-----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, AkTTARJ6QTQ5GKco/+KOhSmCM14kyaHc0Qsy0TNdEHQJ8NuXVvqAyJf7oZZ3rZPC roGeragl5WVFUuQccTVnsg== 0001047469-98-013659.txt : 19980406 0001047469-98-013659.hdr.sgml : 19980406 ACCESSION NUMBER: 0001047469-98-013659 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980403 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: SEC FILE NUMBER: 000-16126 FILM NUMBER: 98586925 BUSINESS ADDRESS: STREET 1: 3500 LACEY RD CITY: DOWNERS GROVE STATE: IL ZIP: 60515-5432 BUSINESS PHONE: 7089868800 MAIL ADDRESS: STREET 1: 3500 LACEY ROAD CITY: DOWNERS GROVE STATE: IL ZIP: 60515-5432 10-K405 1 10-K405 CONFORMED COPY UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended ....................JANUARY 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ..................... to ...................... Commission file number .......................0-16126 S P I E G E L, I N C. (Exact name of registrant as specified in its charter) DELAWARE 36-2593917 (State of Incorporation) (I.R.S. Employer Identification No.) 3500 LACEY ROAD 60515-5432 DOWNERS GROVE, ILLINOIS (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (630) 986-8800 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A NON-VOTING COMMON STOCK, PAR VALUE, $1.00 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The Class B Voting Common Stock is not publicly traded. Therefore, no market value information is readily available on this class of stock. The number of the shares of Registrant's Class A Non-Voting Common Stock and Class B Voting Common Stock outstanding on March 26, 1998 was 14,683,964 and 117,009,869, respectively. DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I ITEM 1. BUSINESS A. GENERAL DEVELOPMENT OF BUSINESS Spiegel, Inc., a Delaware corporation, was incorporated in 1965. Spiegel, Inc. and its subsidiaries are sometimes referred to collectively in this Form 10-K as the "Company" or "Spiegel." The Company and its predecessors date from 1865. Since 1905, the Company has operated as a catalog merchandiser. In 1982, the Company was purchased by Otto Versand (GmbH & Co) ("Otto Versand"), a privately-held German partnership that is one of the largest catalog merchandisers in the world, selling its products in Europe and Asia. In 1984, all of the capital stock of the Company was transferred to the partners of Otto Versand or their designees resulting in common ownership for Spiegel and Otto Versand. In this transaction, 65% of the capital stock of the Company was transferred to Spiegel Holdings, Ltd., an Illinois limited partnership, whose general partner was Dr. Werner Otto. Since 1984, additional shares of the Company's capital stock have been acquired by Spiegel Holdings, Ltd. and its successor. In 1986, Spiegel Holdings, Ltd. was converted to Spiegel Holdings, Inc., a Delaware corporation ("SHI"). Prior to the Company's 1987 initial public offering of Class A non-voting common stock, all of Spiegel's existing capital stock was converted into Class B voting common stock. SHI holds 99.9% of the Company's Class B voting common stock, affording SHI control of the Company. In 1988, the Company acquired Eddie Bauer, Inc. and certain related Canadian assets (collectively, "Eddie Bauer"). Eddie Bauer is a leading specialty retailer serving the casual lifestyle needs of men and women through the sale of high quality apparel, home furnishings and accessories through catalogs and specialty retail stores. In 1990, the Company acquired First Consumers National Bank ("FCNB"). FCNB is a special purpose bank limited to the issuance of credit cards, primarily FCNB Preferred Charge cards for use by Spiegel, Eddie Bauer and Newport News customers. In 1993, the Company acquired substantially all of the assets of New Hampton, Inc. ("New Hampton") through a bankruptcy proceeding. In 1995, New Hampton's name was changed to Newport News, Inc. ("Newport News"). Newport News is a specialty catalog company offering fashionable women's apparel and household furnishings at moderate price points. In 1997, the Company incorporated its Spiegel Catalog division as a separate subsidiary parallel to Eddie Bauer and Newport News. This was done to provide for greater clarity between the Spiegel brand name and the corporate entity. 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:
1997 1996 1995 ----- ----- ------ Apparel 79% 74% 72% Household furnishings and other merchandise 21 26 28 ---- ---- ---- 100% 100% 100% ---- ---- ----
2 The Company's household furnishings range from traditional to contemporary styles, including accent pieces, decorative accessories, bedding and bath, home electronics, window treatments and rugs. The other merchandise category includes items such as fitness and personal care equipment, toys, cameras and luggage. The following is a discussion of the major operations of the Company: Eddie Bauer, Spiegel Catalog, Newport News and FCNB: ($000s omitted on sales data) EDDIE BAUER Eddie Bauer is a leading specialty retailer serving the casual lifestyle needs of men and women through the sale of high quality private-label apparel, home furnishings and accessories. Eddie Bauer presents its retail concepts through multiple distribution channels, including 508 stores, catalogs and electronic media. Total net sales were $1,750,991 and $1,567,750 for the years ended January 3, 1998 and December 28, 1996, respectively. Nearly 75% of total net sales for Eddie Bauer are retail and outlet sales. A key strategy for Eddie Bauer is to leverage synergies between its retail and catalog channels of distribution, maximizing opportunities for cross-promotion. This strategy includes referring retail customers to catalog stations within stores for additional merchandise and size options; utilizing the catalog customer database to help identify potential store locations; using catalog space to advertise the retail concept; and utilizing retail store mailing lists to help build the catalog file. Eddie Bauer's principal retailing concept is its trademark Eddie Bauer Sportswear stores and catalogs, which feature casual apparel and accessories. Eddie Bauer also has other specialty retail concepts that serve targeted niches through retail stores and catalogs, including Eddie Bauer HOME, which offers casual home furnishings and decorative accessories; A|K|A EDDIE BAUER, featuring dress sportswear, footwear and accessories for men and women; and EBTEK, a store-within-a-store concept which provides a line of performance active wear. In September 1993, Eddie Bauer entered into a joint-venture arrangement with Otto-Sumisho, Inc. to sell its full line of Eddie Bauer sportswear products through retail stores and catalogs in Japan. There are currently 28 such stores. During 1995, Eddie Bauer entered into an agreement with Handelsgesellschaft Heinrich Heine GmbH and Sport-Scheck GmbH (both subsidiaries of Otto Versand) to form a joint venture to sell Eddie Bauer products through retail stores and catalogs in Germany. There are currently seven such stores. In 1996, Eddie Bauer entered into a joint-venture agreement with Gratten plc (a subsidiary of Otto Versand) to sell Eddie Bauer products through retail stores and catalogs in the United Kingdom. There are currently two such stores. 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, as well as arrangements with The Lane Company, a furniture manufacturer, Signature Eyewear, Inc. and Seattle's Best Coffee that commenced in 1997. EDDIE BAUER RETAIL DIVISION Eddie Bauer operates 463 retail and 45 outlet stores. There are 469 stores in the United States and 39 stores in Canada. At January 3, 1998, 34 of these stores were Eddie Bauer HOME Collection and 26 were A|K|A EDDIE BAUER stores. A typical Eddie Bauer store is approximately 6,600 gross square feet, and average net sales per gross square foot for the retail and outlet stores combined was $409 and $414 in 1997 and 1996, respectively. The retail stores are usually located in an upscale regional mall or a high traffic metropolitan location, 3 because the company believes that convenience is a primary consideration for its target customers. Most of Eddie Bauer's current retail stores are located in large metropolitan markets. Eddie Bauer has also begun to open stores 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. Net store openings in 1997 and 1996, respectively, were 65 and 32. In 1998, the Company is planning a net of approximately 50 new store openings for Eddie Bauer. The average cost of opening a typical new Eddie Bauer store in 1997, including inventory, furniture and fixtures, pre-opening expenses and net leasehold improvements, was approximately $625,000. Eddie Bauer's ability to open and operate new stores profitably is dependent on the availability of suitable store locations, the negotiation of acceptable lease terms, Eddie Bauer's financial resources and its ability to control the operational aspects and personnel requirements of its growth. EDDIE BAUER CATALOG DIVISION The Eddie Bauer catalog division distributed over 105 million catalogs in 1997 and at January 3, 1998 had approximately 3.4 million active customers (customers who have purchased within the last 18 months.) As a corollary to its retail operations, Eddie Bauer catalog concepts include its trademark Eddie Bauer Sportswear catalog, Eddie Bauer HOME and A|K|A EDDIE BAUER, as well as its largest catalog, Eddie Bauer Resource, combining all of its specialty concepts in a single catalog, including EBTEK. Eddie Bauer also actively pursues new customers within its target market through initiatives including list rentals and utilizing names of its retail store customers. SPIEGEL CATALOG Spiegel Catalog offers apparel, household furnishings and other merchandise through its various catalogs and, to a lesser extent, Ultimate Outlet retail stores. Spiegel Catalog net sales were $769,225 and $990,761 for the years ended January 3, 1998 and December 28, 1996, respectively. Sales through catalog offerings comprise approximately 85% of the total net sales. Spiegel Catalog is one of the largest catalog companies in the United States and in 1997 distributed over 154 million catalogs throughout the country. At January 3, 1998, Spiegel Catalog's customer base included 4.4 million active customers (customers who have purchased within the last 18 months). Spiegel Catalog's apparel merchandise, which represented 52% of its sales in 1997, includes private-label and branded merchandise. Private-label merchandise is developed by its in-house product design teams based on emerging fashion trends and customer research. Spiegel Catalog's household furnishings and other merchandise, which represented 48% of its sales in 1997, 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. 4 In 1997, Spiegel Catalog redefined itself in order to reconnect with its target customer, the working woman. It adopted a new positioning as "the lifestyle resource for the working woman," dedicated to creating a collection of businesses that focus on function and design to serve the living needs and taste preferences of a busy, demanding customer. To support this new positioning, Spiegel Catalog reorganized itself into strategic business units, including Portfolio, "OnView" and "elements exclusively Spiegel", each focused on satisfying the lifestyle needs of customers who have different style preferences as identified through extensive research. This new structure enables Spiegel Catalog to understand its customer better and respond to her changing needs more effectively. Catalogs include the trademark semiannual Big Book, the primary vehicle for Portfolio's branded and private-label product, as well as specialty catalogs specific to "OnView" and "elements exclusively Spiegel" which emphasize private-label offerings. NEWPORT NEWS Newport News, acquired by the Company in August 1993, is a specialty catalog company whose catalogs offer fashionable, moderately priced women's apparel as well as home textiles. Newport News' net sales were $315,081 for the year ended January 3, 1998, as compared to $292,044 for the year ended December 28, 1996. In 1997, Newport News mailed 169 million catalogs to active and prospective customers. Newport News had a customer base of 3.9 million active customers (customers who have purchased within the last 18 months) at January 3, 1998. 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 or Newport News 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 headquarters located in Beaverton, Oregon. FCNB also issues MasterCard credit cards, including the co-branded Spiegel MasterCard and the Eddie Bauer MasterCard. At January 3, 1998, customer receivables serviced were approximately $1,684,000, of which 83% were Preferred Charge receivables and 17% were FCNB MasterCard receivables. Approximately 35% of the Company's 1997 total net sales were made on the FCNB Preferred Charge card including approximately 64% of Spiegel Catalog net sales, 20% of Eddie Bauer's net sales, and 45% of Newport News' net sales. The lower percentage of Eddie Bauer sales made on the Preferred Charge card is attributable primarily to the relatively higher percentage of retail store sales at Eddie Bauer. Catalog sales generally have a higher percentage of sales made on credit compared to retail store sales. Deterioration in the credit market, increases in account charge-offs and interest rate fluctuations all represent risks to the profitability of the Company's credit operations. PRODUCT DEVELOPMENT AND SOURCING The Company's product development and sourcing teams are a significant element of its private-label merchandise strategy. The Company selects manufacturers based on their ability to produce high quality product on a cost-effective basis. The Company's product 5 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 4,100 suppliers, none of which supplied as much as 5% of the merchandise purchased during 1997. A significant amount of the dollar value of merchandise purchased by the Company is imported directly from the Far East and Europe. Consequently, the Company is subject to the risks generally associated with conducting business abroad. The Company's business could be affected by economic events or political instability that might affect imports, including duties, quotas and work stoppages. To date, these factors have not caused any material disruption of the Company's operations. As with other companies that denominate purchases in dollars, declines in the dollar relative to foreign currencies could over time increase the cost to the Company of merchandise purchased in foreign countries, which could adversely affect the Company's results of operations. The Company is unable to predict the effect, if any, of the above; however, the Company believes this risk exists for many other retailers. LICENSES AND TRADEMARKS The Company utilizes its own trademarks and tradenames including "Spiegel", "Eddie Bauer", "A|K|A EDDIE BAUER", "Eddie Bauer HOME", "EBTEK" and "Newport News." The Company is also licensed to sell goods under the "Together!" and "Apart" labels. With the exception of the names "Spiegel", "Eddie Bauer", "A|K|A EDDIE BAUER", "Eddie Bauer HOME", "EBTEK", "Newport News", "Together!" and "Apart", 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 earnings. 