Co)(1988) David C. Moon 53 Executive Vice President 1991 Dr. Peter Muller (1) 54 Board of Directors and Director - 1985 Advertising and Marketing of Otto Versand (GmbH & Co) 35 Dr. Peer Witten 50 Board of Directors and Director - 1991 Operations of Otto Versand (GmbH & Co)
(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, 1996. 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. EXECUTIVE OFFICERS The following persons are the executive officers of the Company:
Positions and Offices Held (all positions and offices are of the Company Name Age unless otherwise indicated) - ---------------------- --- --------------------------------------------------- John J. Shea 57 Vice Chairman (1989), President and Chief Executive Officer (1985) and Director (1983) James W. Sievers 53 Senior Vice President - Finance (1995) and Chief Financial Officer (1994); Vice President - Finance (1990); Senior Vice President - Finance and Operations and Director of Eddie Bauer (1988) Kenneth A. Bochenski (1) 53 Senior Vice President - Operations and Information Services (1987) and Director (1987) Harold S. Dahlstrand 51 Senior Vice President - Human Resources (1993); Vice President - Human Resources (1985); and Director (1994) David C. Moon (1) 53 Executive Vice President (1994); Senior Vice President- Merchandise (1990); Vice President - Merchandise (1987) and Director (1991) James J. Broderick 42 Vice President - Merchandising (1993); Divisional Vice President - Merchandise (1992); General Merchandise Manager (1991); Merchandise Manager (1988) Robert E. Conradi 52 Vice President - Merchandising (1987) 36 Davia L. Kimmey 42 Vice President - Advertising (1992); Vice President Advertising and Marketing of Eddie Bauer (1990); Divisional Vice President - Advertising of Eddie Bauer (1988) Stanley D. Leibowitz 44 Vice President - Corporate Planning (1988) Alois J. Lohn 61 Vice President - Manufacturing (1990); Vice President - Manufacturing of Jones New York (1989) Michael R. Moran 49 Vice President, Secretary & General Counsel (1988) Karl A. Steigerwald 49 Vice President - Marketing (1992); Vice President - Marketing and Information Services (1991) John R. Steele 43 Divisional Vice President and Treasurer (1995); Treasurer (1993); Corporate Finance Director of Deutsche Bank (1992); Vice President of Deutsche Bank (1988) Richard T. Fersch 46 President and Chief Operating Office of Eddie Bauer (1992); Executive Vice President - Merchandising and Marketing of Eddie Bauer (1992); Senior Vice President - Store of Eddie Bauer (1989) George D. Ittner 52 President and Chief Operating Officer - Newport News (1992); Executive Vice President and General Manager - Avon Fashions (1985)
(1) In March 1996, Kenneth A. Bochenski and David C. Moon announced they would retire from the Company. Each will resign from the Board of Directors in April 1996. 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, 1996. There is no family relationship between any of the officers. 37 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 30, 1995, December 31, 1994 and December 31, 1993 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(1) Position Year ($) ($) (#) ($) - ------------------------ ------ ------ ------- -------- --------------- John J. Shea 1995 $600,000 $ - 100,000 (2) $157,732 Vice Chairman 1994 600,000 236,250 -- 145,667 President, Chief 1993 550,000 605,500 125,000 143,218 Executive Officer and Director Richard T. Fersch 1995 415,000 466,875 50,000 68,789 President of 1994 400,000 150,000 10,000 79,741 Eddie Bauer 1993 304,225 274,560 5,000 59,886 David C. Moon 1995 270,000 - 10,000 72,387 Executive Vice 1994 240,000 70,900 5,000 55,862 President - 1993 220,000 183,000 5,000 64,923 Merchandise and Director George D. Ittner 1995 330,000 - 5,000 24,612 President of 1994 299,156 99,750 5,000 3,696 Newport News, Inc. 1993 (3) 100,000 - - - Alois J. Lohn 1995 285,000 - - 82,078 Vice President, 1994 285,000 85,500 3,000 66,291 Manufacturing 1993 275,000 168,500 3,000 80,682
(1) The following tables summarize all other compensation for the years ended December 30, 1995, December 31, 1994 and December 31, 1993: (2) The options granted to John J. Shea in 1995 represent a repricing of 100,000 of the options granted to him in 1993. (3) Newport News, Inc. was acquired by the Company in August, 1993. Compensation represented for George D. Ittner is from this time on in 1993. 38
