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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 2, 1999
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.
-----
On March 18, 1999, the aggregate market value of Class A non-voting common stock
held by non-affiliates (based on the closing price reported by NASDAQ National
Market on that date) was $94,653,105. The number of shares outstanding of the
issuer's Class A non-voting common stock at March 18, 1999 were 14,791,544.
The Class B voting common stock is not publicly traded and is 99.9% held by
affiliates. The number of shares outstanding of the issuer's Class B voting
common stock at March 18, 1999 were 117,009,869.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Spiegel, Inc. ("Spiegel" or the "Company") and its predecessors date from 1865.
In 1965, the Company was incorporated under the laws of Delaware. 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 principally 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 currently 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").
In 1990, the Company acquired First Consumers National Bank ("FCNB"). FCNB is a
special- purpose bank limited to the issuance of credit cards.
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").
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.
NARRATIVE DESCRIPTION OF BUSINESS (Dollars in thousands)
Spiegel is a leading, international specialty retailer that, together with its
subsidiaries, offers merchandise and credit services through a merchandising
segment and a bankcard segment.
MERCHANDISING SEGMENT
PRINCIPAL PRODUCTS, SERVICES, AND REVENUE SOURCES. The merchandising segment is
an aggregation of the Company's Eddie Bauer, Spiegel Catalog and Newport News
subsidiaries which distribute apparel, home furnishings and other merchandise
through catalogs, Internet sites and retail stores. These businesses are
supported by the Company's FCNB Preferred charge programs. In 1998, revenue
related to the sale of merchandise comprised approximately 95% of the
merchandising segment's total revenue. The remainder was contributed by finance
revenue generated from FCNB Preferred charge programs, including incremental
gains recognized in conjunction with the securitization of customer receivables.
PRODUCTS
The merchandising segment has two principal product categories: apparel
and home furnishings and other merchandise. The components of net sales
by product category for the last three years were:
1998 1997 1996
---- ---- ----
Apparel 80% 79% 74%
Home furnishings
and other merchandise 20 21 26
---- ---- ----
100% 100% 100%
---- ---- ----
---- ---- ----
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The apparel category includes a wide array of men's and women's
private-label and branded merchandise in various styles, including
seasonal product offerings. Home 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.
CREDIT SERVICES
In an effort to build brand loyalty and to provide additional
convenience for its customers, the Company offers credit programs to
qualifying catalog and retail customers in the form of its FCNB
Preferred charge card. The card is imprinted with a Spiegel Catalog,
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 FCNB Preferred charge card. The
accounts are serviced through FCNB's headquarters located in Beaverton,
Oregon.
At January 2, 1999, FCNB Preferred charge customer receivables serviced
were $1,343,417. Approximately 34% of 1998's total net sales were made
on FCNB Preferred charge cards, including approximately 73% of Spiegel
Catalog net sales, 19% of Eddie Bauer net sales, and 50% of Newport
News net sales. The lower percentage of Eddie Bauer sales made on the
FCNB Preferred charge card is attributable primarily to the relatively
higher percentage of retail store sales at Eddie Bauer. Catalogs
generally have a higher percentage of sales made on credit compared to
retail stores.
Deterioration in the credit market, increases in account charge-offs
and interest rate fluctuations all represent risks to the profitability
of the FCNB Preferred charge programs.
The following is a discussion of the major operations included in the
merchandising segment that offer the products and services described above:
EDDIE BAUER
Eddie Bauer is a leading specialty retailer serving the active, casual
lifestyle needs of men and women through the sale of high quality
private-label apparel, accessories and home furnishings. Eddie Bauer
markets its products through stores, catalogs and the Internet. Total
net sales were $1,709,610 and $1,750,991 for the years ended January 2,
1999 and January 3, 1998, respectively. Approximately 73% 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, catalog and
Internet channels 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 the Internet
site; and utilizing retail store mailing lists to help build the
catalog customer file.
Eddie Bauer's apparel category comprised 86% of its total net sales in
1998. Eddie Bauer presents its active, casual apparel and related
accessories primarily through its trademark Eddie Bauer sportswear
stores and catalogs. In addition, the apparel category also includes
AKA EDDIE BAUER, which features dress sportswear and accessories for
men and women; and EBTEK, which provides a line of performance active
wear. Eddie Bauer presents its casual home furnishings, linens and
decorative accessories through its Eddie Bauer HOME retail stores and
catalogs.
In 1993, Eddie Bauer entered into a joint-venture arrangement with
Otto-Sumisho, Inc. (a joint venture company of Otto Versand and
Sumitomo Corporation) to sell its full line of Eddie Bauer sportswear
products through retail stores and catalogs in
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Japan. There are currently 33 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 nine 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 six 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 division of
Furniture Brands International); Signature Eyewear, Inc.; Cosco, Inc.,
a manufacturer of infant and juvenile car seats and strollers; Imperial
Wall Coverings; and Giant Bicycle, Inc.
EDDIE BAUER RETAIL DIVISION
At January 2, 1999, Eddie Bauer operated a total of 555 stores;
507 retail stores and 48 outlets. There are 515 stores located in
the United States and 40 stores in Canada. Of the stores open at
January 2, 1999, 40 were Eddie Bauer HOME Collection and 34 were
AKA EDDIE BAUER stores. A typical Eddie Bauer store is
approximately 6,700 gross square feet. Eddie Bauer's retail stores
are generally located in upscale regional malls or in high traffic
metropolitan areas. 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 1998 and 1997, respectively,
were 47 and 65. In 1999, the Company plans to slow its new-store
growth pace. The average cost of opening a typical new Eddie Bauer
store in 1998, including inventory, furniture and fixtures,
pre-opening expenses and leasehold improvements (net of landlord
construction allowances) was approximately $700. 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 1998 and at January 2, 1999 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 AKA EDDIE BAUER, as well
as its largest catalog, Eddie Bauer Resource, combining all of its
specialty concepts in a single catalog. Eddie Bauer also actively
pursues new customers within its target market through initiatives
including list rentals and utilizing names of its retail store
customers.
SPIEGEL CATALOG
Spiegel Catalog has positioned itself as the lifestyle resource for the
working woman. Spiegel Catalog serves its customers by offering an
extensive array of fashionable apparel, home furnishings and other
merchandise through its trademark semiannual catalog, seasonal and
specialty catalogs, and Internet sites. Spiegel Catalog also operates
Ultimate Outlet stores, predominately located in outlet malls, which
offer overstock and end-of-season merchandise. Total net sales were
$586,873 and $769,225 for the years ended January 2, 1999 and January
3, 1998, respectively. Sales through catalog offerings comprise nearly
87% of the total net sales. Spiegel Catalog distributed over 112
million catalogs in 1998 and at January 2, 1999 had
4
approximately 3.3 million active customers (customers who have
purchased within the last 18 months.)
Spiegel Catalog's apparel merchandise, which represented 49% of its net
sales in 1998, 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 home furnishings and other merchandise, which represented 51%
of its net sales in 1998, 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.
NEWPORT NEWS
Newport News, acquired by the Company in 1993, is a specialty
catalog business offering fashionable, moderately priced women's
apparel and home furnishings. Newport News' net sales were $345,473
for the year ended January 2, 1999, compared to $315,081 for the
year ended January 3, 1998. In 1998, Newport News distributed 183
million catalogs. Newport News had a customer base of 3.7 million
active customers (customers who have purchased within the last 18
months) at January 2, 1999. In 1999, Newport News plans to launch a
Web site to broaden its sales and marketing reach.
The Newport News apparel category comprises a majority of its sales.
Although the largest categories are swimwear and dresses, all women's
apparel categories, including footwear, are well-represented. The
Newport News home furnishings category consists primarily of bed, bath
and decorative accessories.
PRODUCT DEVELOPMENT AND SOURCING
The merchandising segment's product development and sourcing teams are a
significant element of its private-label merchandise strategy. Manufacturers are
selected based on their ability to produce high quality product on a
cost-effective basis. Product design teams select and source fabrics to be
delivered to manufacturers along with product patterns, specifications and
templates used for cutting fabric and other pre-production work. Prototype
samples are submitted to the merchandise businesses 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 merchandising businesses sell domestically produced and imported
merchandise, which is purchased in the open market from approximately 2,800
suppliers, none of which supplied as much as 5% of the merchandise purchased
during 1998. A significant amount of the dollar value of merchandise purchased
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.
5
LICENSES AND TRADEMARKS
The Company's merchandising businesses utilize trademarks and tradenames
including "Spiegel", "Eddie Bauer", "AKA EDDIE BAUER", "Eddie Bauer HOME",
"EBTEK", "Newport News", and "easy style." The Company is also licensed to sell
goods under the "Together!" and "Apart" labels. The Company utilizes numerous
other trademarks and tradenames, however, believes that the loss or abandonment
of the above named trademarks, tradenames or licenses would have the most
significant effect on its business.
SEASONALITY OF BUSINESS
The merchandising businesses, like other retailers, have experienced and expect
to continue to experience seasonal fluctuations in merchandise sales and net
earnings. Historically, a significant amount of the merchandising segment's net
sales and a majority of its net earnings have been realized during the fourth
quarter. If sales were materially different from seasonal norms during the
fourth quarter, the merchandising segment'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 merchandising businesses participate 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. Success is highly dependent upon the
merchandising group's ability to maintain its existing customers, solicit new
customers, identify distinct fashion trends and continue to address the needs
and fashion tastes of its customers.
EMPLOYEES
During 1998, the merchandising segment employed between approximately 11,500 and
14,500 full-time equivalent employees, depending on the time of year, reflecting
the seasonality of the merchandising business and the fluctuations in its
workforce during the year. At February 27, 1999, the merchandising segment
employed approximately 11,200 full-time equivalent employees.
Spiegel Catalog is a party to a collective bargaining agreement with the
Warehouse, Mail Order, Office, Technical and Professional Employees Union,
Local 743, affiliated with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America ("Local 743"). Local 743
represents approximately 70 full-time employees under an agreement that
expires on February 28, 2001. In addition, Spiegel is party to a separate
agreement with Local 743 which expires on May 31, 2000 that covers
approximately 60 full-time equivalent Chicago-area Spiegel Catalog outlet
store employees.
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.
PROPERTIES
The Company's corporate headquarters and Spiegel Catalog operations are located
in leased office space in Downers Grove, Illinois. The Company owns its
Westmont, Illinois corporate data center.
The following information is specific to the merchandising segment: In addition
to the office space mentioned above, Spiegel Catalog leases a customer order
center in Wichita, Kansas and a customer service facility in Rapid City, South
Dakota. 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. Newport News leases office space in New York, New York, in addition to
leasing a facility in Hampton, Virginia where its order taking, customer service
and administrative functions are performed.
6
All retail store locations are also 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 Spiegel Catalog and Eddie Bauer retail and catalog distribution functions
are performed in two owned facilities in Groveport and Columbus, Ohio. An
additional retail distribution facility is leased in Toronto, Canada to support
the Eddie Bauer retail stores located in Canada. The Newport News distribution
function is performed in an owned facility in Newport News, Virginia.
Newport News owns approximately 62 acres of vacant land in Hampton, Virginia
adjacent to its distribution facility. At present, there are no plans to expand
upon this vacant land. The Company is exploring other alternatives for the
property.
The Company considers its present space and facilities under development
generally adequate for anticipated future requirements.