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. 6 EMPLOYEES During 1997, the Company employed between approximately 13,000 and 16,900 full-time equivalent employees, depending on the time of year, reflecting the seasonality of the Company's business and the variations in its workforce during the year. At February 28, 1998, the Company employed approximately 12,400 full-time equivalent employees. Spiegel is a party to two collective bargaining agreements with the Warehouse, Mail Order, Office, Technical and Professional Employees Union, Local 743, affiliated with the International Brotherhood of Teamsters, Chauffers, Warehousemen and Helpers of America ("Local 743"). Local 743 represents approximately 180 full-time headquarters employees under an agreement that expires on February 28, 1999. Approximately 60 full-time equivalent Chicago area Spiegel Catalog outlet store employees are covered by a separate agreement with Local 743 which expires on May 31, 2000. The Company considers its relations with its employees to be good and has never experienced any material interruption of operations due to labor disagreements with its employees. ITEM 2. PROPERTIES The Company's corporate headquarters is located in leased office space in Downers Grove, Illinois. In addition, all of the Company's retail store locations are leased, with the exception of a downtown Chicago Eddie Bauer store. A typical store lease is for a term of 10 years, with options for renewal. The Company's Groveport, Ohio catalog fulfillment and distribution facility, which was constructed on land owned by the Company, was completed in 1994 and consolidates the majority of catalog fulfillment and distribution functions of Spiegel Catalog and Eddie Bauer. In 1995, the Company purchased a four million square-foot facility in Columbus, Ohio, which replaced its previous retail distribution facilities and performs certain catalog distribution functions. An additional retail distribution facility is leased in Toronto, Canada to support the Eddie Bauer retail stores located in Canada. Eddie Bauer occupies office space in nine buildings located in and around Redmond, Washington, two of which are owned and seven of which are under lease. Spiegel leases a customer order center in Wichita, Kansas and a customer service facility in Rapid City, South Dakota. 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 in Hampton, Virginia. Its distribution function is performed in an owned facility in Newport News, 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. 7 ITEM 3. LEGAL PROCEEDINGS The Company is routinely involved in a number of legal proceedings and claims that cover a wide range of matters. In the opinion of management, the outcome of these matters is not expected to have any material adverse effect on the consolidated financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. MARKET INFORMATION The Class A Non-Voting Common Stock is traded on NASDAQ's National Market System. The ticker symbol is SPGLA. Daily trading information is listed in the stock tables carried by major newspapers as "SPIEGEL." See Item 8 "Selected Quarterly Financial Data" for information on the high and low sales prices of the Class A Non-Voting Common Stock. On March 26, 1998, the closing market price of the Class A Non-Voting Common Stock, as quoted on the NASDAQ National Market System, was $5 11/16 per share. B. HOLDERS There were approximately 10,000 Class A Non-Voting Common Stockholders as of March 26, 1998. The Company believes that certain of the outstanding shares of Class A Non-Voting Common Stock are held by nominees for an unknown number of beneficial stockholders. The Class B Voting Common Stock of the Company is privately held and is not publicly traded. As of the date hereof, there were two Class B Voting Common Stockholders. C. DIVIDENDS In December 1995, the Company discontinued payment of all cash dividends. Certain restrictions on dividend payments exist under the Company's debt covenants based on financial results. The Company will evaluate its dividend policy on an ongoing basis. No cash dividends were paid in the years ended January 3, 1998 and December 28, 1996. 9 ITEM 6. FIVE-YEAR SELECTED FINANCIAL DATA ($000s omitted, except per share amounts)
1997 1996 1995 1994 1993 (2) ------------ ----------- ----------- ---------- ------------ EARNINGS DATA Net sales and other revenues $ 3,056,834 $3,014,620 $3,184,184 $3,015,985 $2,596,147 Earnings (loss) before income taxes (1) (49,406) (21,276) (15,807) 47,246 87,363 Net earnings (loss) $ (33,021) $ (13,389) $ (9,481) $ 25,100 $ 48,705 Net earnings (loss) per common share (3) Basic $ (.28) $ (.12) $ (.09) $ .23 $ .47 Diluted $ (.28) $ (.12) $ (.09) $ .23 $ .46 Cash dividends per common share $ - $ - $ .20 $ .20 $ .20 BALANCE SHEET AND CASH FLOW DATA Current assets $ 1,244,823 $1,231,535 $1,559,909 $1,928,172 $1,606,158 Total assets 1,949,554 1,945,625 2,273,982 2,560,287 2,210,591 Current liabilities 634,729 695,396 666,448 628,346 627,247 Long-term debt, excluding current maturities 713,750 676,656 1,014,692 1,300,364 971,683 Stockholders' equity $ 568,093 $ 521,549 $ 535,573 $ 579,217 $ 567,485 Net additions to property and equipment $ 55,047 $ 45,698 $ 131,229 $ 84,191 $ 104,489 Depreciation and amortization $ 88,062 $ 95,278 $ 79,047 $ 60,555 $ 45,766
(1) Earnings before income taxes 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 the purchase date forward. (3) Net earnings per common share has been restated in accordance with SFAS No. 128, "Earnings per Share." 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ($000s omitted) RESULTS OF OPERATIONS 1997 COMPARED WITH 1996 Net sales for the year ended January 3, 1998 were $2,835,297 compared to $2,850,555 for the year ended December 28, 1996. Retail sales of $1,352,564 increased 10% and represent 48% of total net sales compared to 43% in 1996. This increase was driven by Eddie Bauer, where retail sales increased 10% over last year due to a higher number of stores open in 1997. Eddie Bauer ended the year with 508 stores compared to 443 at year end 1996. Comparable store sales declined 3% from 1996 levels resulting primarily from weakness in fall season sales due to lower than expected demand for cold-weather-related products. Total Company catalog sales of $1,482,733 declined 8% from the previous year. The decrease was driven by a 24% decline in Spiegel Catalog's sales, which were affected by lower catalog productivity and reduced circulation, as well as by the continued effect of tightened credit policies on the Company's proprietary credit card. Catalog circulation at Spiegel Catalog was reduced by more than 20% compared to 1996, with further circulation reductions planned for 1998. Spiegel Catalog repositioned its operations in 1997 into strategic business units to create more focused, targeted catalog offerings and improve operating performance. Somewhat offsetting the Spiegel Catalog decline were catalog sales improvements at Newport News and the continued growth of Eddie Bauer's catalog operations. For the year ended January 3, 1998, finance revenue was $178,293 compared to $111,274 for the year ended December 28, 1996. This increase was due to an incremental pretax gain of $75,141 on the sale of customer receivables recognized pursuant to SFAS No. 125. Finance revenue excluding the gain declined compared to 1996 due to a significantly lower level of average owned receivables, driven in part by an increase in the average level of sold customer receivables, as well as decreases in sales on the Company's proprietary credit card. Other revenue, which includes such items as handling charge income and royalty income, was $43,244 and $52,791 for the years ended January 3, 1998 and December 28, 1996, respectively. This decrease was due in part to the sale of the Company's information and technology subsidiary in the first quarter of 1996, as well as declines in other revenue categories at Spiegel Catalog which were driven by the lower catalog productivity. The gross profit margin on net sales was 31.5% for the year ended January 3, 1998 compared to 34.1% for the year ended December 28, 1996. The decline in margin rate from 1996 was driven by Spiegel Catalog, which experienced a higher level of markdowns as part of its continuing efforts to reposition its merchandise assortment and eliminate products that do not fit within the company's new merchandising plans. Through its repositioning, Spiegel Catalog will strengthen its private-label offerings and develop a more profitable product mix aimed at improving margins. Eddie Bauer contributed to the decline in gross margin as well with increased promotional activity in the fall season due largely to lower than expected demand for cold-weather-related products. The Company effectively managed inventory risk, ending the year with $508,756 of inventory, only 1% over the 1996 year-end level despite below-plan sales and the addition of 65 Eddie Bauer retail stores. Selling, general and administrative expenses as a percentage of total revenues were 35.9% and 35.7% for the years ended January 3, 1998 and December 28, 1996, respectively. Spiegel Catalog experienced a higher expense ratio in 1997, as a result of lower productivity from catalog offerings as well as approximately $16 million in expenses associated with repositioning and restructuring activities. These activities included a 15% reduction in the Spiegel Catalog headquarter's work force, the closing of two 11 telephone sales centers, and the consolidation of certain operational units into the corporate headquarters. The negative impact Spiegel Catalog had on the ratio was offset by greater expense leverage from Newport News and Eddie Bauer. Newport News generated a significant improvement in catalog productivity, while Eddie Bauer realized better expense leverage in total. In addition, the ratio benefited from lower charge-offs realized in the Company's credit division and an incremental pretax gain of $75,141 on the sale of customer receivables recognized in 1997 pursuant to SFAS No. 125. By comparison, the 1996 ratio was favorably impacted by the reversal of approximately $24 million of the provision for doubtful accounts on sold customer receivables, as well as the gain of approximately $8 million realized on the sale of the Company's information technology subsidiary in the first quarter. Interest expense was $68,098 and $82,677 for the years ended January 3, 1998 and December 28, 1996, respectively. This decrease was due primarily to lower average debt levels partially offset by a slightly higher effective interest rate compared to 1996. Average debt in 1997 was $877,698, compared to $1,089,056 in 1996. The decrease in average debt resulted from a lower level of owned customer receivables, as well as the $69,972 net proceeds from the issuance of Class B voting stock in March 1997. The effective tax rate was 33.2% for the year ended January 3, 1998 compared to 37.1% for the same period last year. The Company assesses its effective tax rate on a continual basis. Different earnings levels in the Company's individual business units had a profound impact on the consolidated state rate. 1996 COMPARED WITH 1995 For the years ended December 28, 1996 and December 30, 1995, net sales were $2,850,555 and $2,886,225, respectively. Retail sales comprised 43% and 40% of total net sales for the Company for the years 1996 and 1995, respectively. Eddie Bauer's retail store sales in 1996 were 9% higher than in 1995, primarily as a result of an increase in the average number of stores. Comparable store sales in 1996 were flat, due primarily to the effects of reductions in certain merchandise lines and less promotional activity. For the year ended December 28, 1996, total Company catalog sales comprised 57% of total net sales and were 6% lower than the catalog sales for the year ended December 30, 1995. This decrease was the result of planned catalog circulation reductions made to reduce the impact of previous paper price increases. Additionally, tighter credit policies and lower productivity rates on certain catalog media at Spiegel Catalog contributed to the decline. Finance revenue for the year ended December 28, 1996 was $111,274 compared to $226,941 for the same period of 1995. This decline was mainly the result of significantly lower average owned receivables due to sales of customer receivables. Other revenue was $52,791 and $71,018 for the years ended December 28, 1996 and December 30, 1995, respectively. Other revenue includes such items as handling charge income and consulting revenue from the Company's information technology subsidiary. The decrease in other revenue was primarily attributable to a decline in consulting revenue due to the sale of the Company's information technology subsidiary in the first quarter of 1996. The gross profit margin on net sales increased to 34.1% from 32.9% for the years ended December 28, 1996 and December 30, 1995, respectively. Significant margin improvement occurred at Eddie Bauer as a result of substantially less clearance