Employer Car Profit Life Supplemental Allow- Sharing Insurance Employer Retirement ance/ Contrib- Premiums 401(K) Name Benefits Other ution Paid Matching Total ------------------- ---------- ------- ------- ------- -------- -------- 1995 John J. Shea $73,401 $38,168 $6,000 $33,413 $6,750 $157,732 Richard T. Fersch 14,515 33,514 14,010 - 6,750 68,789 David C. Moon 14,680 25,300 6,000 19,657 6,750 72,387 George D. Ittner - 17,998 - 1,994 4,620 24,612 Alois J. Lohn 22,020 25,602 6,000 21,706 6,750 82,078 1994 John J. Shea $72,154 $36,368 $6,000 $24,395 $6,750 $145,667 Richard T. Fersch 33,699 33,292 6,000 -- 6,750 79,741 David C. Moon 6,808 19,311 6,000 16,993 6,750 55,862 George D. Ittner - - - - 3,696 3,696 Alois J. Lohn 17,699 19,428 6,000 16,414 6,750 66,291 1993 John J. Shea $43,142 $33,225 $12,928 $47,177 $6,746 $143,218 Richard T. Fersch 24,810 17,294 11,036 - 6,746 59,886 David C. Moon 5,685 17,411 13,018 22,063 6,746 64,923 George D. Ittner - - - - - - Alois J. Lohn 13,317 17,644 12,928 30,047 6,746 80,682
OPTION GRANTS TABLE The following table sets forth grants of stock options to the named executive officers during the year ended December 30, 1995 and the potential realizable value of the grants assuming that the market price of the underlying stock appreciates in value from the date of grant to the end of the option term at the stipulated annual rates of 5% and 10%:
Number of Potential Realizable Securities Percent of Value at Assumed Under- Total Options Annual Rates of Stock lying Granted to Price Appreciation Options Employees Exercise Expiration for Option Name Granted in 1995 Price Date 5% ($) 10% ($) - ------------------ --------- ----------- --------- ----------- ----------- ----------- John J. Shea 100,000 36% $ 10.00 12/30/04 $628,895 $1,593,742 Richard T. Fersch 50,000 18% 7.00 12/29/05 220,113 557,810 David C. Moon 10,000 4% 7.00 12/29/05 44,023 111,562 George D. Ittner 5,000 2% 7.00 12/29/05 22,011 55,781 Alois J. Lohn - - - - - -
The stock options granted become exercisable at the rate of 20% per year from the date of the grant. 39 AGGREGATED OPTION EXERCISES IN 1995 AND DECEMBER 30, 1995 OPTION VALUES The following table sets forth shares acquired on exercise and stock option values at December 30, 1995:
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at at Acquired December 30, 1995 December 30, 1995 On Value Exercise- Unexercise- Exercise- Unexercise- Name Exercise Realized able able able able - ------------------ -------- -------- ---------- ----------- ---------- ----------- John J. Shea 20,000 $265,000 239,000 119,000 $117,460 $ 3,500 Richard T. Fersch - - 21,600 63,800 2,700 525 David C. Moon - - 48,600 21,400 45,445 875 George D. Ittner - - 1,000 9,000 - - Alois J. Lohn - - 10,600 5,400 3,350 525
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 transaction which in effect reprices 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
40 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 $600,000. 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. Semi-Monthly 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 $8.09. Net cash realized with respect to the exercise of options during the year was approximately $243,000. SPIEGEL GROUP PROFIT SHARING AND 401(K) SAVINGS PLAN The Company maintains a consolidated Profit Sharing and 401(K) Savings Plan for salaried and hourly 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 8% of the first $100 million of Spiegel consolidated earnings before income taxes, plus 6.75% of the second $100 million of Spiegel consolidated earnings before income taxes, plus 4.5% 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 1-1/2% of eligible considered compensation will be made, 41 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 voluntary contributions to the plan of up 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 who suffer a financial hardship as defined by the Internal Revenue Code may withdraw amounts from the plan while still employed. Repayment is made through payroll deductions. 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 a funded supplemental retirement plan for the benefit of its employees and those of its participating subsidiaries covered by the profit sharing and thrift plans 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 or reaching retirement age. 42 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. The Company premium payments will last only seven years. Future employee contributions will reduce the amounts advanced by the Company's premium payments. The Company may withdraw cash at the earlier of the employee's retirement, termination of employment or the time at which the policy dividends will pay the premium after the withdrawal. At termination of employment or retirement, the Company may withdraw its cash value and the employee may either surrender the policy for his portion of the cash value, receive an income from the insurance company in lieu of cash, or continue the policy in force. 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 and financial objectives. For 1995, approximately $6,340,000 was paid 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, 43 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT a. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Spiegel Holdings, Inc. (SHI) holds 99.8% 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 22, 1996, was four.
