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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
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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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
Apparel 79% 74% 72%
Household furnishings
and other merchandise 21 26 28
---- ---- ----
100% 100% 100%
---- ---- ----
</TABLE>
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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,
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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.
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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
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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.
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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.
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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.
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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.
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ITEM 6. FIVE-YEAR SELECTED FINANCIAL DATA
($000s omitted, except per share amounts)
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<CAPTION>
1997 1996 1995 1994 1993 (2)
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<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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."
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
($000s omitted, except per share amounts)
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
------------ ------------
<S> <C> <C>
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
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended ($000s omitted, except per share amounts)
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
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)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($000s omitted, except per share amounts)
<TABLE>
<CAPTION>
Class A Class B Additional Minimum
non-voting voting paid-in Retained pension
Total common stock common stock capital earnings liability
----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
========== ========== ========= ========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended ($000s omitted)
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
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
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
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
============= ============
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
24
<PAGE>
4. LONG-TERM DEBT
The following is a summary of the Company's long-term debt at January 3, 1998
and December 28, 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
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
=========== ==========
</TABLE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Shares Amount Average Price
----------- ---------- --------------
<S> <C> <C> <C>
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
=========== ========== ==============
</TABLE>
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:
<TABLE>
<CAPTION>
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
- --------- ----------- ---------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 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
========= =========
</TABLE>
27
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
Weighted average assumptions used in accounting for obligations and assets were
as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Discount rate 7.25% 8.0%
Expected long-term rate of return on assets 9.0% 9.0%
</TABLE>
The following table sets forth the plans' funded status at January 3, 1998 and
December 28, 1996:
<TABLE>
<CAPTION>
1997 1996
Union Non-Union Union Non-Union
Plan Plan Plan Plan
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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)
======== ======== ======== ========
</TABLE>
28
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
The net periodic postretirement benefit cost for the years ended January 3,
1998, December 28, 1996 and December 30, 1995 is computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
1998 $126,578
1999 $115,040
2000 $107,189
2001 $ 90,751
2002 $ 81,523
and thereafter $360,596
</TABLE>
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
<PAGE>
7. INCOME TAXES
Earnings (loss) before income taxes is composed of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Domestic $ (57,510) $ (25,307) $ (16,740)
Foreign 8,104 4,031 933
--------- --------- ---------
Total $ (49,406) $ (21,276) $ (15,807)
========= ========= =========
</TABLE>
The components of income tax expense (benefit) for the years ended January 3,
1998, December 28, 1996 and December 30, 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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)
========= ========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
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)%
========= ======== ========= ======== ========= ========
</TABLE>
31
<PAGE>
Significant components of the Company's deferred tax assets and liabilities at
January 3, 1998 and December 28, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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)
======== ========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
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)
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
($000s omitted, except per share amounts)
<TABLE>
<CAPTION>
1997 First Second Third Fourth Total Year
- ------------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
1996 First Second Third Fourth Total Year
- ------------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
36
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
<TABLE>
<CAPTION>
The following persons are the directors of the Company.
Year
Elected as
Name Age Offices with Registrant or Other (4) Director
- ---------------------- --- ------------------------------------------------------------
<S> <C> <C> <C>
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
<PAGE>
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)
</TABLE>
(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
<PAGE>
EXECUTIVE OFFICERS
The following persons are the executive officers and certain significant
employees of the Company:
<TABLE>
<CAPTION>
Positions and Offices Held
(all positions and offices are of the Company
Name Age unless otherwise indicated)
- ---------------------- --- ---------------------------------------------------
<S> <C> <C>
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
<PAGE>
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)
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Stock
Name and Annual Compensation Options All Other
Principal Salary Bonus Granted Compensation (4)
Position Year ($) ($) (#) ($)
---------------------- ---- -------- --------- -------- ------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
41
<PAGE>
(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:
<TABLE>
<CAPTION>
Retirement Car Allowance/ Life Insurance
Name Benefits Other Premiums Paid Total
-------------------- ----------- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
42
<PAGE>
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%:
<TABLE>
<CAPTION>
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% ($) 10% ($)
- -------------------- -------- ----------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
The stock options granted become exercisable at the rate of 20% per year from
the date of the grant.
43
<PAGE>
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:
<TABLE>
<CAPTION>
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
- --------------------- -------- -------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 - -
</TABLE>
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.
<TABLE>
<CAPTION>
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
- ----- ------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John J. Shea 5/10/95 100,000 $10.00 $22.75 $10.00 8 years
</TABLE>
44
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Percentage of
Outstanding
Number of Title of Class B Voting
Name and Address Shares(1) Class Common Stock
- ------------------------- ----------- --------- ---------------
<S> <C> <C> <C>
Spiegel Holdings, Inc.(2) 116,957,089 Class B 99.9%
The Corporation Voting
Trust Center Common
1209 Orange Street Stock
Wilmington, DE 19801
</TABLE>
(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
<PAGE>
<TABLE>
<CAPTION>
Amount and
Name of Nature of
Title Beneficial Beneficial Acquirable Percent
of Class Owner Ownership (1) Within 60 Days of Class
- -------- -------------------- ------------- -------------- ------------
(I) (II) (III)
<S> <C> <C> <C> <C>
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)
</TABLE>
(1) Includes shares which may be acquired within 60 days under the Company's
Stock Option Plan.
* Less than 1%.
49
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
SCHEDULE II
SPIEGEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED
($000s omitted)
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
55
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title
- -------------------------- ------------------------------------------
<S> <C>
/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
<PAGE>
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
</TABLE>
57
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JAN-03-1998
<CASH> 47,582
<SECURITIES> 0
<RECEIVABLES> 578,298
<ALLOWANCES> 14,922
<INVENTORY> 508,756
<CURRENT-ASSETS> 1,244,823
<PP&E> 600,356
<DEPRECIATION> 205,534
<TOTAL-ASSETS> 1,949,554
<CURRENT-LIABILITIES> 634,729
<BONDS> 713,750
0
0
<COMMON> 118,143
<OTHER-SE> 449,950
<TOTAL-LIABILITY-AND-EQUITY> 1,949,554
<SALES> 2,835,297
<TOTAL-REVENUES> 3,056,834
<CGS> 1,941,307
<TOTAL-COSTS> 1,941,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,098
<INCOME-PRETAX> (49,406)
<INCOME-TAX> (16,385)
<INCOME-CONTINUING> (33,021)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,021)
<EPS-PRIMARY> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