and promotional markdown activity in the 1996 period compared to the 1995 period. Slightly offsetting this increase, Spiegel Catalog experienced lower margins in 1996 due to incremental markdowns, especially in the fourth quarter, that were taken to liquidate merchandise that no longer fit the targeted style assortment planned for the future. Improved inventory management was a focus for the Company overall. The total inventory balance was down 12% 12 at December 28, 1996 compared to December 30, 1995 despite the addition of 32 Eddie Bauer stores. Selling, general and administrative expenses as a percentage of total revenues were 35.7% and 36.4% for the years ended December 28, 1996 and December 30, 1995, respectively. The Company continued to pursue cost saving measures in all areas of its businesses in 1996. The lower selling, general and administrative expense ratio reflected reductions in several operating units' expenses as well as efficiencies being realized from the Company's fulfillment and distribution facilities. Additionally, activities in the Company's credit business helped improve the selling, general and administrative expense ratio. In general, the Company's credit business has a higher selling, general and administrative expense ratio than other areas of the Company and was experiencing higher charge-offs. However, as a result of the receivable sales, finance revenues and selling, general and administrative expenses for the credit business decreased. This had a favorable impact on the Company's overall ratio. The 1996 ratio was also favorably impacted by the gain of approximately $8 million realized on the sale of the Company's information technology subsidiary in the first quarter and by approximately $24 million on the reversal of the provision for doubtful accounts on the customer receivables sold in 1996. By comparison, the 1995 ratio was favorably impacted by the effects of customer receivable sales including the $18,637 gain recognized and a reversal of approximately $34 million of the provision for doubtful accounts on the receivables sold. The Company recorded a $39,000 nonrecurring charge in the third quarter of 1993, to provide for the estimated impact of closing certain of the Company's existing catalog distribution facilities. The Company added $2,750 and $2,400 in 1996 and 1995, respectively, for additional costs in excess of the original reserve. Through 1996, approximately $41,650 was used for certain termination benefits, the impact on net periodic pension cost, other incremental costs incurred for closing the existing facilities and the write-off of fixed assets. The remaining balance of the reserve was used in 1997. Interest expense was $82,677 and $103,177 for years ended December 28, 1996 and December 30, 1995, respectively. This decrease was mainly due to lower average debt levels resulting from a higher level of customer receivables sold and the Company's lower inventory levels. The effective tax rate was 37.1% for the year ended December 28, 1996 compared to 40.0% for the same period of 1995. This decrease is the result of a change in the relative impact of the amortization of nondeductible goodwill as a percentage of loss before taxes and the effect of tax credits. LIQUIDITY AND CAPITAL RESOURCES The Company has historically met its operating and cash requirements through funds generated from operations, the sale of customer accounts receivable and the issuance of debt and common stock. Total customer receivables sold were $1,292,713 at January 3, 1998 and $1,463,730 at December 28, 1996. Net cash used in operating activities was $61,535 for the year ended January 3, 1998 compared to net cash provided by operations of $470,614 for the year ended December 28, 1996. All categories contributed to the net decrease in cash provided from operations over the comparable period last year. However, receivable and inventory levels, as well as the effect of receivable sales, were the overriding factors. Without the effects of the sale of customer receivable activity, net cash provided by operations would have been $109,482 and $186,884 for the years ended January 3, 1998 and December 28, 1996, 13 respectively. Reductions in the proprietary credit card portfolio drove the source of cash provided in 1997. Net additions to property and equipment were $55,047 for the year ended January 3, 1998 compared to $45,698 for the same period last year. The capital spending in both the 1997 and 1996 periods was primarily related to the continued Eddie Bauer retail store expansion and remodeling. In 1998, additions to property and equipment will continue to be primarily for Eddie Bauer retail store expansion. As of January 3, 1998 total debt was $816,650 compared to $785,948 as of December 28, 1996. Total outstanding borrowing under the Company's revolving credit agreement was $105,000 at January 3, 1998, with a remaining availability of $410,000. There was no borrowing under the revolving credit agreement at December 28, 1996. In March 1997, the Company issued 10.3 million shares of Class B voting common stock for $70,000 to its majority shareholder, Spiegel Holdings, Inc. The Company issued an additional 13.5 million shares of Class B voting common stock for $70,000 to Spiegel Holdings, Inc. in March 1998. The proceeds from these issuances, net of related costs, are being used to fund working capital and investing needs, including the continued expansion of Eddie Bauer. In March 1994 and December 1995, Newport News issued shares of non-voting preferred stock to certain directors and executive officers of the Company, its subsidiaries, and Otto Versand. The redemption price of the preferred stock prior to December 31, 1997 ranged from $40 to $43 per share. Subsequent to December 31, 1997, the redemption price is fair market value. As of January 3, 1998, 92 shares remain outstanding. All shares must be redeemed by December 31, 1999. The Company believes that its cash on hand, together with cash flows anticipated to be generated from operations, borrowings under its existing credit facilities, sales of customer receivables and other available sources of funds, will be adequate to fund the Company's capital and operating requirements for the foreseeable future. YEAR 2000 The Company is currently conducting a comprehensive review of its internal systems to mitigate the risks associated with the Year 2000 compliance issue. This review includes the inventory of all systems requiring conversion programming, the coordination of internal personnel to identify all exposures, and the assessment of implications of noncompliance in the organization. Program conversion of systems is under way, with testing being completed as systems are converted. In order to simulate year-end 1999 processing for all operating systems, all internal software modifications will be completed by December 31, 1998. This timetable affords the Company one year to conduct any follow-up testing required, test interfaces between systems and address any unforeseen system failures. While the Company is acting prudently in addressing the Year 2000 issue, the failure of a third party to be compliant could potentially have an adverse affect on the Company's ability to operate. Plans are in place to communicate to our critical vendors and suppliers our expectations that they attain Year 2000 compliance in a timely manner. Contingency plans will be in place by year-end 1998 to provide alternate solutions if the progress of certain significant vendors/suppliers is questionable so as not to jeopardize our ability to service our customers. The Company believes it has taken and will continue to take the appropriate steps to minimize the threat of any material technical failure having a significant impact on 14 operations. However, it is impossible for any company to ensure Year 2000 compliance. While it is certainly possible that there may be some litigation arising from the Year 2000 conversion, the Company does not anticipate, nor can it estimate, any costs associated with such litigation at this time. The Company is currently looking into the availability and cost of insurance covering both business interruption and litigation arising from the Year 2000 conversion. The costs associated with this effort are expected to range between $7,000 and $10,000. These costs are expensed as incurred, with amounts associated with this effort totaling approximately $1.2 million through January 3, 1998. ACCOUNTING STANDARDS SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997, establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company is evaluating the Statement's provisions to conclude how it will present comprehensive income in its financial statements. The Company will adopt the new standard, as required, in fiscal year 1998. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the way public business enterprises report financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to stockholders. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," standardizes the disclosure requirements for pensions and other postretirement benefit plans. These standards are effective for fiscal years beginning after December 15, 1997. The Company is evaluating these new Statements' provisions to determine the disclosures required in its financial statements, if any. The Company will adopt SFAS No. 131 and SFAS No. 132 in fiscal year 1998. FORWARD-LOOKING STATEMENTS This report contains statements which are forward-looking statements within the meaning of applicable federal securities laws and are based upon the Company's current expectations and assumptions. Such forward-looking statements are subject to a number of risks and uncertainties which could cause actual results to differ materially from those anticipated including, but not limited to, financial strength and performance of the retail and direct marketing industry, changes in consumer spending patterns, dependence on the securitization of accounts receivable to fund operations, state and federal laws and regulations related to offering and extending credit, the impact of competitive activities, inventory risks due to shifts in the market demand, risks associated with collections on the Company's credit card portfolios, interest rate fluctuations, postal rate, paper or printing cost increases, and the success of planned merchandising, advertising, marketing, and promotional campaigns, as well as other risks indicated in other filings with the Securities and Exchange Commission such as the Company's most recent Form 10-K. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS ($000s omitted, except per share amounts)
January 3, December 28, 1998 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 47,582 $ 86,917 Receivables, net 563,376 505,242 Inventories 508,756 502,209 Prepaid expenses 89,137 84,634 Refundable income taxes 6,064 16,991 Deferred income taxes 29,908 35,542 ----------- ----------- Total current assets 1,244,823 1,231,535 Property and equipment, net 394,822 399,910 Intangible assets, net 159,016 166,275 Other assets 150,893 147,905 ----------- ----------- $ 1,949,554 $ 1,945,625 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of debt $ 102,900 $ 89,292 Indebtedness to related parties - 20,000 Accounts payable 238,723 270,973 Accrued liabilities: Salaries and wages 37,305 36,636 General taxes 120,345 127,170 Allowance for returns 37,094 41,691 Other accrued liabilities 98,362 109,634 ----------- ------------ Total current liabilities 634,729 695,396 Long-term debt, excluding current maturities 713,750 676,656 Deferred income taxes 32,982 52,024 ----------- ------------ Total liabilities 1,381,461 1,424,076 ----------- ------------ Stockholders' equity: Class A non-voting common stock, $1.00 par value; authorized 16,000,000 shares; 14,660,464 shares issued and outstanding at January 3, 1998; 14,618,404 shares issued and outstanding at December 28, 1996 14,660 14,618 Class B voting common stock, $1.00 par value; authorized 104,000,000 shares; 103,483,298 shares issued and outstanding at January 3, 1998; 93,141,654 issued and outstanding at December 28, 1996 103,483 93,142 Additional paid-in capital 271,645 211,828 Minimum pension liability - (9,365) Retained earnings 178,305 211,326 ----------- ------------ Total stockholders' equity 568,093 521,549 ----------- ------------ $ 1,949,554 $ 1,945,625 ============ ===========
See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF EARNINGS Years ended ($000s omitted, except per share amounts)
January 3, December 28, December 30, 1998 1996 1995 ------------ ------------ ------------ NET SALES AND OTHER REVENUES Net sales $ 2,835,297 $ 2,850,555 $ 2,886,225 Finance revenue 178,293 111,274 226,941 Other revenue 43,244 52,791 71,018 ------------ ------------ ------------ 3,056,834 3,014,620 3,184,184 COST OF SALES AND OPERATING EXPENSES Cost of sales, including buying and occupancy expenses 1,941,307 1,877,859 1,936,366 Selling, general and administrative expenses 1,096,835 1,075,360 1,160,448 ------------ ------------ ------------ 3,038,142 2,953,219 3,096,814 Operating income 18,692 61,401 87,370 Interest expense 68,098 82,677 103,177 ------------ ------------ ------------ Earnings (loss) before income taxes (49,406) (21,276) (15,807) Income tax provision (benefit) (16,385) (7,887) (6,326) ------------ ------------ ------------ Net earnings (loss) $ (33,021) $ (13,389) $ (9,481) ============ ============ ============ EARNINGS PER COMMON SHARE Net earnings (loss) per common share Basic and diluted $ (.28) $ (.12) $ (.09) ============ ============ ============
See accompanying notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ($000s omitted, except per share amounts)