BANKCARD SEGMENT
Managed through FCNB, the Company's special-purpose bank, the bankcard business
markets various MasterCard and Visa programs nationwide from FCNB's leased
headquarters in Beaverton, Oregon (suburban Portland). The Company's bankcard
portfolio includes secured cards, co-branded cards and affinity cards, such as
the FCNB MasterCard, the FCNB Visa, the Pink Ribbon Spiegel MasterCard, and the
Eddie Bauer MasterCard. The bankcard segment's revenue is comprised of finance
revenue and credit related fees generated from the bankcard credit programs and
includes incremental gains recognized in conjunction with the securitization of
bankcard receivables.
At January 2, 1999, bankcard receivables serviced were $444,472, representing
approximately 428,000 active accounts. The credit market is highly competitive
and is served by numerous lenders. The bankcard segment's ability to compete in
this environment is dependent on its ability to develop credit programs that
attract and retain credit customers. The bankcard segment has capitalized on
bankcard programs which offer customized service to under-serviced niches in the
credit industry, which contributed to its significant growth in 1998.
In 1999, the bankcard segment intends to continue to grow its portfolio through
initiatives aimed at customer acquisition and retention and increasing average
account balances. This will entail the continued development and marketing of
customized bankcard credit programs, including programs specific to the
Company's merchandising businesses.
During 1998, FCNB employed an average of approximately 850 employees. At
February 27, 1999, FCNB employed approximately 930 full-time equivalent
employees, a reflection of the growth of the bankcard business.
Deterioration in the credit market, increases in account charge-offs and
interest rate fluctuations all represent risks to the profitability of the
Company's bankcard credit operations.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information regarding revenues, operating income and assets of the Company's
merchandising and bankcard segments for each of the three fiscal years ended
January 2, 1999, January 3, 1998 and December 28, 1997, is incorporated herein
by reference to Note 10. "Segment Reporting" of Part II. Item 8. "Notes to
Consolidated Financial Statements." of this Form 10-K. For additional
information, see also the above description of business and Part II. Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
7
ITEM 2. PROPERTIES
Information regarding the principal properties of the Company is incorporated
herein by reference to pages 6 to 7 of Item 1 hereof.
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely involved in a number of legal proceedings and claims
that cover a wide range of matters. In the opinion of management, the outcome of
these matters is not expected to have any material adverse effect on the
consolidated financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 sale prices of the
Class A non-voting common stock.
On March 18, 1999, the closing market price of the Class A non-voting common
stock, as quoted on the NASDAQ National Market System, was $6 7/16 per share.
The Class B voting common stock is not publicly traded. Therefore, no market
value information is readily available on this class of stock. However, the
Company believes the value of the Class B voting common stock approximates the
market value of the Class A non-voting common stock as both classes of stock are
equal in all respects, with the exception of voting rights.
HOLDERS
There were approximately 11,400 Class A non-voting common stockholders as of
March 18, 1999. 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. As of the date
hereof, there were two Class B voting common stockholders.
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 evaluates its dividend policy
on an ongoing basis. No cash dividends were paid in the years ended January 2,
1999 and January 3, 1998.
9
ITEM 6. FIVE-YEAR SELECTED FINANCIAL DATA
($000s omitted, except per share amounts)
1998 1997 1996 1995 1994
EARNINGS DATA ------------ ------------ ------------ ------------ ------------
Net sales and
other revenues $ 2,935,411 $ 3,056,834 $ 3,014,620 $ 3,184,184 $ 3,015,985
Earnings (loss) before
income taxes 18,110 (49,406) (21,276) (15,807) 47,246
Net earnings (loss) (1) $ 3,270 $ (33,021) $ (13,389) $ (9,481) $ 25,100
Net earnings (loss) per
common share (1)
Basic and diluted $ 0.03 $ (0.28) $ (0.12) $ (0.09) $ 0.23
Cash dividends per
common share $ - $ - $ - $ 0.20 $ 0.20
BALANCE SHEET AND CASH FLOW DATA
Current assets $ 1,255,494 $ 1,244,823 $ 1,231,535 $ 1,559,909 $ 1,928,172
Total assets 1,857,260 1,949,554 1,945,625 2,273,982 2,560,287
Current liabilities 663,251 637,222 697,250 668,229 630,828
Long-term debt,
excluding current
maturities 523,036 713,750 676,656 1,014,692 1,300,364
Stockholders' equity $ 637,267 $ 565,600 $ 519,695 $ 533,792 $ 576,735
Net additions to
property and equipment $ 28,610 $ 55,047 $ 45,698 $ 131,229 $ 84,191
Depreciation and
amortization $ 88,547 $ 88,062 $ 95,278 $ 79,047 $ 60,555
(1) In 1998, second quarter and total year net earnings includes a charge of
$8,535, or $0.06 per share, for the redemption of subsidiary preferred
stock.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ($000s omitted, except per share amounts)
RESULTS OF OPERATIONS
For the fiscal year ended January 2, 1999, net earnings were $3,270, or $0.03
per common share, basic and diluted. Net earnings in 1998 included the
redemption of subsidiary preferred stock in the second quarter, which decreased
net earnings per common share $0.06 for the year. Earnings before redemption of
subsidiary preferred stock totaled $11,805, or $0.09 per share, compared to net
losses of $33,021, or $0.28 per share, in 1997 and $13,389, or $0.12 per share,
in 1996. The 1998 fiscal year results included incremental pretax gains on the
sale of receivables totaling $45,328, or $0.23 per share, compared to $75,141,
or $0.43 per share, in 1997. No comparable gains were recognized in fiscal year
1996. Excluding the impact of receivable gains, fiscal year 1998 operating
income increased nearly $97 million over 1997, driven by improvements in both
the merchandising and bankcard segments.
MERCHANDISING SEGMENT
1998 1997 1996
------------- ------------- ------------
Retail net sales $1,331,476 $1,353,142 $1,233,859
Comp store % change (9)% (3)% 0%
Catalog net sales 1,310,480 1,482,155 1,616,696
------------- ------------- ------------
Total net sales 2,641,956 2,835,297 2,850,555
Finance revenue 138,033 132,030 65,159
Other revenue 42,222 43,244 52,791
------------- ------------- -------------
Total revenue $2,822,211 $3,010,571 $2,968,505
------------- ------------- -------------
% change (6.3)% 1.4% (5.7)%
Gross margin %
to total net sales 31.6% 31.5% 34.1%
SG&A % to total revenue 35.2% 35.4% 35.2%
Operating income $ 21,601 $ 2,314 $ 45,430
------------- ------------- --------------
1998 COMPARED WITH 1997
Total merchandising revenue declined in 1998 compared to 1997, driven by lower
retail and catalog net sales, slightly offset by higher finance revenue
generated from the Company's private-label FCNB Preferred charge programs.
Retail net sales were down primarily due to the decline in Eddie Bauer's
comparable-store sales, offset somewhat by sales contributed by new stores.
Retail net sales were negatively impacted by lackluster customer response to
merchandise, which led to increased promotional activity. Additionally,
unseasonably warm weather during most of the fourth quarter dampened the demand
for outerwear and other cold-weather related products. Lower catalog net sales
resulted from a reduction in catalog pages circulated by Spiegel Catalog and
lower customer response to Eddie Bauer's catalog mailings, particularly in
cold-weather related products. Partially offsetting the catalog net sales
decline was solid sales growth at Newport News. FCNB Preferred charge finance
revenue included incremental pretax gains on the sale of receivables of $11,757
in 1998 compared to $63,813 in 1997. Excluding the impact of receivable gains,
finance revenue was $126,273 and $68,217 in 1998 and 1997, respectively. This
increase resulted from the improved performance of the FCNB Preferred charge
portfolio, as well as from pricing changes implemented in late 1997.
11
Merchandising operating income increased in 1998 to $21,601, a $19,287
improvement over 1997. Excluding the impact of the receivable gains discussed
above, the comparable operating income improved by $71,343. Key factors
contributing to the progress in the merchandising segment included the improving
performance of Spiegel Catalog, solid sales and earnings growth at Newport News
and the earnings contribution realized from the FCNB Preferred charge programs.
Although Eddie Bauer recorded another profitable year, lower operating income
compared to last year somewhat offset the above improvements.
Gross margin improved slightly in 1998 over the prior year due to margin rate
improvements at Spiegel Catalog and Newport News, driven primarily by a shift in
sales mix toward higher margin items and better product sourcing. These
improvements were substantially offset by a margin decline at Eddie Bauer
resulting from a higher level of markdowns taken to manage inventories.
Consolidated merchandise inventories were 4% lower than the year-end level in
1997, even though Eddie Bauer increased its store base by 47 stores.
In spite of lower revenues, the selling, general and administrative expense rate
improved slightly over last year. This improvement resulted primarily from
higher catalog sales productivity at Spiegel Catalog and Newport News, offset
somewhat by lower productivity on Eddie Bauer's catalog sales. The SG&A ratio
also benefited from favorable charge-off experience in the FCNB Preferred charge
portfolio. Stringent cost controls continue to be a focus across all
merchandising divisions. In addition, SG&A expense in 1997 included a charge of
approximately $16 million to provide for the estimated impact of certain
repositioning activities at Spiegel Catalog. During 1997, the Company expended
approximately $3.5 million related to these activities. The remaining balance of
the reserve was utilized in 1998.
1997 COMPARED WITH 1996
Total merchandising revenue increased in 1997 compared to 1996, as growth in
retail net sales coupled with higher FCNB Preferred charge finance revenue
offset declines in catalog net sales. The retail net sales increase was driven
by a higher number of stores open in 1997 compared with 1996. Comparable-store
sales declined from 1996 levels resulting from weakness in fall-season sales due
to lower than expected demand for cold-weather related products. Catalog net
sales declined in 1997 compared to 1996 driven by a 24% decrease in Spiegel
Catalog net sales, which were affected by lower catalog productivity, reduced
circulation, and the continued effect of tightened credit policies in the FCNB
Preferred charge programs. Somewhat offsetting the decline in sales at Spiegel
Catalog were catalog net sales improvements at Newport News and the continued
growth of Eddie Bauer's catalog operations. FCNB Preferred charge finance
revenue included incremental pretax gains on the sale of receivables of $63,813
in 1997. No comparable gain was recorded in 1996. Excluding the impact of
receivable gains, finance revenue was $68,217 in 1997 compared to $65,159 in
1996. Other revenue declined to $43,244 in 1997 from $52,791 the previous year
primarily due to the sale of the Company's information and technology subsidiary
in the first quarter of 1996, the results of which were previously included in
the merchandising segment.
Merchandising operating income declined in 1997 to $2,314, including the
above-mentioned receivable gains of $63,813. Results for the year were
disappointing, driven by the continued decline in sales and productivity at
Spiegel Catalog. Spiegel Catalog repositioned its operations in 1997 to create
more focused, targeted catalog offerings and improve performance. The
performance of Eddie Bauer and Newport News somewhat offset the declines at
Spiegel Catalog.
Gross margins declined in 1997, driven by a higher level of markdown activity
experienced at Spiegel Catalog as part of its continuing efforts to reposition
its merchandise assortment and eliminate products inconsistent with its
merchandising plans. Through its 1997 repositioning, Spiegel Catalog began its
effort to strengthen its private-label offerings and develop a more profitable
product mix aimed at improving margins. Eddie Bauer also contributed to the
gross margin rate decline with increased promotional activity in the fourth
quarter due largely to lower than expected demand for cold-weather related
products. The Company effectively managed consolidated inventory risk, ending
the year at $508,756, only 1% over the 1996 year-end level despite below-plan
sales and the addition of 65 Eddie Bauer retail stores.
