Form 10-K
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended January 3, 2009
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 001-33070
Eddie Bauer Holdings, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
|
|
Delaware
|
|
42-1672352
|
|
(State of or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
10401 NE 8
th
Street, Suite 500
Bellevue, WA 98004
(425) 755-6544
(Address
and telephone number, including area code, of registrant’s principal executive offices)
Securities Registered Pursuant to
Section 12(b) of the Act:
Common Stock, Par Value $0.01 per share
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
¨
No
þ
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
þ
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 any definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
|
|
|
|
|
|
|
|
Large accelerated filer
¨
|
|
Accelerated filer
þ
|
|
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
|
|
Smaller reporting company
¨
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act.). Yes
¨
No
þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $122,930,747 based on the closing price of the registrant’s common stock on June 28, 2008,
the last business day of the registrant’s most recently completed second fiscal quarter.
Indicate by check mark whether the registrant
has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes
þ
No
¨
The number of shares of the
registrant’s common shares outstanding as of March 11, 2009 was 30,829,530.
TABLE OF CONTENTS
i
SAFE HARBOR STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION ACT OF 1995
Any
forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in this report or made by us involve risks and uncertainties and are subject to change based on various important factors,
many of which are beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Words such as “estimate,” “project,”
“plan,” “believe,” “expect,” “anticipate,” “intend,” “planned,” “potential” and similar expressions may identify forward-looking statements. The following factors, among others,
in some cases have affected and in the future could affect our financial performance and actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements included in this report or
otherwise made by us:
|
|
•
|
|
a continued downturn in the national economy and in consumer spending;
|
|
|
•
|
|
our ability in a recessionary U.S. and global economy to implement new marketing, merchandising, sourcing and operations plans to rebuild the Eddie Bauer brand and
increase retail sales;
|
|
|
•
|
|
consumer acceptance of our products and our ability to capture limited customer dollars through the development of new merchandise, successful launch of new product
lines and offering of products at the appropriate price points;
|
|
|
•
|
|
the current highly promotional nature of the retail industry generally and the segment in which we operate particularly;
|
|
|
•
|
|
our ability to service our current debt and to continue to remain in compliance with the covenants under our term loan and revolving loan facilities;
|
|
|
•
|
|
our ability to hire, train and retain key personnel and management;
|
|
|
•
|
|
our reliance on foreign sources of production, including risks related to the disruption of imports by labor disputes, political instability, legal and regulatory
matters, duties, taxes, other charges and quotas on imports, local business practices and political issues and risks related to currency and exchange rates;
|
|
|
•
|
|
the seasonality of our business;
|
|
|
•
|
|
the ability of our manufacturers to deliver products in a timely manner and meet our quality standards;
|
|
|
•
|
|
the availability of suitable new store locations or renewals of existing leases on appropriate terms;
|
|
|
•
|
|
our ability to utilize net loss carry forwards in future years;
|
|
|
•
|
|
the lack of effectiveness of our disclosure controls and procedures in the future;
|
|
|
•
|
|
increases in the costs of paper for and printing and mailing of our catalogs;
|
|
|
•
|
|
the price and supply volatility of energy supplies;
|
|
|
•
|
|
our reliance on information technologies, including risks related to the lack of functionality of older systems and software, the implementation of new information
technology systems, service interruptions and unauthorized access to third party information;
|
|
|
•
|
|
the potential impact of national and international security concerns on the retail environment, including any possible military action, terrorist attacks or other
hostilities; and
|
|
|
•
|
|
the other risks identified in this Annual Report on Form 10-K.
|
These forward-looking statements speak only as of the date stated and, except as required by law, we do not intend to make publicly available any update or other revisions to any of the forward-looking statements
contained in this report to reflect circumstances existing after the date of this report or to reflect the occurrence of future events even if experience or future events make clear that any expected results expressed or implied by those
forward-looking statements will not be realized.
ii
PART I
Eddie Bauer Holdings, Inc.
was formed in June 2005 as a new parent company in connection with the emergence from bankruptcy of our principal operating subsidiary, Eddie Bauer, Inc. When we use the terms “Eddie Bauer,” “we,” “us,” “our,”
“the Company” or similar words in this annual report, unless the context otherwise requires, we are referring to Eddie Bauer Holdings, Inc. and its subsidiaries, including Eddie Bauer, Inc. For more information on the bankruptcy, see
“
The Spiegel Bankruptcy
” under this Item 1.
Company History
In 1920, our founder, Eddie Bauer
(1899-1986)
, opened his first store in Seattle, Washington, to sell outdoor sporting and recreational equipment,
clothing and accessories. The first store specialized in sporting goods such as tennis rackets, fishing tackle and golf clubs hand-made by Mr. Bauer—giving us our field and stream heritage. Mr. Bauer’s own experience with
hypothermia on a fishing trip in 1935 led to the invention of the Skyliner down parka, which was patented in 1940. During World War II, the U.S. Army Corps commissioned more than 50,000 “Eddie Bauer B-9 Flight Parkas” designed to keep
pilots warm during high altitude flights. Mr. Bauer also produced 250,000 down sleeping bags and many other items to meet military purchase orders. Eddie Bauer was the first government supplier granted permission to put his label on his
products during World War II, which raised brand awareness and built a market for his merchandise. Throughout our history, we have outfitted notable scientific and exploratory expeditions in Eddie Bauer outerwear, including that of Jim Whittaker,
who became the first American to summit Mt. Everest in 1963, wearing Eddie Bauer outerwear. From 1953 to 1983, Eddie Bauer outfitted more than 30 major mountaineering expeditions, including the first American ascents of Mt. Everest, Dhaulagiri, Peak
Lenin and Makalu; as well as the first worldwide ascents of Gasherbrum I and Vinson Massif. Through these expeditions, the Company fine-tuned its designs and field-tested its gear under the most demanding conditions. The result was that the name
Eddie Bauer became synonymous with the finest expedition-quality outerwear in the world.
From the beginning, the Eddie Bauer brand has
stood for legendary quality, service and value. Our Creed and Guarantee, which Mr. Bauer himself wrote, are the foundation of everything we do. When Mr. Bauer introduced his unconditional lifetime guarantee on everything that he sold, it
was a radical concept. Now it has become the standard for exemplary customer service, and is a tradition we are proud to continue to this day.
In 1945, we issued our first mail-order catalog. In 1971, we were acquired by General Mills, Inc., and in 1972 we opened our first store outside of Seattle in San Francisco, California. We celebrated our first $100 million sales
year in 1983, at which time we operated 27 retail stores. In July 1988 we were acquired by Spiegel, Inc. (“Spiegel”). By the end of fiscal 2002, our retail stores increased from 58 to 399 and our outlet stores from 3 to 102. In addition,
from fiscal 1990 to fiscal 2002, our catalog circulation increased from 61.2 million to 101.6 million (excluding Eddie Bauer Home catalogs). In 1996, we started selling products over the Internet. While the Spiegel era was one of rapid
growth, it was also a period in which the Company lost focus, direction and brand identity, as the brand shifted from its outdoor outfitter heritage to a casual apparel company aimed primarily at women.
In March 2003, Spiegel, together with 19 of its subsidiaries and affiliates, including our principal operating subsidiary, Eddie Bauer, Inc., filed
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. See “
The Spiegel Bankruptcy
” under this Item 1. From 2003 to mid- 2005, the majority of our efforts were focused on maintaining our existing business,
rather than strategizing for business growth. In June 2005, we emerged from bankruptcy as a stand-alone company for the first time in 34 years. The following two years were marked by a number of changes in strategy, direction and management. In
July 2007, the Board and its newly-appointed Chief Executive Officer (“CEO”), Neil Fiske, set the Company on a course to return the brand to its roots and heritage in a contemporary context, and Mr. Fiske and his new senior management
team began execution of the Company’s five key priorities: clarify our brand position and rebuild our brand identity; upgrade our
1
merchandise and align it to our brand position; revamp our marketing function and exploit our multi-channel retail avenues; cut costs; and realign the
organization and build talent to achieve our goals.
Our mission
is to be the preeminent active, outdoor, lifestyle brand combining
an untamable spirit of adventure and a sense of style with the legendary quality, inventiveness and customer service that has been our hallmark since 1920.
Our creed
, established by our founder, Eddie Bauer, has been and will continue to be:
To give you
such outstanding quality, value, service and guarantee
that we may be worthy
of your high esteem.
®
Executive Overview
Eddie Bauer is a specialty retailer that sells mens’ and womens’ outerwear, apparel and
accessories for the modern outdoor lifestyle. Our primary target customers are women and men who are 30-54 years old with an average annual household income of $77,000. Eddie Bauer is a nationally recognized brand that stands for high quality,
innovation, style and customer service. Eddie Bauer was ranked as the 4
th
outerwear brand in a
Womens’ Wear Daily
survey in July 2008,
and 26th in a companion
Womens’ Wear Daily Top 100 Brands
survey, also in July 2008.
We sell our products through three
interdependent sales channels that share product sourcing, design and marketing resources:
|
|
•
|
|
retail stores, which sell our premium Eddie Bauer merchandise;
|
|
|
•
|
|
outlet stores, which sell high quality Eddie Bauer merchandise and inventory overstocks at value or clearance price points; and
|
|
|
•
|
|
direct, which consists of our Eddie Bauer catalogs and our website
www.eddiebauer.com.
|
We design and source most of the clothing and accessories that we sell through our stores and direct sales channel. We structure our operations to offer
our customers a seamless transition between our sales channels. Customers can purchase our products through any of our sales channels and return or exchange our products at any of our stores, regardless of the channel of purchase. Our
U.S. stores also offer a direct phone connection to our customer call centers that allows an in-store customer to order for home delivery a particular size, color or item that may not be available in the store. During 2008, we had
33.9 million visits to our website,
www.eddiebauer.com,
and circulation of approximately 77 million catalogs.
We are
minority participants in a joint venture operation in Japan that operates retail and outlet stores, as well as catalog and website sales channels, and we license our trademarks and tradenames to the joint venture. In 2008, we transferred our
interest in a joint venture in Germany to a third party in exchange for release from past and future liabilities. We also executed a new license agreement with the acquirer for use of our tradename and marks. See “
Joint Venture”
below. We also license the Eddie Bauer name to various consumer product manufacturers and other retailers for use on products that we believe enhance the brand image of Eddie Bauer. See “
Licensing”
below.
The following summarizes the number of retail and outlet stores we opened and closed throughout fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
Outlet
|
|
|
Total
|
|
|
Stores as of December 29, 2007
|
|
271
|
|
|
120
|
|
|
391
|
|
|
Stores Opened in 2008
|
|
8
|
|
|
6
|
|
|
14
|
|
|
Stores Closed in 2008
|
|
(24
|
)
|
|
(5
|
)
|
|
(29
|
)
|
|
Stores as of January 3, 2009
|
|
255
|
|
|
121
|
|
|
376
|
|
2
We expect to open three retail stores and no outlet locations in 2009, and close up to seven
stores—four retail and three outlets—in 2009. The closures are primarily as a result of lease expirations.
2008 and Beyond:
Five Key Initiatives.
The management team has set initiatives, formulated strategies to achieve these initiatives, and took action to implement the initiatives in 2008, with the goal of rebuilding the Eddie Bauer brand as a leader in
outerwear and apparel for an active outdoor lifestyle. Given the 12- to 18-month lead time to develop and introduce merchandise into our sales channels, and the current downturn in the economy, the turnaround of the Eddie Bauer business will be a
multi-year effort.
Our five key initiatives are:
|
|
•
|
|
clarify the brand position and rebuild brand identity
|
|
|
•
|
|
upgrade the quality of the merchandise and align the assortment strategy to the new brand position
|
|
|
•
|
|
revamp the creative marketing function and fully exploit our marketing advantage as a multi-channel retailer
|
|
|
•
|
|
cut costs to become more competitive and profitable
|
|
|
•
|
|
realign the organization and build talent to accomplish our goals
|
Brand Identity.
We are rebuilding the Eddie Bauer brand as an active, outdoor
lifestyle brand, modernizing our heritage as “The Original Outdoor Outfitter”
®
and fully exploiting our rich history. In pursuit of our mission, we are re-emphasizing the fundamentals of quality,
value, service and style. Finally, we are working to restore the true dual gender nature of the Eddie Bauer brand by adding a revamped mens’ business to a solid foundation in womens’.
Merchandising Strategies and Execution.
As we align our merchandise strategy to the brand position, we are putting particular emphasis on
rebuilding our historic strength in outerwear and mens’ apparel, while adding a more active orientation to the assortment. We created a new group in Design and Merchandising to build merchandise lines in outerwear, activewear and gear. Our
Senior Vice President of Sourcing and Supply has worked with our agents and vendors throughout 2008 to improve our quality and costs. We intend to strengthen the value perception of the brand, both through more competitive opening price points and
with better quality, innovation and style for the price paid. We are building the foundation of the merchandise assortment with a concerted effort on improving our core basics.
Marketing.
Our marketing strategy hinges on exploiting our competitive advantage as a true multi-channel retailer and using our catalog as
our primary advertising vehicle. Multi-channel customers who shop in two or more of our store, catalog and internet channels have great value to us as customers and represent approximately 48% percent of our sales. The direct nature of our
relationship with customers allows us to tailor communication and marketing to specific customer segments with specific needs. We are aligning all of our brand marketing to our positioning, while upgrading the quality of our models and imagery.
Costs.
In 2008 we announced a goal of taking $25-30 million out of the operating cost structure of the business in 2008,
with cost reductions coming from overhead, marketing and distribution costs. In January 2008, we announced that 123 jobs had been eliminated from our corporate support organizations as the initial step in reducing our selling, general and
administrative expenses. At the end of fiscal 2008, we removed $48.3 million from our year-over-year SG&A expenses. In January 2009, we announced a further goal of taking an additional $10-15 million out of our cost structure and also
announced an additional headcount reduction of 193 positions from our corporate headquarters, information technology center, distribution center and call center.
Talent and Organization.
We completed building the executive team by hiring a new CEO, CFO, General Counsel and Senior Vice Presidents of Human Resources and of Sourcing and Supply in 2007 and promoting a
3
new Senior Vice President of Merchandising, and hiring a Senior Vice President of Design in 2008. In 2008, we built additional talent under the executive
level through new hires, and created a separate design team focused on outerwear, realigned the marketing team into creative and marketing program groups and moved all our customer facing functions to the Senior Vice President of Customer
Experience & Legendary Service to provide fuller accountability for customer service.
Our Products
We sell mens’ and womens’ apparel and apparel accessories; outerwear; gear, such as
knives, compasses, water bottles and walking poles; backpacks and daypacks; duffel, rolling and messenger bags; gadgets and gift items. Beginning in 2008 we refocused our merchandising strategies on outerwear, a historically strong category for
Eddie Bauer, with the launch of an expanded line of down outerwear for men and women, as well as Weatheredge
®
and 365™ all-weather outerwear systems. Our apparel lines consist of
clothing for men and women, including outerwear, pants, jeans, shirts, dresses, skirts, sweaters, sleepwear, underwear and swimwear. We offer a wide variety of options in fabric, color, style, fit and size and a mix of basic offerings and seasonal
collections. In addition, we offer apparel accessories such as scarves, belts, hats, jewelry, daypacks, bags and footwear that complement our outdoor-inspired apparel lines. We also offer select down products for the home, such as comforters,
pillows and throws. In 2009 and beyond, we will continue to focus on outerwear and apparel items for the active, outdoor lifestyle that reflect the Company’s heritage and its continued reputation for quality. Product strategies for 2009 and
beyond include:
|
|
•
|
|
Rebuilding our strength in outerwear.
Eddie Bauer has a long history of leadership in outerwear, from the
first patented down jacket to Air Force parkas in World War II to outfitting over 30 major expeditions to the world’s most extreme mountains. Eddie Bauer was ranked as the 4
th
outerwear brand in a
Womens’ Wear Daily
survey in July 2008, and 26th in a companion
Womens’ Wear Daily Top 100 Brands
survey, also in July 2008. As an
active, outdoor lifestyle brand, we are committed to building a category-leading outerwear assortment.
|
|
|
•
|
|
Leveraging our heritage.
We will continue to infuse products with heritage elements, while modernizing many
of our historic best sellers, like our Kara Koram™ parka and Yukon Classic™ down vest, as well as our line of field and stream jackets. These heritage pieces reinforce our positioning as “The Original Outdoor Outfitter.
®
”
|
|
|
•
|
|
Focusing on the fundamentals.
We will continue to improve our core programs as the foundation for seasonal collections and fashion. We are making a
concerted effort to improve our top selling items and key programs through better fit, fabrics, detailing, color and style.
|
|
|
•
|
|
Focusing the assortment.
We believe we have a significant opportunity to narrow the assortment, cut unproductive styles and make fewer, clearer
merchandising statements.
|
|
|
•
|
|
Rebuilding the men’s business.
We plan to add product with an active, rugged, adventure-oriented sensibility.
|
|
|
•
|
|
Driving better perceptions of value
through more competitive opening price points, and better quality for the price paid.
|
|
|
•
|
|
Differentiate on style.
We see a significant opportunity to increase the styling of our products and differentiate our assortment from our competitors.
|
These strategies, if properly executed, will improve the customer’s perception of quality, value and style and
reinforce Eddie Bauer as a premium performance brand.
Target Customers
Our historic data shows that our primary target customers are women and men who are 30-54 years old with an average annual household income of
$77,000. According to data from MRI Doublebase in 2007, apparel
4
spending in the United States by women and men between the ages of 35 and 54 totaled $38 billion. According to the Bureau of Labor Statistics, women and
men between the ages of 45 and 54 spend more on apparel than any other segment of the population (approximately $782 per woman per year and $439 per man per year) and belong to the highest household income bracket (an average of $77,000). We intend
to capitalize on this market opportunity by leveraging our established reputation and brand image among this demographic group that has historically made up our core customer base and that has historically spent a larger portion of discretionary
income on specialty apparel.
2008 Performance
Our sales performance declined slightly in 2008—combined comparable store sales declined by
1.8% (1.1% if excluding the impact of Canadian currency fluctuations)—as a result of the substantial downturns in the national economy and consumer spending in the third and fourth quarters of 2008, as well as certain planned reductions in
catalog circulation to less productive addresses in the second and third quarters of 2008. Comparable store sales improved through the first half of 2008, and then declined slightly in the second half of the year as the economy slowed. Net
merchandise sales were $971.3 million in fiscal 2008, which included 53 weeks, compared to $989.4 million in fiscal 2007, a 52-week year. The impact of the 53
rd
week in 2008 was approximately $22.0 million in net merchandise sales.