Class A Class B Additional Minimum non-voting voting paid-in Retained pension Total common stock common stock capital earnings liability ----------- ------------ ------------ ----------- ----------- ----------- BALANCES AT DECEMBER 31, 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 Class A common shares 243 40 - 203 - - Purchase & retirement of 500,000 Class A common shares (4,742) (500) - (4,242) - - Adjustment to minimum pension liability (8,084) - - - - (8,084) ---------- ---------- --------- ---------- ---------- -------- BALANCES AT DECEMBER 30, 1995 535,573 14,605 93,142 211,761 224,715 (8,650) Net loss (13,389) - - - (13,389) - Issuance of 13,560 Class A common shares 80 13 - 67 - - Adjustment to minimum pension liability (715) - - - - (715) ---------- ---------- --------- ---------- ---------- -------- BALANCES AT DECEMBER 28, 1996 521,549 14,618 93,142 211,828 211,326 (9,365) Net loss (33,021) - - - (33,021) - Issuance of 42,060 Class A common shares 228 42 - 186 - - Issuance of 10,341,644 Class B common shares 69,972 - 10,341 59,631 - - Adjustment to minimum pension liability 9,365 - - - - 9,365 ---------- ---------- --------- ---------- ---------- -------- BALANCES AT JANUARY 3, 1998 $ 568,093 $ 14,660 $ 103,483 $ 271,645 $ 178,305 $ 0 ========== ========== ========= ========== ========== ========
See accompanying notes to consolidated financial statements. 18 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended ($000s omitted)
January 3, December 28, December 30, 1998 1996 1995 ------------ ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $ (33,021) $ (13,389) $ (9,481) Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 88,062 95,278 79,047 Net gain on sale of receivables (75,141) - (18,637) Change in assets and liabilities, net of effects of acquisition: Increase (decrease) in sold customer receivables (171,017) 283,730 700,000 (Increase) decrease in receivables, net 188,024 (26,493) (316,752) (Increase) decrease in inventories (6,547) 70,168 25,404 (Increase) decrease in prepaid expenses (4,504) 16,691 (20,354) Increase (decrease) in accounts payable (32,250) 14,446 (9,224) Increase (decrease) in accrued liabilities (6,417) 15,644 2,514 Increase (decrease) in income taxes (8,724) 14,539 8,976 ---------- ---------- --------- Total adjustments (28,514) 484,003 450,974 ---------- ---------- --------- Net cash provided by (used in) operating activities (61,535) 470,614 441,493 ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net additions to property and equipment (55,047) (45,698) (131,229) Net additions to other assets (23,655) (39,965) (21,002) ---------- ---------- --------- Net cash used in investing activities (78,702) (85,663) (152,231) ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of debt 105,000 111,250 116,250 Payment of debt (74,298) (451,666) (370,570) Dividends paid - - (21,580) Purchase and retirement of common shares - - (4,742) Issuance of Class A common shares 228 80 243 Issuance of Class B common shares 69,972 - - ---------- ---------- --------- Net cash provided by (used in) financing activities 100,902 (340,336) (280,399) ---------- ---------- --------- Net change in cash and cash equivalents (39,335) 44,615 8,863 Cash and cash equivalents at beginning of year 86,917 42,302 33,439 ---------- ---------- --------- Cash and cash equivalents at end of year $ 47,582 $ 86,917 $ 42,302 ========== ========== ========= Supplemental cash flow information Cash paid during the year for: Interest $ 69,806 $ 84,428 $ 104,426 ---------- ---------- --------- Income taxes $ 16,262 $ 6,500 $ 6,092 ---------- ---------- ---------
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 leading international, specialty retailer marketing fashionable apparel and home furnishings through catalogs, more than 500 specialty retail stores and innovative electronic shopping platforms. The Company also operates a special purpose bank which offers a proprietary credit card to the Company's customers as well as MasterCard credit programs. 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 intercompany transactions and accounts have been eliminated in consolidation. The Company's joint venture investments in Germany, Japan and the United Kingdom with affiliated companies of Otto Versand, a related party, are accounted for using the equity method as they are less than 50 percent owned. The results of these entities are not material to the consolidated Company. FISCAL YEAR The Company operates and reports financial results on a 52/53 week fiscal year ending on the Saturday closest to December 31. Fiscal years 1996 and 1995 each consisted of 52 weeks and ended on December 28, 1996 and December 30, 1995, respectively. Fiscal year 1997 consisted of 53 weeks and ended on January 3, 1998. REVENUE RECOGNITION The Company records revenue at the point of sale for retail stores and at the time of shipment for catalog sales. The Company provides for returns at the time of sale based upon projected merchandise returns. Finance revenue on customer installment accounts receivables owned is recorded as income when earned. The Company recognizes gains on the sale of customer receivables in accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." These gains are recorded as Finance Revenue in the Consolidated Statements of Earnings. CASH EQUIVALENTS Cash equivalents consist principally of highly liquid institutional money market investments with original maturities of three months or less. MARKETABLE SECURITIES Marketable securities consist of the retained certificates issued by a trust in conjunction with the securitization of the Company's customer receivables. These debt securities are classified as trading and stated at market value. 20 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 January 3, 1998 and December 28, 1996 were $37,988 and $52,795, respectively, and are included in prepaid expenses. All other advertising costs for both catalog and retail operations are expensed as incurred. Total advertising expense in the fiscal years 1997, 1996 and 1995 was $454,240, $448,700 and $439,380, respectively. STORE PRE-OPENING COSTS Pre-opening and start-up costs for new stores are charged to operations as incurred. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. Depreciable lives range from 5 to 40 years for buildings and improvements and 3 to 10 years for furniture and equipment. Leasehold improvements are amortized over the lesser of the term of the lease or asset life. INTANGIBLE ASSETS Intangible assets represent principally trademarks and the excess of cost over the fair market value of net assets of businesses purchased. On an annual basis, the Company amortizes these intangibles on a straight-line basis in relation to the anticipated benefits to be derived from the businesses acquired, not to exceed 40 years. Total accumulated amortization of these intangibles was $65,777 and $70,272 at January 3, 1998 and December 28, 1996, respectively. Management periodically considers whether there has been a permanent impairment in the value of goodwill and trademarks by evaluating various factors, including current and projected future operating results and undiscounted cash flows. The Company does not believe there has been any material impairment in the carrying value of its goodwill and trademarks. DERIVATIVE FINANCIAL INSTRUMENTS The Company's current derivative positions consist of interest rate swaps. The accounting treatment for these interest rate swaps is to record the net interest paid as interest expense on a current basis. Gains or losses resulting from market movements are not recognized. SYSTEMS DEVELOPMENT COSTS Significant systems development costs are capitalized and amortized on a straight-line basis over a three-year period. Costs, net of amortization, included in other assets as of January 3, 1998 and December 28, 1996 were $26,726 and $29,511, respectively. Related amortization expense recognized in fiscal years 1997, 1996 and 1995 was $16,038, $15,809 and $8,887, respectively. Costs associated with the Company's Year 2000 remediation efforts are expensed as incurred. 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). 21 STOCK BASED COMPENSATION The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations as discussed in Note 5 to the consolidated financial statements. INCOME TAXES Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is included in the consolidated federal income tax return of Spiegel, Inc.'s majority shareholder, Spiegel Holdings, Inc. EARNINGS PER SHARE Earnings per share are calculated and presented in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic and diluted earnings per share are computed 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 1997 presentation. 22 2. RECEIVABLES Receivables consist primarily of proprietary credit card receivables generated in connection with the sale of the Company's merchandise as well as receivable balances generated on the MasterCard credit cards offered by the Company's bank subsidiary. At January 3, 1998, customer receivables serviced were $1,683,783, of which 83% related to the Company's proprietary credit card. The Company's customer base is diverse in terms of both geographic and demographic coverage. Due to the revolving nature of the credit card portfolio, management believes that the current carrying value of credit card receivables approximates fair value. The average interest rate collected on the receivables approximates the current market rates on new accounts. The allowance for credit card losses is based upon management's evaluation of the collectability of credit card receivables after giving consideration to current delinquency data, historical loss experience and general economic conditions. This allowance is continually reviewed by management; however, the actual losses incurred may differ from these estimates. Receivables at January 3, 1998 and December 28, 1996 consist of the following:
1997 1996 ------------- ------------- Composition of customer receivable portfolio: Receivables serviced $ 1,683,783 $ 1,865,040 Receivables sold (1,292,713) (1,463,730) ------------- ------------ Receivables owned 391,070 401,310 ------------- ------------ Composition of receivables owned: Retained certificates 145,732 188,299 Receivables with no certificates issued 245,338 213,011 ------------- ------------ Receivables owned 391,070 401,310 Less allowance for returns on proprietary credit card sales (21,247) (32,243) Less allowance for doubtful accounts (11,757) (12,270) Other trade receivables, net 205,310 148,445 ------------- ------------ Receivables, net $ 563,376 $ 505,242 ============= ============
The Company routinely transfers portions of its customer receivables to trusts which, in turn, sell certificates representing undivided interests in the trusts to investors. The receivables are sold without recourse, and accordingly, no bad debt reserve related to the net receivables sold is maintained. Cash flows generated from the receivables in the trusts are, to the extent allocable to the investor percentage, applied to payment of interest on the certificates, reinvestment in additional receivables to maintain the investors' percentage, and payment of servicing fees to the Company. Excess cash flows revert to the Company. The Company owns the remaining undivided interest in the trusts not represented by the certificates and will continue to service all receivables for the trusts. In addition to the certificates sold, an additional class of investor certificates, currently held by the Company, was issued by the trust in certain transactions. The aggregate principle balances for these retained certificates were $145,732 and $188,299 as of January 3, 1998 and December 28, 1996, respectively. These retained certificates, 23 classified as trading and stated at market value, are included in the Company's balance sheet under "Receivables, net." Cash flows generated from the receivables in the trust are expected to be adequate to cover any losses which may be incurred on uncollectible amounts associated with the receivables supporting these retained certificates. Therefore, no bad debt reserve is maintained on these balances as of January 3, 1998. The Company also held a total of $59,592 at January 3, 1998 and $55,670 at December 28, 1996 in reserve funds used as credit enhancement for related receivables sold. Restricted cash accounts have been maintained for these reserve funds, none of which has been utilized as of January 3, 1998. The value of these funds is included in the Company's balance sheet under "Other assets." As a result of these transactions, finance revenue increased by $18,637 in 1995. In 1997, the Company adopted SFAS No. 125, which requires gain recognition based on the revolving nature of sold customer receivables. Incremental gains of $75,141 were recorded as finance revenue in 1997 pursuant to SFAS No. 125. 3. PROPERTY AND EQUIPMENT Property and equipment at January 3, 1998 and December 28, 1996 consist of the following:
1997 1996 ----------- ----------- Land $ 19,813 $ 20,178 Buildings and improvements 151,297 142,712 Equipment 242,774 233,554 Leasehold improvements 169,401 155,309 ----------- ----------- 583,285 551,753 Less accumulated depreciation and amortization (205,534) (164,135) ----------- ----------- 377,751 387,618 Construction in process 17,071 12,292 ----------- ----------- Property and equipment, net $ 394,822 $ 399,910 =========== ===========
24 4. LONG-TERM DEBT The following is a summary of the Company's long-term debt at January 3, 1998 and December 28, 1996:
1997 1996 ----------- ---------- Notes payable: Revolving credit agreement $ 105,000 $ - Term loan agreements, 6.42% to 9.70%, due March 20, 1998 through March 31, 2005 522,900 577,198 Indebtedness to related parties - 20,000 Subordinated notes, 7.19% to 9.35%, due June 30, 2000 128,750 128,750 Secured notes, 7.25% to 7.35%, due November 15, 2001 through November 15, 2005 60,000 60,000 ----------- ---------- Total long-term debt 816,650 785,948 Less current maturities of debt (102,900) (109,292) ----------- ---------- Long-term debt, excluding current maturities $ 713,750 $ 676,656 =========== ==========