12
The selling, general and administrative expense ratio was negatively impacted in
1997 by the higher expense ratio experienced at Spiegel Catalog, the result of
lower productivity from catalog offerings as well as approximately $16 million
in expenses associated with its repositioning. This repositioning included a 15%
corporate work force reduction at Spiegel Catalog, the closing of two telephone
sales centers, and the movement of certain operational units to the corporate
headquarters. The impact of Spiegel Catalog on the ratio was offset somewhat by
greater expense leverage from Newport News and Eddie Bauer compared to 1996.
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 FCNB Preferred charge portfolio
and the incremental pretax gain from the sale of receivables of $63,813 included
in finance revenue in 1997. 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.
BANKCARD SEGMENT
1998 1997 1996
------------ ------------ ------------
Finance revenue $ 113,200 $ 46,263 $ 46,115
SG&A % to finance revenue 37.9% 51.0% 50.9%
Operating income $ 70,344 $ 22,685 $ 22,638
------------ ------------ ------------
1998 COMPARED WITH 1997
Bankcard operating performance improved dramatically in 1998 compared to prior
years. Diversification in the bankcard credit programs drove substantial
increases in the bankcard receivable portfolio, positioning it well for future
growth. Bankcard finance revenue of $113,200 in 1998 represented a 145% increase
over 1997. Excluding the impact of incremental receivable gains of $33,571 in
1998 and $11,328 in 1997, finance revenue increased 128% in 1998 compared to
1997, driven by the growth in the portfolio and pricing changes implemented in
late 1997. Operating income in 1998 benefited from market and risk based pricing
strategies, enhanced credit scoring initiatives, tightened expense controls, as
well as the growth in the portfolio and receivable gains.
1997 COMPARED WITH 1996
Bankcard finance revenue and operating income in 1997 included $11,328 in
incremental receivable gains. No comparable gains were recorded in 1996.
Excluding the impact of incremental receivable gains, 1997 bankcard finance
revenue was $34,935. The decrease from 1996 was due to a higher average level of
receivables sold in 1997, offset somewhat by a 14% increase in the total
bankcard portfolio and a slightly higher finance yield due primarily to pricing
changes implemented in late 1997.
Excluding the above-mentioned receivable gain, 1997 operating income was also
lower than 1996. This decrease was primarily due to increased acquisition and
marketing expenditures to support the bankcard programs. Additionally, higher
charge-offs in the secured card programs negatively impacted operating
performance. During 1997, in response to these higher charge-offs, the Company
tightened credit criteria in certain programs and adopted more aggressive
collection strategies.
13
INTEREST EXPENSE
The Company continued to benefit from lower average debt levels, as interest
expense declined in 1998 to $67,733 from $68,098 in 1997 and $82,677 in 1996.
Average debt was $853,749, $877,698, and $1,089,056 in 1998, 1997 and 1996,
respectively. The trend in lower average debt levels resulted primarily from the
improvement in cash flow from operations, increased efficiency in asset-backed
securitization programs, as well as the net proceeds of $69,993 and $69,972 from
the issuance of Class B voting stock in 1998 and 1997, respectively.
INCOME TAXES
The effective tax rate in 1998 was 34.8% compared to 33.2% in 1997 and 37.1% in
1996. State tax rates have been affected by changes in earnings mix among the
Company's various business units. The Company assesses its effective tax rate on
a continual basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its operating and cash requirements through
funds generated from operations, the securitization of customer accounts
receivable and the issuance of debt and common stock. Total customer receivables
sold were $1,420,730 at January 2, 1999 and $1,292,713 at January 3, 1998.
Net cash provided by operating activities increased nearly $230 million in 1998
compared to 1997. This increase was due to several factors including
significantly improved operating results, the overall level of receivables and
strong inventory control. Additionally, the Company also brought its bankcard
secured deposit processing in-house, providing approximately $57 million in
additional cash. Receivables and the related securitization activity had a
significant impact on net cash provided by operating activities. Net cash
provided by securitization of customer receivables was $128,017 in 1998 compared
to $171,017 of net cash used in 1997 to reduce securitization levels. Net cash
used to fund increases in credit portfolios was $63,459 in 1998 compared to net
cash provided by decreases in the FCNB Preferred charge portfolio of $188,024 in
1997.
Net additions to property and equipment were $28,610 and $55,047 in fiscal 1998
and 1997, respectively. Capital spending, primarily related to Eddie Bauer
retail store expansion and remodeling, decreased in 1998 compared to 1997,
driven by a lower number of Eddie Bauer store openings in the period. Eddie
Bauer ended the year with 555 stores, increasing its store base by 47 stores in
1998 compared to the net addition of 65 stores in 1997.
The Company maintains restricted cash accounts as necessary representing reserve
funds used as credit enhancement for specific classes of investor certificates
issued in certain asset-backed securitization transactions. These restricted
cash accounts are included in other assets in the Company's consolidated balance
sheets. In 1998, restricted cash of $49,400 was released to the Company when the
asset-backed securitizations requiring credit enhancement matured. The remaining
balance of restricted cash was $10,192 at January 2, 1999.
As of January 2, 1999, total debt was $608,750 compared to $816,650 as of
January 3, 1998. In 1998, the Company successfully achieved its objective to
continue to decrease total debt outstanding. Debt reduction remains a primary
objective of the Company.
In 1998 and 1997, the Company issued 13,526,571 and 10,341,644 shares of Class B
voting common stock, respectively, to its majority shareholder, Spiegel
Holdings, Inc. The net proceeds of $69,993 and $69,972 received in 1998 and
1997, respectively, were used primarily to fund working capital and investing
needs.
In March 1994 and December 1995, Newport News issued shares of non-voting
redeemable preferred stock to certain directors and executive officers of the
Company, its subsidiaries, and Otto Versand. All outstanding shares were
redeemed in April 1998 for
14
$12,236. The excess of the redemption price over the carrying value of the
preferred stock reduced net earnings by $8,535 and the related basic and diluted
net earnings per common share by $0.06 for the year.
The Company believes that its cash on hand, together with cash flows anticipated
to be generated from operations, borrowings under its existing credit
facilities, securitization 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.
MARKET RISK
The Company is exposed to market risk from changes in interest rates and, to a
lesser extent, foreign exchange rate fluctuations. In seeking to minimize risk,
the Company manages exposure through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial instruments.
The Company manages interest rate exposure through its mix of fixed and variable
rate financing of owned receivables, asset-backed securitizations and other
assets. The Company is generally able to meet certain targeted objectives
through direct fixed and variable rate borrowings. However, on occasion,
derivative financial instruments are utilized to reach these objectives.
Interest rate swaps may be used to minimize interest rate exposure when
appropriate based on market conditions. The use of interest rate swaps is
minimal, and as of January 2, 1999, the notional amount totaled $70,000. The
Company also entered into a short-term interest rate lock in 1998 to hedge an
anticipated securitization transaction, which was subsequently completed in
February 1999. The notional amount of this interest rate lock was $250,000 at
January 2, 1999.
In conjunction with its asset-backed securitizations, the Company recognizes
gains representing the present value of estimated future cash flows the Company
expects to receive over the estimated outstanding securitization period. Certain
estimates inherent in determining the present value of these estimated future
cash flows are influenced by factors outside the Company's control, and, as a
result, could materially change in the near term and affect the carrying value
of these receivables.
The Company believes that its interest rate exposure management policies,
including the use of derivative financial instruments, is adequate to limit any
material market risk exposure to its consolidated financial statements at
January 2, 1999.
YEAR 2000
The Company continues to take the appropriate steps to minimize the threat of
any material technical failure relating to Year 2000 compliance issues. A series
of comprehensive plans, covering the renovation of internal systems, outside
vendor readiness and testing are in place and are being executed in accordance
with prescribed time tables.
The renovation phase is progressing, with over 80% of our internal hardware and
software systems and facilities Year 2000 compliant as of January 2, 1999.
Systems yet to be renovated include those that are dependent on minor third
party vendor software upgrades, systems that have been targeted for replacement
or renovation in 1999 and will be compliant upon installation, and off-the-shelf
PC hardware and software that can be purchased and installed in a short period
of time. At this point, it is anticipated that 90% of the Company's internal
systems will be Year 2000 compliant by the end of the first quarter 1999, 98% at
mid-year and 100% at the end of the third quarter. Contingency plans are
currently in place in order to mitigate the impact of possible system failure.
These plans also include contingencies for the renovation of existing systems in
the event that replacement systems cannot be installed in a timely manner.
Generally, individual systems are being tested as they are renovated. A fully
integrated system test is scheduled to commence in January 1999, lasting
approximately six months. Systems not yet renovated will be added to this
integrated test as renovation is completed.
15
The Company has also implemented a comprehensive plan to communicate to all
critical vendors and suppliers the expectation that they attain Year 2000
compliance in a timely manner. To date, the Company has received responses from
over 80% of these critical vendors and is aggressively pursuing those who have
not responded or have responded in an unsatisfactory manner. Contingency plans
have been put in place to provide alternate solutions if the progress of certain
vendors and suppliers is deemed questionable so as not to jeopardize the
Company's ability to service customers.
The direct costs associated with the Year 2000 initiative are expected to range
between $8,000 and $10,000. These costs, totaling $4,800 through January 2,
1999, are funded through current operations and expensed as incurred.
Risks associated with Year 2000 failures range from sporadic delays of limited
scope all the way to an extended impairment of the Company's merchandise
receipt, distribution and billing capabilities. While difficult to predict, the
most reasonably likely scenario will include some sporadic delays of limited
scope. While the Company believes it is acting prudently in addressing the Year
2000 issue, it is impossible for any company to ensure complete Year 2000
compliance. While it is certainly possible that there may be litigation arising
from the Year 2000 conversion, at this time the Company does not anticipate, nor
can it estimate, any costs associated with such litigation.
ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, establishes accounting
and reporting standards for derivatives and for hedging activities. The Company
is studying the statement to determine its effect on the consolidated financial
position or results of operations, if any. The Company will adopt SFAS No. 133,
as required, in fiscal year 2000.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants issued Statements of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and No. 98-5, "Reporting on the Costs of Start-up Activities." The
adoption of these new accounting rules in fiscal year 1999 is not anticipated to
have a material impact on the Company's financial position or results of
operations.