Although sales declined in the
third quarter, and declined sharply in the fourth quarter of 2008 because of the overall economic downturn, the Company posted a slight decline for the year as a whole because of an increase in comparable store results in retail sales in the first
half of the 2008 (2.9% in the first quarter and 11.2% in the second quarter) and strong second quarter comparable store sales in outlets (4.3%). The Company believes that its performance reflects traction for new merchandising initiatives and
marketing programs implemented in 2008. These include:
|
|
•
|
|
The Eddie Bauer activewear lines
|
|
|
•
|
|
The reintroduction of certain items reflecting our heritage, like the Gasherbraum fleece and the Jim Whittaker blanket
|
|
|
•
|
|
The expansion of our lines of down outerwear, including our 800-fill down jacket
|
2009 and Beyond.
Although the latter half of 2008 was very challenging due to the sharp decrease in retail consumer spending and the highly
promotional holiday sales, especially amongst apparel retailers, we intend to continue to execute against our five key initiatives in 2009. This year we will continue to expand our activewear lines, including yoga apparel and our field and stream
line, and launch a new line of outerwear. To leverage our heritage as an outfitter to mountaineering expeditions worldwide to its fullest, we have created and will be launching in April 2009 the First Ascent™ line of world-class mountaineering
outerwear in collaboration with Rainier Mountaineering, Inc.—the largest mountain guide service in the U.S.—and a team of the best mountain climbers in the world. The guide-built philosophy of the First Ascent line begins with four
attributes: simple, functional, light, and durable. The line marks the return of Eddie Bauer to the center stage of outerwear development and expedition outfitting, two of the cornerstones of what originally established the brand’s
international reputation.
We will continue to closely monitor consumer retail spending and we will make revisions to our pricing
strategies in 2009 if needed to capture more value-oriented consumers’ retail spending dollars. We have tightened our inventory controls and improved our ability to make quick purchases to increase certain inventory in the face of consumer
demand, and in 2009 will purchase slightly less of our total forecasted sales of goods from our vendors initially, and then closely monitor inventory levels to make later purchases to fill out inventory if required to meet additional consumer
demand.
Although we believe that the initiatives already underway should strengthen our business, there are significant risks and
challenges, as discussed in more detail under
“Risk Factors”
below, to our ability to
5
successfully commence and complete a turnaround of this business. Moreover, even if we are successful, given the current challenging economic conditions, we
do not expect significant improvements in operating results until 2010.
Design and Merchandising
We describe the Eddie Bauer organization as “Merchant Led, Design Driven, Marketing Powered and Associate Delivered,” reflecting the order in
which ideas are strategized and brought to market. Merchants lead the process by defining the merchandise strategy, commercial priorities and opportunities, competitive benchmarks and standards, price points and margins, and line plans. Design then
translates the merchandise strategy into seasonal collections.
In 2008, we split our design team into two functional groups: one focused
on Outerwear, Active Wear and Gear and the other on Sportswear. The design process begins with our designers’ development of four seasonal collections 10 to 12 months in advance of each season. Our design teams regularly travel nationally
and internationally to develop color, fabric and design ideas. Once a design team has developed a season’s color palette and design concepts, a tableau is built to identify the critical ideas to be executed within the season. The tableau is
created using original and purchased samples, photos and other inspirational objects and materials that express the theme of the season as well as business initiatives within the season. A prototype sample collection is then developed to evaluate
the styles, details, such as how color takes to a particular fabric, how a fabric performs to our fit specifications, and the overall look and feel of the garment with our coordinated accessories.
Merchants provide our design teams with periodic updates regarding the results of product performance. This feedback helps guide the designers as they
create and update products for upcoming seasons, focusing on the top twenty-five styles by gender as well as important marketing ideas. Our design process is iterative, with regularly scheduled sessions between the merchandising and design groups to
ensure that new products meet internal and customer expectations. In 2008, our design teams and merchants used recognized experts in certain areas—yoga, field and stream activities and mountaineering—to provide input into the components
and designs of certain of our activewear and outerwear pieces to ensure their authenticity and functionality in an active, outdoor lifestyle.
Our designers then create a seasonal line presentation with samples, fabric swatches and drawings reiterating the tableau so our merchandising teams can edit the collection as necessary to increase its commercial strength. Our teams
communicate regularly and work closely with each other to leverage market data, ensure the quality of our products, margins and to remain true to a unified brand image. Our technical design teams develop construction and fit specifications for every
product, ensuring quality workmanship and consistency across product lines. We are able to efficiently offer an assortment of styles within each season’s line while still maintaining a unified brand image, because our product offerings
originate from a single concept collection. As a final guarantee of brand image consistency, senior management reviews the four seasonal collections before selections are finalized.
Apparel products designed for our outlet stores generally follow a design and merchandising process similar to core products designed for our retail
stores, with the same level of quality and fit, but with slightly less expensive fabrics and trims.
As the product line begins to take
shape, the merchant and marketing teams collaborate to identify the “big ideas” and focal points for the season. Marketing then develops programs to maximize the potential of each of the major ideas. As ideas come to market, associates in
our stores and call center are trained to sell and support the new assortment.
6
Product Sourcing
Sourcing Strategy.
We contract with third-party sourcing agents and directly with vendors for sourcing and manufacturing of all of our merchandise. Our sourcing strategy emphasizes the quality fabrics and
construction that our customers expect of our brand. To ensure that our standards of product quality and timely product delivery are met, we:
|
|
•
|
|
retain close control over our product quality and design costs by designing and developing most clothing and accessory products in-house;
|
|
|
•
|
|
directly, or through a small group of sourcing agents, negotiate product cost with our vendors;
|
|
|
•
|
|
prepare in-house and send detailed specification packages to sourcing agents and vendors;
|
|
|
•
|
|
inspect pre-production samples, make periodic site visits to our vendors’ factories and selectively inspect inbound shipments at our distribution
center; and
|
|
|
•
|
|
establish quality standards that are included in our policies with our sourcing agents and vendors and enforced by our sourcing agents and our Quality Assurance
Department through inspections of shipments before they leave the factories and after they arrive in our distribution centers.
|
We believe our sourcing strategy to date has helped us maintain our quality control standards while allowing us to enhance our speed to market to respond to our customers’ preferences. We have four sourcing seasons per year and
typically place orders with our vendors approximately six months prior to the initial sale date, with approximately 11 to 12 weeks for reorders and seven to nine weeks for replenishment of our basic non-seasonal items. We use a similar sourcing
calendar for each of our sales channels. We purchase approximately 85% to 90% of inventory for our stores in advance so as to permit all of our stores to have sufficient product to support demand. In the case of direct sales, we purchase only
approximately 75% to 80% of inventory in advance because we can better gauge anticipated demand for products through our preview catalog, which we typically send to customers approximately 10 to 12 weeks in advance of a season’s product
launch.
Sourcing Agents.
For fiscal 2008, on a purchase value basis, we sourced:
|
|
•
|
|
approximately 76% of our products through our main Hong Kong sourcing agent, Eddie Bauer International, Ltd. (“EBI”). EBI is a subsidiary of Otto
International (Hong Kong) Ltd. (“OIHK”), a former affiliate of Spiegel;
|
|
|
•
|
|
approximately 23% of our merchandise (primarily non-apparel and swimwear) direct; and
|
|
|
•
|
|
the remainder (primarily footwear and home products) through other buying agents.
|
In 2008, we reviewed our sourcing and supply procedures and sourcing agency relationships to further reduce costs while improving adherence to new,
higher quality standards. In 2009, to improve our pricing for goods and increase our speed of delivery, we added one new Asian sourcing agent without prior affiliations to the Company, and opened an office in Hong Kong to enable us to source more
product directly from Asian vendors. Eddie Bauer manages cost negotiations and production directly with factories in Mexico, Central and South America and the Caribbean for basic bottoms and knit products. EBI sources merchandise primarily from
Asia. We are EBI’s sole customer, although the parent company, Otto Asia Holding KG and affiliates provide similar buying agency services for third parties and affiliates of OIHK. EBI provides various services to us, including market research,
product development, vendor screening, quality control standards implementation, labor compliance reviews and product delivery scheduling. EBI operates on a commission-rate basis and our arrangements with EBI are automatically renewed each year,
unless terminated by either party upon one-year written notice. Under a Vendor Service Payment Agreement with OIHK, OIHK pays our vendors for inventory, less volume discounts and a small transaction fee paid by the vendor. We maintain a $500,000
reserve balance with OIHK, and typically reimburse OIHK in advance of payment to a vendor. This arrangement is less expensive than obtaining a letter of credit for each vendor from whom we source products. Substantially all of our foreign purchases
are negotiated and paid for in U.S. dollars.
7
Vendors.
As of January 3, 2009, our sourcing network consists of more than 250 vendors,
who operate in 37 countries. In 2008, our largest countries of import were Hong Kong (34% of total imports), China (20% of total imports), Sri Lanka (12% of total imports), Thailand (6% of total imports) and India (6% of total imports). In fiscal
2008, our top ten vendors supplied approximately 41% of our total vendor purchases and no single vendor supplied more than 7.1% of our total vendor purchases. Our top 30 vendors have supplied us for an average of approximately 10 years. We
believe our long-term relationships with our vendors have also provided us with the ability to resolve supply issues efficiently and negotiate favorable pricing terms over time, further improving our overall cost structure. In 2009, we intend to
build our factory-direct base of vendors through our new Hong Kong office, which should improve product quality and speed to market, and may improve overall product margins. We will also continue to focus on improving product quality worldwide.
Global Labor Practices Program.
Our Global Labor Practices Program, established in 1995, seeks to protect and promote
workplace human rights by training, education, monitoring and, where necessary, corrective action of vendor factories for compliance with our standards. Our standards include prohibitions against forced labor, child labor, harassment and abuse. They
also address non-discriminatory practices, health and safety, freedom of association and collective bargaining, wages and benefit standards, hours of work, overtime compensation and environmental standards. All of our vendors who manufacture
products for us must agree to comply with our Global Labor Practices Program. Our sourcing agents and external monitors conduct annual vendor audits on our behalf. Since 2001, we also have been active participants in the Fair Labor Association
(“FLA”), a non-profit monitoring system established to protect the rights of workers and improve working conditions worldwide. FLA provides systematic risk assessments, identification of best practices, collaboration on workplace
improvements, expanded factory inspections, outreach to special interest groups knowledgeable about local issues, and use of external auditors and public reporting on our compliance program. In May 2005, our Global Labor Practices Program was
accredited by the FLA, as being in substantial compliance with FLA requirements on workplace codes of conduct in apparel factories.
Sales Channels
We distribute our apparel and accessories through our retail channel and outlet store channels, and through our direct channel, which
consists of our Eddie Bauer catalogs and our website located at
www.eddiebauer.com.
See “
Website
” below.
Retail
Stores.
Our retail stores generated net merchandise sales (net of returns) of $443.9 million in fiscal 2008, comprising 45.7% of our net merchandise sales. Our retail stores are generally located in regional malls and lifestyle centers
and in metropolitan areas. We also have stores in smaller markets where we believe concentrations of our target customers exist. We believe situating our stores in desirable locations is key to the success of our business, and we determine store
locations based on several factors, including geographic location, demographic information, presence of anchor tenants in mall locations and proximity to other specialty retail stores that target a similar demographic. Our retail stores are designed
and fixtured to create a distinctive and inviting atmosphere, with clear displays and information about product quality and fabrication.
We believe that approximately 5,500 square feet is the appropriate size for most of our retail stores, as we believe this size allows us to achieve the correct balance between product assortment, inventory and sales. As of
January 3, 2009, approximately 66% of our retail stores were within plus or minus 15% of our model retail store size. We are in the process of realigning our remaining retail stores as opportunities arise, mainly through down-sizing and opening
new retail stores in select locations with a more uniform size and configuration that we believe will improve the sales per square foot realized in the retail store. Additionally, we intend to increase the sales per square foot and comparable store
sales by, among other things, focusing on outerwear, offering products featuring improved fit and higher quality fabric, trim and hardware and emphasizing our outdoor heritage to drive traffic and conversion. We expect to open up to three retail
stores in 2009, and expect to close up to four retail stores, with most closures occurring in the first quarter of 2009. In 2009, we will focus on areas of historic retail success for us, including locations in the northern U.S.
8
We train our retail sales associates to provide a high standard of customer service and to create
appealing head-to-toe outfit displays to show our customers how to wear our apparel and to encourage multiple purchases by customers. To provide our sales associates with an incentive to deliver superior customer service and to drive sales, each
retail sales associate’s compensation consists of a base hourly rate supplemented by eligibility for incentive bonuses based on overall store performance. Our associates are eligible to earn an incentive based on monthly store sales thresholds,
payable after the end of each month in which the threshold sales goal has been met. We believe our compensation policies enable us to maintain high standards of customer service in our stores.
Outlet Stores.
Our outlet stores generated net merchandise sales of $253.2 million in fiscal 2008, comprising 26.1% of our net
merchandise sales. Our outlet stores target customers seeking Eddie Bauer apparel at lower prices. Our outlet merchandise consists of apparel designed exclusively for the outlet stores and excess inventory from our retail stores, and we regularly
monitor this mix. Apparel products designed for our outlet stores leverage the same design process, brand image principles and quality standards as apparel sold in our retail stores, but with less expensive fabrics and trims. Outlet products
typically are priced at least 20% to 40% below full retail store product prices. Our outlet stores are located predominantly in outlet centers, value strip centers and “destination” outlet areas such as Palm Springs, California, and Hilton
Head, South Carolina. See
“Item 2. Properties”.
In fiscal 2009, we expect to close three outlet stores and do not expect to open any outlet stores.
Sales associates in our outlet stores adhere to customer service practices similar to our retail stores, and are trained to provide similar services to those provided in our retail stores. The compensation policies
for our outlet sales associates are the same as those of our retail sales associates.
Direct Channel.
In fiscal 2008, our
direct channel generated net merchandise sales of $274.2 million, comprising 28.2% of our net merchandise sales. We believe that the increasing trend of consumers shopping via the Internet will drive growth in our Internet sales, offsetting
anticipated declines in our catalog sales. Our direct channel consists of our catalog and website operations, both of which we believe reinforce our brand image and drive sales across all sales channels. Our catalogs and websites offer the broadest
assortment of available colors, styles and sizes, including petite, tall and plus, as well as certain products, such as swimwear, dresses and footwear, that are not available in our stores. Our U.S. stores offer a direct phone connection to our
customer call centers that allows an in-store customer to order for home delivery a particular size, color or item that may not be available in the store. We account for these sales under direct channel sales. In addition, our website and catalogs
are linked through our “Catalog Quick Order” feature, which allows a customer to input a catalog item number to place an order on the website.
As of January 3, 2009, we maintained a database of customers who have purchased from us in the last three years of approximately nine million households, of which approximately four million were households that
had purchased from us at least once in the past 12 months, and approximately three million were customers with e-mail addresses who receive regular promotional e-mails from us. We update our customer database on a continuous basis. Our customer
database enables us to analyze customer purchases by numerous metrics, including frequency and average transaction size, which allows us to implement more advanced circulation and strategic marketing programs. We focus on continually improving the
segmentation of our customer database and the acquisition of additional customer names from several sources, including our retail stores, our websites, list rentals and list exchanges with other catalog companies.
Catalogs.
In fiscal 2008, we distributed 26 catalog editions with an aggregate circulation of approximately 77 million catalogs. Our top
catalog customers receive a new catalog every two to three weeks. In the second and third quarters of 2008, we reduced overall catalog circulation by cutting circulation to unproductive households. In the second and third quarters, catalog
circulation pages were down approximately 18% although direct productivity increased approximately 19% on our targeted marketing strategy. In addition, we target our best customers to receive preview catalogs with incentives to purchase items
approximately 10 to 12 weeks prior to the official launch of a new season. Customer response to these preview catalogs is important information we use
9
to adjust our product offerings in our direct channel and also enables us to better control inventory commitments and assortments. All creative work on our
catalogs is coordinated by our in-house personnel, and we believe this allows us to shape and reinforce our brand image.
Website.
Our
www.eddiebauer.com
website was launched in 1996 to allow our customers to purchase our merchandise over the Internet. We design and operate our website using an in-house technical staff and outside web
hosting provider. Our website emphasizes simplicity and ease of customer use while integrating our brand’s modern outdoor lifestyle imagery used in our catalogs. In fiscal 2008, our website had over 33.9 million visits, and has received a
number of awards, being named a “Top 50 Best of the Web” online retailing website for 2005 by
Internet Retailer
in November 2005. In the first quarter of 2008, we launched a redesigned website, under the
www.eddiebauer.com
address, with new graphics that better represent our brand image, and easier, more consumer-intuitive functionality to increase the number of visitors who actually purchase from the site. The new website integrated our two prior websites (the
www.eddiebauer.com
retail site and the
www.eddiebaueroutlet.com
outlet site) into one site for ease of shopping and for greater efficiencies internally.
Protecting and Developing Our Brand Name
Trademarks.
Substantially all of our trademarks are owned by Eddie Bauer, Inc. As of January 3, 2009, we had 62 trademark registrations in the U.S. and 76 pending trademark applications. Our pending trademark applications
may not result in issued trademark registrations. Our primary trademarks include Eddie Bauer
®
, the Eddie Bauer signature logo and the Eddie Bauer goose logo.
We regard our trademarks as key assets and believe they have substantial value in the marketing of our products. We protect these trademarks by
registering them with the U.S. Patent and Trademark Office and with governmental agencies in other countries, particularly where our products are manufactured and/or sold. We work vigorously to enforce and protect our trademark rights by
engaging in monitoring services, issuing cease-and-desist letters against third parties infringing or denigrating our trademarks and initiating litigation as necessary.
We grant licenses to certain of our trademarks to other parties to manufacture and sell certain products that we believe are compatible with our brand identity. See “
Licensing
” below.
Joint Venture.
We own 30% of Eddie Bauer Japan, a joint venture with Otto-Sumisho, Inc. (a joint venture company of Otto KG, a former Spiegel
affiliate, and Sumitomo Corporation), under which we have granted the joint venture the right to sell a mixture of Eddie Bauer apparel and accessories from the U.S. core assortment, in addition to products developed by the joint venture partner
exclusively for the applicable market. We also license our name to the joint venture. We provide oversight on product development, catalogs, merchandising, store design and marketing efforts, and retain the right to approve all products offered by
the joint venture that carry the Eddie Bauer brand. In exchange, we receive a share, as an equity holder, in the earnings or losses of the joint venture. Eddie Bauer Japan reported joint venture net sales of $152.5 million in fiscal 2008. In
fiscal 2008, we received approximately $4.8 million in royalties from the joint venture and recorded a loss of approximately $5.0 million for our equity share which included an impairment of $3.7 million recording during the fourth quarter
of 2008 based on our determination that our carrying value exceeded the fair value of the investment. As of January 3, 2009, our equity investment balance was approximately $9.5 million in Eddie Bauer Japan.