In March 1996, the Company established a $600,000 revolving credit agreement with a group of 23 banks. The $600,000 commitment amount was permanently reduced to $520,000 in December 1996 and $515,000 in September 1997 in conjunction with a sale of MasterCard receivable assets totaling $100,000. The $515,000 revolving credit agreement expires on March 26, 2000. Fees are variable based on the total commitment. Borrowings under this commitment averaged $145,802 with a maximum of $278,500 during 1997. The effective annual interest rate was 6.9% in 1997, excluding the previously mentioned fees. In the second quarter of 1997, the Company made the final $20,000 principal payment on the loan from the its majority shareholder, Spiegel Holdings, Inc., which existed as of December 28, 1996. This loan originated in November 1995 and bore interest at a variable rate based on LIBOR plus a margin. The Company selectively uses interest rate swap contracts to hedge the underlying interest risks on various term loans. At January 3, 1998, these interest rate swap agreements had effective and termination dates from March 1995 to March 2005. At year-end 1997 and 1996, the notional principal amounts of these agreements totaled $70,000 and $80,000, respectively. At January 3, 1998 and December 28, 1996, the fair value of these swap agreements was $4,631 and $4,271, respectively. These values were obtained from financial institutions and represent the estimated amount the Company would pay to terminate the agreements, taking into consideration current interest rates and risk of the transaction. The counterparties are expected to fully perform under the terms of the agreements, thereby mitigating the risk from these transactions. These interest rate swaps in total increased interest expense by $1,291, $1,008 and $234 in 1997, 1996 and 1995, respectively. Additionally, the Company has letter of credit facilities to support the purchase of inventories. Letter of credit commitments outstanding were $95,008 and $130,149 at January 3, 1998 and December 28, 1996, respectively. At January 3, 1998, there was an additional $104,992 of commitments available for the issuance of letters of credit. Also 25 at January 3, 1998, the Company had an available undrawn standby letter of credit facility totaling approximately $13,300 to support a leasing arrangement. 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 January 3, 1998. Aggregate maturities of long-term debt for the five years subsequent to January 3, 1998 are as follows: 1998, $102,900; 1999, $85,714; 2000, $334,464; 2001, $107,714; and 2002 and thereafter, $185,858. 5. 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 $8,649, $8,395, and $8,314 in 1997, 1996 and 1995, 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 $6,091, $5,388 and $5,842 in 1997, 1996 and 1995, 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. In addition, the Company has a non-qualified stock option plan in place for certain former employees. Options are transferred from the qualified plan to the non-qualified plan 90 days after the date of separation. Options outstanding under the non-qualified plan were 510,000 at January 3, 1998 and are included in the following presentations of total options outstanding. The Company follows the disclosure provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for the stock option activity. Had compensation expense for the Company's stock option activity been calculated under the provisions of SFAS No. 123 and recognized in the Company's net earnings (loss) and earnings (loss) per share for the years ended January 3, 1998 and December 28, 1996, the effect would have been immaterial. During the phase-in period of SFAS No. 123, the estimation of compensation costs reflects only a partial vesting of options. In future years, the estimated pro-forma compensation costs may be higher depending upon, among other factors, the number of options granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. A risk-free discount rate of 5.75%, an expected life of 5 years for the grants and a volatility of 53% and 58% were assumed for grants in 1997 and 1996, respectively. Dividend yields of 1.8% and 1.6% were assumed for the 1997 and 1996 valuations, respectively. The weighted-average fair value of stock options granted during 26 the years ended January 3, 1998 and December 28, 1996, respectively, were $2.18 and $3.63 calculated using the Black-Scholes option-pricing model. A summary of the changes in the options outstanding is as follows:
Shares Amount Average Price ----------- ---------- -------------- Outstanding at December 31, 1994 1,252,820 $ 12,493 $ 9.97 Granted 274,500 2,222 8.09 Exercised (39,600) (243) 6.13 Canceled (124,460) (2,532) 20.34 ----------- ---------- -------------- Outstanding at December 30, 1995 1,363,260 11,940 8.76 Granted 195,500 1,526 7.80 Exercised (13,560) (80) 5.92 Canceled (28,880) (314) 10.85 ----------- ---------- -------------- Outstanding at December 28, 1996 1,516,320 13,072 8.62 Granted 134,500 659 4.90 Exercised (42,060) (228) 5.41 Canceled (225,060) (2,076) 9.22 ----------- ---------- -------------- OUTSTANDING AT JANUARY 3, 1998 1,383,700 $ 11,427 $ 8.26 =========== ========== ==============
Total stock options authorized but unissued at January 3, 1998 were 617,200. The following table summarizes information about options outstanding at January 3, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- --------------------------------- Range of Number Weighted-Average Number Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average Prices at 1/03/98 Contractual Life Exercise Price at 1/03/98 Exercise Price - --------- ----------- ---------------- --------------- ----------- ----------------- $ 4.00 to $ 7.99 824,220 5.9 years $ 6.18 539,820 $ 6.20 $ 8.00 to $ 11.99 485,880 3.6 years $ 9.66 427,600 $ 9.60 $ 12.00 to $ 23.00 73,600 3.8 years $ 22.25 68,880 $ 22.25 --------- --------- 1,383,700 5.0 years $ 8.26 1,036,300 $ 8.67 ========= =========
27 PENSION PLANS The Company also has defined benefit pension plans covering substantially all employees other than those eligible to participate in the savings and profit-sharing plans and those hourly employees eligible to participate in the thrift plans. The unit credit actuarial cost method is used in developing the costs of the pension plans and the pension benefit obligation. The plan assets consist primarily of high quality common stock and bond funds. In 1996, due to consolidation of certain distribution operations, the Company recognized a curtailment an hourly pension plan. This resulted in $1,625 of periodic pension cost which is included in net amortization and deferral in 1996. The net periodic pension cost for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 is computed as follows:
1997 1996 1995 -------- -------- -------- Service cost $ 397 $ 647 $ 397 Interest cost 4,580 4,298 4,413 Return on plan assets (12,595) (5,208) (7,049) Net amortization and deferral 10,115 4,654 3,509 -------- -------- -------- Net periodic pension cost $ 2,497 $ 4,391 $ 1,270 ======== ======== ========
Weighted average assumptions used in accounting for obligations and assets were as follows:
1997 1996 -------- -------- Discount rate 7.25% 8.0% Expected long-term rate of return on assets 9.0% 9.0%
The following table sets forth the plans' funded status at January 3, 1998 and December 28, 1996:
1997 1996 Union Non-Union Union Non-Union Plan Plan Plan Plan -------- -------- -------- -------- Accumulated and projected benefit obligation: Vested $ 45,808 $ 10,907 $ 46,987 $ 11,983 Non-Vested 801 146 899 162 -------- -------- -------- -------- Total 46,609 11,053 47,886 12,145 Market value of plan assets 48,009 13,658 35,666 11,539 -------- -------- -------- -------- Over (under) funded projected benefit obligation 1,400 2,605 (12,220) (606) Unrecognized net transition liability - 848 315 1,060 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions 6,677 (222) 12,764 2,846 Additional liability required to recognize minimum liability - - (13,079) (3,906) -------- -------- -------- -------- Prepaid (accrued) pension cost in the balance sheet $ 8,077 $ 3,231 $(12,220) $ (606) ======== ======== ======== ========
28 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 January 3, 1998 and December 28, 1996:
1997 1996 ------- ------- Retirees $ 5,393 $ 6,049 Fully eligible active plan participants 1,097 1,153 Other active plan participants 2,982 3,753 ------- ------- Total 9,472 10,955 Unrecognized prior service cost 331 (2,500) Unrecognized loss (1,981) (1,246) ------- ------- Accrued postretirement benefit cost in the balance sheet $ 7,822 $ 7,209 ======= =======
The net periodic postretirement benefit cost for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 is computed as follows:
1997 1996 1995 ------- ------- ------- Service cost $ 393 $ 727 $ 629 Interest cost 727 827 804 Net amortization and deferral 117 236 141 ------- ------- ------- Net periodic postretirement benefit cost $ 1,237 $ 1,790 $ 1,574 ======= ======= =======
For measurement purposes, a 9% and 10% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) was assumed for 1997 and 1996, 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 January 3, 1998 by $648 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended January 3, 1998 by $117. The weighted average discount rates used in determining the accumulated postretirement benefit obligation were 7.25% and 8.0% at January 3, 1998 and December 28, 1996, respectively. 29 6. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases office facilities, distribution centers, retail store space and data processing equipment. Lease terms are generally 10 years and many contain renewal options. Many of the retail store leases provide for minimum annual rentals plus additional rentals based upon percentage of sales, which range from 3% to 5%. Rental expense for all operating leases was $137,604 in 1997, $128,173 in 1996 and $124,183 in 1995. 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 January 3, 1998:
Amount --------- 1998 $126,578 1999 $115,040 2000 $107,189 2001 $ 90,751 2002 $ 81,523 and thereafter $360,596
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. 30 7. INCOME TAXES Earnings (loss) before income taxes is composed of the following:
1997 1996 1995 --------- --------- --------- Domestic $ (57,510) $ (25,307) $ (16,740) Foreign 8,104 4,031 933 --------- --------- --------- Total $ (49,406) $ (21,276) $ (15,807) ========= ========= =========
The components of income tax expense (benefit) for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 are as follows:
1997 1996 1995 --------- --------- --------- Current Federal $ (5,975) $(12,311) $(12,577) State (896) 700 (2,950) Foreign 3,894 2,277 946 --------- --------- --------- Total Current (2,977) (9,334) (14,581) --------- --------- --------- Deferred Federal (10,548) 2,811 9,489 State (2,633) (931) (787) Foreign (227) (433) (447) --------- --------- --------- Total Deferred (13,408) 1,447 8,255 --------- --------- --------- $(16,385) $ (7,887) $ (6,326) ========= ========= =========
The differences between the provision (benefit) for income taxes at the statutory rate and the amounts shown in the consolidated statements of earnings for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 are as follows:
1997 1996 1995 Amount Percent Amount Percent Amount Percent --------- -------- --------- -------- --------- -------- Statutory rate $(17,292) (35.0)% $ (7,447) (35.0)% $ (5,532) (35.0)% State income tax (net of federal income tax benefit) (241) (0.5) (1,391) (6.5) (1,027) (6.5) Amortization of non- deductible goodwill and other items 1,548 3.1 1,601 7.5 1,885 11.9 Changes in estimates of previously provided taxes - - - - (1,652) (10.4) Tax Credits (400) (0.8) (650) (3.1) - - --------- -------- --------- -------- --------- -------- Effective tax rate $(16,385) (33.2)% $ (7,887) (37.1)% $ (6,326) (40.0)% ========= ======== ========= ======== ========= ========
31 Significant components of the Company's deferred tax assets and liabilities at January 3, 1998 and December 28, 1996 are as follows:
1997 1996 -------- -------- Deferred tax assets: Allowance for doubtful accounts $ 6,369 $ 6,240 Allowance for the gross profit on estimated future returns 10,810 14,633 Reserve for distribution facility and store closings 4,979 5,220 Compensated absences accruals 4,395 4,429 Reserve for self insurance 1,340 1,338 Pension liability - 6,243 Reserve for inventory losses 9,915 5,232 Postretirement benefit obligation 3,232 3,052 Capitalized overhead in inventory 3,957 4,157 Net operating loss carryforward 49,167 - Other 2,462 1,675 -------- -------- 96,626 52,219 -------- -------- Deferred tax liabilities: Property and equipment 46,337 45,309 Prepaid and deferred expenses 8,386 7,934 Gain on sale of accounts receivable 34,412 7,192 Earned but unbilled finance charges 5,843 5,997 Deferred rent obligation 3,331 1,135 Other 1,391 1,134 -------- -------- 99,700 68,701 -------- -------- Net deferred tax liabilities $ (3,074) $(16,482) ======== ========
The Company has a net operating loss carryforward of $124,540, due to expire in the year 2012. Although realization is not assured for the deferred tax assets relating to the NOL, management believes it is more likely than not that they will be realized through future taxable earnings or alternative tax strategies. 8. STOCKHOLDERS' EQUITY In December 1995, the Company discontinued payment of all cash dividends. Certain restrictions on dividend payments exist under the Company's debt covenants based on financial results. The Company will evaluate its dividend policy on an ongoing basis. During the first six months of 1995, the Company purchased and retired 500,000 shares of Class A non-voting common stock at market value for a total cost of $4,742. Accordingly, common stock was decreased by $500 representing the par value of the shares and additional paid-in capital was decreased by approximately $4,242 for the difference between the purchase price and the par value. 32 In March 1997, the Company issued 10,341,644 shares of Class B voting common stock to its majority shareholder, Spiegel Holdings, Inc. The net proceeds of $69,972 are being used primarily to fund working capital and investing needs, including the continued expansion of Eddie Bauer. 9. EARNINGS PER COMMON SHARE Earnings per share are calculated and presented in accordance with SFAS No. 128, "Earnings per Share." Basic and diluted earnings per share are computed based on the weighted average number of both classes of common shares outstanding during the year.