FORWARD-LOOKING STATEMENTS
This report contains statements that are forward-looking 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 that 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, 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, and postal
rate, paper or printing cost increases, as well as other risks indicated in
other filings with the Securities and Exchange Commission.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information contained in Part II, Item 7. under the caption "Market Risk" on
page 15 of this Form 10-K is incorporated herein by reference.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
Years ended ($000s omitted, except per share amounts)
January 2, January 3,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 91,200 $ 47,582
Receivables, net 544,146 563,376
Inventories 490,915 508,756
Prepaid expenses 93,390 89,137
Refundable income taxes 9,897 6,064
Deferred income taxes 25,946 29,908
------------ ------------
Total current assets 1,255,494 1,244,823
Property and equipment, net 359,361 394,822
Intangible assets, net 153,146 159,016
Other assets 89,259 150,893
------------ ------------
$ 1,857,260 $ 1,949,554
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt $ 85,714 $ 102,900
Accounts payable 287,585 238,723
Accrued liabilities:
Salaries and wages 46,301 37,305
General taxes 103,890 120,345
Allowance for returns 33,222 37,094
Other accrued liabilities 106,539 100,855
------------ ------------
Total current liabilities 663,251 637,222
Long-term debt, excluding current maturities 523,036 713,750
Deferred income taxes 33,706 32,982
------------ ------------
Total liabilities 1,219,993 1,383,954
------------ ------------
Stockholders' equity:
Class A non-voting common stock, $1.00 par
value; authorized 16,000,000 shares;
14,747,844 shares issued and outstanding
at January 2, 1999; 14,660,464 shares
issued and outstanding at January 3, 1998 14,748 14,660
Class B voting common stock, $1.00 par value;
authorized 121,500,000 shares; 117,009,869
shares issued and outstanding at
January 2, 1999; 103,483,298 shares issued
and outstanding at January 3, 1998 117,010 103,483
Additional paid-in capital 328,489 271,645
Accumulated other comprehensive income (4,555) (2,493)
Retained earnings 181,575 178,305
------------ ------------
Total stockholders' equity 637,267 565,600
------------ ------------
$ 1,857,260 $ 1,949,554
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended ($000s omitted, except per share amounts)
January 2, January 3, December 28,
1999 1998 1996
------------ ------------ ------------
NET SALES AND OTHER REVENUES
Net sales $ 2,641,956 $ 2,835,297 $ 2,850,555
Finance revenue 251,233 178,293 111,274
Other revenue 42,222 43,244 52,791
------------ ------------ ------------
2,935,411 3,056,834 3,014,620
COST OF SALES AND OPERATING EXPENSES
Cost of sales, including buying
and occupancy expenses 1,807,569 1,941,307 1,877,859
Selling, general and
administrative expenses 1,041,999 1,096,835 1,075,360
------------ ------------ ------------
2,849,568 3,038,142 2,953,219
Operating income 85,843 18,692 61,401
Interest expense 67,733 68,098 82,677
------------ ------------ ------------
Earnings (loss) before
income taxes 18,110 (49,406) (21,276)
Income tax provision (benefit) 6,305 (16,385) (7,887)
------------ ------------ ------------
Earnings (loss) before redemption
of subsidiary preferred stock 11,805 (33,021) (13,389)
Redemption of subsidiary
preferred stock 8,535 - -
------------ ------------ ------------
Net earnings (loss) $ 3,270 $ (33,021) $ (13,389)
------------ ------------ ------------
------------ ------------ ------------
EARNINGS PER COMMON SHARE
Net earnings (loss) per
common share
Basic and diluted $ 0.03 $ (0.28) $ (0.12)
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended ($000s omitted)
January 2, January 3, December 28,
1999 1998 1996
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 3,270 $ (33,021) $ (13,389)
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Depreciation and amortization 88,547 88,062 95,278
Incremental gains on sale of receivables (45,328) (75,141) -
Change in assets and liabilities,
net of effects of acquisition:
Increase (decrease) in sold
customer receivables 128,017 (171,017) 283,730
(Increase) decrease in receivables, net (63,459) 188,024 (26,493)
(Increase) decrease in inventories 17,841 (6,547) 70,168
(Increase) decrease in prepaid expenses (4,253) (4,504) 16,691
Increase (decrease) in accounts payable 48,862 (32,250) 14,446
Increase (decrease) in accrued liabilities (5,646) (5,778) 15,717
Increase (decrease) in income taxes 853 (8,724) 14,539
------------ ------------ -------------
Net cash provided by (used in)
operating activities 168,704 (60,896) 470,687
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (28,610) (55,047) (45,698)
Net (additions to) reductions in other assets 43,027 (23,655) (39,965)
------------ ------------ -------------
Net cash provided by (used in)
investing activities 14,417 (78,702) (85,663)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt 25,000 105,000 111,250
Payment of debt (232,900) (74,298) (451,666)
Issuance of Class A common shares 466 228 80
Issuance of Class B common shares 69,993 69,972 -
------------ ------------ -------------
Net cash provided by (used in)
financing activities (137,441) 100,902 (340,336)
------------ ------------ -------------
Effect of exchange rate changes on cash (2,062) (639) (73)
------------ ------------ -------------
Net change in cash and cash equivalents 43,618 (39,335) 44,615
Cash and cash equivalents at
beginning of year 47,582 86,917 42,302
Cash and cash equivalents at ------------ ------------ -------------
at end of year $ 91,200 $ 47,582 $ 86,917
------------ ------------ -------------
------------ ------------ -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 68,973 $ 69,806 $ 84,428
------------ ------------ -------------
Income taxes $ 5,631 $ 16,262 $ 6,500
------------ ------------ -------------
See accompanying notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($000s omitted, except per share amounts)
Accumulated
Class A Class B Additional other
non-voting voting paid-in Retained comprehensive
Total common stock common stock capital earnings income
-------- ------------ ------------- ----------- ---------- ----------
BALANCES AT
DECEMBER 30, 1995 $533,792 $14,605 $ 93,142 $ 211,761 $ 224,715 $(10,431)
Comprehensive income
Net loss (13,389) - - - (13,389) -
Foreign currency (73) - - - - (73)
Adjustment to minimum
pension liability
(net of tax benefit
of $523) (715) - - - - (715)
--------
Total comprehensive income (14,177)
Issuance of 13,560
Class A common shares 80 13 - 67 - -
-------- ----------- ------------- ---------- ---------- ---------
BALANCES AT
DECEMBER 28, 1996 519,695 14,618 93,142 211,828 211,326 (11,219)
Comprehensive income
Net loss (33,021) - - - (33,021) -
Foreign currency (639) - - - - (639)
Adjustment to minimum
pension liability
(net of taxes
of $6,243) 9,365 - - - - 9,365
--------
Total comprehensive income (24,295)
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 - -
-------- ----------- ------------- ---------- ---------- ---------
BALANCES AT
JANUARY 3, 1998 565,600 14,660 103,483 271,645 178,305 (2,493)
Comprehensive income
Net income 3,270 - - - 3,270 -
Foreign currency (2,062) - - - - (2,062)
--------
Total comprehensive income 1,208
Issuance of 87,380
Class A common shares 466 88 - 378 - -
Issuance of 13,526,571
Class B common shares 69,993 - 13,527 56,466 - -
-------- ----------- ------------- ---------- ---------- ---------
BALANCES AT
JANUARY 2, 1999 $637,267 $14,748 $ 117,010 $ 328,489 $181,575 $(4,555)
-------- ----------- ------------- ---------- ---------- ---------
-------- ----------- ------------- ---------- ---------- ---------
See accompanying notes to consolidated financial statements.
20
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, Internet sites and
more than 550 specialty retail stores. The Company also offers private-label
FCNB Preferred charge programs to customers of its merchandising businesses and
operates a special-purpose bank that markets various bankcard credit programs
nationwide.
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 in the financial statements and accompanying notes.
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 Company.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to December 31. Fiscal
years 1998 and 1996 each consisted of 52 weeks and ended on January 2, 1999 and
December 28, 1996, 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
Statement of Financial Accounting Standards (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 AND CASH EQUIVALENTS
Cash equivalents represent short-term, highly liquid 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, classified as trading and stated at fair market value, are
included in the Company's balance sheet under "Receivables, net."
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.
21
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 2, 1999 and January 3, 1998
were $41,273 and $37,988, respectively, and are included in prepaid expenses.
All other advertising costs for both catalog and retail operations are expensed
as incurred. Total advertising expense, including the above mentioned catalog
costs, was $389,130, $454,240 and $448,700 for fiscal years 1998, 1997 and 1996,
respectively.
STORE PRE-OPENING COSTS
Pre-opening 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 $71,647
and $65,777 at January 2, 1999 and January 3, 1998, 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 cash flows. The Company does
not believe there has been any material impairment in the carrying value of its
goodwill and trademarks.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's Canadian subsidiary, where the
Canadian dollar is considered the functional currency, are translated into U.S.
dollars using the exchange rate in effect at the end of the fiscal year for
assets and liabilities and the exchange rates in effect at month-end for results
of operations. The related unrealized gains or losses resulting from translation
are reflected as a component of accumulated other comprehensive income in
stockholders' equity. Foreign currency transaction gains and losses are included
in the consolidated statements of earnings as incurred.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company selectively uses non-leveraged, off-balance-sheet derivative
instruments to manage its market and interest rate risk, and does not hold
derivative positions for trading purposes. Current derivative positions consist
primarily of non-leveraged, off-balance-sheet interest rate swaps that are
accounted for by recording the net interest paid as interest expense on a
current basis. In 1998, the company entered into a short-term interest rate lock
to hedge an anticipated securitization transaction, which was subsequently
completed in February 1999. Gains or losses resulting from market movements
related to these transactions are not recognized at January 2, 1999. The
resulting gain related to the interest rate lock will be deferred in the
February 1999 balance sheet and recognized in earnings over the life of the
transaction.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial assets and liabilities are recorded in the consolidated balance sheets
at historical cost, which approximates fair value. The methods and assumptions
used to estimate the fair value of receivables including amounts related to
securitizations are discussed in Note 2. The fair value of long-term debt and
related derivative financial instruments is discussed in Note 4.
22
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 2, 1999 and January 3, 1998 were $26,721
and $26,726, respectively. Related amortization expense recognized in fiscal
years 1998, 1997 and 1996 was $11,223, $16,038 and $15,809, respectively. Costs
associated with the Company's Year 2000 remediation efforts are expensed as
incurred.
CREDIT CARD FEES AND DEFERRED EXPENSES
Annual credit card fees and credit card origination expenses are deferred, on a
net basis, and amortized on a straight-line basis over one year.
EMPLOYEE PENSION PLANS
Company policy is to, at a minimum, fund the pension plans to meet the
requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
STOCK BASED COMPENSATION
The Company has elected to continue to account for stock-based compensation
using the intrinsic value method as discussed in Note 5.
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. (SHI). Pursuant to a tax reimbursement agreement with SHI, the Company
records provisions for income tax expense as if it were a separate taxpayer.
EARNINGS PER COMMON SHARE
Basic earnings per common share (EPS) is computed by dividing net earnings by
the weighted average number of both classes of common shares outstanding during
the year. Diluted EPS assumes the exercise of employee stock options when there
is income from continuing operations and the average market price of the common
shares exceeds the options exercise price. The dilutive effect of the potential
exercise of options, if any, is reflected in diluted EPS using the treasury
stock method.
In 1998, options to purchase 1,175,265 shares of common stock at prices ranging
from $4.47 to $22.25 were not included in the computation of diluted EPS because
the options' exercise prices were greater than the average market price of the
common shares. When income from continuing operations is a loss, inclusion of
options in the computation of diluted EPS will result in an antidilutive per
share amount. Therefore, 166,690 and 846,895 potentially dilutive options were
not included in the computation of diluted EPS in fiscal years 1997 and 1996,
respectively.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified from amounts previously
reported to conform with the 1998 presentation.
23
2. RECEIVABLES
Receivables consist primarily of FCNB Preferred charge receivables generated in
connection with the sale of the Company's merchandise as well as receivable
balances generated from the bankcard credit programs offered by the Company's
special-purpose bank. At January 2, 1999, customer receivables serviced were
$1,787,890, of which 75% related to the Company's FCNB Preferred charge program.
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.
Receivables consist of the following:
1998 1997
----------- ------------
Composition of Customer Receivable Portfolio:
Receivables serviced $ 1,787,890 $ 1,683,783
Receivables sold (1,420,730) (1,292,713)
----------- ------------
Receivables owned, at certificate value 367,160 391,070
----------- ------------
Composition of Receivables Owned:
Retained certificates 239,828 145,732
Receivables with no certificates issued 127,332 245,338
----------- ------------
Receivables owned, at certificate value 367,160 391,070
Receivables from trust 140,469 95,141
Receivables owned, at fair market value ----------- ------------
before allowances 507,629 486,211
Less allowance for returns on FCNB Preferred
charge sales (22,246) (21,247)
Less allowance for doubtful accounts (8,857) (11,757)
Other trade receivables, net 67,620 110,169
----------- ------------
Receivables, net $ 544,146 $ 563,376
----------- ------------
----------- ------------
The Company routinely transfers portions of its customer receivables to trusts
that, 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. In addition to
the certificates sold, an additional class of investor certificates, currently
retained by the Company, was issued by the trust in certain transactions.