The Company had a 40% interest in Eddie Bauer GmbH & Co. (“Eddie Bauer Germany”), a joint venture established to sell Eddie Bauer
merchandise in Germany. The remaining 60% was held by Heinrich Heine GmbH and Sport-Scheck GmbH (both former Spiegel affiliates and subsidiaries of Otto KG). In February 2008, the Company received a required one-year notice from its joint venture
partners in Eddie Bauer Germany of their decision to terminate the joint venture arrangement, and as a result, the joint venture, together with a companion license arrangement, would have terminated in February 2009. In June 2008, we, together with
the other joint venture partners, completed the transfer, effective March 1, 2008, of our interests in the joint venture to a third
10
party in return for a release of past and future liabilities. As part of the transfer of the joint venture interest, we terminated our prior licensing
agreement with Eddie Bauer Germany and entered into a new licensing arrangement to license the use of our tradename and trademarks to the new entity for a five-year period in exchange for specified royalties.
Licensing
We selectively license our brand name and
logo to be included on products sold by other companies to enhance and extend the Eddie Bauer brand. We received $12.8 million in royalty revenues in fiscal 2008 relating to our licensing arrangements.
We seek licensees who are leaders in the outdoor, juvenile, home, SUV, personal and other categories. We typically enter into multi-year license
agreements with one licensee per product category to prevent price competition and market saturation of our brand. In each of our licensing arrangements, we work closely with our licensees and have a final right of approval to ensure our brand is
consistently presented. Our top performing licenses by royalty revenues received for fiscal 2008 were:
|
|
|
|
|
Name of Licensee
|
|
Licensed Products
|
|
Cosco Management, Inc.
|
|
Infant/juvenile car seats and strollers
|
|
Skyway Luggage Company
|
|
Luggage
|
|
American Recreation Products
|
|
Camping gear
|
|
Ford Motor Company
|
|
SUVs
|
|
Lowe’s Companies
|
|
Interior paint and products
|
We are actively reviewing other licensing opportunities based on appropriate fit with our brand
image.
Marketing
Our
marketing investment focuses on retaining our core customers and profitably acquiring new customers. In 2008, we focused primarily on the following:
|
|
•
|
|
creating a single powerful brand message across all channels;
|
|
|
•
|
|
ensuring our stores are a compelling shopping destination via powerful graphics, props and product displays that amplify our monthly product news;
|
|
|
•
|
|
using 77 million distributed catalogs that influence sales in all channels and establish our brand image amongst existing and new customer; and
|
|
|
•
|
|
limited time promotional offers and incentives that drive seasonal traffic and sales.
|
Our Marketing Strategy.
We design our marketing strategy to present a consistent and unified brand image grounded in our outdoor heritage to
increase traffic, purchase frequency and sales through each of our sales channels and create an emotional connection between our target customers and the Eddie Bauer brand. Our target customers are women and men, ages 30-54, who desire
high-quality outdoor-inspired activewear, outerwear and casual sportswear. Our goal is to create marketing campaigns that amplify our seasonal merchandising messages and make our target customers aware of new merchandise, special events and sale
offers. Our primary methods of driving traffic to our sales channels are extensive catalog and e-mail circulation, compelling visual displays and signage in our stores and our customer loyalty and credit card programs. Through the efforts of our
public relations department, in 2008 we had uncompensated product coverages from 33 national independent publications such as
Men’s Journal, National Geographic Adventure, Outside, Oprah Magazine, Shape
and
Womens’ Wear
Daily.
11
To drive brand awareness and purchase frequency, we utilize our active in-house customer database of
approximately 9 million households to develop our year-round catalog circulation strategies. We consistently add new customers to our database through online advertising (e.g., Google, Yahoo, etc.), third party catalog mailings and by
recruiting new members into our customer loyalty and credit card programs. We also utilize an email database of over three million names to further strengthen our current customer relationships and drive sales to all channels. In the second and
third quarters of 2008, we decreased catalog pages circulated to certain less productive households by 18%, but saw an overall increase in direct productivity in those quarters of 19%.
Loyalty Program.
In September 2006, we launched our first full-scale customer loyalty program, Eddie Bauer Friends. Customers may enroll in
the program for free via our stores, catalog call centers or at
www.eddiebauerfriends.com
. The loyalty program allows customers in the United States to accrue points that may be redeemed for Eddie Bauer reward certificates or used toward
acquiring special Eddie Bauer merchandise at
www.eddiebauerfriends.com
. We operate a similar program in Canada under the name Canadian Rewards. The full terms and conditions of the loyalty program are available at
www.eddiebauerfriends.com
. As of January 3, 2009, approximately 4.7 million customers have enrolled in our loyalty program. We believe that the program is a valuable tool in retaining our core customers, driving incremental customer
loyalty and building our database to better track and market to our customers.
Our Private-Label Credit Card.
We seek to
increase customer loyalty and sales by offering customers our private-label Eddie Bauer credit card through a third party, World Financial Network National Bank (“WFNNB”). Customers apply for the Eddie Bauer credit card, and if approved in
accordance with WFNNB’s credit criteria policies, customers can use the Eddie Bauer credit card in any of our sales channels. Nearly all Eddie Bauer credit card holders are members of our Friends loyalty program. As of January 3, 2009, we
had approximately 362,000 customers who had used the Eddie Bauer credit card at least once in the past 12 months. Sales using our credit card, after discounts, comprised approximately 8% of our total net merchandise sales in fiscal 2008, and we
receive a small per-transaction fee from WFNNB for each credit card transaction.
Marketing expenses accounted for 9.4% (including catalog
production costs) of our net merchandise sales in fiscal 2008.
Our Support Functions
Distribution Centers.
Our wholly-owned subsidiary, Eddie Bauer Fulfillment Services, or EBFS, supports our U.S. distribution, fulfillment
and inbound/outbound transportation requirements. Under the Spiegel Plan of Reorganization, we acquired ownership to a 2.2 million square foot distribution center in Groveport, Ohio from Spiegel. This facility handles logistics and distribution
for our U.S. retail, U.S. outlet and direct operations, including direct-to-consumer ship and return services, purchasing of non-merchandise inventory and services and shipping and transportation coordination. We also lease a
97,200 square foot distribution center in Vaughan, Ontario, to provide distribution services for our Canadian retail stores. As of January 3, 2009, 487 associates were employed by our distribution centers: 464 associates in Groveport; and
23 associates in Vaughan, with the number of associates typically increasing in the fourth quarter to handle larger processing volume during the holiday season. In January 2009, we announced a reduction in workforce that eliminated approximately 15%
of the positions at the Groveport facility as part of our 2009 cost reduction measures.
Each overseas vendor sends the finished products
to a designated shipper or consolidator who assembles the shipments into containers. Shipments for the U.S. retail market generally arrive in Tacoma/Seattle and then move by rail to our Groveport, Ohio distribution center, while shipments for
the Canadian retail market arrive in Vancouver, British Columbia, and move by rail to our Vaughan, Ontario distribution center. In 2009, we will use FedEx for delivering shipments from our distribution center in Groveport, Ohio, to our retail and
outlet stores across the U.S. and for expedited and non-U.S. shipments to our customers. U.S. ground shipments originating from our catalogs or website are delivered to our customers by FedEx and the United States Postal Service.
12
Information Technology.
In 2005, as part of our emergence from bankruptcy, we acquired from
Spiegel an approximately 50,000 square foot information technology (“IT”) center in Westmont, Illinois, that houses all of our information systems relating to product development, merchandising, marketing, planning, store operations,
sourcing, finance, accounting, call centers, Internet, inventory and order fulfillment. As of January 3, 2009, approximately 93 associates were employed at the IT center. In January 2009, approximately 18% of the support positions at the IT
center were eliminated as part of our reduction in workforce.
Our website is hosted by a third party at its data center. In 2008, our IT
group launched a new website that combined our old retail and outlet websites. The new website provides a significantly enhanced customer experience and more flexibility to modify the website.
We maintain a disaster recovery plan that can be implemented in the event we lose our capacity to perform daily data operations. All critical data is
backed up and sent off site on a daily basis specifically for recovery purposes. We have contracted with a disaster recovery vendor to provide the necessary computing equipment at a hot site so that operations can be restored. We test the plan
periodically to ensure its validity.
In keeping with our key initiatives for 2009, the IT group will be limiting application development
projects to high priority enhancements as part of our overall cost reduction initiative.
Call Center.
We operate an
approximately 38,000 square foot call center in St. John, New Brunswick, Canada, at which our associates handle calls from customers. Additionally, we outsource a portion of our customer call handling, as well as the handling of customer
emails, to a third party. The call center and third party provider handle calls and emails related to catalog orders, make suggestions to customers about additional products and assist customers with purchases. The service teams handle all calls
regarding issues with quality and service in our three channels, as well as customer feedback. The ecommerce team handles calls and emails and provides both sales and service functions for website customers. Our support team handles all processing
functions required to complete orders through the catalog and website. In January 2009, we eliminated approximately 12% of the positions at the Call Center and reallocated certain service responsibilities between in-house and third party providers
as part of our 2009 cost reductions.
Competition
The retail apparel industry is highly competitive. In the past, the primary competitive factors in the industry were brand recognition, the selection, availability, quality and fit of products, the ability to
anticipate and react to changing customer demands and fashion trends in a timely manner, price, effectiveness of marketing and advertising, and effectiveness of customer service. In the current economy, value perceptions and the promotional
activities of the brand, as well as the uniqueness of the merchandise, have become important factors as well. With the downturn in the U.S. economy and the decline in consumer spending in the second half of 2008, the competition for consumer dollars
became much more promotional, even prior to and during the holiday season. We expect this promotional activity will continue at least through the first half of 2009. We compete with a variety of retailers, including national department store chains,
national and international specialty apparel chains, global discount chains, outdoor specialty stores, catalog businesses, sportswear marketers and online businesses that sell similar lines of merchandise. In the United States, our retail stores
compete primarily with other specialty retailers, such as Ann Taylor, Banana Republic, Talbots, Chico’s, Coldwater Creek, Gap, J. Crew, J. Jill and Timberland, with national department store chains such as Macy’s and Nordstrom, and with
outdoor specialty stores such as Columbia Sportswear, North Face, Patagonia and REI. We also compete with catalog businesses such as L.L. Bean and Lands’ End. In Canada, we compete primarily with retail stores such as Bluenotes and Roots, as
well as various national and international department store chains. Our outlet stores compete with the outlet stores of other specialty retailers such as Ann Taylor, Banana Republic, Gap, J. Crew and Ralph Lauren/Polo, outdoor specialty stores such
as Columbia Sportswear and North Face as well as with other value-oriented apparel chains and national department store chains.
13
We completed the year with overall comparable store sales of (1.1%), adjusted for Canadian currency
fluctuations, which was a stronger overall sales performance than the majority of our competitors who report sales results. We believe our stronger performance was due to our focus on our brand identity and our realignment of our merchandise
assortment to that brand identity, emphasizing our heritage as an outdoor outfitter, as well as our revamped marketing programs emphasizing the active outdoor lifestyle. That heritage includes the innovation of goose down outerwear and Eddie Bauer
being America’s premier expedition outfitter in the 1950s and 1960s. The merchandise we developed for 2008 included the re-creation of some historical pieces. To leverage our heritage to its fullest, we have also created the First Ascent™
line of world-class mountaineering gear in collaboration with Rainier Mountaineering, Inc.—the largest mountain guide service in the U.S.—and a team of the best mountain climbers in the world. The guide-built philosophy of the First
Ascent™ line begins with four attributes: simple, functional, light, and durable. The line marks the return of Eddie Bauer to the center stage of outerwear development and expedition outfitting; two of the cornerstones of what originally
established the brand’s international reputation. The line will launch in spring 2009 to the professional mountaineering community, with full retail availability in fall 2009.
We believe that our primary competitive advantages are customer recognition of the Eddie Bauer brand name and quality of our merchandise, our integration
of our retail and direct sales channels, our customer service and our satisfaction guarantee. We believe that we also differentiate ourselves from competitors through our offering of down outerwear and outdoor-inspired clothing and accessories. We
believe our success depends in substantial part on our ability to convey our brand identity and provide clothing that fulfills our stated position as a leader in clothing for an active, outdoor lifestyle, as well as anticipate, gauge and react in a
timely manner to changing consumer preferences which, in turn, allows us to drive traffic to our channels, increase purchase frequency and improve conversions.
Many of our competitors may have greater financial, distribution, logistics and marketing resources than us. In addition, many of our competitors are not in the early stages of trying to stabilize their business and
revitalize their brand. Many of our competitors therefore may adopt more aggressive pricing policies than we can and adapt to changes in customer requirements more quickly, devote greater resources to the design, sourcing, distribution, marketing
and sale of their products and generate greater national brand recognition.
For information on the primary factors on which we compete and
the risks we face from competition, see “
Risk Factors—Industry Risks
—
If we cannot compete effectively in the apparel industry our business and financial condition may be adversely affected
” under Item 1A.
Seasonality
We are a seasonal
business, with our sales and earnings peaking during the fourth quarter, particularly during the November through December holiday periods. In addition, we typically experience higher sales of mens’ products and accessories in June for
Father’s Day. As a result of our seasonal sales patterns, we increase our inventory levels during these selling periods.
Associates
As of January 3, 2009, we had approximately 1,086 full-time associates and 6,341 part-time retail associates in the U.S. and
Canada. We had approximately 1,277 corporate support personnel in our Bellevue, Washington headquarters, our Westmont, Illinois IT center, our call center in St. John, New Brunswick, Canada and our distribution centers in Groveport, Ohio and
Vaughan, Ontario, Canada. As a result of our seasonal sales patterns, we hire additional temporary staff at our retail stores and at our distribution and call centers during the fourth quarter. Our associates are not represented by unions and are
not covered by any collective bargaining agreements. We have had no labor-related work stoppages, and we consider relations with our associates to be good. In January 2008, we eliminated 123 positions from our non-retail support personnel, and in
January 2009, we completed a reduction in work force that eliminated 193 non-retail personnel from our organization.
14
Government Regulation
U.S. Regulation
We are subject to federal, state and local laws and regulations affecting our
business, including those related to labor, employment, worker health and safety, environmental protection, products liability, product labeling, consumer protection, privacy and anti-corruption. These laws include the Occupational Safety and Health
Act, the Consumer Products Safety Act, the Tariff Act of 1930 (as amended), the Flammable Fabrics Act, the Textile Fiber Product Identification Act, the Foreign Corrupt Practices Act and the laws and regulations of the Consumer Products Safety
Commission (CPSC), the Federal Trade Commission (FTC) and the Office of Foreign Asset Controls (OFAC). We also voluntarily participate in the Customs—Trade Partnership Against Terrorism (“C-TPAT”) and received our Tier Three
validation status at the end of 2006. We are subject to import and export laws, including U.S. economic sanction and embargo regulations and other related laws such as the U.S. anti-boycott law and U.S. export controls regulations.
Our imported merchandise is subject to U.S. and Canadian duties. We have taken advantage of the reduction of duties on merchandise sourced from vendors
located in World Trade Organization (WTO) member countries, have benefited from the elimination of quotas, the last of which sunsetted at the end of 2008 and have taken advantage of several bilateral and multilateral trade agreements, such as the
North American Free Trade Agreement (NAFTA), the Singapore Free Trade Agreement (SFTA) the African Growth and Opportunity Act (AGOA) as well as the General Preferential Tariff and the Lesser Developed Country benefit programs offered by Canada.
In 2008, the U.S Congress passed the Consumer Products Safety Improvement Act that enhanced consumer products safety testing and record
keeping for certain categories of our merchandise. There is an existing threat that the U.S. government could “self-initiate” a dumping action against apparel imports from Vietnam, China, India and/or several other countries. However, to
date they have declined to do so. It is also possible that a U.S. person (individual, partnership, corporation or trade association) could file their own dumping or subsidies action creating significant uncertainty of the duty rates applicable to a
few categories of our merchandise. In 2009, there is some possibility that Congress may make it easier for dumping actions to be filed against imports from non-market economies, such as Vietnam, or they may enact a currency manipulation act against
China or otherwise impose other import restrictions that would negatively impact our ability to import our merchandise or manage our duty obligations for affected categories.
Our C-TPAT certification is up for review by U.S. Customs in the latter part of 2009. This review is conducted by U.S. Customs every three years. In
2008, U.S. Customs completed their regularly scheduled Focused Assessment (FA) review of our customs compliance program and processes and determined that we were in compliance with all U.S. Customs laws and regulations.
Non-U.S. Regulation
We are
subject to Canadian and other foreign laws and regulations affecting our business, including those related to labor, employment, work health and safety, environmental protection products liability, consumer protection and anti-corruption. Many,
although not all U.S. laws and regulations impacting our imports have Canadian equivalents and likewise there are a few Canadian laws and regulations that are unique to Canada. We actively monitor potential changes in foreign laws and regulations
that may impact our business.
Passage of legislation intended to curb imports from China, such as a measure targeted at alleged currency
manipulation and amendments to existing anti-dumping and subsidies laws also could negatively impact the costs of imports from that country.
We believe we are in substantial compliance with all U.S. and foreign regulations that apply to our business.
15
The Spiegel Bankruptcy
The Spiegel Group.
Eddie Bauer, Inc. was acquired by Spiegel in July 1988. During 2001 and 2002, net sales declined at Spiegel’s three merchant divisions, including Eddie Bauer, Inc. In addition,
Spiegel’s special-purpose bank, FCNB, which offered private-label and standard credit cards, expanded credit to high risk, low-credit score customers. These events led to lower liquidity and contributed to the noncompliance by Spiegel and its
affiliates with certain financial and other covenants under their financing arrangements. In addition, in 2002, FCNB entered into an agreement with the Office of the Comptroller of the Currency which required FCNB to comply with certain requirements
and restrictions. As a result, substantially all monthly excess cash flow from the securitizations of credit card receivables was diverted to repay principal to investors in the securitization vehicles on an accelerated basis, rather than to pay the
cash to FCNB upon deposit of new receivables. Accordingly, Spiegel and 19 affiliates (including Eddie Bauer) (the “Debtors”) lost a significant source of liquidity to fund their operations.
In March 2003: (i) Spiegel’s merchant divisions ceased honoring private-label credit
cards; (ii) FCNB discontinued charging privileges on all MasterCard
™
and Visa
™
bankcards issued by FCNB to its customers;
(iii) FCNB began to liquidate, and (iv) the SEC commenced a civil proceeding against Spiegel alleging, among other things, that Spiegel’s public disclosures violated the Securities Exchange Act of 1934, as amended.