Income Shares Per-Share (Numerator) (Denominator) Amount 1995 Basic EPS $ (9,481) 107,838 $ (.09) Effect of dilutive securities - Diluted EPS $ (9,481) 107,838 $ (.09) 1996 Basic EPS $(13,389) 107,751 $ (.12) Effect of dilutive securities - Diluted EPS $(13,389) 107,751 $ (.12) 1997 Basic EPS $(33,021) 116,194 $ (.28) Effect of dilutive securities - Diluted EPS $(33,021) 116,194 $ (.28)
When income from continuing operations is a loss, potential common shares included in the computation of diluted EPS will always result in an antidiluted per share amount. Therefore, for the years shown, no potential shares were added to the equation for diluted EPS. Potential common shares consist only of employee stock options. Options to purchase 1,383,700 shares of Class A non-voting common stock, with exercise prices ranging between $4.47 and $22.25, were outstanding at January 3, 1998. Assuming income from continuing operations, 166,690, 846,895, and 1,067,590 shares would have had dilutive potential in 1997, 1996 and 1995, respectively. After applying the treasury stock method to the dilutive options, which assumes the proceeds from the exercise is used to repurchase 124,049 shares of stock, a net 42,641 additional shares would have been added to the denominator of the equation for diluted EPS in 1997. The remainder of the shares would not be included because the options' exercise price exceeded the average market value of the common stock at January 3, 1998. 10. SUBSEQUENT EVENT (UNAUDITED) In March 1998, the Board of Directors of the Company authorized an additional 17.5 million shares of Class B voting common stock. In conjunction with the increase in authorized shares, the Company issued 13.5 million shares of Class B voting common stock for $70,000 to its majority shareholder, Spiegel Holdings, Inc. The proceeds from this issuance will be used primarily to fund working capital and investing needs, including the continued expansion of Eddie Bauer. 33 STATEMENT OF MANAGEMENT RESPONSIBILITY We have prepared the accompanying consolidated financial statements and related information for the years 1997, 1996 and 1995. The opinion of the Company's independent auditors, KPMG Peat Marwick LLP, on those financial statements follows. The primary responsibility for the integrity and objectivity of the financial information included in this annual report rests with management. Such information was prepared in accordance with generally accepted accounting principles appropriate in the circumstances, based on our best estimates and judgments and giving due consideration to materiality. The Company maintains an internal control structure that is adequate to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and that produces records adequate for preparation of financial information. There are limits inherent in all systems of internal control structures based on the recognition that the cost of such a structure should not exceed the benefits to be derived. In addition, the Company maintains an internal audit department to review the adequacy, application and compliance of the internal control structure. KPMG Peat Marwick LLP, independent auditors, has been engaged to audit the financial statements and to render an opinion as to their conformity with generally accepted accounting principles. They conducted their audit in accordance with generally accepted auditing standards. Those standards require that they plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. KPMG Peat Marwick LLP is a member of the SEC Practice Section of the American Institute of Certified Public Accountants. The Board of Directors pursues its responsibility for these financial statements through its audit committee, composed of directors who are not employees of Spiegel or its subsidiaries, which meets periodically with both management and the independent auditors to ensure 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. 34 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 January 3, 1998 and December 28, 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended January 3, 1998. 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 January 3, 1998 and December 28, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended January 3, 1998 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Chicago, Illinois February 11, 1998 35 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) ($000s omitted, except per share amounts)
1997 First Second Third Fourth Total Year - ------------------ ------------ ------------ ------------ ------------ ----------- Net sales and other revenues $ 601,812 $ 696,243 $ 646,963 $ 1,111,816 $ 3,056,834 Operating income (loss) (39,863) (3,365) (10,394) 72,314 18,692 Net earnings (loss) $ (31,209) $ (13,483) $ (20,195) $ 31,866 $ (33,021) Net earnings (loss) per common share Basic and diluted $ (.28) $ (.11) $ (.17) $ .27 $ (.28) Weighted average common shares outstanding 110,261,774 118,106,457 118,112,697 118,143,431 116,193,587 MARKET PRICE DATA High $ 7 7/8 $ 7 5/8 $ 7 1/2 $ 7 1/4 $ 7 7/8 Low $ 6 1/2 $ 5 3/4 $ 6 $ 4 3/4 $ 4 3/4 1996 First Second Third Fourth Total Year - ------------------ ------------ ------------ ------------ ------------ ----------- Net sales and other revenues $ 634,681 $ 668,601 $ 620,916 $ 1,090,422 $ 3,014,620 Operating income (loss) (3,842) 13,911 (7,800) 59,132 61,401 Net earnings (loss) $ (14,321) $ (3,297) $ (15,558) $ 19,787 $ (13,389) Net earnings (loss) per common share Basic and diluted $ (.13) $ (.03) $ (.14) $ .18 $ (.12) Weighted average common shares outstanding 107,746,498 107,746,760 107,752,989 107,757,531 107,750,945 MARKET PRICE DATA High $ 11 1/8 $ 12 1/4 $ 13 1/4 $ 9 1/8 $ 13 1/4 Low $ 6 7/8 $ 8 5/8 $ 6 1/2 $ 6 1/2 $ 6 1/2
36 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS
The following persons are the directors of the Company. Year Elected as Name Age Offices with Registrant or Other (4) Director - ---------------------- --- ------------------------------------------------------------ Dr. Michael Otto (1) 54 Chairman of the Board of Directors 1982 and Chairman of the Board of Directors of Otto Versand (GmbH & Co) Harold S. Dahlstrand (1)(4) 53 Vice Chairman of the Board of Directors, 1994 Chief Human Resources Officer and Chairperson of the Office of the President Thomas Bohlmann 52 Board of Directors and Director - Planning 1989 and Control of Otto Versand (GmbH & Co)(1989) Dr. Michael E. Cruesemann (2)(3) 52 Board of Directors and Director - Finance 1994 of Otto Versand (GmbH & Co) and Chief Financial Officer of Otto Versand Group (1994); Deputy Director of Finance of Otto Versand (GmbH & Co)(1985) Richard T. Fersch (4) 48 President and Chief Executive Officer of 1996 Eddie Bauer Hans Jorg Hammer 58 Board of Directors and Director - 1991 Personnel of Otto Versand (GmbH & Co)(1991) Horst R. Hansen (2) 63 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 John W. Irvin (4) 50 President and Chief Executive Officer of 1996 Spiegel Catalog Siegfried Kockmann 58 Board of Directors and Director - 1997 Organizational and Systems Planning of Otto Versand (GmbH & Co)(1982) Michael R. Moran (3)(4) 51 General Counsel, Chief Legal Officer and 1997 Member of the Office of the President Dr. Peter Mueller (2) 56 Retired. Prior to December 1997 was a 1985 member of the Board of Directors and Director - Advertising and Marketing of Otto Versand (GmbH & Co) 37 Gert Rietz 51 Board of Directors and Director - 1997 Merchandise of Otto Versand (GmbH & Co)(1989) James W. Sievers (3)(4) 55 Chief Financial Officer and Member of 1997 the Office of the President Dr. Peer Witten 52 Board of Directors and Director - 1991 Operations of Otto Versand (GmbH & Co) for at least the last five years Martin Zaepfel (1) 54 Vice Chairman of the Board of Directors and Director - Advertising and Marketing of Otto Versand (GmbH & Co)(1998); Board of Directors and Director - Merchandise of Otto Versand (GmbH & Co)(1988)
(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, 1998. 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. 38 EXECUTIVE OFFICERS The following persons are the executive officers and certain significant employees of the Company:
Positions and Offices Held (all positions and offices are of the Company Name Age unless otherwise indicated) - ---------------------- --- --------------------------------------------------- EXECUTIVE OFFICERS OF SPIEGEL, INC.: Harold S. Dahlstrand 53 Vice Chairman, Chief Human Resources Officer and Chairperson of the Office of the President (1997); Senior Vice President - Human Resources (1993); and Director (1994) Michael R. Moran 51 General Counsel, Chief Legal Officer and Member of the Office of the President (1997); Senior Vice President, Secretary & General Counsel (1996); Vice President, Secretary & General Counsel (1988); and Director (1997) James W. Sievers 55 Chief Financial Officer (1994) and Member of the Office of the President (1997); Senior Vice President - Finance (1995); Vice President - Finance (1990); and Director (1997) Richard T. Fersch 48 President (1992) and Chief Executive Officer (1997) of Eddie Bauer; and Director (1994) John W. Irvin 50 President (1996) and Chief Executive Officer (1997) of Spiegel Catalog; Senior Vice President, General Merchandise Manager of Mervyn's (a division of Dayton Hudson Corporation) (1992); and Director (1996) George D. Ittner 54 President (1992) and Chief Executive Officer (1997) of Newport News Jon K. Nordeen 42 Vice President and Chief Information Officer (1996); Director of Application Development of Dayton Hudson Corporation (1995); Director of Application Development - Department Store Division of Dayton Hudson Corporation (1987) John R. Steele 45 Vice President (1995) and Treasurer (1993) 39 CERTAIN SIGNIFICANT EMPLOYEES: Gregory R. Aube 45 President of FCNB (1995); General Counsel and Corporate Secretary of FCNB (1989) James R. Cannataro 45 Executive Vice President - Finance and Administration of Eddie Bauer (1996); Senior Vice President - Finance of Eddie Bauer (1993) Julie A. Rodway 38 Executive Vice President - Merchandising of Eddie Bauer (1997); Senior Vice President - Merchandising of Eddie Bauer (1996); Vice President - Catalog Merchandising of Eddie Bauer (1995); President - Logan's Drive (a small specialty retailer focusing on casual menswear) (1993) Dr. Jack Sansolo 54 Executive Vice President - Global Brand Direction of Eddie Bauer (1997); Senior Vice President - Global Brand Direction of Eddie Bauer (1996); President/Owner of Point A Consulting (a marketing, communications and advertising consultancy in California) (1993) Georgia Shonk-Simmons 46 Executive Vice President - Merchandising and Marketing of Newport News (1994); Vice President - Merchandise of Spiegel (1993) Karl A. Steigerwald 51 Executive Vice President - Administration of Spiegel Catalog (1996); Vice President - Marketing of Spiegel (1992) Michael L. Wilson 43 President of DFS (1996); Director - Logistics of Eddie Bauer (1995); Vice President - Retail Distribution of DFS (1993)
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, 1998. There is no family relationship between any of the officers. 40 ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth all compensation paid or accrued by the Company for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 to or on behalf of each of the seven most highly compensated key policy-making executive officers of the Company.