The Company accounts for these asset-backed securitizations in accordance with
SFAS No. 125, which requires that the Company recognize gains on its
securitization of customer receivables. Incremental gains of $45,328 and $75,141
were recorded as finance revenue in fiscal year 1998 and 1997, respectively,
representing the present value of estimated future cash flows the Company will
receive over the estimated outstanding period of the asset securitization. These
future cash flows consist of an estimate of the excess of finance charges and
fees over the sum of the return paid to certificate holders, contractual
servicing fees, and credit losses along with the future finance charges and
principal collections related to interests in the customer receivables retained
by the Company. These estimates are calculated utilizing the current performance
trends of the receivable portfolios. Certain estimates inherent in determining
the present value of these estimated future cash flows are influenced by factors
outside the Company's control, and, as a result, could materially change in the
near term.
24
The Company also maintains restricted cash accounts as necessary representing
reserve funds used as credit enhancement for specific classes of investor
certificates issued in certain asset-backed securitization transactions. The
value of these funds is included in the Company's balance sheet under "Other
assets" and totaled $10,192 and $59,592 at January 2, 1999 and January 3, 1998,
respectively. In 1998, restricted cash of $49,400 was released to the Company
when the asset-backed securitizations requiring credit enhancement matured.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
1998 1997
--------- ----------
Land $ 19,450 $ 19,813
Buildings and improvements 145,589 151,297
Equipment 249,935 242,774
Leasehold improvements 179,836 169,401
--------- ----------
594,810 583,285
Less accumulated depreciation and amortization (247,627) (205,534)
--------- ----------
347,183 377,751
Construction in process 12,178 17,071
--------- ----------
Property and equipment, net $ 359,361 $ 394,822
--------- ----------
--------- ----------
25
4. DEBT
The following is a summary of the Company's debt:
1998 1997
---------- -----------
Notes payable:
Revolving credit agreement $ - $ 105,000
Term loan agreements, 6.59% to 9.70%,
due March 17, 1999 through March 31, 2005 420,000 522,900
Subordinated notes, 6.96% 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 debt 608,750 816,650
Less current maturities of debt (85,714) (102,900)
---------- -----------
Total debt, excluding current maturities $ 523,036 $ 713,750
---------- -----------
---------- -----------
The Company has a revolving credit agreement with a group of banks that expires
on March 26, 2000. In 1998, the related $515,000 commitment was permanently
reduced to $350,000 in conjunction with the additional sales of bankcard
receivables totaling $165,000. Fees are variable based on the total commitment.
Borrowings under this commitment averaged $180,944 with a maximum of $336,000
during 1998. The effective annual interest rate was 6.7% in 1998, excluding the
previously mentioned commitment fees.
The Company selectively uses interest rate swap contracts to hedge the
underlying interest risks on various term loans. At January 2, 1999, these
interest rate swap agreements had effective and termination dates from March
1995 to March 2005. The notional principal amounts of these agreements totaled
$70,000 at the end of fiscal year 1998 and 1997. At January 2, 1999 and January
3, 1998, the fair value of these swap agreements was $6,232 and $4,631,
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 risks of the
transactions. 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 $1,264, $1,291 and
$1,008 in fiscal year 1998, 1997 and 1996, respectively. In 1998, the Company
entered into a short-term interest rate lock to hedge an anticipated
transaction, which was subsequently completed in February 1999. The notional
principal amount of the interest rate lock was $250,000 at January 2, 1999,
which approximated its fair value at that date.
Additionally, the Company has letter of credit facilities to support the
purchase of inventories. Letter of credit commitments outstanding were $87,307
and $95,008 at January 2, 1999 and January 3, 1998, respectively. At January 2,
1999, there was an additional $112,693 of commitments available for the issuance
of letters of credit. The Company also had an available undrawn standby letter
of credit facility at January 2, 1999, totaling approximately $10,300 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 2, 1999.
Aggregate maturities of long-term debt for the five fiscal years subsequent to
January 2, 1999 are as follows: 1999, $85,714; 2000, $214,464; 2001, $107,714;
2002, $65,214; 2003, $70,214; and thereafter, $65,430.
26
5. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The current Spiegel, Inc. Salaried Employee Incentive Stock Option Plan,
established in 1998 to replace an expiring plan, provides for the issuance of
options to purchase up to 1,000,000 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. At January 2,
1999, options outstanding under the current plan and the expired plan were
174,000 and 671,460, respectively. The Company also 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 358,000 at
January 2, 1999. The following presentations of total options outstanding
include all aforementioned stock option plans.
The Company follows the disclosure provisions of SFAS No. 123. Accordingly, no
compensation expense has been recognized for the stock option activity. If
compensation expense had been determined based on the estimated fair value of
the options at the grant date as prescribed by SFAS No. 123, the pro-forma
effect on the Company's net income would have been a reduction of $223 and $275
in fiscal year 1998 and 1997, respectively. The fair value of each option
granted is estimated on the date of grant using the Black-Scholes option-pricing
model. A risk-free discount rate of 4.50%, an expected life of 5 years for the
grants and a volatility of 60% and 53% were assumed for grants in 1998 and 1997,
respectively. Dividend yields of 3.7% and 1.8% were assumed for the 1998 and
1997 valuations, respectively. The weighted-average fair value of stock options
granted during the years ended January 2, 1999 and January 3, 1998,
respectively, were $2.46 and $2.18.
A summary of the changes in the options outstanding is as follows:
Shares Amount Average Price
---------- ---------- -------------
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
Granted 174,000 1,044 6.00
Exercised (87,380) (466) 5.33
Canceled (266,860) (2,264) 8.48
----------- --------- -------------
OUTSTANDING AT JANUARY 2, 1999 1,203,460 $ 9,741 $ 8.09
----------- --------- -------------
----------- --------- -------------
Total stock options authorized but unissued at January 2, 1999 were 826,000.
27
The following table summarizes information about options outstanding and
exercisable at January 2, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------------
Range of Weighted-Average
Exercise Number Remaining Weighted-Average Number Weighted-Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------- ------------ ---------------- ---------------- ------------ -----------------
$ 4.00 to $ 7.99 748,980 6.4 years $ 6.23 383,380 $ 6.43
$ 8.00 to $11.99 400,980 2.8 years $ 9.69 358,800 $ 9.65
$12.00 to $23.00 53,500 3.0 years $22.25 53,500 $22.25
---------- ------------
1,203,460 5.1 years $ 8.09 795,680 $ 8.95
---------- ------------
---------- ------------
RETIREMENT PLANS
The Company's retirement plans consist of noncontributory defined benefit
pension plans and contributory defined benefit health care and life insurance
plans. The Company also sponsors a noncontributory supplemental retirement
program for certain executives and other defined contribution plans, including
401(K) plans, a profit sharing plan and thrift plans. The Company has recognized
additional costs associated with the curtailment of retirement plans, including
special termination benefits, due to the consolidation of certain operations.
The cost of these programs and the balances of plan assets and obligations are
shown below:
Pension Benefits Other Benefits
1998 1997 1998 1997
-------- ------- -------- -------
ASSETS AND OBLIGATIONS
Change in benefit obligation:
Beginning of year $57,663 $60,031 $ 9,472 $ 9,705
Service cost 358 397 438 393
Interest cost 3,998 4,580 644 727
Actuarial (gain)loss 918 432 975 (577)
Benefits paid (5,933) (7,777) (714) (776)
Curtailment 1,780 - - -
Special termination benefits 254 - - -
Plan amendments - - (906) -
-------- ------- -------- --------
End of year 59,038 57,663 9,909 9,472
-------- ------- -------- --------
Fair value of plan assets:
Beginning of year 61,668 47,205 - -
Actual return on plan assets 3,097 12,595 - -
Employer contributions 2,598 9,645 714 776
Benefits paid (5,933) (7,777) (714) (776)
-------- ------- -------- --------
End of year 61,430 61,668 - -
-------- ------- -------- --------
Funded Status 2,392 4,005 (9,909) (9,472)
Unrecognized net actuarial loss 9,527 6,453 2,884 1,981
Unrecognized transition obligation
and prior service cost 637 850 (1,219) (331)
-------- ------- -------- --------
Prepaid (accrued) benefit cost $12,556 $11,308 $(8,244) $(7,822)
-------- ------- -------- --------
-------- ------- -------- --------
28
1998 1997 1996
-------- -------- --------
EXPENSE
Pension:
Service cost $ 358 $ 397 $ 647
Interest cost 3,998 4,580 4,298
Expected return on plan assets (5,379) (4,032) (3,614)
Amortization of transition obligation 212 528 581
Recognized net actuarial loss 204 1,024 847
Amortization of prior service cost - - 7
Loss due to curtailment - - 1,625
-------- -------- --------
Total pension cost (607) 2,497 4,391
-------- -------- --------
Health care and life insurance:
Service cost 439 393 727
Interest cost 644 727 827
Recognized net actuarial loss 72 112 91
Amortization of prior service cost (18) (18) 145
Loss due to curtailment - 23 -
-------- -------- --------
Total health care and life insurance 1,137 1,237 1,790
-------- -------- --------
Defined contribution plans 15,325 14,740 13,783
-------- -------- --------
Total retirement plan expense $15,855 $18,474 $19,964
-------- -------- --------
-------- -------- --------
ACTUARIAL ASSUMPTIONS
Expected return on plan assets 9% 9% 9%
Health care trend rate 8 9 10
Discount rate 7 7.25 8
For measurement purposes, an 8% annual rate of increase in the per capita cost
of covered health care benefits (i.e., health care cost trend rate) was assumed
for 1998. The rate was assumed to decrease 1% per year to 6% in the year 2000
and remain at that level thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A
one-percentage-point increase in assumed health care cost trend rates would
increase the accumulated postretirement benefit obligation and related expense
by $645 and $93, respectively. A one-percentage-point decrease in assumed health
care cost trend rates would decrease the accumulated postretirement benefit
obligation and related expense by $583 and $83, respectively.
29
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases office facilities, distribution centers, retail store space
and data processing equipment. Lease terms are generally 10 years and many
contain renewal options. Many of the retail store leases provide for minimum
annual rentals plus additional rentals based upon percentages of sales, which
range from 3% to 5%. The Company also sublets certain leased office space to
unrelated third parties. Rent expense consisted of the following:
1998 1997 1996
--------- -------- ---------
Minimum rentals $139,798 $135,264 $125,704
Percentage rentals 1,836 2,340 2,469
Less sublease income (569) - -
--------- -------- ---------
Net rental expense $141,065 $137,604 $128,173
--------- -------- ---------
--------- -------- ---------
Future minimum rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of January 2,
1999 are as follows:
Fiscal Year Amount
----------- ---------
1999 $131,360
2000 123,030
2001 105,732
2002 95,784
2003 90,449
and thereafter 358,323
---------
Total minimum lease payments 904,678
Less minimum sublease income (4,196)
---------
Net minimum lease payments $900,482
---------
---------
LITIGATION
The Company is routinely involved in a number of legal proceedings and claims
that cover a wide range of matters. In the opinion of management, the outcome of
these matters is not expected to have any material adverse effect on the
consolidated financial position or results of operations of the Company.