At this time, the Debtors concluded that it was in the best interests of their creditors, stockholders and other parties-in-interest for the Debtors to
seek protection under the Bankruptcy Code. On March 17, 2003, the Debtors, including Eddie Bauer, Inc., filed petitions for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court of the Southern
District of New York. The bankruptcy court confirmed the Amended Joint Plan of Reorganization relating to the bankruptcy on May 25, 2005, and the Plan of Reorganization became effective on June 21, 2005.
Plan of Reorganization.
Under the Plan of Reorganization, Eddie Bauer Holdings, Inc. was formed as a new holding company to serve as the
parent company for Eddie Bauer, Inc. and its subsidiaries. In exchange for the Company’s issuance of 30 million shares of common stock to certain unsecured creditors of the Debtors, certain subsidiary operations were transferred to the
Company. In order to take advantage of tax net operating losses (“NOLs”) available to Eddie Bauer Holdings from certain subsidiaries, we included ownership limitations on our newly issued common stock in our certificate of incorporation
and bylaws. The ownership restrictions were to expire in January 2009, but were extended in 2008 by consent of the holders of 5.25% Senior Convertible Notes, and after receipt of shareholder approval, to January 1, 2012. Under the Plan of
Reorganization, Eddie Bauer, Inc. and Eddie Bauer Holdings, Inc, along with our U.S. subsidiaries as guarantors, were required to enter into a $300 million senior secured term loan agreement, the proceeds from which were used to pay
Spiegel creditors and not to fund operations of the Company or its subsidiaries. See
“Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Sources of Liquidity”
for further discussion of the term loan, including the April 2007 term loan refinancing and the First Amendment (“First Amendment”) we executed in April 2009.
Any of the
risks discussed below, as well as any of the other risks described in this Form 10-K, could materially affect our business, financial condition, results of operations and cash flows.
Industry Risks
Continued adverse changes in the economy may
adversely affect consumer spending, which could negatively impact our business.
The specialty retail apparel industry is heavily
dependent on discretionary consumer spending patterns. Our business is sensitive to numerous factors that affect discretionary consumer income, including adverse general
16
economic conditions, changes in employment trends and levels of unemployment, increases in interest rates, weather, a significant rise in energy or food
prices or other events or actions that may lead to a decrease in consumer confidence or a reduction in discretionary income. In addition, in a period of inflationary pricing, increased fuel costs may discourage customers from driving to our retail
and outlet locations, reducing store traffic and possibly sales. Continued declines in consumer spending on apparel and accessories, especially for extended periods, could have a material adverse effect on our business, financial condition and
results of operations.
Reduced pricing by competitors in the retail apparel industry has affected and may continue to affect our results of
operations.
Increasing pressure on retailers to reduce prices of their products as a result of the overall reduction in consumer
spending, as well as increased competition, the increased outsourcing of product manufacturing to countries with lower labor costs, trade liberalization, consolidation among retailers and lower barriers to entry for manufacturers and retailers has
and may continue to force us to lower prices, or make us unable to sell our higher-priced products, in which case our business, financial condition and results of operations could suffer materially.
If we cannot compete effectively in the apparel industry our business and financial condition may be adversely affected.
The retail apparel industry is highly competitive. We compete with a variety of retailers, including national department store chains, national and
international specialty apparel chains, outdoor specialty stores, apparel catalog businesses, sportswear marketers and online apparel businesses that sell similar lines of merchandise. Our outlet stores compete with the outlet stores of other
specialty retailers as well as with other value-oriented apparel chains and national department store chains. Our competitors may be able to adopt more aggressive pricing policies or adapt to changes in customer requirements more quickly, devote
greater resources to the design, sourcing, distribution, marketing and sale of their products, or generate greater national brand recognition than we can. If we are unable to overcome these potential competitive disadvantages or effectively place
our products relative to our competition, our business and results of operations will suffer.
The retail apparel business is seasonal in nature, and
any decrease in our sales or margins during these periods could have a material adverse effect on our Company.
The retail apparel
industry is highly seasonal, with the highest levels of sales during the fourth quarter. Our profitability depends, to a significant degree, on the sales generated during these peak periods. Any decrease in sales or margins during these periods,
whether as a result of increased promotional activity because of economic conditions, poor weather or other factors, could have a material adverse effect on our Company.
The apparel industry is characterized by rapidly changing customer demands and our failure to anticipate and respond to changing customer style preferences in a timely manner will adversely affect our business
and financial condition.
The apparel industry is characterized by rapidly changing customer preferences and quickly emerging and
dissipating trends. In a recessionary economy, consumers may allocate spending to novelty apparel instead of basic apparel components. Failure to effectively gauge the direction of customer preferences and anticipate trends, or convey a compelling
brand image or price/value equation to consumers may result in lower sales and resultant lower gross margins to sell inventory. We typically place orders with our vendors approximately six months prior to the initial sale date, and so can make only
limited modifications to orders in response to changes in customer preferences. If we are unable to successfully identify changes in customer preferences or anticipate customer demand from season to season, we could experience lower sales, excess
inventories, higher mark-downs and decreased earnings.
17
Results of operations could be hurt if new trade restrictions are imposed or existing trade restrictions become
more burdensome.
Trade restrictions, including increased tariffs or quotas, embargoes, safeguards and customs restrictions against
apparel items could increase the cost or reduce the supply of apparel available to us or may require us to modify our current business practices, any of which could hurt our business, financial condition and results of operations. Safeguard quotas
imposed by the U.S. on categories of goods and apparel imported from China may impact our sourcing patterns and costs. We also cannot predict whether any of the countries in which our merchandise is currently manufactured or may be manufactured
in the future will be subject to additional trade restrictions imposed by the U.S., Canadian and foreign governments, nor can we predict the likelihood, type or effect of any such restrictions.
Risks Relating to Our Business
If we cannot revitalize the
Eddie Bauer brand, our business will be adversely impacted.
Our net merchandise sales declined during each of the fiscal years
between 2000 and 2006 and again in the second half of 2008, and comparable store sales also decreased in 25 of the 36 quarters between 2000 and 2008. As we discuss in
“Item 1. Business—2008 and Beyond: Five Key Initiatives,”
we have taken, and intend to take, strategic, operational and management actions designed to reconnect with our customers and revitalize Eddie Bauer as a premium quality brand. However, we cannot be assured that the changes we have made, or the
additional actions we are taking or intend to take, will be successful, or that such actions and changes will not result in the following:
|
|
•
|
|
our desire to attract additional male customers may result in the loss of existing female customers;
|
|
|
•
|
|
our addition of higher priced merchandise may drive away existing customers and may not attract new customers;
|
|
|
•
|
|
our efforts to increase traffic and sales in our retail and outlet stores may not be cost effective; or
|
|
|
•
|
|
our marketing efforts to promote our revitalized brand may not be effective.
|
If we cannot successfully revitalize the Eddie Bauer brand, or if the revitalization takes longer than anticipated, our business and our financial
condition and results of operations will be adversely impacted. If customer purchases lag behind our expectations, we may experience decreased net merchandise sales, negative comparable store sales and higher operating losses.
We depend on a high volume of mall traffic, the lack of which will hurt our business.
Many of our stores are located in shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those malls. Traffic in malls
where we have stores have been, and may continue to be, adversely affected by the economic downturn, the closing of other retail tenants and competition from non-mall retailers and other malls where we do not have stores, which will hurt our
business, financial condition and results of operations.
We face numerous challenges as a result of our involvement in the Spiegel bankruptcy
process which, if not addressed, could have a material adverse effect on our business.
As a result of our involvement in the
Spiegel bankruptcy proceedings, we were required to take actions that we might not otherwise have taken as a stand-alone company, including:
|
|
•
|
|
borrowing significant amounts (including $300 million under our previous senior secured term loan, which has been refinanced to our $225 million Amended Term
Loan and $75 million in Notes, and amounts from time to time under our senior secured revolving credit facility of up to $150 million) to
|
18
|
|
pay Spiegel creditors, and as a result becoming subject to the restrictions and limitations imposed by the lenders under our financing facilities;
|
|
|
•
|
|
assuming ongoing obligations associated with Spiegel’s former pension and other retirement plans; and
|
|
|
•
|
|
inheriting support facilities that were not optimally suited for our operations and, as a result, having to bear the overhead costs of, sell, streamline,
consolidate or relocate some of these facilities.
|
We have been operating as a stand-alone entity since June 2005 and
face additional costs and risks as a result. We must continue to streamline the back-end distribution and logistics operations we inherited and reduce costs throughout our organization. If we are unable to do so successfully, our business, financial
condition and results of operations could be harmed. In addition, with the downturn in the economy, the investment return on the assets in the Spiegel pension plan transferred to us may decline to a level that will require us to contribute
additional cash to bring the asset value to levels required by law.
If we cannot attract and retain qualified senior and middle management and
motivate our retail associates, our business will be adversely affected.
Our success will depend to a significant extent on our
ability to retain the services of members of our senior management team in the long term through attractive incentive arrangements. Our current depressed stock price, plus the limited amount of available stock in our equity plan, make incentive
packages more difficult to achieve. Competition for qualified personnel is intense. We may not be able to retain current employees or attract new employees due to uncertainty relating to our future business prospects. The loss, for any reason, of
the services of key individuals or the failure to attract and retain additional members of our management team could have a material adverse effect on us. Our success also depends on our ability to hire, motivate and retain other qualified
associates who reflect and enhance our customer-service oriented culture, including our store managers, sales associates and staff at our call centers. If we are unable to hire and keep enough qualified associates, especially during our peak season,
our customer service levels and our business, financial condition and results of operations may be hurt.
We rely on a few sourcing agents for a
substantial majority of our sourcing needs, the loss of which could adversely affect our business.
In 2008, on a purchase value
basis, we sourced approximately 76% of our products through EBI. Our sourcing agreement with EBI is on a commission basis and is automatically renewed each year unless terminated by either party upon one year written notice. If the agreement with
EBI were terminated or if the terms of the agreement were modified substantially and we did not find an appropriate replacement in a timely manner and on reasonable terms, or if we were unable to transition the EBI functions in-house in a
cost-effective manner, we could experience shortages or delays in receipt of our merchandise, higher costs and quality control issues. In addition, if vendors from whom we purchase require advance letters of credit to continue to manufacture our
goods, or refuse to manufacture due to concern about our ability to pay for products, our available product sources may become limited, impacting our store inventory and sales. Any of these events could have a material adverse effect on our
business, financial condition and results of operations. In addition, some of our competitors may perform all or a larger portion of their sourcing functions in-house, and, as a result, have lower sourcing costs than we do.
We obtain licensing royalties and rely on our licensees to maintain the value of our brand.
We have licensing arrangements with various consumer product manufacturers and retailers. In 2008, $12.8 million of our revenues were derived from
licensing royalties. Although we have control over the appearance and quality of our licensees’ products and advertising, we rely on our licensees for, among other things, operational and financial controls over their businesses. Our licensing
revenues are based upon the net sales of the licensed products as reported by our licensees. When the net sales information for the licensed products is not available to
19
us prior to issuance of our financial statements, we are required to make estimates of our licensing revenues. Revenues related to our licensing agreements
vary if actual net sales for the licensed products are different than our estimates. Licensing revenues declined in fiscal 2008 from the prior year due to lower sales of licensed products, driven in part by several licensees filing for bankruptcy
protection. Continuation or acceleration of the decline in consumer spending in 2009 and beyond could result in further loss of existing licenses, which could adversely affect our licensing revenue.
If we are not successful in improving profitability of our retail and outlet stores, our business will be adversely affected.
The growth of sales in our stores is significantly dependent on our ability to operate stores in desirable locations with capital investments and lease
costs that allow us to earn a reasonable return. Desirable locations and configurations for reasonable costs may not be available to us because of our inability to improve sales per square foot.
If our catalogs are not successful, it could adversely affect all of our sales channels.
The success of our catalogs is a key factor in our efforts to revitalize our brand, as we believe the catalogs reinforce our brand image and drive sales
across in our retail and outlet stores and direct channels. If we are unable to continue to attract customers to our catalogs by providing them with appealing and extensive product offerings, our business, financial condition and results of
operations may suffer. Factors that may impact our ability to maintain and grow our catalog sales include: customer acceptance of our catalog presentations; increases in paper and printing costs; postage rates and other costs relating to our catalog
mailings; a failure in the timing of catalog deliveries; and the accuracy, breadth and depth of the information contained in our customer database so we can correctly analyze our mailing lists and maximize our customer targeting efforts.
Our website operations may not be successful, which could adversely affect our business.
The success of our website is subject to risks and uncertainties associated with the Internet, including changing customer preferences and buying trends
relating to Internet usage, changes in required technology interfaces, increasing costs of placing advertisements and keywords online, website downtime and other technical failures, changes in applicable U.S. and foreign regulation, security
breaches and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties might hurt our website sales and damage our brand’s reputation. Internet sales may also be affected since, unlike some of our online
competitors, we collect a sales tax on Internet sales.
If we cannot negotiate new leases or renewals of existing leases on reasonable terms, our
business will be adversely affected.
Substantially all of our store locations are leased from landlords in regional malls and
lifestyle centers and in metropolitan areas. As a result, each year, a portion of the locations under lease are due for renewal or renegotiation. In addition, we relocate a certain number of our store locations each year. Landlords typically
evaluate the creditworthiness of a tenant and the expected sales volume of the store location in connection with the negotiation of lease terms. Weakening of our financial performance or financial profile, including our sales per square foot, or
potential covenant defaults on our debt instruments could ultimately lead landlords to conclude that we do not meet their criteria for risk and return, and result in our inability to negotiate leases on reasonable terms or renew leases.
Our processing, storage and use of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or
differing views of personal privacy rights.
Our collection and processing of transactions through our sales channels require us to
receive and store a large volume of personally identifiable data. This type of data is subject to legislation and regulation in various
20
jurisdictions. Our business, financial condition and results of operations could be adversely affected if the laws and regulations are expanded, implemented
or interpreted to require changes to our business practices and methods of data collection. In addition, as personal and legal issues relating to privacy and data protection become more sensitive, we may become exposed to potential liabilities with
respect to the data we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data.
A significant disruption in back-end operations could adversely affect our business.
Some of our back-end systems, particularly relating to information technology, are dated and are an amalgamation of multiple applications, rather than one
overarching state-of-the-art system. If we are unable to effectively streamline these systems and update them where necessary, this could have a material adverse effect on our business, financial condition and results of operations. In addition, any
significant interruption in our back-end operations resulting from systems failures, associate grievances, natural disasters, inclement weather, accidents or other unforeseen events could lead to delays or other lapses in service relating to the
distribution of merchandise to our stores and to our customers, or in the processing of returns from our customers. Any delays or lapses in service could have a material adverse effect on our business, financial condition and results of operations.
If we cannot protect our trademarks and other proprietary intellectual property rights, our business may be adversely affected.
We use many trademarks and product designs in our business. As appropriate, we rely on the trademark and copyright laws to protect these designs even
if not formally registered as marks, copyrights or designs. We believe these trademarks and product designs are important to our competitive position and success. Third parties may sue us for alleged infringement of their proprietary rights. The
party claiming infringement might have greater resources than we do to pursue its claims, and we could be forced to incur substantial costs and devote significant management resources to defend the litigation. Moreover, if the party claiming
infringement were to prevail, we could be forced to discontinue the use of the related trademark, patent or design and/or pay significant damages, or to enter into expensive royalty or licensing arrangements with the prevailing party, assuming these
royalty or licensing arrangements are available at all on an economically feasible basis, which they may not be. Additionally, we may experience difficulty in effectively limiting unauthorized use of our trademarks and product designs worldwide.
Unauthorized use of our trademarks or other proprietary rights may cause significant damage to our brand name and our ability to effectively represent ourselves to our agents, suppliers, vendors, licensees and/or customers. While we intend to
enforce our trademark and other proprietary rights, there can be no assurance that we are adequately protected in all countries or that we will prevail when defending our trademark and proprietary rights.
If our independent vendors do not use ethical business practices or comply with applicable laws and regulations, our business and our reputation could be harmed.
While our Global Labor Practices Program and our vendor operating guidelines promote ethical business practices, we do not control
our independent vendors or their business practices. Accordingly, we cannot guarantee their compliance with our guidelines. Violation of labor or other laws by our vendors, or the divergence of a vendor’s labor practices from those generally
accepted as ethical in the U.S. could materially hurt our reputation, which can impact our business, financial condition and results of operations.
Unseasonable or severe weather conditions may adversely impact our net merchandise sales and our operating results.
Our business is adversely affected by unseasonal weather conditions. Sales of certain seasonal apparel items, specifically our outerwear and sweaters, are dependent in part on the weather and may decline in years in
21
which weather conditions do not favor the use of these products. Further, sales of our spring and summer products, which traditionally consist of lighter
clothing, are adversely impacted by cool or wet weather. In addition, severe weather events typically lead to temporarily reduced traffic at malls where most of our stores are located. Severe weather events may impact our ability to supply our
stores, deliver orders to our customers and staff our stores and call centers.
We may be subject to significant liability if we are required to
recall any product or should any of our products cause injury or death.
If the use of any of our products causes, or is alleged to
have caused, an injury we may become subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertion that our products caused injury
or death could adversely affect our reputation with existing and potential customers and our corporate and brand image. Under certain circumstances, we may be required to recall products, leading to a material adverse effect on our business. Even if
a situation does not necessitate a recall, product liability claims might be asserted against us. A product liability judgment against us or a product recall could have a material adverse effect on our business or consolidated financial results.
Our disclosure controls and procedures and internal control pursuant to Section 404 of the Sarbanes-Oxley Act over financial reporting may not
be effective in future periods, as a result of past or future identified weaknesses in internal controls.
In preparing our
financial statements in prior years, management identified weaknesses in our internal control over financial reporting that adversely affected our ability to initiate, authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles. We have corrected such weaknesses but if we fail to identify or are unable to adequately remediate future weaknesses, or if recent reductions in workforce create new weaknesses due to under
staffing, investors could lose confidence in the accuracy and reliability of our financial statements, which would cause the market price of our stock to decline and could lead to stockholder litigation.
Risks Relating to Our Financial Condition and Results of Operations
Our substantial amount of debt may limit the cash flow available for our operations and place us at a competitive disadvantage.