Percentage of Outstanding Number of Title of Class B Voting Name and Address Shares(1) Class Common Stock - ------------------------- ----------- --------- --------------- Spiegel Holdings, Inc.(2) 92,991,374 Class B 99.8% 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 22, 1996, 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 22, 1996. 44
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 Richard T. Fersch 25,200 21,600 * Class A Karl-August Hopmann 15,000 0 * Class A George D. Ittner 2,400 1,000 * Class A Alois J. Lohn 284,600 10,600 1.9% Class A David C. Moon 54,100 48,600 * Class A Dr. Peter Muller 10,000 0 * Class A John J. Shea 351,000 239,000 2.4% Class A All directors and 1,126,325 605,400 7.7% officers as a group (24 persons)
(1) Includes shares which may be acquired within 60 days under the Company's Stock Option Plan. * Less than 1%. 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 $3,720,000 in 1995, $4,445,000 in 1994 and $4,126,000 in 1993. 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 a 50% interest in Together, Ltd. Commission expenses incurred on this account were $5,755,000, $8,012,000 and $7,417,000 in 1995, 1994, and 1993, respectively. These expenses include certain production services, the cost of which would normally be borne by the Company, 45 including design of the product, color separation, catalog copy and layout, identification of suggested manufacturing sources and test marketing information. In September 1993, the Company announced an agreement with Otto-Sumisho, Inc. (a joint venture company of Otto Versand and Sumitomo Corporation) to form a joint venture and enter into license agreements to sell Eddie Bauer products through retail stores and catalogs in Japan. The joint venture and license agreements were executed in 1993. Three retail stores were opened in the Fall of 1994, and another four retail stores were opened during 1995. 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. To date, Eddie Bauer has contributed $8,900,000 to the project and in 1994, received a $2,500,000 licensing fee for the use of its name. Eddie Bauer received $1,717,000 and $246,000 in royalty income on retail sales during 1995 and 1994, respectively. Eddie Bauer recorded approximately $673,000 and $780,000 for its share of the equity losses of the joint venture during 1995 and 1994, respectively. 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. The joint venture and license agreements were executed on June 6, 1995. 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. 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 recorded approximately $98,000 for its share of equity losses of the joint venture during 1995. Retail stores are scheduled to open in late 1996. In addition in 1994 and 1995 Eddie Bauer participated in a limited test marketing program with Sport Scheck GmbH (a subsidiary of Otto Versand) for the sale of Eddie Bauer products in Germany and Switzerland through Sport-Scheck catalogs. This arrangement has ceased operating with the advent of the joint venture discussed above. The Company believes that the terms of the arrangement were no less favorable to Eddie Bauer than would have been the case in an arrangement with an unrelated third party. During 1995 and 1994, respectively, Eddie Bauer received approximately $296,000 and $211,000 in royalty income from Sport-Scheck. 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 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 $13,707,000 and $11,056,000 for these services in 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. These individuals and the number of shares each owns, indicated in parentheses following each name, include: 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); Kenneth A. Bochenski (4); Harold S. Dahlstrand (4); David C. Moon (4); James J. Broderick (4); Robert E. Conradi (4); Davia L. Kimmey (4); Stanley D. Leibowitz (4); Alois J. Lohn (4); Michael R. Moran (4); Georgia L. Shonk-Simmons (4); James W. Sievers (4); Karl 46 A. Steigerwald (4); George D. Ittner (4); James W. Brewster (4); Marianne A. Taylor (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); Charley 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. 