30
7. INCOME TAXES
Earnings (loss) before income taxes is composed of the following:
1998 1997 1996
--------- ---------- ----------
Domestic $ 19,247 $ (57,510) $ (25,307)
Foreign (1,137) 8,104 4,031
--------- ---------- ----------
Total $ 18,110 $ (49,406) $ (21,276)
--------- ---------- ----------
--------- ---------- ----------
The components of income tax expense (benefit) are as follows:
1998 1997 1996
--------- --------- ---------
Current:
Federal $ 4,247 $ (5,975) $(12,311)
State (1,536) (896) 700
Foreign (1,092) 3,894 2,277
--------- --------- ---------
Total Current 1,619 (2,977) (9,334)
--------- --------- ---------
Deferred:
Federal 7,275 (10,548) 2,811
State (3,197) (2,633) (931)
Foreign 608 (227) (433)
--------- --------- ---------
Total Deferred 4,686 (13,408) 1,447
--------- --------- ---------
$ 6,305 $(16,385) $ (7,887)
--------- --------- ---------
--------- --------- ---------
The differences between the provision (benefit) for income taxes at the
statutory rate and the amounts shown in the consolidated statements of earnings
are as follows:
1998 1997 1996
Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- --------
Statutory rate $ 6,339 35.0% $(17,292) (35.0)% $ (7,447) (35.0)%
State income tax (net of
federal income tax benefit) 91 0.5 (241) (0.5) (1,391) (6.5)
Amortization of non-
deductible goodwill
and other items 1,031 5.7 1,548 3.1 1,601 7.5
Changes in estimates of
previously provided taxes (756) (4.2) - - - -
Tax Credits (400) (2.2) (400) (0.8) (650) (3.1)
--------- -------- --------- -------- --------- --------
Effective tax rate $ 6,305 34.8% $(16,385) (33.2)% $ (7,887) (37.1)%
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
31
Significant components of the Company's deferred tax assets and liabilities are
as follows:
1998 1997
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts $ 5,283 $ 6,369
Allowance for the gross profit
on estimated future returns 10,759 10,810
Facilities reserve 2,265 4,979
Compensated absences accruals 4,382 4,395
Reserve for self insurance 1,145 1,340
Reserve for inventory losses 10,013 9,915
Postretirement benefit obligation 3,412 3,232
Capitalized overhead in inventory 1,249 3,957
Net operating loss carryforwards 58,821 49,167
Other 3,453 2,462
--------- ---------
100,782 96,626
--------- ---------
Deferred tax liabilities:
Property and equipment 40,841 46,337
Prepaid and deferred expenses 5,948 8,386
Gains on sale of accounts receivable 51,801 34,412
Earned but unbilled finance charges 6,196 5,843
Deferred rent obligation 3,756 3,331
Other - 1,391
--------- ---------
108,542 99,700
--------- ---------
Net deferred tax liabilities $ 7,760 $ 3,074
--------- ---------
--------- ---------
The Company has net operating loss (NOL) carryforwards of $147,627, due to
expire in the years 2012 and 2013. Although realization is not assured for
deferred tax assets, management believes it is more likely than not that they
will be realized through future taxable earnings or alternative tax strategies.
8. STOCKHOLDERS' EQUITY
The Company discontinued payment of all cash dividends in 1995. 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.
In 1998 and 1997, the Company issued 13,526,571 and 10,341,644 shares of Class B
voting common stock, respectively, to its majority shareholder, Spiegel
Holdings, Inc. The net proceeds of $69,993 and $69,972 received in 1998 and
1997, respectively, were used primarily to fund working capital and investing
needs.
9. SUBSIDIARY PREFERRED STOCK
In March 1994 and December 1995, Newport News issued shares of non-voting
redeemable preferred stock to certain directors and executive officers of the
Company, its subsidiaries and Otto Versand. All outstanding shares were redeemed
in April 1998 for $12,236. The excess of the redemption price over the carrying
value of the preferred stock reduced net earnings by $8,535 and the related
basic and diluted net earnings per common share by $0.06.
32
10. SEGMENT REPORTING
Management reviews results of operations before the impact of interest and
income taxes. The Company segregates its operations for this review based on
products and services offered and includes a merchandising segment and a
bankcard segment. Substantially all of the Company's operations are in the
United States, with a small Eddie Bauer retail operation in Canada.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. All intersegment transactions are
accounted for as if with a third party. All expenses for support functions are
allocated to each segment based on an equitable division of costs.
The merchandising segment is an aggregation of Eddie Bauer, Spiegel Catalog and
Newport News. These businesses offer apparel, home furnishings and other
merchandise through catalogs, the Internet and retail stores, and are supported
by the Company's FCNB Preferred charge card, which can be used interchangeably
by Eddie Bauer, Spiegel Catalog and Newport News customers.
The bankcard segment represents the bankcard operations of First Consumers
National Bank (FCNB), the Company's special-purpose bank.
33
BUSINESS SEGMENT COMPARISONS
1998 1997 1996
----------- ----------- -----------
Revenues:
Merchandising $ 2,822,211 $ 3,010,571 $ 2,968,505
Bankcard 113,200 46,263 46,115
----------- ----------- -----------
Total revenues 2,935,411 3,056,834 3,014,620
----------- ----------- -----------
Operating income
Merchandising 21,601 2,314 45,430
Bankcard 70,344 22,685 22,638
----------- ----------- -----------
Total segment operating income 91,945 24,999 68,068
Premium on acquisitions (6,102) (6,307) (6,667)
----------- ----------- -----------
Total operating income 85,843 18,692 61,401
Interest expense 67,733 68,098 82,677
----------- ----------- -----------
Earnings before income taxes $ 18,110 $ (49,406) $ (21,276)
----------- ----------- -----------
----------- ----------- -----------
Assets:
Merchandising $ 1,527,024 $ 1,637,761 $ 1,709,664
Bankcard 167,331 142,786 60,647
Premium on acquisitions 162,905 169,007 175,314
----------- ----------- -----------
Total assets 1,857,260 1,949,554 1,945,625
----------- ----------- -----------
----------- ----------- -----------
Depreciation and amortization
Merchandising 80,896 80,110 85,929
Bankcard 1,549 1,645 2,682
Premium on acquisitions 6,102 6,307 6,667
----------- ----------- -----------
Total depreciation and amortization 88,547 88,062 95,278
----------- ----------- -----------
----------- ----------- -----------
Net additions to property and equipment:
Merchandising 28,414 54,662 44,881
Bankcard 196 385 817
----------- ----------- -----------
Total net additions to property
and equipment $ 28,610 $ 55,047 $ 45,698
----------- ----------- -----------
----------- ----------- -----------
Segment assets, revenues and operating results reflect the impact of the
securitization of customer receivables. Non-cash incremental gains on the sale
of FCNB Preferred charge customer receivables of $11,757 and $63,813 were
included in the merchandising segment in fiscal year 1998 and 1997,
respectively. Included in the bankcard segment were non-cash incremental gains
of $33,571 and $11,328 in fiscal year 1998 and 1997, respectively.
34
STATEMENT OF MANAGEMENT RESPONSIBILITY
We have prepared the accompanying consolidated financial statements and related
information for the fiscal years 1998, 1997 and 1996. The opinion of the
Company's independent auditors, KPMG 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 LLP, independent auditors, has been engaged to audit the consolidated
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 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 LLP and the internal audit department have free access to
the audit committee, with and without the presence of management.
35
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 2, 1999 and January 3, 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended January 2, 1999. 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 2, 1999 and January 3, 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended January 2, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- -----------------
Chicago, Illinois
February 10, 1999
36
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
($000s omitted, except per share amounts)
1998 First Second Third Fourth Total Year
- ------------------ ------------ ------------ ------------ ------------ -----------
Net sales and
other revenues $ 590,553 $ 684,046 $ 643,968 $ 1,016,844 $ 2,935,411
Operating income (loss) (23,763) 11,244 9,938 88,424 85,843
Net earnings (loss)(1) $ (23,133) $ (10,909) $ (4,216) $ 41,528 $ 3,270
Net earnings (loss)
per common share (1)
Basic and diluted $ (0.19) $ (0.08) $ (0.03) $ 0.32 $ 0.03
Weighted average
common shares
outstanding 119,484,137 131,712,229 131,713,833 131,715,391 128,656,398
MARKET PRICE DATA
High $ 6 $ 7 15/16 $ 7 1/4 $ 10 7/8 $ 10 7/8
Low $ 3 9/16 $ 4 9/16 $ 3 3/8 $ 2 3/8 $ 2 3/8
1997 First Second Third Fourth Total Year
- ------------------ ------------ ------------ ------------ ------------ -----------
Net sales and
other revenues $ 601,812 $ 696,243 $ 646,963 $ 1,111,816 $ 3,056,834
Operating income (loss) (39,863) (3,365) (10,394) 72,314 18,692
Net earnings (loss) $ (31,209) $ (13,483) $ (20,195) $ 31,866 $ (33,021)
Net earnings (loss)
per common share
Basic and diluted $ (0.28) $ (0.11) $ (0.17) $ 0.27 $ (0.28)
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
(1) In 1998, second quarter and total year net earnings include a charge of
$8,535, or $0.06 per share, for the redemption of subsidiary preferred stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following persons are the directors of the Company.
Year
Elected as
Name Age Offices with Registrant or Other (4) Director
- ---------------------- --- ------------------------------------------ ----------
Dr. Michael Otto (1) 55 Chairman of the Board of Directors 1982
and Chairman of the Board of Directors
of Otto Versand (GmbH & Co)
Thomas Bohlmann 53 Board of Directors and Director, Planning 1989
and Control of Otto Versand (GmbH & Co)(1989)
Dr. Michael E. Cruesemann (2)(3) 53 Board of Directors and Director, Finance 1994
of Otto Versand (GmbH & Co) and Chief
Financial Officer of Otto Versand Group
(1994)
Richard T. Fersch (4) 49 President and Chief Executive Officer, 1996
Eddie Bauer
Hans Jorg Hammer 59 Board of Directors and Director, Personnel 1991
of Otto Versand (GmbH & Co)(1991)
Horst R. Hansen (2) 64 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) 51 President and Chief Executive Officer, 1996
Spiegel Catalog
George D. Ittner (4) 55 President and Chief Executive Officer, 1998
Newport News
Siegfried Kockmann 59 Board of Directors and Director, 1997
Organizational and Systems Planning of
Otto Versand (GmbH & Co)(1982)
Michael R. Moran (1)(3)(4) 52 Office of the President, Chairman and 1997
Chief Legal Officer
Dr. Peter Mueller (2) 57 Retired. Prior to December 1997 was a 1985
member of the Board of Directors and
Director, Advertising and Marketing of
Otto Versand (GmbH & Co)
38
Gert Rietz 52 Board of Directors and Director, Merchandise 1997
of Otto Versand (GmbH & Co)(1989)
James W. Sievers (3)(4) 56 Office of the President, Chief Financial 1997
Officer
Dr. Peer Witten 53 Board of Directors and Director, 1991
Operations of Otto Versand (GmbH & Co) for
at least the last five years
Martin Zaepfel (1) 55 Vice Chairman of the Board of Directors of 1996
Otto Versand (GmbH & Co) and Director,
Marketing and Advertising of Otto Versand
(GmbH & Co)(1998); Board of Directors and
Director, Merchandise of Otto Versand
(GmbH & Co)(1988)
(1) Member of Board Committee (Executive Committee)
(2) Member of Audit Committee
(3) Member of Finance Committee
(4) The business experience during the last five years of directors who are
executive officers of the Company is detailed along with the listing of
executive officers that follows.
The terms of all the above-named directors expire on the date of the next annual
meeting of the stockholders which is to be held in April, 1999.
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.