In connection with the Plan of Reorganization, we and our subsidiaries entered into a $300 million senior secured term loan agreement, which has since been restated and reduced to $225 million, of which $193
million was outstanding at January 3, 2009, and a $150 million senior secured revolving credit facility. We also have outstanding $75 million principal amount of 5.25% senior convertible notes. As a result, we have, and will
continue to have, a substantial amount of debt. Due to the economic decline in 2008, our concern about our ability to meet our term loan covenants increased substantially, and led us to negotiate and execute an amendment to provide covenant relief
through 2009. Our term loan facility requires that we comply with a substantial number of covenants and conditions related to our operations and financial performance. Under the First Amendment to our Amended Term Loan (“First Amendment”)
(see “
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity”
), we have agreed to pay, as consideration for the First Amendment, 300
basis points in cash, with the payment of 200 of the 300 basis points deferred into the fourth quarter of 2009 and a 500 basis point payment-in-kind (“PIK”) First Amendment fee, and issue $.01 warrants exercisable for 19.9% of the
Company’s common stock on a fully-diluted basis subject to adjustment for conversion of the Notes (see below), new capital infusions of less than $40 million (unless otherwise agreed to) and exercise of equity compensation grants. In addition,
the interest rate on the Amended Term Loan is increased to the greater of the following: (i) for base rate loans, 4.25% plus (A) the prime rate, (B) the federal funds effective rate plus one-half of one percent, (C) a rate equal
to the Eurodollar Rate for a one month interest period on such day plus 1%, or (D) 4.00%, or (ii) for
22
Eurodollar loans, LIBOR plus 5.25%, with LIBOR set at a minimum of 3.00% (but with a 350 basis point cap on the increase over the rate under the Amended Term
Loan), which will increase the amount of cash interest we pay each year. As part of the First Amendment, we have covenanted to either: (1) retire or convert into equity securities 75% in principal value of the outstanding 5.25% convertible
notes, or (2) raise $50 million in new capital, with the proceeds used to pay down the Amended Term Loan principal balance (“Convertible Note Covenant”). If we fail to do so within 90 days following execution of the First Amendment,
we may obtain two 60-day extensions of the performance period, for the payment upon each extension of a 500 basis point PIK First Amendment fee and the issuance of $.01 warrants exercisable for 15% of the Company’s common stock subject to
adjustment for conversion of the Notes (see below), new capital infusions of less than $40 million (unless otherwise agreed to) and exercise of equity compensation grants. If, after the 210-day period, we have not performed under the Convertible
Note Covenant, we may obtain a waiver of nonperformance by the payment of another 500 basis point PIK fee. The PIK fees increase the principal amount of the Amended Term Loan, increasing our total level of debt. The warrants we are required to issue
under the First Amendment could impair our ability to raise new capital to reduce our debt levels. Our level of debt requires us to use a substantial portion of our cash flow from operations to pay interest on our debt, which reduces our funds
available for working capital, capital expenditures and other general corporate purposes; limits our flexibility in planning for or reacting to, and heighten our vulnerability to, changes or downturns in our business, the industry or in the general
economy; may result in higher interest expense if interest rates increase on our floating rate borrowings; and may also prevent us from taking advantage of business opportunities as they arise or successfully carrying out expansion plans, if any.
In addition, the terms of our debt contain various restrictive covenants that limit our ability to, among other things: incur additional
debt; grant liens; dispose of certain property; make certain capital expenditures; and engage in sale-leaseback transactions and transactions with affiliates. We are also required to meet a fixed charge coverage ratio and a leverage ratio under our
term loan and, if certain availability thresholds are not met, a fixed charge coverage ratio under our revolving credit facility. Under the First Amendment, we receive relief from our senior secured leverage and fixed charge coverage ratios through
January 2, 2010. The Company’s permitted senior secured leverage ratio will increase to 6.25 to 1.00, 8.00 to 1.00, 9.00 to 1.00 and 7.75 to 1.00 as of the end of the first, second, third and fourth quarters, respectively, of 2009, and the
permitted consolidated fixed charge coverage ratio will decrease to 0.900 to 1.00, 0.800 to 1.00, 0.775 to 1.00 and 0.800 to 1.00, respectively, for those quarters. The senior secured leverage and fixed charge coverage ratios will then return to the
levels set forth in the Amended Term Loan unless the Company has met certain other conditions set forth in the First Amendment. If the economy has not rebounded from its recession, we may have difficulty meeting the levels of senior secured leverage
and fixed charge coverage ratios set forth in the Amended Term Loan agreement, as amended. In addition, the First Amendment requires us to limit capital expenditures in each of 2009 and 2010 to $20 million, which may restrict our ability to open new
stores or remodel older stores. These restrictions and covenants inhibit our operational flexibility and restrict or prohibit our ability to take actions that could be beneficial to our Company and our stockholders. This may place us at a
competitive disadvantage to our competitors who may not be subject to similar restrictions.
If the Notes do not convert or we are
unsuccessful in raising $50 million in new equity under the Convertible Note Covenant, our debt load will increase by approximately $45 million from PIK fees. Our ongoing operations in a recessionary economy may not be adequate to support the
increased interest rates and debt loads of the Company. The downturn in the U.S. economy, and in particular, credit markets, is expected to continue to make it more difficult for us to obtain waivers or amendments of covenant defaults, obtain
extensions of our revolving line of credit, which expires in 2010, or refinance any of our existing credit facilities to more advantageous terms at reasonable costs. Inability to extend or refinance our revolving line of credit on terms acceptable
to the Company will materially impact our ability to purchase inventory. Substantial increases in fees for waivers and amendments may also impair our liquidity.
23
We may not have sufficient available cash necessary to settle conversion of the 5.25% senior convertible notes
or to purchase the notes upon a fundamental change, and our other debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.
Upon the occurrence of certain fundamental changes, including certain change of control transactions as set forth in the indenture governing the
convertible notes, the Company will be required to offer to repurchase the convertible notes for cash at 100% of the principal amount thereof plus accrued and unpaid interest and additional interest, if any, to but not including the date of
repurchase. In certain events of default under the indenture, either the trustee thereunder or the holders of at least 25% in principal amount of the then-outstanding convertible notes may declare 100% of the principal of the convertible notes and
accrued and unpaid interest, including additional interest, to be due and payable. We may not have sufficient cash to pay the convertible notes in the event cash payment becomes required.
We experience fluctuations in our quarterly comparable store sales.
The success of our business depends, in part, upon our ability to increase sales at our existing stores. Our comparable store sales have been negative for the past two quarters and they may continue to be negative in
the future. Various factors affect our comparable store sales, including current economic conditions and levels of consumer spending, the number of stores we open and close in any period, the general retail sales environment, changes in our
merchandise, competition, customer preferences, energy prices, the timing of our releases of new merchandise and promotional events, the success of our marketing programs, the approach and timing of mark-down strategies, weather conditions and the
overlapping of existing store sales by new stores in existing markets. Our ability to maintain and improve our comparable store sales results depends in large part on improving our forecasting of customer demand and preferences and adjusting our
inventory levels accordingly, increasing the number of transactions in each store, selecting effective marketing techniques, providing an appropriate mix of merchandise for our broad and diverse customer base and using more effective pricing
strategies. Any failure to meet the comparable store sales expectations could significantly reduce the market price of our common stock and have a material adverse impact on our financial results.
Unexpected outcomes in legal proceedings could have a material adverse impact on our financial conditions.
From time to time, we are a party to legal proceedings arising in the ordinary course of business. In addition, an increasing number of cases are being
filed against companies generally regarding patent violations for use of technology related to online sales or that contain class-action allegations under federal and state wage and hour laws. We estimate our exposure to these legal proceedings and
establish accruals for the estimated liabilities in accordance with generally accepted accounting principles. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management,
unexpected outcomes in these legal proceedings, or changes in management’s evaluations or predictions related to potential exposure in such suits, could have a material adverse impact on our financial results.
Our reorganization valuation was based in part on estimates of future performance. If actual results do not meet or exceed the projections in our long term plan,
we may take additional impairment charges that could adversely affect our operating results.
Our financial statements reflect the
adoption of fresh start accounting under American Institute of Certified Public Accountants Statement of Position 90-7, or SOP 90-7. On our emergence from bankruptcy based on an independent valuation analysis, the Company valued certain
tangible and intangible assets, such as goodwill and trademarks. The Company annually evaluates the recorded value of such assets using independent appraisals. In 2008, based on such an appraisal, the Company reduced the value of goodwill by
approximately $65 million, and the value of its trademarks by $80 million, based on reductions in assumptions regarding future revenues. If future estimated results are not achieved, we may be required to further write down the value of our assets
and record non-cash impairment charges which could make our earnings volatile.
24
We may not be able to realize the full amount of our net loss carryforwards, which could impact our financial
results and available cash for debt paydown and operations.
We have made certain assumptions regarding our ability to fully utilize
our net loss carryforwards, including those from the time of emergence from bankruptcy, as well as losses subsequently generated. Our ability to fully and timely utilize such net loss carryforwards may be impaired if we are unable to generate
sufficient taxable income or if a change of ownership, as defined in the Internal Revenue Code, subsequently occurs before we have applied the loss carryforwards described above. In 2008, we have recorded a full valuation allowance on our net
operating loss carryforwards. See “
Notes to Consolidated Financial Statements—Note 11—Income Taxes
” for further discussion.
Risks Relating to Our Common Stock
An active trading market for our common stock may not continue, and there can be no assurance as
to the market price for our common stock.
While our common stock is currently quoted on The NASDAQ Global Market, we cannot assure
that an active market for our common stock will continue to exist. The market price for our common stock has been highly volatile and has been trading below $1.00 per share for several months. On October 16, 2008, NASDAQ implemented a temporary
suspension of the enforcement of the minimum $1.00 bid price and the minimum market value of publicly held shares listing requirements for continued listing. NASDAQ has extended this suspension through July 19, 2009. According to NASDAQ, it
will not take any action to delist a security for failing the minimum bid price or market value of publicly held shares requirements during the suspension. The compliance process is presently scheduled to be reinstated effective Monday,
July 20, 2009. If after reinstatement of the compliance process our stock continues to trade for more than 30 consecutive business days below $1.00, NASDAQ may send a deficiency notice advising the Company that it has been afforded a
“compliance period” of 180 calendar days to regain compliance with the applicable requirements. If we are unable to comply with the bid price requirement prior to the expiration of the 180-day compliance period, or if we cannot comply with
or obtain exemptions to other NASDAQ rules for listed companies, including rules related to shareholder consent prior to issuance of certain amounts of common stock, we may transfer the trading of our securities to The NASDAQ Capital Market, so as
to take advantage of the additional compliance period offered on that market, provided we meet all requirements for initial listing on The NASDAQ Capital Market, except for the bid price requirement. We received an exemption pursuant to NASDAQ
Marketplace Rule 4350(i) from NASDAQ’s stockholder approval requirements in connection with issuing the warrants called for by the First Amendment. There is no assurance that we can obtain shareholder approval or an exemption therefrom for
further issuances of equity securities to Noteholders under the Convertible Note Covenant of the First Amendment. In order to achieve compliance with the bid price requirement, a security must maintain a closing $1.00 bid price for a minimum of ten
consecutive business days. A delisting letter is issued if a company does not demonstrate compliance within the compliance period, which is subject to appeal. Delisting of our stock may result in a violation of covenants under certain of our credit
facilities or a conversion trigger under our convertible note indenture.
In addition, it is possible that investors who have been trading
in our stock have been engaging in short-selling, which could further cause the price of our common stock to fluctuate. The trading price of our common stock could also fluctuate due to the factors discussed in this
“Risk Factors”
section. The trading market for our common stock also may be influenced by the research and reports that industry or securities analysts publish about us or our industry. In addition, the stock market in general has experienced extreme price and
volume fluctuations. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market price
of a company’s securities, securities class action litigation has often been instituted against these companies. Litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and
resources.
25
Future issuances or sales of our securities will dilute existing shareholders and could cause our stock price to
fall.
We may issue securities in the future and may do so in a manner that results in substantial dilution for our existing
stockholders. Under the terms of the First Amendment to our Amended Term Loan, we will be required to issue warrants exercisable for 19.9% of our common stock on a fully diluted basis as part of the First Amendment, with subsequent issuances of up
to an additional 30% on a fully-diluted basis if we fail to comply with certain covenants in the Amended Term Loan related to the retirement or conversion of our Notes. Those covenants require that we retire or convert to equity securities 75% of
the Notes or raise $50 million in new equity (with the net proceeds used to pay down the Amended Term Loan) within a certain period of time. The issuance of the warrants, the conversion of the Notes or securities issued to new equity investors will
substantially dilute existing stockholders. These issuances could also materially and adversely affect the market price of our common stock. In addition, we may issue debt or equity from time to time that ranks in preference to our common stock in
the event of a liquidation or winding up or that is secured by an interest in some or all of our assets. Sales of common stock by existing stockholders in the public market, our issuances of new securities or debt, or the expectation that any of
these events might occur could materially and adversely affect the market price of our common stock.
Provisions of our Certificate of Incorporation,
Bylaws and Senior Officer Change in Control Compensation Benefits Plan could discourage potential acquirers and could deter or prevent a change in control.
Provisions in our Certificate of Incorporation, bylaws and Senior Officer Change in Control Compensation Benefits Plan, as well as Delaware corporate law, may have the effect of delaying, deferring or preventing a
change in control. These provisions include:
|
|
•
|
|
our ability to issue “blank check” preferred stock;
|
|
|
•
|
|
provisions restricting stockholders from calling a special meeting of stockholders;
|
|
|
•
|
|
provisions that set forth advance notice procedures for meetings of stockholders; and
|
|
|
•
|
|
payments of certain bonus and severance amounts to covered employees in certain circumstances.
|
In addition, under our Certificate of Incorporation, a person or entity who seeks to acquire 4.75% or more of our outstanding common stock, or a person
or entity who already is a direct or indirect 4.75% stockholder and wishes to increase its ownership, may not acquire such shares unless it has obtained the prior written consent of our board of directors until such time as these restrictions lapse,
which will be no later than January 1, 2012. This restriction does not apply to conversion of our 5.25% convertible senior notes to common stock. Our board may deny any such proposed transaction if it determines in its reasonable assessment
that the proposed transaction could jeopardize realization of the full benefits of unrestricted use of our net operating loss carryovers. In accordance with our Certificate of Incorporation, any transaction in violation of these ownership
restrictions will be void so that a purported transferee will not have any ownership rights with respect to any shares acquired in excess of these ownership restrictions. Therefore, a purported transferee will not be entitled to any rights as a
stockholder, including voting, dividend or distribution rights, with respect to any excess shares. In addition, Eddie Bauer has the right to demand any purported transferee of excess shares to transfer to an agent of our designation its excess
shares for resale by the agent or, if the excess shares have already been sold by the purported transferee, to transfer to the agent any proceeds from the sale by the purported transferee of such excess shares. These provisions may make it more
difficult for other persons or entities, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of our common stock, or to launch other takeover attempts that a stockholder might consider to
be in such stockholder’s best interest. These provisions also may limit the price that certain investors might be willing to pay in the future for shares of our common stock.
26
Our ability to utilize our NOLs and certain other tax attributes may be limited.
As of January 3, 2009, we estimated our Federal NOLs to be approximately $124.2 million (tax affected) and our state NOLs to be approximately
$14.4 million (tax affected). Under Section 382 of the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes to
offset its post-change income may be limited. An ownership change is generally defined as a greater than 50% change in its equity ownership by value over a three-year period. Our NOLs are currently limited under Section 382 as a result of the
ownership change triggered upon our emergence from bankruptcy. We may experience a second ownership change in the future as a result of the lapse of the ownership restrictions within our Certificate of Incorporation, or as a result of conversion of
our outstanding convertible notes into shares of our common stock. The issuance of warrants pursuant to the First Amendment, and the potential issuance of securities in connection with the Convertible Note Covenant, may trigger an ownership change
under Section 382. If we were to trigger a second ownership change in the future as defined under Section 382, our ability to use any NOLs existing at that time could be further significantly limited. In addition, we may be unable to generate
sufficient taxable income to utilize the NOLs before their expiration.
Our dividend policies and other restrictions on the payment of dividends
prevent the payment of dividends for the foreseeable future.
We do not anticipate paying dividends on our common stock for the
foreseeable future. Our ability to pay dividends depends on our receipt of cash dividends from our subsidiaries because we are a holding company. The terms of certain of our outstanding indebtedness prohibit us from paying dividends. Accordingly,
investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. Any determination to pay dividends
in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.
|
Item 1B.
|
UNRESOLVED STAFF COMMENTS
|
Not
applicable.
The following is an
overview of key properties used in the operation of our business. We believe all of our facilities are suitable and adequate for our current and anticipated operations.
Corporate Headquarters.
We moved into a 230,000 square foot leased corporate headquarters in Bellevue, Washington in the summer of 2007. Our lease has a term of 15 years. Approximately one-half
of our build-out costs were reimbursed by the landlord.
Retail and Outlet Stores.
All of our retail and outlet stores are
leased. Our retail stores are generally located in regional malls, lifestyle centers, with a few stand-alone stores in metropolitan areas. We also have retail stores in smaller markets where a concentration of our target customers exists. We look at
catalog distributions, loyalty program information and a custom software program in determining the locations of target customers. Our outlet stores are located predominantly in destination outlet centers. Our retail stores average approximately
6,400 gross square feet, while our outlet stores average approximately 7,300 gross square feet. In most cases, our retail store leases have ten-year terms and our outlet store leases have five-year terms, with one five-year option to
renew. Approximately 12% of our retail store leases allow us the one-time right to terminate the lease three to five years after the commencement of the lease if previously agreed upon sales thresholds are not achieved. The majority of our store
leases normally provide for base rent and the payment of a percentage of sales as additional rent when certain sales thresholds are reached. We are typically responsible for our share of common area and maintenance charges, real estate taxes and
certain other expenses. We receive tenant allowances from most of our landlords for approximately one-half of our tenant build out costs.
27
As of January 3, 2009, we had 219 U.S. retail stores located in 47 states and 36 retail
stores located in Canada. In 2008, we had more than ten retail/outlet stores located in each of the following states: California (30), Colorado (15), Illinois (16), Michigan (15), North Carolina (11), New York (12), Ohio (11), Oregon (11),
Pennsylvania (18), Texas (23), Virginia (11) and Washington (19). As of January 3, 2009, we had 121 U.S. outlet stores located in 35 states, with 13 outlet stores in California. We also have 14 retail stores in Ontario, Canada.
In fiscal 2009, we intend to open approximately three additional retail stores and no new outlet stores in the aggregate in the United States and Canada. We closed four retail and two outlet stores in January 2009 and anticipate closing one
additional outlet store in 2009. The closures are primarily as a result of lease expirations. We intend, as a part of our normal-course operations, to continue to open new retail and outlet stores in advantageous locations and close underperforming
retail and outlet stores upon natural expiration of store leases.
The following summarizes the number of retail and outlet stores we
opened and closed throughout fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
Outlet
|
|
|
Total
|
|
|
Stores as of December 29, 2007
|
|
271
|
|
|
120
|
|
|
391
|
|
|
Stores Opened in 2008
|
|
8
|
|
|
6
|
|
|
14
|
|
|
Stores Closed in 2008
|
|
(24
|
)
|
|
(5
|
)
|
|
(29
|
)
|
|
Stores as of January 3, 2009
|
|
255
|
|
|
121
|
|
|
376
|
|
Support Facilities
Distribution Centers.