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. 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K Page A. 1. FINANCIAL STATEMENTS Consolidated Balance Sheets 16 Consolidated Statements of Earnings 17 Consolidated Statements of Stockholders' Equity 18 Consolidated Statements of Cash Flows 19 Notes to Consolidated Financial Statements 20- 31 Independent Auditors' Report 33 Selected Quarterly Financial Data 34 2. FINANCIAL STATEMENT SCHEDULE Independent Auditors' Report on Schedule 50 Schedule II--Valuation and Qualifying Accounts 51 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. 48 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 Independent Auditors 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. 49 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholders Spiegel, Inc.: Under date of February 9, 1996, we reported on the consolidated balance sheets of Spiegel, Inc., and subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 30, 1995, 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 as listed in Part IV, Item 14 (A) (2). 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 9, 1996 50 SCHEDULE II SPIEGEL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED ($000s omitted)
December 30, December 31, December31, 1995 1994 1993 ---------- ----------- ---------- ACCOUNTS RECEIVABLE VALUATION ACCOUNTS ALLOWANCE FOR DOUBTFUL ACCOUNTS Balance at beginning of year $49,954 $46,855 $37,231 Charged to earnings 91,612 79,183 69,160 Reduction for receivables sold (33,600) (6,300) (1,609) Other (1) - - 695 Accounts written off, net of recoveries (67,134) (69,784) (58,622) ---------- ----------- ---------- Balance at end of year $40,832 $49,954 $46,855 ---------- ----------- ---------- ---------- ----------- ---------- ALLOWANCE FOR RETURNS Balance at beginning of year $27,762 $28,238 $23,960 Charged to earnings 274,331 266,700 259,111 Amounts written off (276,390) (267,176) (254,833) Other (2) 12,066 - - ----------- ------------ ----------- Balance at end of year $37,769 $27,762 $28,238 ---------- ----------- ---------- ---------- ----------- ----------
(1) Other represents the beginning balance of Newport News (formerly New Hampton) which was acquired in 1993. (2) Other represents an adjustment to the allowance for returns to provide for the effect of an increase in sales activity on the Company's proprietary card. 51 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 29, 1996. 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 29, 1996.
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/ Kenneth A. Bochenski Director Kenneth A. Bochenski /s/ Thomas Bohlmann Director Thomas Bohlmann /s/ Dr. Michael E. Crusemann Director Dr. Michael E. Crusemann /s/ Harold S. Dahlstrand Director Harold S. Dahlstrand /s/ David C. Moon Director David C. Moon /s/ Dr. Peter Muller Director Dr. Peter Muller
52 EX-21 2 EXHIBIT 21 EXHIBIT 21 SPIEGEL, INC. LISTING OF SUBSIDIARIES December 30, 1995
Name of Corporation Incorporated In - ----------------------------------------------- ----------------- Cara Corporation Illinois 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 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. 53 EX-23 3 EXHIBIT 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 9, 1996, relating to the consolidated balance sheets of Spiegel, Inc. and subsidiaries as of December 30, 1995 and December 31, 1994, 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 30, 1995, which reports appear in the December 30, 1995 annual report on Form 10-K of Spiegel, Inc. /S/ KPMG PEAT MARWICK LLP Chicago, Illinois March 26, 1996 54 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-30-1995 DEC-30-1995 42,302 0 821,081 37,769 572,377 1,530,277 574,725 171,791 2,273,982 666,448 1,014,692 0 0 107,747 427,826 2,273,982 2,886,225 3,184,184 1,936,366 1,936,366 0 0 103,177 (15,807) (6,326) (9,481) 0 0 0 (9,481) (0.09) (0.09)
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