39
EXECUTIVE OFFICERS
The following persons are the executive officers and certain significant
employees of the Company:
Positions and Offices Held
(all positions and offices are of the Company
Name Age unless otherwise indicated)
- ---------------------- --- --------------------------------------------------
EXECUTIVE OFFICERS OF SPIEGEL, INC.:
Michael R. Moran 52 Office of the President (1997), Chairman (1998),
and Chief Legal Officer (1997); Senior Vice
President, Secretary & General Counsel (1996);
Vice President, Secretary & General Counsel
(1988); and Director (1997)
James W. Sievers 56 Office of the President (1997) and Chief Financial
Officer (1994); Senior Vice President,
(1995); Vice President, Finance (1990);
and Director (1997)
Richard T. Fersch 49 President (1992) and Chief Executive Officer (1997), Eddie
Bauer; and Director (1994)
John W. Irvin 51 President (1996) and Chief Executive Officer (1997),
Spiegel Catalog; Senior Vice President, General
Merchandise Manager of Mervyn's (a division of Dayton
Hudson Corporation) (1992);
and Director (1996)
George D. Ittner 55 President (1992) and Chief Executive Officer (1997),
Newport News; and Director (1998)
Jon K. Nordeen 43 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 46 Vice President (1995) and Treasurer (1993)
CERTAIN SIGNIFICANT EMPLOYEES:
Gregory R. Aube 46 President of FCNB (1995); General Counsel and
Corporate Secretary of FCNB (1989)
Michael L. Wilson 44 President of DFS (1996); Director, Logistics of
Eddie Bauer (1995); Vice President, Retail
Distribution of DFS (1993)
The terms of all the above-named officers expire on the date of the next annual
meeting of the Board of Directors which is to be held in April, 1999.
There is no family relationship between any of the officers.
40
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation paid or accrued by the Company
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996 to or
on behalf of each of the six most highly compensated key policy-making executive
officers of the Company.
Annual Compensation Stock
Name and ---------------------------- Options LTIP
Principal Salary Bonus Other (2) Granted Payout (3)
Position Year ($) ($) ($) (#) ($)
- ------------------- ------ -------- -------- --------- ---------- ----------
Michael R. Moran 1998 $318,462 $267,436 $101,783 15,000 $242,300
Office of the 1997 260,000 150,000 94,456 10,000 -
President, Chairman, 1996 210,000 23,464 90,635 5,000 -
Chief Legal Officer
and Director
James W. Sievers 1998 $343,077 $224,077 $ 91,924 15,000 $243,700
Office of the 1997 310,000 150,000 103,765 10,000 -
President, Chief 1996 270,000 23,464 95,151 5,000 -
Financial Officer
and Director
Harold S. Dahlstrand(1) 1998 $332,039 $230,236 $ 75,015 - $238,700
Retired. Former Vice 1997 290,000 150,000 99,357 10,000 -
Chairman, Chief Human 1996 230,000 123,464 80,056 7,500 -
Resources Officer and
Chairperson of the Office
of the President
Richard T. Fersch 1998 $750,000 $ - $174,531 15,000 $ -
President and Chief 1997 650,000 243,700 157,789 10,000 -
Executive Officer of 1996 600,000 702,000 150,387 10,000 -
Eddie Bauer and Director
John W. Irvin 1998 $500,000 $300,000 $140,408 15,000 $331,000
President and Chief 1997 475,000 213,750 126,945 10,000 -
Executive Officer of 1996 300,000 100,000 88,649 60,000 -
Spiegel Catalog and
Director
George D. Ittner 1998 $400,000 $377,610 $ 33,078 15,000 $368,932
President and Chief 1997 374,736 175,000 57,906 25,000 -
Executive Officer of 1996 366,045 50,000 49,601 5,000 -
Newport News and
Director
(1) Harold S. Dahlstrand retired from the Company and the Board of
Directors in November 1998. As part of his retirement agreement, Mr.
Dahlstrand will receive $761,600 over the two year period ending
December 30, 2000.
(2) The following tables summarize all other compensation for the years
ended January 2, 1999, January 3, 1998 and December 28, 1996:
(3) Certain executives of the Company earned long-term incentive bonuses
in 1998. This long-term incentive plan covered the operating and
financial performance of the individual businesses over the last two
years, with the payout formula heavily weighted to the 1998
performance.
41
Retirement Car Allowance/ Life Insurance
Name Benefits Other Premiums Paid Total
-------------------- ------------ --------------- -------------- ------------
1998 Michael R. Moran $ 27,069 $ 63,648 $ 11,066 $ 101,783
James W. Sievers 29,162 43,524 19,238 91,924
Harold S. Dahlstrand 24,699 45,165 5,151 75,015
Richard T. Fersch 63,750 41,515 69,266 174,531
John W. Irvin 42,500 52,456 45,452 140,408
George D. Ittner 3,200 23,908 5,970 33,078
1997 Michael R. Moran $ 22,600 $ 64,095 $ 7,761 $ 94,456
James W. Sievers 27,100 62,779 13,886 103,765
Harold S. Dahlstrand 25,300 64,055 10,002 99,357
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 Michael R. Moran $ 18,210 $ 61,593 $ 10,832 $ 90,635
James W. Sievers 23,670 53,102 18,379 95,151
Harold S. Dahlstrand 20,030 46,184 13,842 80,056
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
42
OPTION GRANTS TABLE
The following table sets forth grants of stock options to the named executive
officers during the year ended January 2, 1999 and the potential realizable
value of the grants assuming that the market price of the underlying stock
appreciates in value from the date of grant to the end of the option term at the
stipulated annual rates of 5% and 10%:
Number
of Potential Realizable
Securities Percent of Value at Assumed
Under- Total Options Annual Rates of Stock
lying Granted to Exercise Price Appreciation
Options Employees Price Expiration for Option
Name Granted in 1998 ($/sh) Date 5% ($) 10% ($)
- ------------------ --------- ------------- -------- ----------- -------- ---------
Michael R. Moran 15,000 8.6% 6.00 12/31/08 56,601 143,437
James W. Sievers 15,000 8.6% 6.00 12/31/08 56,601 143,437
Harold S. Dahlstrand - - - - - -
Richard T. Fersch 15,000 8.6% 6.00 12/31/08 56,601 143,437
John W. Irvin 15,000 8.6% 6.00 12/31/08 56,601 143,437
George D. Ittner 15,000 8.6% 6.00 12/31/08 56,601 143,437
The stock options granted become exercisable at the rate of 20% per year from
the date of the grant.
43
AGGREGATED OPTION EXERCISES IN 1998 AND JANUARY 2, 1999 OPTION VALUES
The following table sets forth shares acquired on exercise and stock option
values at January 2, 1999:
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at at
Acquired January 2, 1999 January 2, 1999
On Value Exercise- Unexercise- Exercise- Unexercise-
Name Exercise Realized able able able able
- ---------------- -------- -------- --------- ---------- ----------- -----------
Michael R. Moran 6,000 $48,125 43,500 30,000 $ 1,700 $ 6,800
James W. Sievers - - 45,000 31,000 $ 1,700 $ 6,800
Harold S. Dahlstrand 1,200 $ 7,875 60,500 - $ 8,500 -
Richard T. Fersch - - 69,400 51,000 $ 1,700 $ 6,800
John W. Irvin - - 26,000 59,000 $ 1,700 $ 6,800
George D. Ittner - - 14,000 41,000 $ 4,250 $17,000
COMPENSATION OF DIRECTORS
The Company pays an annual fee of $10,000 to its independent directors and
reimburses any reasonable out-of-pocket expenses incurred by all directors in
attending meetings.
44
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Richard T. Fersch, President and
Chief Executive Officer of Eddie Bauer, the term of which extends through
December 31, 2002. The annual base salary under this agreement is $850,000 in
1999, and escalates to $1,000,000 in the year 2000. The agreement also entitles
Mr. Fersch to receive an annual bonus based upon the financial performance of
Eddie Bauer. The bonus opportunity for 1999 is 95% of base salary. The bonus
opportunity for the remaining three years of the agreement is 100% of base
salary. During all four remaining years of this agreement, Mr. Fersch is
guaranteed 50% of the eligible bonus opportunity.
The Company has an employment agreement with John W. Irvin, President and Chief
Executive Officer of Spiegel Catalog, the term of which extends through December
31, 2001. The current annual base salary under this agreement is $525,000. The
agreement entitles Mr. Irvin to receive an annual bonus based on the financial
performance of Spiegel Catalog.
The Company has an employment agreement with George D. Ittner, President and
Chief Executive Officer of Newport News, the term of which extends through
August 31, 2000. The current annual base salary under this agreement is
$425,000. The agreement entitles Mr. Ittner to receive an annual bonus based on
the financial performance of Newport News.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board Committee, which determines executive officer compensation, consists
of Dr. Michael Otto, Martin Zaepfel, and Michael Moran. Mr. Moran also serves as
the Chairperson of the Office of the President of the Company.
EMPLOYEE BENEFITS
STOCK OPTION PLAN
The current Spiegel, Inc. Salaried Employee 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 the current
plan is 1,000,000. 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. Stock options outstanding under the
above plan were 174,000 at January 2, 1999.
In addition to the current stock option plan discussed above,
671,460 shares were outstanding at January 2, 1999 under a plan
that expired in 1998. These options were issued under the same
terms as the plan currently in place. The Company also 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 358,000 at January
2, 1999.
The average per share price of stock options granted during the
year was $6.00. Net cash realized with respect to the exercise of
options during the year was approximately $466,000.
45
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 (Catalog and corporate),
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.
Employees may also contribute up to 10% of their base
compensation to the 401(k) Plan through payroll deductions.
Employee contributions are made on a pretax basis under Section
401(k) of the Internal Revenue Code. The Company matches salaried
employee contributions dollar for dollar up to the first 3% of
base compensation and 50 cents for each dollar contributed up to
the next 3%. The Company matches hourly employee contributions 25
cents for each dollar contributed up to 6% of base compensation.
The Company's matching contributions, however, may not exceed the
amount deductible under the Internal Revenue Code. 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.
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 certain employees 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 401(a)(17) and 402(g)of the Internal
Revenue Code. If a participant's annual additions under the
profit sharing and thrift plans are reduced by reason of special
limitations of the Internal Revenue Code, the Company will make
an annual contribution to the trust in the amount of the
reduction. Supplemental benefits under the supplemental
retirement plan are payable in cash at the same time and in the
same manner as the participant's employer account under the
profit sharing and thrift plans except no payments are made prior
to death, disability or reaching retirement age.
46
SPLIT DOLLAR LIFE INSURANCE PROGRAM
The Company maintains a split dollar life insurance program
covering certain executives of the Company. A covered employee
may apply for an individual life insurance policy on his life in
a face amount up to three times his base salary. The employee
pays a portion of the annual premium approximately 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 annual 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 annual operating and financial performance
objectives. In addition, the Company periodically offers a
long-term incentive bonus plan. Payment of long-term incentive
bonuses is based on the attainment of pre-determined operating
and financial performance objectives that span more than one
year. For 1998, approximately $17,800,000 was earned under both
these bonus plans.
NEWPORT NEWS, INC. RETIREMENT SAVINGS PLAN
Newport News has a retirement savings plan covering its
associates. Associates become eligible as of the beginning of the
calendar quarter following completion of one year of service.
Associates may elect to contribute up to 10% of their
compensation to the plan on a pre-tax basis under Section 401(k)
of the Internal Revenue Code. The associate may also elect to
make nondeductible after-tax contributions to the plan of up to
5% of their compensation. The company matches contributions at a
rate of 50% of the first 4% of compensation contributed. The
company matching contributions, however, may not exceed the
amount deductible under the Internal Revenue Code.