Eddie Bauer Fulfillment Services (“EBFS”) operates our two main facilities in Groveport, Ohio, and Vaughan, Ontario, Canada. EBFS owns our facility in Groveport, Ohio, which
consists of approximately 2.2 million square feet. We lease our facility in Vaughan, Ontario, which consists of approximately 97,200 square feet. The lease expires in April 2012.
Customer Call Center.
Our customer contact center is located in Saint John, New Brunswick, Canada. We lease approximately 38,000 square feet
and the lease expires in May 2011.
Information Technology Center.
We own an approximately 50,000 square foot IT facility
in Westmont, Illinois. This facility houses all of our systems and network services, including those related to product development, merchandising, marketing, planning, store operations, sourcing, finance, accounting, call centers, Internet,
inventory and order fulfillment.
|
Item 3.
|
LEGAL PROCEEDINGS
|
In June 2006, a
class action suit captioned
Tara Hill v. Eddie Bauer, Inc.
, was filed in Los Angeles Superior Court, State of California. The suit alleged that the Company violated the California Labor Code and Business and Professions Code relating to the
adequacy of wage statements, reimbursements for business expenses, meal and rest periods and other claims, on behalf of a class comprised of all employees in the Company’s California stores. The Company reached a settlement with the plaintiff
in April 2007, and has provided notice to class members regarding the potential settlement. A hearing on final court approval of the settlement occurred on July 10, 2008, at which the plaintiff in the
Scherer v. Eddie Bauer, Inc.
suit
referenced below objected to the settlement on various grounds. The court took the parties’ positions under advisement but has not yet issued a ruling. In connection with the proposed settlement, the Company accrued $1.6 million in the first
quarter of 2007 to cover settlement payments and attorneys’ fees. The settlement payments are proposed to be made partly in cash and partly in Company gift cards. In a status conference held on March 30, 2009, the judge indicated that he
would sign an order approving the settlement.
In September 2007, a purported class action suit related to the
Hill
suit and
captioned
Kristal Scherer, on behalf of herself, all others similarly situated v. Eddie Bauer, Inc. and Does 1 to 100
was filed in Superior Court
28
of California, County of San Diego, alleging violations of the California Labor Code and Business and Professions Code relating to the payment of incentive
bonuses and the Company’s policy on forfeiture of personal days. The case has been removed to U.S. District Court, Southern District of California. In December 2007, the Company filed a partial motion to dismiss certain counts of
plaintiff’s complaint for failure to state a claim. That motion was denied in June 2008. The complaint was amended in January 2008 to add an additional named plaintiff. The Company filed an answer in July 2008 denying the claims made. The
parties have agreed to postpone discovery pending issuance of a ruling on the settlement in the
Hill
suit referenced above.
In
September 2008, a complaint was filed under the caption
Landmark Technologies vs. Zale Corporation, Blue Nile, Inc., Canon USA, Inc., Eddie Bauer, Inc., Kohl’s Corporation, Lowe’s Companies, Inc., Walgreen Co., Golfsmith International
Holdings, Inc. and Bidz.com, Inc.
, in the Eastern District of Texas. The suit alleges infringement by the defendants of three U.S. patents exclusively licensed to Landmark—U.S. Patent Nos. 5,576,951; 6,289,319; and 7,010,508. Neither the
Complaint nor a subsequently filed First Amended Complaint specifies the allegedly infringing actions, but the claims are apparently directed to the defendants’ use of its website to sell goods. The amended complaint seeks injunctive relief,
and an unspecified amount of damages, costs and attorneys’ fees. The Company intends to vigorously defend the case. The Company has been served but other defendants have not been served, and discovery has not commenced. A number of the
defendants, including the Company, have entered into a joint defense agreement related to defense of the suit. The Company is unable at this time to estimate the likelihood or probability of damages. The Company and other defendants tentatively
reached an agreement with the plaintiff to settle the suit for a nominal amount.
In November 2006, three purported class action complaints
were filed by putative stockholders of the Company in the Superior Court of the State of Washington, King County against the Company and its Board of Directors. The complaints alleged, among other things, that the Board of Directors breached its
fiduciary duties in connection with a proposed merger of the Company with an affiliate of Sun Capital Partners, Inc. and Golden Gate Capital that was ultimately rejected by the Company’s shareholders, and that the consideration to have been
paid to holders of Eddie Bauer’s common stock was inadequate. The complaints sought, among other things, to enjoin the consummation of the merger. An order of dismissal without prejudice with respect to one of the complaints was entered in
December 2006, and the remaining two actions were subsequently consolidated. In June 2007, plaintiffs’ motion for an award of attorneys’ fees was denied, and plaintiffs appealed. In December 2007, after a stipulated motion to dismiss was
filed by the plaintiffs, the Court of Appeals dismissed the appeal, and in January 2008, the Superior Court of the State of Washington dismissed the remaining case with prejudice.
In the ordinary course of business, the Company may be subject from time to time to various other proceedings, lawsuits, disputes or claims. These
actions may involve commercial, intellectual property, product liability, labor and employment related claims and other matters. Although the Company cannot predict with assurance the outcome of any litigation, it does not believe there are
currently any such actions that, if resolved unfavorably, would have a material impact on the Company’s financial condition or results of operations except as disclosed herein.
|
Item 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
On November 5, 2008, the Company held a Special Meeting of Stockholders. At the meeting, the stockholders approved an amendment of Eddie Bauer’s Certificate of Incorporation to extend the 4.75% limitation on
ownership of its securities to January 1, 2012, provided that the conversion of the Company’s 5.25% Convertible Senior Notes due 2014 is not prohibited by the extended ownership limitation. The votes were:
|
|
|
|
|
|
|
FOR
|
|
AGAINST
|
|
ABSTAINED
|
|
21,760,573
|
|
101,859
|
|
612,167
|
29
PART II
|
Item 5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Eddie Bauer’s common stock
is traded on The NASDAQ Global Market under the trading symbol “EBHI”. The following table sets forth, for the periods indicated, the high and low sales prices per share for the Eddie Bauer common stock as reported by The NASDAQ Global
Market for the past two fiscal years:
|
|
|
|
|
|
|
|
|
|
|
$
|
|
High
|
|
Low
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
First Quarter Ended March 31, 2007
|
|
$
|
|
11.56
|
|
6.50
|
|
Second Quarter Ended June 30, 2007
|
|
$
|
|
14.27
|
|
10.11
|
|
Third Quarter Ended September 29, 2007
|
|
$
|
|
14.25
|
|
7.29
|
|
Fourth Quarter Ended December 29, 2007
|
|
$
|
|
9.42
|
|
5.56
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
First Quarter Ended March 29, 2008
|
|
$
|
|
7.30
|
|
3.92
|
|
Second Quarter Ended June 28, 2008
|
|
$
|
|
5.05
|
|
2.91
|
|
Third Quarter Ended September 27, 2008
|
|
$
|
|
8.72
|
|
3.70
|
|
Fourth Quarter Ended January 3, 2009
|
|
$
|
|
6.44
|
|
0.30
|
As of March 11, 2009, there were
30,829,530 shares of Eddie Bauer common stock outstanding. As of March 11, 2009, our common stock was held by approximately 456 holders of record.
We do not anticipate paying any
dividends on our common stock in the foreseeable future. In addition, covenants in our term loan agreement and revolving credit facility restrict our ability to pay dividends and may prohibit the payment of dividends and certain other payments.
|
(d)
|
Securities Authorized for Issuance Under Equity Compensation Plans
|
The information called for by this Item is contained in “
Part III, Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
”.
30
The following performance graph
is furnished to show the percentage change in cumulative total return to a holder of Eddie Bauer common stock (NASDAQ:EBHI) compared with the cumulative total return, assuming dividend reinvestment, of The NASDAQ Composite Index and the industry
peer group indicated below, during the period from June 3, 2005 through January 3, 2009. The Company paid no cash dividends during the periods presented.
Peer Group
Chico’s
FAS, Inc. (NYSE:CHS)
The Gap, Inc. (NYSE: GPS)
Limited
Brands, Inc. (NYSE:LTD)
Ann Taylor Stores Corporation (NYSE:ANN)
Coldwater Creek Inc. (NASDAQ:CWTR)
(The) Talbots, Inc. (NYSE:TLB)
31
|
(f)
|
Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Purchases of Equity Securities
|
In the fourth quarter of 2008, we issued an aggregate of 6,750 restricted stock units (“RSUs”) as grants to induce two individuals to accept
employment with the Company:
|
|
|
|
|
|
|
|
|
DATE OF GRANT
|
|
NAME OF RECIPIENT
|
|
TITLE OF OFFERED EMPLOYMENT
|
|
NUMBER OF RSUs
|
|
September 29, 2008
|
|
Scott Hutsenpiller
|
|
Vice President, Outerwear/Activewear Design
|
|
4,250
|
|
|
|
|
|
|
October 1, 2008
|
|
Jean Park
|
|
Divisional Vice President, Men’s Retail Merchandise
|
|
2,500
|
The RSUs will vest four years after the date of grant, and will be settled for an equal number of
shares of the Company’s common stock. The RSUs were issued as equity inducement grants to employment under NASDAQ Marketplace Rule 4350(i) and in reliance upon the exemption from registration provided by Section 4(2) of the Securities
Exchange Act of 1934, as amended and Regulation D, Rule 506, promulgated thereunder.
32
|
Item 6.
|
SELECTED FINANCIAL DATA
|
The
following tables set forth selected historical financial and other information for the Predecessor and Successor entities as of the dates and for the periods indicated. Financial information for periods prior to July 2, 2005 (the date we
adopted fresh start accounting upon our emergence from bankruptcy) relates to the Predecessor and financial information for periods as of and subsequent to July 2, 2005 relates to the Successor. We refer to the entities prior to emergence from
bankruptcy as the “Predecessor” and to the emerged entities as the “Successor”. The Predecessor consists of Eddie Bauer, Inc., EBFS, the IT Group and Saint John. The Successor consists of Eddie Bauer, Eddie Bauer, Inc., FSAC,
SAC, EBFS, EBCS, EBIT and the obligations associated with Spiegel’s former pension and other post-retirement plans that were assumed by Eddie Bauer.
Because of our emergence from bankruptcy and our corresponding adoption of fresh start
accounting
,
our financial information for any period prior to July 2, 2005 will not be comparable to financial information for periods after that date.
Our fiscal year ends on the Saturday closest to December 31. Fiscal year 2008 includes 53 weeks, while fiscal years 2007-2004 include 52 weeks. Our
selected historical balance sheet information as of January 3, 2009, December 29, 2007, December 30, 2006, December 31, 2005, July 2, 2005 (the date we adopted fresh start accounting) and January 1, 2005 are derived
from our audited consolidated and combined balance sheets. Our selected historical statement of operations information for the fiscal years ended January 3, 2009, December 29, 2007 and December 30, 2006, the six months ended
December 31, 2005 and July 2, 2005, and fiscal year ended January 1, 2005 are derived from our audited consolidated and combined statements of operations.
For all periods presented, income from continuing operations excludes the results of our discontinued Eddie Bauer Home business unit which we discontinued in fiscal 2005. The results of operations of this business
unit are presented separately as discontinued operations, net of tax.
The Company’s results of operations and financial condition
reflected below include the Company’s adoption of SFAS No. 123(R),
Share-Based Payment
effective July 2, 2005; SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an
amendment of FASB Statements No. 87, 88, 106, and 132R)
effective fiscal 2006 (with the measurement provisions adopted effective fiscal 2008); FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109
effective fiscal 2007; and SFAS No. 157,
Fair Value Measurements
, effective fiscal 2008.
33
The following financial information should be read in conjunction with our financial statements and
related notes included elsewhere in this annual report, and with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
2008(a)
|
|
|
Successor
2007
|
|
|
Successor
2006
|
|
|
Successor
Six Months
Ended
December 31,
2005
|
|
|
Predecessor
Six Months
Ended
July 2,
2005
|
|
|
Combined
2005
|
|
|
Predecessor
2004
|
|
|
|
|
($ in thousands, except per share data)
|
|
|
Statement of Operations Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other revenues
|
|
$
|
1,023,437
|
|
|
$
|
1,044,353
|
|
|
$
|
1,013,447
|
|
|
$
|
593,711
|
|
|
$
|
465,723
|
|
|
$
|
1,059,434
|
|
|
$
|
1,120,761
|
|
|
Revenue from Spiegel-affiliated parties
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
37,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,023,437
|
|
|
|
1,044,353
|
|
|
|
1,013,447
|
|
|
|
593,711
|
|
|
|
465,723
|
|
|
|
1,059,434
|
|
|
|
1,157,915
|
|
|
Costs of sales, including buying and occupancy
|
|
|
628,191
|
|
|
|
630,853
|
|
|
|
603,171
|
|
|
|
337,318
|
|
|
|
259,536
|
|
|
|
596,854
|
|
|
|
604,864
|
|
|
Impairment of indefinite-lived intangible assets
(b)
|
|
|
144,574
|
|
|
|
—
|
|
|
|
117,584
|
|
|
|
40,000
|
|
|
|
—
|
|
|
|
40,000
|
|
|
|
—
|
|
|
Selling, general and administrative expenses
|
|
|
393,585
|
|
|
|
441,875
|
|
|
|
411,300
|
|
|
|
214,125
|
|
|
|
185,225
|
|
|
|
399,350
|
|
|
|
452,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,166,350
|
|
|
|
1,072,728
|
|
|
|
1,132,055
|
|
|
|
591,443
|
|
|
|
444,761
|
|
|
|
1,036,204
|
|
|
|
1,057,467
|
|
|
Operating income (loss)
|
|
|
(142,913
|
)
|
|
|
(28,375
|
)
|
|
|
(118,608
|
)
|
|
|
2,268
|
|
|
|
20,962
|
|
|
|
23,230
|
|
|
|
100,448
|
|
|
Interest expense
|
|
|
(22,800
|
)
|
|
|
(26,698
|
)
|
|
|
(26,928
|
)
|
|
|
(11,064
|
)
|
|
|
(761
|
)
|
|
|
(11,825
|
)
|
|
|
(316
|
)
|
|
Other income (expense) , net
(c)
|
|
|
13,385
|
|
|
|
23,695
|
|
|
|
3,031
|
|
|
|
1,919
|
|
|
|
—
|
|
|
|
1,919
|
|
|
|
—
|
|
|
Equity in earnings (losses) of foreign joint ventures
|
|
|
(9,134
|
)
|
|
|
(1,147
|
)
|
|
|
(3,413
|
)
|
|
|
174
|
|
|
|
(95
|
)
|
|
|
79
|
|
|
|
3,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before reorganization items and income tax expense
|
|
|
(161,462
|
)
|
|
|
(32,525
|
)
|
|
|
(145,918
|
)
|
|
|
(6,703
|
)
|
|
|
20,106
|
|
|
|
13,403
|
|
|
|
103,722
|
|
|
Gain on discharge of liabilities
(d)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(107,559
|
)
|
|
|
(107,559
|
)
|
|
|
—
|
|
|
Reorganization costs and expenses, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,686
|
|
|
|
13,686
|
|
|
|
26,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax expense
|
|
|
(161,462
|
)
|
|
|
(32,525
|
)
|
|
|
(145,918
|
)
|
|
|
(6,703
|
)
|
|
|
113,979
|
|
|
|
107,276
|
|
|
|
76,851
|
|
|
Income tax expense
(e)
|
|
|
4,067
|
|
|
|
69,193
|
|
|
|
65,531
|
|
|
|
14,645
|
|
|
|
50,402
|
|
|
|
65,047
|
|
|
|
36,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(165,529
|
)
|
|
|
(101,718
|
)
|
|
|
(211,449
|
)
|
|
|
(21,348
|
)
|
|
|
63,577
|
|
|
|
42,229
|
|
|
|
40,771
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(534
|
)
|
|
|
(1,440
|
)
|
|
|
(2,661
|
)
|
|
|
(4,101
|
)
|
|
|
2,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(165,529
|
)
|
|
$
|
(101,718
|
)
|
|
$
|
(211,983
|
)
|
|
$
|
(22,788
|
)
|
|
$
|
60,916
|
|
|
$
|
38,128
|
|
|
$
|
43,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings Per Share Information(f):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per share
|
|
$
|
(5.38
|
)
|
|
$
|
(3.33
|
)
|
|
$
|
(7.04
|
)
|
|
$
|
(0.71
|
)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Loss from discontinued operations per share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Net loss per share
|
|
$
|
(5.38
|
)
|
|
$
|
(3.33
|
)
|
|
$
|
(7.06
|
)
|
|
$
|
(0.76
|
)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Weighted average shares used to complete basic and diluted earnings per share
|
|
|
30,749,922
|
|
|
|
30,524,191
|
|
|
|
30,012,896
|
|
|
|
29,995,092
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Operating Information—Unaudited(g):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase (decrease) in comparable store sales
(h)
|
|
|
(1.8
|
)%
|
|
|
4.4
|
%
|
|
|
(2.0
|
)%
|
|
|
(6.0
|
)%
|
|
|
3.4
|
%
|
|
|
(2.2
|
)%
|
|
|
(1.7
|
)%
|
|
Average sales per square foot
(i)
|
|
$
|
275
|
|
|
$
|
269
|
|
|
$
|
256
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
256
|
|
|
$
|
252
|
|
|
Number of retail stores
(j):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open at beginning of period
|
|
|
271
|
|
|
|
279
|
|
|
|
292
|
|
|
|
279
|
|
|
|
304
|
|
|
|
304
|
|
|
|
330
|
|
|
Opened during the period
|
|
|
8
|
|
|
|
21
|
|
|
|
16
|
|
|
|
16
|
|
|
|
—
|
|
|
|
16
|
|
|
|
7
|
|
|
Closed during the period
|
|
|
(24
|
)
|
|
|
(29
|
)
|
|
|
(29
|
)
|
|
|
(3
|
)
|
|
|
(25
|
)
|
|
|
(28
|
)
|
|
|
(33
|
)
|
|
Open at the end of the period
|
|
|
255
|
|
|
|
271
|
|
|
|
279
|
|
|
|
292
|
|
|
|
279
|
|
|
|
292
|
|
|
|
304
|
|
|
Number of outlet stores
(j):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open at beginning of period
|
|
|
120
|
|
|
|
115
|
|
|
|
108
|
|
|
|
103
|
|
|
|
101
|
|
|
|
101
|
|
|
|
103
|
|
|
Opened during the period
|
|
|
6
|
|
|
|
8
|
|
|
|
8
|
|
|
|
5
|
|
|
|
3
|
|
|
|
8
|
|
|
|
2
|
|
|
Closed during the period
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
Open at the end of the period
|
|
|
121
|
|
|
|
120
|
|
|
|
115
|
|
|
|
108
|
|
|
|
103
|
|
|
|
108
|
|
|
|
101
|
|
|
Total store square footage at end of period (in thousands)
|
|
|
2,527
|
|
|
|
2,653
|
|
|
|
2,752
|
|
|
|
2,897
|
|
|
|
n/a
|
|
|
|
2,897
|
|
|
|
2,960
|
|
|
Gross margin
|
|
$
|
343,141
|
|
|
$
|
358,527
|
|
|
$
|
353,517
|
|
|
$
|
228,161
|
|
|
$
|
176,478
|
|
|
$
|
404,639
|
|
|
$
|
442,875
|
|
|
Gross margin%
|
|
|
35.3
|
%
|
|
|
36.2
|
%
|
|
|
37.0
|
%
|
|
|
40.3
|
%
|
|
|
40.5
|
%
|
|
|
40.4
|
%
|
|
|
42.3
|
%
|
|
Capital expenditures
|
|
$
|
21,014
|
|
|
$
|
56,636
|
|
|
$
|
45,814
|
|
|
$
|
30,214
|
|
|
$
|
8,641
|
|
|
$
|
38,855
|
|
|
$
|
13,906
|
|
|
Depreciation and amortization
|
|
$
|
44,898
|
|
|
$
|
50,333
|
|
|
$
|
55,494
|
|
|
$
|
26,589
|
|
|
$
|
16,171
|
|
|
$
|
42,760
|
|
|
$
|
41,142
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
As of
January 3,
2009
|
|
Successor
As of
December 29,
2007
|
|
Successor
As of
December 30,
2006
|
|
Successor
As of
December 31,
2005
|
|
Successor
As of
July 2,
2005
|
|
Predecessor
As of
January 1,
2005
|
|
|
|
|
($ in thousands)
|
|
|
Balance Sheet Information:
|
|
|
|
|
|
Net working capital
|
|
$
|
76,257
|
|
$
|
71,821
|
|
$
|
105,067
|
|
$
|
107,297
|
|
$
|
115,087
|
|
$
|
112,577
|
|
|
Goodwill
(b)
|
|
$
|
43,174
|
|
$
|
107,748
|
|
$
|
114,765
|
|
$
|
220,481
|
|
$
|
220,481
|
|
$
|
76,601
|
|
|
Trademarks
(b)
|
|
$
|
105,065
|
|
$
|
185,000
|
|
$
|
185,000
|
|
$
|
185,000
|
|
$
|
225,000
|
|
$
|
58,756
|
|
|
Total assets
|
|
$
|
596,920
|
|
$
|
811,432
|
|
$
|
855,910
|
|
$
|
1,153,236
|
|
$
|
1,186,005
|
|
$
|
591,975
|
|
|
Due to (from) Spiegel
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(37,751
|
)
|
|
Total long-term debt
(k)
|
|
$
|
252,187
|
|
$
|
262,275
|
|
$
|
274,500
|
|
$
|
298,500
|
|
$
|
300,000
|
|
$
|
—
|
|
|
Stockholders’ equity
|
|
$
|
72,810
|
|
$
|
256,272
|
|
$
|
346,641
|
|
$
|
545,020
|
|
$
|
564,900
|
|
$
|
292,391
|
|
|
(a)
|
Fiscal 2008 includes 53 weeks as compared to 52 weeks for fiscal years 2004 – 2007.