Stock Name and Annual Compensation Options All Other Principal Salary Bonus Granted Compensation (4) Position Year ($) ($) (#) ($) ---------------------- ---- -------- --------- -------- ------------ Harold S. Dahlstrand 1997 $290,000 $150,000 10,000 $ 99,357 Vice Chairman, 1996 230,000 123,464 7,500 80,056 Chief Human Resources 1995 210,000 - 5,000 59,642 Officer and Chairperson of the Office of the President Michael R. Moran 1997 $260,000 $150,000 10,000 $ 94,456 General Counsel, Chief 1996 210,000 23,464 5,000 90,635 Legal Officer, Member 1995 180,000 - 7,500 51,700 of the Office of the President and Director James W. Sievers 1997 $310,000 $150,000 10,000 $ 103,765 Chief Financial Officer, 1996 270,000 23,464 5,000 95,151 Member of the Office of 1995 225,000 - 10,000 57,883 the President and Director John J. Shea (2) 1997 $375,000 $ - - $1,685,980 Retired. Former Vice 1996 700,000 23,464 - 198,200 Chairman, President, 1995 600,000 - 100,000(1) 157,732 Chief Executive Officer and Director Richard T. Fersch 1997 $650,000 $243,700 10,000 $ 157,789 President and Chief 1996 600,000 702,000 10,000 150,387 Executive Officer of 1995 415,000 466,875 50,000 68,789 Eddie Bauer and Director John W. Irvin (3) 1997 $475,000 $213,750 10,000 $ 126,945 President and Chief 1996 300,000 100,000 60,000 88,649 Executive Officer of 1995 - - - - Spiegel Catalog and Director George D. Ittner 1997 $374,736 $175,000 25,000 $ 57,906 President of 1996 366,045 50,000 5,000 49,601 Newport News 1995 330,000 - 5,000 24,612
41 (1) The options granted to John J. Shea in 1995 represent a repricing of 100,000 of the options granted to him in 1993. (2) John J. Shea retired from the Company and the Board of Directors in July 1997. As part of his retirement agreement, Mr. Shea received $1,525,000 in 1997 and will receive an additional $750,000 in 1998. (3) John W. Irvin joined Spiegel Catalog in April 1996. (4) The following tables summarize all other compensation for the years ended January 3, 1998, December 28, 1996 and December 30, 1995:
Retirement Car Allowance/ Life Insurance Name Benefits Other Premiums Paid Total -------------------- ----------- ------------- ---------------- ---------- 1997 Harold S. Dahlstrand $ 25,300 $ 64,055 $ 10,002 $ 99,357 Michael R. Moran 22,600 64,095 7,761 94,456 James W. Sievers 27,100 62,779 13,886 103,765 John J. Shea 1,591,700 52,981 41,299 1,685,980 Richard T. Fersch 57,700 45,251 54,838 157,789 John W. Irvin 41,950 50,712 34,283 126,945 George D. Ittner 5,476 52,430 - 57,906 1996 Harold S. Dahlstrand $ 20,030 $ 46,184 $ 13,842 $ 80,056 Michael R. Moran 18,210 61,593 10,832 90,635 James W. Sievers 23,670 53,102 18,379 95,151 John J. Shea 86,663 56,918 54,619 198,200 Richard T. Fersch 53,700 41,710 54,977 150,387 John W. Irvin - 49,476 39,173 88,649 George D. Ittner 3,791 43,835 1,975 49,601 1995 Harold S. Dahlstrand $ 22,537 $ 27,397 $ 9,708 $ 59,642 Michael R. Moran 17,643 26,588 7,468 51,700 James W. Sievers 20,906 23,578 13,399 57,883 John J. Shea 86,151 38,168 33,413 157,732 Richard T. Fersch 35,275 33,514 - 68,789 John W. Irvin - - - - George D. Ittner 4,620 17,998 1,994 24,612
42 OPTION GRANTS TABLE The following table sets forth grants of stock options to the named executive officers during the year ended January 3, 1998 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 1997 Price Date 5% ($) 10% ($) - -------------------- -------- ----------- -------- ----------- -------- --------- Harold S. Dahlstrand 10,000 7.4% 4.90 12/31/07 30,816 78,093 Michael R. Moran 10,000 7.4% 4.90 12/31/07 30,816 78,093 James W. Sievers 10,000 7.4% 4.90 12/31/07 30,816 78,093 John J. Shea - - - - - - Richard T. Fersch 10,000 7.4% 4.90 12/31/07 30,816 78,093 John W. Irvin 10,000 7.4% 4.90 12/31/07 30,816 78,093 George D. Ittner 25,000 18.6% 4.90 12/31/07 77,040 195,233
The stock options granted become exercisable at the rate of 20% per year from the date of the grant. 43 AGGREGATED OPTION EXERCISES IN 1997 AND JANUARY 3, 1998 OPTION VALUES The following table sets forth shares acquired on exercise and stock option values at January 3, 1998:
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Shares Options at at Acquired January 3, 1998 January 3, 1998 On Value Exercise- Unexercise- Exercise- Unexercise- Name Exercise Realized able able able able - --------------------- -------- -------- ------- -------- ------- ----------- Harold S. Dahlstrand - - 39,700 22,000 $ 516 $ - Michael R. Moran - - 43,400 21,100 2,580 - James W. Sievers - - 38,400 22,600 - - John J. Shea - - 358,000 - - - Richard T. Fersch - - 52,400 53,000 - - John W. Irvin - - 12,000 58,000 - - George D. Ittner - - 6,000 34,000 - -
COMPENSATION OF DIRECTORS The Company pays an annual fee of $10,000 to its independent directors and reimburses any reasonable out-of-pocket expenses incurred by all directors in attending meetings. REPORT OF REPRICING OF OPTIONS The following table sets forth a 1995 transaction which, in effect, repriced certain options granted. This transaction was approved by the Board of Directors and the Stock Option Committee.
Length of Number of Market Price Exercise Original Securities of Stock at Price at Option Term Underlying Time of Time of Remaining at Options Repricing or Repricing or New Date of Repriced or Amendment Amendment Exercise Repricing or Name Date Amended (#) $ $ Price ($) Amendment - ----- ------ ------------ ------------ ------------ ----------- ------------ John J. Shea 5/10/95 100,000 $10.00 $22.75 $10.00 8 years
44 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board Committee, which determines executive officer compensation, consists of Dr. Michael Otto, Martin Zaepfel, and Harold S. Dahlstrand. Mr. Dahlstrand also serves as the Chairperson of the Office of the President of the Company. EMPLOYEE BENEFITS STOCK OPTION PLAN The Spiegel, Inc. Salaried Employees Incentive Stock Option Plan is administered by a Stock Option Committee consisting of three members of the Company's Board of Directors who are not salaried employees of the Company or its participating subsidiaries and who are appointed to the Committee periodically. Certain salaried employees of Spiegel and its subsidiaries are eligible to participate in the plan. Options are granted to those eligible employees as determined by the Stock Option Committee. 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 $4.90. Net cash realized with respect to the exercise of options during the year was approximately $228,000. SPIEGEL GROUP VALUE IN PARTNERSHIP PROFIT SHARING AND 401(k) SAVINGS PLAN The Company maintains two consolidated Profit Sharing and 401(k) Savings Plans for employees of Spiegel, Eddie Bauer, FCNB and Distribution Fulfillment Services ("DFS"). Participation commences on the beginning of a quarter following one year of continuous service. The Company and participating subsidiaries contribute annually to the plan 7% of the first $100 million of Spiegel consolidated earnings before income taxes, plus 6% of the second $100 million of Spiegel consolidated earnings before income taxes, plus 4% of Spiegel consolidated earnings before income taxes in excess of $200 million plus any other amounts determined by the Company's Board of Directors. A minimum contribution of 4% of eligible considered compensation will be made, but in no event will the total contribution exceed the maximum amount deductible for Federal income tax purposes. Company contributions and forfeitures are allocated among eligible participants in proportion to considered compensation. A participant can make nondeductible after-tax contributions to the plan of up 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 45 Company matches hourly employee contributions 25 cents for each dollar contributed up to 6% of base compensation. The Company's matching contributions, however, may not exceed the amount deductible under the Internal Revenue Code. All contributions and investments are held in a trust for the benefit of plan participants. All employees who participate in the plan after one year of service are 100% vested in their contributions and earnings thereon but become vested in the Company's matching contribution and earnings thereon at a rate based on years of service, with full vesting after a maximum of seven years. Participants are permitted to borrow from their account, but may have only one outstanding loan at a time. Repayment is made through payroll deductions. Participants who suffer a financial hardship as defined by the Internal Revenue Code and who are not eligible for a loan may withdraw amounts from the plan while still employed. In addition, participants may annually receive a distribution of their after-tax contributions. All participants receive the full value of their accounts under the plan upon retirement after age 62 or permanent disability and the vested portion of their accounts on other termination of employment. The full value of a deceased participant's account is distributable to his beneficiaries. Distributions are made in a lump sum. SPIEGEL, INC., SUPPLEMENTAL RETIREMENT BENEFIT PLAN The Company maintains an unfunded supplemental retirement plan for the benefit of its employees and those of its participating subsidiaries covered by the Spiegel Group Value in Partnership Profit Sharing and 401(k) Savings Plan described above (the "profit sharing and thrift plans") whose benefits under the profit sharing and thrift plans are reduced by application of Sections 415, 401(a)(17) and 402(g)of the Internal Revenue Code. If a participant's annual additions under the profit sharing and thrift plans are reduced by reason of special limitations of the Internal Revenue Code, the Company will make an annual contribution to the trust in the amount of the reduction. Supplemental benefits under the supplemental retirement plan are payable in cash at the same time and in the same manner as the participant's employer account under the profit sharing and thrift plans except no payments are made prior to death, disability or reaching retirement age. 46 SPLIT DOLLAR LIFE INSURANCE PROGRAM The Company maintains a split dollar life insurance program covering certain executives of the Company. A covered employee may apply for an individual life insurance policy on his life in a face amount up to three times his base salary. The employee pays a portion of the annual premium equal to the after tax cost of an equivalent amount of term life insurance. The balance of the premium due (if any) is paid by the Company. The Company owns a part of the cash value equal to its payments and is beneficiary for that amount. The employee names his own beneficiary and collaterally assigns the policy to the Company to the extent of the Company's payments. Cash value and dividends accumulate tax-free and all amounts in excess of the Company's payments belong to the employee. On the death of the employee, any amounts due to the Company are paid with the balance of the proceeds distributed as directed by the employee. EXECUTIVE BONUS AND INCENTIVE PLANS The Company maintains various bonus plans for certain of its executives, designed to reward performance. The Company's annual payment of bonuses is based upon the attainment of pre-determined operating, financial and individual performance objectives. For 1997, approximately $9,900,000 was earned under these bonus plans. NEWPORT NEWS, INC. RETIREMENT SAVINGS PLAN Newport News has a retirement savings plan covering its associates. Associates become eligible as of the beginning of the calendar quarter following completion of one year of service. Associates may elect to contribute up to 10% of their compensation to the plan on a pre-tax basis under Section 401(k) of the Internal Revenue Code. The associate may also elect to make nondeductible after-tax contributions to the plan of up to 5% of their compensation. The company matches contributions at a rate of 50% of the first 4% of compensation contributed. The company matching contributions, however, may not exceed the amount deductible under the Internal Revenue Code. Contributions are held in trust for the benefit of the plan participants. A participant receives the full amount in this account under the plan (including investment earnings) on termination of employment by reason of retirement (as defined in the plan document), or disability. Upon death, the full value of the participant's account is distributable to their beneficiary. On any other termination of employment, a participant is 100% vested at all times in the portion of his account attributable to pre-tax contributions, and is vested in the company's matching contributions and earnings thereon, at a rate based on years of service, with full vesting after a maximum of five years. Distributions are made on a lump sum basis. Participants are permitted to borrow from their account, but may only have one loan outstanding at a time. Participants suffering certain financial hardships may request an inservice withdrawal of prior contributions. 47 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Spiegel Holdings, Inc. (SHI) holds 99.9% of the Company's Class B Voting Common Stock. The following table sets forth certain information with respect to the number of shares of Class B Voting Common Stock owned by SHI, which is the only stockholder beneficially owning more than 5% of the Class B Voting Common Stock. SHI is a holding company whose principal asset is stock of the Company. The total number of holders of the Company's Class B voting Common Stock as of March 26, 1998, was two.