Contributions are held in trust for the benefit of the plan
participants. A participant receives the full amount in this
account under the plan (including investment earnings) on
termination of employment by reason of retirement (as defined in
the plan document), or disability. Upon death, the full value of
the participant's account is distributable to their beneficiary.
On any other termination of employment, a participant is 100%
vested at all times in the portion of his account attributable to
pre-tax contributions, and is vested in the company's matching
contributions and earnings thereon, at a rate based on years of
service, with full vesting after a maximum of five years.
Distributions are made on a lump sum basis. Participants are
permitted to borrow from their account, but may only have one
loan outstanding at a time. Participants suffering certain
financial hardships may request an inservice withdrawal of prior
contributions.
47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Spiegel Holdings, Inc. (SHI) holds 99.9% of the Company's Class B voting common
stock. The following table sets forth certain information with respect to the
number of shares of Class B voting common stock owned by SHI, which is the only
stockholder beneficially owning more than 5% of the Class B voting common stock.
SHI is a holding company whose principal asset is stock of the Company. The
total number of holders of the Company's Class B voting common stock as of March
18, 1999, was two.
Percentage of
outstanding
Number of Title of Class B voting
Name and Address shares(1) class common stock
- ------------------------- ---------- --------- ---------------
Spiegel Holdings, Inc.(2) 116,957,089 Class B 99.9%
The Corporation voting
Trust Center common
1209 Orange Street stock
Wilmington, DE 19801
(1) The shares are owned of record and beneficially, with sole investment
and voting power. However, see note (2) below.
(2) In excess of 50% of the common stock of SHI is beneficially owned by
Dr. Michael Otto, who controls the manner in which SHI votes its Class
B voting common stock of the Company in all matters, including the
election of directors. Under rules and regulations promulgated by the
Securities and Exchange Commission, Dr. Otto may be deemed to
beneficially own all the shares of the Company owned by SHI. Dr. Otto
is a director of the Company. No officers or other directors of the
Company are Class B stockholders of record or beneficial stockholders
thereof.
B. SECURITY OWNERSHIP OF MANAGEMENT
As of March 18, 1999, 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 18, 1999.
48
Amount and
Name of Nature of
Title Beneficial Beneficial Acquirable Percent
of Class Owner Ownership (1) Within 60 Days of Class
- -------- -------------------- ------------- -------------- ------------
(I) (II) (III)
Class A Gregory A. Aube 3,761 2,400 *
Class A Richard T. Fersch 73,000 69,400 *
Class A John W. Irvin 46,000 36,000 *
Class A George D. Ittner 16,400 14,000 *
Class A Michael R. Moran 55,500 35,500 *
Class A Dr. Peter Mueller 10,000 - *
Class A Jon K. Nordeen 400 400 *
Class A Gert Rietz (2) 29,500 - *
Class A James W. Sievers 45,000 37,000 *
Class A John R. Steele 1,750 1,500 *
Class A Michael L. Wilson 2,438 2,400 *
Class A All directors and 283,749 198,600 1.9%
officers as a group
(19 persons)
(1) Includes shares which may be acquired within 60 days under the
Company's Stock Option Plan.
(2) Section 16(a) Beneficial Ownership Reporting Compliance: As required by
the Securities Exchange Act of 1934, as amended, the Company notes that
Mr. Gert Rietz reported on a Form 4 filed late one transaction
involving the purchase of Class A non-voting common stock in an open
market transaction in October 1998.
* Less than 1%.
49
ITEM 13. CERTAIN TRANSACTIONS
Since its acquisition of the Company in 1982, and following the transfer of its
interest therein to its partners and designees in April 1984, Otto Versand and
the Company have entered into certain agreements seeking to benefit both parties
by providing for the sharing of expertise. The following is a summary of such
agreements and certain other transactions.
The Company utilizes the services of Otto Versand International (GmbH) as a
buying agent for the Company in Hong Kong, Taiwan, Korea, India, Italy,
Indonesia, Singapore, Thailand and Turkey. Otto Versand International (GmbH) is
a wholly-owned subsidiary of Otto Versand. Buying agents locate suppliers,
inspect goods to maintain quality control, arrange for appropriate documentation
and, in general, expedite the process of procuring merchandise in these areas.
Under the terms of its arrangements, the Company paid $4,035,000 in 1998,
$4,050,000 in 1997, and $3,917,000 in 1996. 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 $2,697,000, $3,171,000 and $3,870,000 in
1998, 1997 and 1996, 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 33 stores open in Japan as of January 2, 1999.
To date, Eddie Bauer has contributed $6,472,027 to the project and in 1994,
received a $2,500,000 licensing fee for the use of its name. Eddie Bauer
received $4,547,000, $4,272,000 and $3,981,000 in royalty income on retail and
catalog sales during 1998, 1997 and 1996, respectively. Eddie Bauer recorded
income of approximately $275,000 in 1998, a loss of $31,000 in 1997, and income
of $406,000 in 1996 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 nine stores open in
Germany as of January 2, 1999. Eddie Bauer has contributed $3,482,401 to the
project and has received $1,000,000 in licensing fees for the use of its name.
Eddie Bauer received $1,033,000, $756,000 and $773,000 in royalty income on
retail and catalog sales during 1998, 1997 and 1996, respectively. Eddie Bauer
recorded approximately $4,394,000, $1,642,000 and $707,000 of losses for its
equity share of the joint venture during 1998, 1997 and 1996, respectively.
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
six stores open in the United Kingdom as of January 2, 1999. Eddie Bauer has
contributed $2,617,240 to the project and received a licensing fee of $666,667
in 1998 for the use of its name. In addition, Eddie Bauer received $209,000 and
$41,000 in 1998 and 1997, respectively, in royalty income on retail and catalog
sales. Eddie Bauer recorded losses of approximately $2,685,000 and $956,000 in
1998 and 1997, respectively, for its equity share of the joint venture.
In 1993, Eddie Bauer entered into an agreement with Eddie Bauer International,
Ltd. (EBI) (a subsidiary of Otto Versand) whereby the latter acts as buying
agent in Asia (EBI-Hong
50
Kong) and, as of 1997, in the Americas (EBI-Miami). The buying agents contact
suppliers, inspect goods and handle shipping documentation for Eddie Bauer. The
Company believes that the terms of the arrangements are no less favorable to
Eddie Bauer than would be the case in an arrangement with an unrelated third
party. The Company paid $20,173,000, $22,900,000 and $14,476,000 to EBI-Hong
Kong for these services in 1998, 1997 and 1996, respectively. The Company paid
EBI-Miami $3,226,000 for these services in 1998. Additionally in 1998, the
Company received $3,750,000 from EBI-Miami in exchange for services rendered to
EBI-Miami. These services related to the startup of EBI-Miami's operations and
included general consulting and training.
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. In December 1995,
an additional seven shares were offered to four executive officers from Newport
News and Eddie Bauer at $43,000 per share. At year-end 1997, 92 shares were
outstanding, including 85 shares from the initial issuance, held by the
following individuals with the number of shares 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) Dr. Michael Cruesemann (4); Martin Smith (1);
David Knoll (1); Charles Krieg (1); and Richard Fersch (4). All 92
outstanding shares were redeemed by the Company for $12,236,000, or $133,000
per share, in April 1998. The redemption price per share was determined by an
independent valuation consultant and reflected the fair market value at that
date.
In March 1997, the Company issued 10,341,644 shares of Class B voting common
stock for $69,972,000 to its majority shareholder, Spiegel Holdings, Inc. The
Company issued an additional 13,526,571 shares of Class B voting common stock
for $69,993,000 to Spiegel Holdings, Inc. in March 1998. The proceeds from these
issuances, net of related costs, were used to fund working capital and investing
needs.
The Company is included in the consolidated federal income tax return of SHI.
Pursuant to a tax reimbursement agreement with SHI, the Company records
provisions for income tax expense as if it were a separate taxpayer.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS OF FORM 8-K
PAGE
A. 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets 17
Consolidated Statements of Earnings 18
Consolidated Statements of Cash Flows 19
Consolidated Statements of Stockholders' Equity 20
Notes to Consolidated Financial Statements 21-34
Report of Independent Auditors 36
Selected Quarterly Financial Data 37
2. FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report on Schedule 54
Schedule II--Valuation and Qualifying Accounts 55
Schedules not listed above are omitted because of
absence of conditions under which they are required or
because the required information is included in the
financial statements submitted.
52
3. EXHIBITS
Exhibit
Number Description of Exhibit
3(a) Restated Certificate of Incorporation of the Registrant (i)
3(b) By-Laws of the Registrant (i)
4 Revised Specimen Stock Certificate (ii)
10(a) Spiegel, Inc., Semi-Monthly Salaried Employees Incentive Stock Option Plan (File No.
33-69937) replacing (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 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. 33-69937, 33-19663,
33-32385, 33-38478, 33-44780, 33-56200 and 33-51755) and
hereby incorporated by reference herein.
(iv) Filed as an Exhibit to or part of the Company's Registration
Statements on Form S-1 (File No. 33-15936) and hereby
incorporated by reference herein.
B. REPORTS ON FORM 8-K
None.
53
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Stockholders
Spiegel, Inc.:
Under date of February 10, 1999, we reported on the consolidated
balance sheets of Spiegel, Inc., and subsidiaries as of January 2, 1999
and January 3, 1998, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for each of the years in
the three-year period ended January 2, 1999, 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 LLP
--------------
Chicago, Illinois
February 10, 1999
54
SCHEDULE II
SPIEGEL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED
($000s omitted)
January 2, January 3, December 28,
1999 1998 1996
----------- ------------ ------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year $ 14,922 $ 14,830 $ 40,832
Charged to earnings 29,837 13,521 22,593
Reduction for receivables sold (10,791) (235) (23,861)
Accounts written off, net of
recoveries (22,125) (13,194) (24,734)
---------- ---------- ----------
Balance at end of year $ 11,843 $ 14,922 $ 14,830
---------- ---------- ----------
---------- ---------- ----------
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Spiegel, Inc., has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized, on March 25, 1999.
SPIEGEL, INC.
By: /s/ Michael R. Moran
----------------------------
Michael R. Moran, Chairman of the
Office of the President,
Chief Legal Officer (Principal
Operating Executive Officer)
/s/ James W. Sievers
----------------------------
James W. Sievers, Office of the
President, Chief Financial Officer
(Principal Operating Executive Officer
and Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Spiegel, Inc., and in the capacities indicated on March 25, 1999.
Signature Title
-------------------------- -----------------------------------------
/s/ Michael R. Moran
-------------------- Chairman of the Office of the President,
Michael R. Moran Chief Legal Officer (Principal Operating
Executive Officer) and Director
/s/ James W. Sievers
-------------------- Office of the President, Chief Financial
James W. Sievers Officer (Principal Operating Executive
Officer and Principal Financial and
Accounting Officer) and Director
56
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Spiegel, Inc., and in the capacities indicated on March 25, 1999.
Signature Title
-------------------------- -----------------------------------
/s/ Thomas Bohlmann
---------------------------- Director
Thomas Bohlmann
/s/ Dr. Michael E. Cruesemann
----------------------------- Director
Dr. Michael E. Cruesemann
/s/ Richard T. Fersch
---------------------------- Director
Richard T. Fersch
/s/ John W. Irvin
---------------------------- Director
John W. Irvin
/s/ George D. Ittner
---------------------------- Director
George D. Ittner
/s/ Martin Zaepfel
---------------------------- Director
Martin Zaepfel
57