|
|
(b)
|
In conjunction with our impairment tests of indefinite-lived intangible assets, we recorded impairment charges of $64.6 million and $80.0 million related to our goodwill and
trademarks, respectively, in the fourth quarter of 2008; $117.6 million related to our goodwill during the third quarter of 2006; and $40.0 million related to our trademarks during the fourth quarter of 2005. See
“
Note 6—Notes to Consolidated Financial Statements
” below for more detailed descriptions of the impairment tests performed.
|
|
(c)
|
Other income (expense), net for fiscal 2008 and 2007 includes income of $9.0 million and $10.5 million, respectively, from fair value adjustments related to the embedded
derivative associated with our 5.25% convertible senior notes (the “Notes”) issued in April 2007. Effective fiscal 2009, the conversion features of our convertible notes will no longer be considered embedded derivatives and therefore no
fair value adjustments will be required. Fiscal 2007 also includes a $9.3 million gain on the sale of certain financing receivables sold in December 2007.
|
|
(d)
|
In accordance with SOP 90-7, we recorded a net gain of $107.6 million related to the discharge of our liabilities upon our emergence from bankruptcy for the six months
ended July 2, 2005.
|
|
(e)
|
We recorded income tax expense associated with increases to our tax valuation allowances of $46.9 million, $27.2 million, $71.3 million and $15.3 million during
fiscal 2008, 2007, 2006 and 2005, respectively. Fiscal 2008 income tax expense also reflects the goodwill impairment we recorded during the fourth quarter which was not deductible for income tax purposes. Additionally, in fiscal 2007 we recorded
income tax expense of $56.6 million related to cash collections and the sale proceeds from our financing receivables, for which we utilized net operating loss carryforwards to offset income tax payments due. See further discussion in
“
Note 11—Notes to Consolidated Financial Statements
” below for more detailed descriptions of our tax valuation allowance changes.
|
|
(f)
|
On June 21, 2005, in connection with our emergence from bankruptcy, we issued 30,000,000 shares of our common stock to certain unsecured creditors. Accordingly, earnings
per share data have been included for periods subsequent to July 2, 2005. No earnings per share data have been presented for periods prior to July 2, 2005 because there were no shares outstanding for the combined entity.
|
|
(g)
|
Represents unaudited financial measures used by our management to assess the financial performance of our business.
|
|
(h)
|
Represents increase (decrease) over respective prior year period and includes net merchandise sales from retail and outlet stores that have been open for one complete fiscal year.
Comparable store sales for fiscal 2008 has been calculated on a 53 week basis, which includes the 53 weeks in fiscal 2008 as compared to the 52 weeks of fiscal 2007 plus the addition of the first week of fiscal 2008, such that fiscal 2007 is
presented on a comparable basis with 53 weeks.
|
|
(i)
|
Average sales per square foot is determined on an annual basis by dividing net merchandise sales from our retail and
outlet stores for the fiscal year by the monthly average of the gross square feet during such fiscal year. References to square feet represent gross square feet and not net selling space. Net merchandise sales include net sales from both our
comparable and non-comparable stores. Average sales per square foot for fiscal 2008 includes the impact of the 53
rd
week in fiscal 2008. Excluding the impact of the 53
rd
week in fiscal 2008, average sales per square foot would
have been $268 per store.
|
|
(j)
|
Retail and outlet store count data excludes stores related to our discontinued Eddie Bauer Home business.
|
|
(k)
|
Includes current portion of long-term debt, which totaled $14.7 million as of January 3, 2009, $8.0 million as of December 30, 2006, $24.0 million as of
December 31, 2005 and $3.0 million as of July 2, 2005, and included the excess cash flow payments due under the Company’s Amended Term Loan. No excess cash flow payment was required at the end of fiscal 2007. The Company amended
its Amended Term Loan in April 2009 as further discussed in “
Note 17—Notes to Consolidated Financial Statements”
below. Total long-term debt as of January 3, 2009 and December 29, 2007 includes $59.4 million and
$66.1 million, respectively, related to $75 million in Notes. The carrying value of our convertible notes is net of a discount, which totaled $17.3 million and $19.6 million, respectively, and included the fair value of the related
embedded derivative of the conversion features of $1.7 million and $10.7 million, respectively, as of January 3, 2009 and December 29, 2007. See further discussion in “
Notes 8 and 9—Notes to Consolidated Financial
Statements
” below for a more detailed discussion of the convertible notes and the embedded derivative liability we recorded related to the notes’ conversion features.
|
Quarterly Comparable Sales Results
The following
table sets forth our historical unaudited quarterly comparable sales data (compared to sales of the same quarter the prior year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
Q4(a)
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
(8.8)%
|
|
(1.1
|
)%
|
|
8.6
|
%
|
|
0.5
|
%
|
|
4.8
|
%
|
|
3.4
|
%
|
|
0.9
|
%
|
|
9.5
|
%
|
|
4.6
|
%
|
|
(1.5
|
)%
|
|
(5.9
|
)%
|
|
(10.0
|
)%
|
|
(a)
|
The fourth quarter of fiscal 2008 includes 14 weeks versus 13 weeks in the fourth quarter of fiscal 2007. Comparable store sales for the fourth quarter of 2008 has been calculated
on a 14 week basis, which includes the 14 weeks in the fourth quarter of fiscal 2008 as compared to the 13 weeks of the fourth quarter of fiscal 2007 plus the addition of the first week of fiscal 2008, such that fiscal 2007 is presented on a
comparable basis with 14 weeks.
|
35
|
Item 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The information in this Management’s Discussion and Analysis contains certain forward-looking statements, which reflect our current view with
respect to future events and financial performance. Any such forward-looking statements are subject to risks and uncertainties that could cause our actual results of operations to differ materially from historical results or current expectations.
This discussion and analysis should be read in conjunction with our consolidated and combined financial statements and the related notes included elsewhere in this document.
Executive Overview
Business Summary
Eddie Bauer is a specialty retailer that sells mens’ and womens’ outerwear, apparel and accessories for the active outdoor lifestyle. Our
primary target customers are women and men who are 30-54 years old with an average annual household income of $77,000. Eddie Bauer is a nationally recognized brand that stands for high quality, innovation, style and customer service. Eddie
Bauer was ranked as the 4th outerwear brand in a
Women’s Wear Daily
survey in July 2008, and 26th in a companion
Women’s Wear Daily Top 100 Brands
survey, also in July 2008.
We sell our products through three interdependent sales channels that share product sourcing, design and marketing resources:
|
|
•
|
|
retail stores, which sell our premium Eddie Bauer merchandise;
|
|
|
•
|
|
outlet stores, which sell high quality Eddie Bauer merchandise and inventory overstocks at value or clearance price points; and
|
|
|
•
|
|
direct, which consists of our Eddie Bauer catalogs and our website
www.eddiebauer.com.
|
In June 2005, we emerged from bankruptcy as a stand-alone company for the first time in 34 years. We are committed to turning our business around
and revitalizing Eddie Bauer as a premium quality brand, both by continuing to implement initiatives that we commenced over the past several years and by actively changing initiatives that are not performing up to our expectations.
As of January 3, 2009, we operated 376 stores, consisting of 255 retail stores and 121 outlet stores in the U.S. and Canada. During 2008, we
had 33.9 million visits to our website and circulation of approximately 77 million catalogs.
We are minority participants in a
joint venture operation that sells Eddie Bauer branded products through retail and outlet stores, websites and catalogs in Japan, and we license the Eddie Bauer name to various consumer product manufacturers and other retailers whose products
complement our brand image.
2008 Business Developments
Five Key Initiatives
The
management team has set initiatives, formulated strategies to achieve these initiatives, and began taking action to implement the initiatives in 2008, with the goal of rebuilding the Eddie Bauer brand as a leader in outerwear and apparel for an
active outdoor lifestyle. Given the 12- to 18-month lead time to develop and introduce merchandise into our sales channels, and the current economic decline, the turnaround of the Eddie Bauer business will be a multi-year effort.
36
Our five key initiatives are:
|
|
•
|
|
clarify the brand position and rebuild brand identity
|
|
|
•
|
|
upgrade the quality of the merchandise and align the assortment strategy to the new brand position
|
|
|
•
|
|
revamp the creative marketing function and fully exploit our marketing advantage as a direct multi-channel retailer
|
|
|
•
|
|
cut costs to become more competitive and profitable
|
|
|
•
|
|
realign the organization and build talent to accomplish our goals
|
See “
Item 1. Business—2008 and Beyond
:
Five Key Initiatives”
for an expanded discussion of our key initiatives.
Loyalty Program
In September
2006, we launched our first full-scale customer loyalty program, Eddie Bauer Friends, for Eddie Bauer customers. The loyalty program allows customers in the United States to accrue points that may be redeemed for Eddie Bauer rewards certificates or
used toward acquiring special Eddie Bauer merchandise. The full terms and conditions of the loyalty program are available at
www.eddiebauerfriends.com
. As of January 3, 2009, approximately 4.7 million customers have enrolled in our
loyalty program, and approximately 61% of our U.S. net merchandise sales are generated in transactions utilizing a loyalty card. We continue to evaluate the performance of our loyalty program on an on-going basis. We believe that the program
will be a valuable tool in driving customer purchases and fostering customer loyalty while facilitating our ability to track and market to our customers.
Real Estate
The table below represents our retail and outlet store activity during fiscal
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
|
Fiscal 2007
|
|
|
Number of retail stores:
|
|
|
|
|
|
|
|
Open at beginning of period
|
|
271
|
|
|
279
|
|
|
Opened during the period
|
|
8
|
|
|
21
|
|
|
Closed during the period
|
|
(24
|
)
|
|
(29
|
)
|
|
Open at the end of the period
|
|
255
|
|
|
271
|
|
|
Number of outlet stores
:
|
|
|
|
|
|
|
|
Open at beginning of period
|
|
120
|
|
|
115
|
|
|
Opened during the period
|
|
6
|
|
|
8
|
|
|
Closed during the period
|
|
(5
|
)
|
|
(3
|
)
|
|
Open at the end of the period
|
|
121
|
|
|
120
|
|
The number of stores we ultimately open during any given year will depend on our ability to obtain
suitable locations on favorable terms, our working capital, general economic conditions, and the terms of our debt agreements. In addition to closing underperforming stores and opening new stores, our strategy includes “right-sizing” our
existing stores, mainly through downsizing and relocations. We are generally satisfied with the retail store prototype size of approximately 5,500 square feet (excluding outlet stores). Currently, approximately 66% of our retail stores fall
within 15% of this prototype size. We do not anticipate a significant change in store count over the short term, as we focus on increasing store productivity, as measured by sales per square foot, driven by our branding, merchandising and marketing
initiatives. As we improve productivity, we will have the opportunity to develop a longer-term real estate strategy that more appropriately balances our retail and outlet store counts.
37
Industry Trends
Overall in 2008 the retail industry experienced slowing sales growth in the first half of the year and negative sales growth in the second half of the
year, with the retail segment becoming highly promotional to move inventory. We anticipate that the overall industry negative trends will continue throughout at least the first half of 2009 and may continue beyond if the U.S. economy does not
significantly improve as a result of the currently proposed economic stimulus packages or general increase in consumer confidence. The industry by nature is seasonal, with significant increases in revenues and expenses in the fourth quarter of each
year due to holiday purchases. Additional industry factors that may impact our results in fiscal 2009 and beyond include the following:
|
|
•
|
|
Activewear and outerwear—two categories that we focused on in fiscal 2008—continue to show sales growth, and we continue to focus on expansion of our
product selection in these categories;
|
|
|
•
|
|
A shift towards consumers being more willing to purchase apparel based on a value perception—apparel either priced at a lower retail, or with a level of
quality that justifies a mid-market price;
|
|
|
•
|
|
A slowdown in the opening of competitors’ retail apparel stores;
|
|
|
•
|
|
Reduced investment by competitors in their luxury brands with a shift to value brands;
|
|
|
•
|
|
Continuing declines in mall traffic as a result of decreased consumer spending and closure of retail tenants;
|
|
|
•
|
|
The increased availability of quality, global low-cost sourcing for apparel due to the elimination of import quotas in the U.S., which puts deflationary pressures
on pricing and further lowers barriers to entry; and
|
|
|
•
|
|
The maturation and fragmentation of the apparel industry by channel of distribution, age, gender, price points and classification, as well as the increase in brand
proliferation, especially with the growth of private label brands, will increase competitive pressure on our sales.
|
Financial
Operations Overview
We assess the performance of our business using various financial and operating measures, which primarily include:
|
|
•
|
|
Net merchandise sales
—Net merchandise sales include sales of merchandise from our retail and outlet stores and our direct business, which includes sales
from our catalogs and website, less discounts and sales return allowances. Upon the sale of a gift card, we defer the revenue and record a liability. We reduce the liability and record merchandise sales when the gift card is redeemed by the
customer.
|
|
|
•
|
|
Comparable store sales
—Comparable store sales include net merchandise sales from retail and outlet stores that have been open for one complete fiscal
year. We exclude new store locations from our comparable store sales until they have been in operation for one complete fiscal year. Similarly, stores that are expanded or down-sized by more than 30% are also excluded from our comparable store base
until they have been in operation in their new configuration for one complete fiscal year. Stores that are closed for more than 10 consecutive days are also excluded from our comparable store base. Certain financial adjustments, including the sales
impact from our customer loyalty program, are excluded from our comparable store sales. Comparable store sales do not include net sales from our catalogs and website. Comparable store sales for fiscal 2008 has been calculated on a 53 week basis,
which includes the 53 weeks in fiscal 2008 as compared to the 52 weeks of fiscal 2007 plus the addition of the first week of fiscal 2008, such that fiscal 2007 is presented on a comparable 53 week basis.
|
|
|
•
|
|
Other revenues
—Other revenues include revenues associated with the royalties we receive from licensing agreements for the use of the Eddie Bauer
trademark, royalties we receive from our international joint venture and shipping revenues from shipments to customers from our direct channel.
|
38
|
|
•
|
|
Gross margin
—Gross margin is equal to our net merchandise sales less our costs of sales. We include in our costs of sales the direct cost of purchased
merchandise, inbound freight, inventory write-downs, design, buying and production costs and occupancy costs related to store operations and our warehouse. We record costs of sales related to our customer loyalty program as points are earned by the
customer, net of estimated breakage. We reduce costs of sales and record a reduction to merchandise sales, which therefore has no impact to our gross margin, when the reward certificates are redeemed by the customer. Costs of sales also include the
amortization expenses associated with our finite-lived intangible assets. As noted below, our warehousing and distribution expenses (excluding occupancy costs related to our warehouse) and shipping and handling costs are included in selling, general
and administrative expenses and are therefore excluded from our calculation of gross margin and gross margin percentage. As a result, our gross margin and gross margin percentage may not be comparable to those of other retailers.
|
|
|
•
|
|
Gross margin %
—Gross margin % is calculated as our gross margin dollars as a percentage of our net merchandise sales.
|
|
|
•
|
|
Impairment of indefinite-lived intangible assets
—These expenses include impairment charges related to our goodwill and trademarks.