Percentage of Outstanding Number of Title of Class B Voting Name and Address Shares(1) Class Common Stock - ------------------------- ----------- --------- --------------- Spiegel Holdings, Inc.(2) 116,957,089 Class B 99.9% The Corporation Voting Trust Center Common 1209 Orange Street Stock Wilmington, DE 19801
(1) The shares are owned of record and beneficially, with sole investment and voting power. However, see note (2) below. (2) In excess of 50% of the common stock of SHI is beneficially owned by Dr. Michael Otto who controls the manner in which SHI votes its Class B Voting Common Stock of the Company in all matters, including the election of directors. Under rules and regulations promulgated by the Securities and Exchange Commission, Dr. Otto may be deemed to beneficially own all the shares of the Company owned by SHI. Dr. Otto is a director of the Company. No officers or other directors of the Company are stockholders of record or beneficial stockholders thereof. B. SECURITY OWNERSHIP OF MANAGEMENT As of March 26, 1998, 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 26, 1998. 48
Amount and Name of Nature of Title Beneficial Beneficial Acquirable Percent of Class Owner Ownership (1) Within 60 Days of Class - -------- -------------------- ------------- -------------- ------------ (I) (II) (III) Class A Gregory A. Aube 1,200 1,200 * Class A James R. Cannataro 18,000 17,000 * Class A Harold S. Dahlstrand 56,850 39,700 * Class A Richard T. Fersch 56,000 52,400 * Class A John W. Irvin 32,000 22,000 * Class A George D. Ittner 8,400 6,000 * Class A Michael R. Moran 55,400 43,400 * Class A Dr. Peter Mueller 10,000 10,000 * Class A Julie Rodway 1,400 1,400 * Class A Jack Sansolo 1,000 1,000 * Class A Georgia Shonk-Simmons 30,900 30,900 * Class A James W. Sievers 44,400 38,400 * Class A John R. Steele 1,150 900 * Class A Karl A. Steigerwald 44,200 31,000 * Class A Michael L. Wilson 1,038 1,038 * Class A All directors and 361,900 286,300 2.5% officers as a group (25 persons)
(1) Includes shares which may be acquired within 60 days under the Company's Stock Option Plan. * Less than 1%. 49 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 $4,050,000 in 1997, $3,917,000 in 1996, and $3,720,000 in 1995. The arrangements are indefinite in term but may generally be canceled by either party upon one year's written notice. The Company has an agreement with Together, Ltd., a United Kingdom company, which gives the Company the exclusive right to market "Together!" merchandise by catalog and in retail stores. Otto Versand owns Together, Ltd. Commission expenses incurred on this account were $3,171,000, $3,870,000 and $5,755,000 in 1997, 1996 and 1995, respectively. These expenses include certain production services, the cost of which would normally be borne by the Company, including design of the product, color separation, catalog copy and layout, identification of suggested manufacturing sources and test marketing information. In 1993, the Company formed a joint venture with Otto-Sumisho, Inc. (a joint venture company of Otto Versand and Sumitomo Corporation) and entered into license agreements to sell Eddie Bauer products through retail stores and catalogs in Japan. The Company believes that the terms of the arrangement are no less favorable to Eddie Bauer than would be the case in an arrangement with an unrelated third party. There were 28 stores open in Japan as of January 3, 1998. To date, Eddie Bauer has contributed $9,294,000 to the project and in 1994, received a $2,500,000 licensing fee for the use of its name. Eddie Bauer received $4,272,000, $3,981,000 and $3,243,000 in royalty income on retail and catalog sales during 1997, 1996 and 1995, respectively. Eddie Bauer recorded approximately a loss of $31,000 in 1997, income of $406,000 in 1996, and a loss of $673,000 in 1995 for its equity share of the joint venture. During 1995, Eddie Bauer formed a joint venture with Handelsgesellschaft Heinrich Heine GmbH and Sport-Scheck GmbH (both subsidiaries of Otto Versand) and entered into license agreements to sell Eddie Bauer products through retail stores and catalogs in Germany. The Company believes that the terms of the arrangement are no less favorable to Eddie Bauer than would be the case in an arrangement with an unrelated third party. There were seven stores open in Germany as of January 3, 1998. Eddie Bauer has contributed $3,482,000 to the project and has received $1,000,000 in licensing fees for the use of its name. Eddie Bauer received $756,000, $773,000 and $295,000 in royalty income on retail and catalog sales during 1997, 1996 and 1995, respectively. Eddie Bauer recorded approximately $1,642,000, $707,000 and $98,000 of losses for its equity share of the joint venture during 1997, 1996 and 1995. During 1996, Eddie Bauer formed a joint venture with Gratten plc (a subsidiary of Otto Versand)and entered into license agreements to sell Eddie Bauer products through retail stores and catalogs in the United Kingdom. The Company believes that the terms of the arrangement are no less favorable to Eddie Bauer than would be the case in an arrangement with an unrelated third party. There were two stores open in the United Kingdom as of 50 January 3, 1998. A licensing fee will not be recognized until 1998. Eddie Bauer received $41,000 in royalty income on retail and catalog sales during 1997. Eddie Bauer recorded approximately $957,000 of losses for its equity share of the joint venture during 1997. In 1993, Eddie Bauer entered into an agreement with Eddie Bauer International, Ltd. (a subsidiary of Otto Versand) whereby the latter acts as buying agent in Asia and contacts 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 $22,900,000, $14,476,000 and $13,907,000 for these services in 1997, 1996 and 1995, respectively. In 1997, an Eddie Bauer International, Ltd. buying office was established in the United States to provide similar sourcing services in the Americas beginning in 1998. In March 1994, Newport News issued 113 shares of non-voting preferred stock to ten directors and ten other executive officers of the Company and nine executive officers and directors of Newport News and Otto Versand for $40,000 per share. Each participant was eligible to purchase up to four shares. Of the initial issuance, 85 shares remain outstanding held by the following individuals with the number of shares each owns indicated by parentheses following each name: Dr. Michael Otto (4); Thomas Bohlmann (3); Hans-Christoph Fischer (4); Hans Jorg Hammer (4); Dr. Peter Mueller (4); Peer Witten(4); John J. Shea (4); Harold S. Dahlstrand (4); James J. Broderick (4); Robert E. Conradi (4); Michael R. Moran (4); Georgia L. Shonk-Simmons (4); James W. Sievers (4); Karl A. Steigerwald (4); George D. Ittner (4); James W. Brewster (4); Geralyn M. Madonna (2); Gerhard Hocht (4); Siegfried Kockmann (4); Gert Rietz (4); Martin Zaepfel (4) and Dr. Michael Cruesemann (4). In December, 1995, an additional seven shares were offered to four executive officers from Newport News and Eddie Bauer at $43,000 per share. These individuals and the number of shares each owns, indicated in parenthesis following each name, include: Martin Smith (1); David Knoll (1); Charles Krieg (1); and Richard Fersch (4). The redemption price of the preferred stock prior to December 31, 1997 ranged from $40,000 to $43,000 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. In March 1997, the Company issued 10.3 million shares of Class B voting common stock for $70,000 to its majority shareholder, Spiegel Holdings, Inc. The Company issued an additional 13.5 million shares of Class B voting common stock for $70,000 to Spiegel Holdings, Inc. in March 1998. The proceeds from these issuances, net of related costs, are being used to fund working capital and investing needs, including the continued expansion of Eddie Bauer. The Company is included in the consolidated federal income tax return of SHI. Pursuant to a tax reimbursement agreement with SHI, the Company records provisions for income tax expense as if it were a separate taxpayer. 51 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 20-33 Report of Independent Auditors 35 Selected Quarterly Financial Data 36 2. FINANCIAL STATEMENT SCHEDULE Independent Auditors' Report on Schedule 54 Schedule II--Valuation and Qualifying Accounts 55 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. 52 3. EXHIBITS Exhibit Number Description of Exhibit 3(a) Restated Certificate of Incorporation of the Registrant (i) 3(b) By-Laws of the Registrant (i) 4 Revised Specimen Stock Certificate (ii) 10(a) Spiegel, Inc., Semi-Monthly Salaried Employees Incentive Stock Option Plan (File No. 33-15936) and post-effective Amendment No. 1 thereto, and the Company's registration statements on Form S-8 and post-effective amendments thereto (File No. 33-19663, 33-32385, 33-38478, 33-44780, 33-56200, 33-51755 and 33-65469) (iii) 10(b) Spiegel, Inc., Supplemental Retirement Benefit Plan (iv) 21 List of subsidiaries of the Registrant 23 Consent of KPMG Peat Marwick LLP 24 Powers of Attorney (iv) 27 Financial Data Schedule (i) Filed as an Exhibit to or part of the Company's Registration Statement on Form S-3 (File No. 33-50739) and hereby incorporated by reference herein. (ii) Filed as an Exhibit to the 1988 10-K. (iii) Filed as an Exhibit to or part of the Company's Registration Statement on Form S-8 (File No. 33-19663, 33-32385, 33-38478, 33-44780, 33-56200 and 33-51755) and hereby incorporated by reference herein. (iv) Filed as an Exhibit to or part of the Company's Registration Statements on Form S-1 (File No. 33-15936) and hereby incorporated by reference herein. B. REPORTS ON FORM 8-K None. 53 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Stockholders Spiegel, Inc.: Under date of February 11, 1998, we reported on the consolidated balance sheets of Spiegel, Inc., and subsidiaries as of January 3, 1998 and December 28, 1996, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended January 3, 1998, which are included elsewhere herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /S/ KPMG PEAT MARWICK LLP Chicago, Illinois February 11, 1998 54 SCHEDULE II SPIEGEL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED ($000s omitted)
January 3, December 28, December 30, 1998 1996 1995 ----------- ------------ ------------ Allowance for doubtful accounts Balance at beginning of year $ 14,830 $ 40,832 $ 49,954 Charged to earnings 13,521 22,593 91,612 Reduction for receivables sold (235) (23,861) (33,600) Accounts written off, net of recoveries (13,194) (24,734) (67,134) ---------- ---------- ---------- Balance at end of year $ 14,922 $ 14,830 $ 40,832 ========== ========== ==========
55 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 April 3, 1998. SPIEGEL, INC. By: /s/ Harold S. Dahlstrand Harold S. Dahlstrand, Chief Human Resources and Chairperson of the Office of the President (Principal Operating Executive Officer) /s/ James W. Sievers James W. Sievers, Chief Financial Officer and Member of the Office of the President (Principal Operating Executive Officer and Principal Financial and Accounting Officer) /s/ Michael R. Moran Michael R. Moran, General Counsel, Chief Legal Officer and Member of the Office of the President (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 April 3, 1998.
Signature Title - -------------------------- ------------------------------------------ /s/ Harold S. Dahlstrand Vice Chairman of the Board of Directors, Harold S. Dahlstrand Chief Human Resources Officer and Chairperson of the Office of the President (Principal Operating Executive Officer) /s/ James W. Sievers Chief Financial Officer and Member of the James W. Sievers Office of the President (Principal Operating Executive Officer and Principal Financial and Accounting Officer) and Director /s/ Michael R. Moran General Counsel, Chief Legal Officer and Member Michael R. Moran of the Officer of the President (Principal Operating Executive Officer) and Director /s/ D. L. Skip Behm Vice President - Controller (Principal D. L. Skip Behm Accounting Officer) 56 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 April 3, 1998. Signature Title - -------------------------- ------------------------------------------ /s/ Thomas Bohlmann Director Thomas Bohlmann /s/ Dr. Michael E. Cruesemann Director Dr. Michael E. Cruesemann /s/ Richard T. Fersh Director Richard T. Fersch /s/ John W. Irvin Director John W. Irvin /s/ Martin Zaepfel Director Martin Zaepfel
57 EX-21 2 EXHIBIT 21 EXHIBIT 21 SPIEGEL, INC. LISTING OF SUBSIDIARIES January 3, 1998 Name of Corporation Incorporated In - ----------------------------------------------- ----------------- 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. Nevada First Consumers National Bank Federal Charter Hampton Realty Acquisition Corporation (2) Delaware Newport News, Inc. (formerly New Hampton, Inc.) Delaware S.I. Reinsurance Limited Turks & Caicos Spiegel Acceptance Corporation Delaware Spiegel Catalog, Inc. Delaware Spiegel Credit Corporation II Delaware Spiegel Credit Corporation III Delaware Spiegel Credit Corporation IV 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. 58 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 11, 1998, relating to the consolidated balance sheets of Spiegel, Inc. and subsidiaries as of January 3, 1998 and December 28, 1996, 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 January 3, 1998, which reports appear in the January 3, 1998 annual report on Form 10-K of Spiegel, Inc. /S/ KPMG PEAT MARWICK LLP Chicago, Illinois March 30, 1998 59 EX-27 4 EXHIBIT 27
5 1,000 12-MOS JAN-03-1998 JAN-03-1998 47,582 0 578,298 14,922 508,756 1,244,823 600,356 205,534 1,949,554 634,729 713,750 0 0 118,143 449,950 1,949,554 2,835,297 3,056,834 1,941,307 1,941,307 0 0 68,098 (49,406) (16,385) (33,021) 0 0 0 (33,021) (0.28) (0.28)
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