|
|
|
•
|
|
Selling, general and administrative (“SG&A”)
—These expenses include all operating expenses not included within costs of sales, such as
store expenses other than occupancy costs, administrative expenses, marketing and advertising expenses, catalog production and mailing costs, program costs related to our customer loyalty program, warehousing and distribution expenses (excluding
occupancy costs related to our warehouse, which are reflected in costs of sales), call center expenses (excluding occupancy costs related to our call center), shipping and handling costs associated with our catalog and website sales, stock based
compensation expenses, depreciation and amortization of our non-store related property and equipment and impairments of long-lived assets. SG&A expenses also include gift card breakage related to gift cards purchased, which is the estimated
amount of gift cards that will go unredeemed. Gift card breakage is recorded as a reduction to SG&A expenses when redemption is determined to be remote, based upon historical breakage percentages.
|
|
|
•
|
|
Interest expense
—Interest expense includes interest on our senior secured revolving credit facility; interest on our senior secured term loan (the
“Amended Term Loan”); interest expense and discount amortization on our Notes; and amortization of our deferred financing fees. Interest expense is reduced for interest we capitalize.
|
|
|
•
|
|
Other income (expense), net
—Other income (expense), net includes non-operational income and expenses which primarily includes interest income earned on
our cash and cash equivalents; fair value adjustments we were required to make on the embedded derivative liability associated with our Notes until the end of fiscal 2008; the net accretion on the financing receivables and liabilities associated
with our securitization interests until their sale in December 2007; and other non-operating items, which included the loss on extinguishment of debt and gain on the sale of our net financing receivables during fiscal 2007 and the curtailment gain
we recognized during fiscal 2008 related to our post-retirement benefits.
|
|
|
•
|
|
Equity in earnings (losses) of foreign joint ventures
—This includes our proportionate share of the earnings or losses of current and former joint
ventures. Additionally, equity in earnings (losses) of foreign joint ventures includes impairment charges associated with our equity investments. We own a 30% interest in Eddie Bauer Japan, Inc. and account for this investment under the equity
method of accounting as we do not control this entity. Prior to March 1, 2008 we owned a 40% interest in Eddie Bauer GmbH & Co., a joint venture in Germany.
|
39
Fiscal and Fourth Quarter 2008 Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
January 3,
2009
(14 weeks)
|
|
|
Three
Months
Ended
December 29,
2007
(13 weeks)
|
|
|
Change
|
|
|
Twelve
Months
Ended
January 3,
2009
(53 weeks)
|
|
|
Twelve
Months
Ended
December 29,
2007
(52 weeks)
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Net merchandise sales
|
|
$
|
356,005
|
|
|
$
|
377,637
|
|
|
$
|
(21,632
|
)
|
|
$
|
971,332
|
|
|
$
|
989,380
|
|
|
$
|
(18,048
|
)
|
|
Total revenues
|
|
$
|
369,898
|
|
|
$
|
392,430
|
|
|
$
|
(22,532
|
)
|
|
$
|
1,023,437
|
|
|
$
|
1,044,353
|
|
|
$
|
(20,916
|
)
|
|
Gross margin
|
|
$
|
145,569
|
|
|
$
|
165,243
|
|
|
$
|
(19,674
|
)
|
|
$
|
343,141
|
|
|
$
|
358,527
|
|
|
$
|
(15,386
|
)
|
|
Gross margin%
|
|
|
40.9
|
%
|
|
|
43.8
|
%
|
|
|
(2.9%
|
)
|
|
|
35.3
|
%
|
|
|
36.2
|
%
|
|
|
(0.9%
|
)
|
|
SG&A
|
|
$
|
123,235
|
|
|
$
|
132,517
|
|
|
$
|
(9,282
|
)
|
|
$
|
393,585
|
|
|
$
|
441,875
|
|
|
$
|
(48,290
|
)
|
|
Impairment of indefinite-lived intangible assets
|
|
$
|
144,574
|
|
|
$
|
—
|
|
|
$
|
(144,574
|
)
|
|
$
|
144,574
|
|
|
$
|
—
|
|
|
$
|
(144,574
|
)
|
|
Operating income (loss)
|
|
$
|
(108,347
|
)
|
|
$
|
47,519
|
|
|
$
|
(155,866
|
)
|
|
$
|
(142,913
|
)
|
|
$
|
(28,375
|
)
|
|
$
|
(114,538
|
)
|
Net merchandise sales for the fourth
quarter of 2008, which included 14 weeks, decreased $21.6 million, or 5.7%, from the fourth quarter of fiscal 2007, which included 13 weeks. Net merchandise sales for fiscal 2008, which included 53 weeks, decreased $18.0 million, or 1.8%,
from fiscal 2007, which included 52 weeks. Net merchandise sales for the 53
rd
week of fiscal 2008 were approximately $22.0 million. Comparable store
sales, as calculated on a comparable 14 week basis for the fourth quarter and on a comparable 53 week basis for the year, declined 8.8% and 1.8%, respectively. Comparable store sales, when excluding the effect of foreign exchange rates, declined
5.7% and 1.1%, for the fourth quarter and fiscal 2008 periods, respectively. Net merchandise sales in our direct business, which includes our catalog and website sales, declined $3.3 million and $3.7 million for the fourth quarter and fiscal year,
respectively. Net merchandise sales in our stores and direct channel continued to be negatively impacted during the fourth quarter of fiscal 2008 due to the overall cut back in retail spending driven by the U.S. economic conditions. We began to see
the slowing of growth in consumer retail spending during the third quarter of fiscal 2008, which accelerated in the fourth quarter. Net merchandise sales in fiscal 2008 were also impacted by second and third quarter planned decreases in catalog
circulation.
Our gross margin and gross margin percentages for the fourth quarter of 2008 were $145.6 million and 40.9%, down from
$165.2 million and 43.8% during the fourth quarter of fiscal 2007. The decline in our gross margin dollars during the fourth quarter reflected the $21.6 million decrease in our net merchandise sales, which was partially offset by a $1.9 million
decrease in our costs of sales. The decline in our gross margin percentage during the fourth quarter resulted from a 1.7 percentage point decrease in our merchandise margins, primarily driven by higher markdowns spurred by an overall increase in
promotional activity by our competitors to attract a declining amount of consumer spending during the holidays, and also due to higher buying and customer loyalty program costs as a percentage of our net merchandise sales. Our gross margin and gross
margin percentages for fiscal 2008 were $343.1 million and 35.3%, down from $358.5 million and 36.2% for fiscal 2007. Consistent with the fourth quarter, our gross margin dollars and gross margin percentage for fiscal 2008 reflected the decline
in our net merchandise sales and lower merchandise margins, as well as an increase in our buying costs. Partially offsetting these negative impacts to our gross margin was an $8.1 million decline in our occupancy costs during fiscal 2008.
SG&A expenses during the fourth quarter and fiscal 2008 decreased by
$9.3 million and $48.3 million, respectively, versus the prior year periods. The fourth quarter decrease in SG&A expenses primarily reflected decreases of $4.7 million in incentive plan expenses; $2.8 million in professional services;
$2.8 million in advertising and marketing costs; and $1.2 million lower stock compensation expenses. These decreases were partially offset by $7.5 million in store leasehold improvement impairments we recorded during the fourth quarter. See
discussion of our fiscal 2008 versus fiscal 2007 SG&A expenses below under
“Results of
Operations
”. We have set a target to reduce our SG&A expenses by an additional $10 – 15 million in fiscal 2009,
excluding the impact of non-recurring items and the impact of the 53
rd
week in 2008.
40
Our operating losses for the fourth quarter and for fiscal 2008 increased $155.9 million and $114.5
million, respectively, which reflected $144.6 million in impairment charges related to our indefinite-lived intangible assets. During the fourth quarter of 2008, we recorded impairment charges of $80.0 million and $64.6 million related to our
trademarks and goodwill, respectively. See further discussion below under
“Results of Operations
”.
Outlook
To increase our profitability and generate cash for future growth, we will need to effectively leverage our existing multi-channel infrastructure and
increase our productivity, as measured by our comparable store sales and sales per square foot in our retail and outlet stores and through higher year-over-year sales in our direct channel. We believe that the five key initiatives identified above
will help drive increased sales and margins, although weakening of consumer confidence and the slow-down in retail specialty apparel sales and the economy in general may negatively impact our ability to increase our sales per square foot and
comparable store sales in 2009. Improvement in our gross margins and profitability also depends upon our ability to source our products at cost effective prices, control our transportation and energy costs and reduce our need for inventory
markdowns. We have tightened our inventory controls and improved our ability to make quick purchases to increase certain inventory in the face of consumer demand, and in 2009 will purchase slightly less of our total forecasted sales of goods from
our vendors initially, and then closely monitor inventory levels to make later purchases to fill out inventory if required to meet additional consumer demand. Additionally, our ability to control store occupancy and buying costs and efficiently
manage our back-end operations and fixed costs will also impact our future gross margins and profitability. As discussed above, we have initiatives underway to further reduce costs in 2009 and improve efficiency. We anticipate that these initiatives
will reduce our costs of sales and SG&A. Despite our strategy to design products that appeal to our target customers, changes in customer preferences or demand or lack of customer response to these designs could result in increased costs and
lower margins if we are required to increase our inventory markdowns or redesign our product offerings. We must continue to make improvements in our merchandise collection and improve our net merchandise sales in order to develop a sustainable trend
of improving results.
Results of Operations
The following is a discussion of our results of operations for fiscal 2008, 2007 and 2006. Our fiscal year ends on the Saturday closest to December 31. The 2008 fiscal year reflects a 53 week period from December 30, 2007 to
January 3, 2009. The 2007 fiscal year reflects a 52 week period from December 31, 2006 to December 29, 2007 and the 2006 fiscal year reflects a 52 week period from January 1, 2006 to December 30, 2006.
Fiscal 2008 (53 weeks) Compared to Fiscal 2007 (52 weeks)
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
|
Fiscal 2007
(52 weeks)
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Retail and outlet store sales
|
|
$
|
697,133
|
|
|
$
|
711,427
|
|
|
$
|
(14,294
|
)
|
|
Direct sales
|
|
|
274,199
|
|
|
|
277,916
|
|
|
|
(3,717
|
)
|
|
Other merchandise sales
|
|
|
—
|
|
|
|
37
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Merchandise Sales
|
|
|
971,332
|
|
|
|
989,380
|
|
|
|
(18,048
|
)
|
|
Shipping revenues
|
|
|
34,037
|
|
|
|
34,220
|
|
|
|
(183
|
)
|
|
Licensing revenues
|
|
|
12,844
|
|
|
|
13,846
|
|
|
|
(1,002
|
)
|
|
Foreign royalty revenues
|
|
|
4,961
|
|
|
|
6,341
|
|
|
|
(1,380
|
)
|
|
Other revenues
|
|
|
263
|
|
|
|
566
|
|
|
|
(303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other revenues
|
|
$
|
1,023,437
|
|
|
$
|
1,044,353
|
|
|
$
|
(20,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase (decrease) in comparable store sales
|
|
|
(1.8
|
)%
|
|
|
4.4
|
%
|
|
|
n/a
|
|
41
Net merchandise sales for the 53 weeks in fiscal
2008 totaled $971.3 million, a decrease of $18.0 million, or 1.8%, from the 52 weeks of fiscal 2007. Retail and outlet store sales and sales from our direct business, which includes our catalog and website sales, decreased $14.3 million and
$3.7 million, respectively. Net merchandise sales for the 53
rd
week in fiscal 2008 were approximately $22.0 million. Net merchandise sales in our
stores and direct channel continued to be negatively impacted during the fourth quarter of fiscal 2008 due to the overall cut back in retail spending driven by the U.S. economic conditions, and direct sales were impacted starting in the second
quarter by planned decreases in catalog circulation.
Comparable store sales, as calculated on a 53 week basis for both periods, declined
1.8% for our combined retail and outlet stores in fiscal 2008 versus fiscal 2007, which included an 8.8% decline in total comparable store sales in the fourth quarter of 2008. Comparable store sales, when excluding the effect of foreign exchange
rates, declined 5.7% and 1.1%, for the fourth quarter and fiscal 2008 periods, respectively. Comparable store sales in our retail stores declined 2.0% and 10.5% in fiscal 2008 and the fourth quarter of fiscal 2008, respectively. Comparable store
sales in our outlet stores decline 1.5% and 5.4% in fiscal 2008 and the fourth quarter of fiscal 2008, respectively.
Non-comparable store
sales in fiscal 2008 totaled $95.1 million compared to $108.7 million in fiscal 2007. The $13.6 million decrease in non-comparable store sales was primarily driven by a $35.2 million impact associated with sales from closed stores during 2008,
which were partially offset by an increase of $22.1 million in net merchandise sales associated with new stores opened in fiscal 2008 and non-comparable stores (sales from retail and outlet stores that have not been open for one complete fiscal
year and stores that are expanded or down-sized by more than 30% and have not been in operation in their new configuration for one complete fiscal year).
Licensing revenues in fiscal 2008 declined $1.0 million versus the prior year due to lower sales of licensed products, driven in part by one of our licensees liquidating during the third quarter of 2008 and a second
licensee filing for bankruptcy protection during the fourth quarter of 2008. The $1.4 million decrease in our foreign royalty revenues during fiscal 2008 versus the prior year resulted from lower net merchandise sales from our joint venture with
Eddie Bauer Japan and a reduction in royalty rates in 2008 and 2009 under a new license agreement with our former joint venture in Germany. In June 2008, we and the other joint venture partners in our Eddie Bauer Germany joint venture transferred
our interests in the joint venture, effective March 1, 2008, to a third party in return for a release of liabilities. As part of the transfer of the joint venture interest, we transferred our royalty receivables to the third party, terminated
the prior license agreement and entered into a new licensing arrangement to license the use of our tradename and trademarks to Eddie Bauer Germany for a five-year period in exchange for specified royalties. As a result of the termination of the
prior licensing agreement and the execution of a new agreement with a reduced royalty rate for the first two years, as well as a continuing economic downturn in the Japanese economy, our results of operations during fiscal 2009 will reflect a
continued decrease in foreign royalty revenues.
Cost of goods sold, including buying and occupancy and gross margin and gross margin %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
|
Fiscal 2007
(52 weeks)
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Net merchandise sales
|
|
$
|
971,332
|
|
|
$
|
989,380
|
|
|
$
|
(18,048
|
)
|
|
Cost of sales, including buying and occupancy
|
|
$
|
628,191
|
|
|
$
|
630,853
|
|
|
$
|
(2,662
|
)
|
|
Gross margin
|
|
$
|
343,141
|
|
|
$
|
358,527
|
|
|
$
|
(15,386
|
)
|
|
Gross margin as a % of net merchandise sales
|
|
|
35.3
|
%
|
|
|
36.2
|
%
|
|
|
(0.9
|
)%
|
Our gross margin for fiscal 2008 was $343.1 million, a decrease of $15.4 million, or 4.3%, from
our gross margin of $358.5 million during fiscal 2007, and reflected the $18.0 million decrease in our net merchandise sales and a $2.6 million decrease in our costs of sales during the current year versus the prior year.
42
The $2.6 million decrease in our costs of sales included:
|
|
•
|
|
a decrease of $8.1 million in our occupancy costs driven by a $2.9 million decrease in amortization expense of our leasehold improvements recorded with our fresh
start accounting upon emergence from bankruptcy; a decrease of $2.5 million in retail store rent expense due to fewer stores; a decrease of $1.5 million in lower rent expense and common area maintenance charges in our corporate facilities allocated
to costs of sales; and a $1.3 million decrease in taxes/utilities.
|
|
|
•
|
|
a $0.9 million decrease in amortization expense associated with our customer-relationship intangible assets.
|
Partially offsetting these decreases in costs of sales were:
|
|
•
|
|
an increase of $4.2 million in buying costs, comprised of increases in salaries and benefits costs due to an increase in headcount and an increase in professional
services costs; and
|
|
|
•
|
|
a $2.0 million increase in our merchandise costs due to a higher number of units sold, which were slightly offset by a lower cost per unit and a higher benefit from
customer loyalty program certificates reclassified as a reduction to net merchandise sales.
|
Our gross margin percentage
decreased to 35.3% in fiscal 2008, down from 36.2% in fiscal 2007. The 0.9 percentage point decrease in our gross margin percentage was due primarily to:
|
|
•
|
|
a 1.0 percentage point decline in our merchandise margins, driven by an increase in markdowns taken to promote sales, particularly during the fourth quarter of 2008
when our merchandise margins declined by 1.7 percentage points; and
|
|
|
•
|
|
an increase in buying costs discussed above, which resulted in a 0.5 percentage point decrease in gross margin percentage.
|
Partially offsetting these decreases to our gross margin percentage was a 0.5 percentage point improvement from lower occupancy costs as a percentage of
our net merchandise sales.
Our warehousing and distribution expenses (excluding occupancy costs related to our warehouses) and shipping
and handling costs are included in selling, general and administrative expenses as discussed further below. As a result, our gross margin and gross margin percentages may not be comparable to those of other retailers who may include these costs in
their gross margin and gross margin percentages. Our warehousing and distribution expenses reflected in selling, general and administrative expenses for fiscal 2008 and 2007 were $29.5 million and $30.2 million, respectively. Our shipping and
handling costs reflected in selling, general and administrative expenses for fiscal 2008 and 2007 were $27.1 million and $25.4 million, respectively. Going forward, adding an additional sourcing agent and opening a Hong Kong branch office to
handle direct sourcing may allow us to reduce our cost of goods.
Selling, general and administrative expenses (SG&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
|
Fiscal 2007
(52 weeks)
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Selling, general and administrative expenses (SG&A)
|
|
$
|
393,585
|
|
|
$
|
441,875
|
|
|
$
|
(48,290
|
)
|
|
SG&A as a % of net merchandise sales
|
|
|
40.5
|
%
|
|
|
44.7
|
%
|
|
|
(4.2%
|
)
|
SG&A expenses for fiscal 2008 were $393.6 million, representing a decrease of
$48.3 million, or 10.9% from the prior year. SG&A expenses as a percentage of net merchandise sales for fiscal 2008 were 40.5%, down from 44.7% in the prior year and included non-recurring expenses of $10.0 million, which included $2.5
million
43
of severance for our reduction in workforce initiative in the first quarter of 2008 and $7.5 million of impairments of store leasehold improvements during
the fourth quarter of 2008. Based upon our analysis of certain of our stores’ historical and projected future operating cash flows, we determined that the carrying value of these leasehold improvements exceeded their fair value and accordingly
we impaired these assets. Non-recurring expenses in 2007 totaled $16.4 million, which included a $5 million merger termination fee; $8.4 million, including $3.2 million of accelerated stock-based compensation expense, related to
the resignation of our former CEO; $1.4 million of legal and other costs related to our terminated merger agreement; and a $1.6 million charge related to a litigation settlement.
SG&A expenses during fiscal 2008 also decreased versus the prior year period as a result of an initiative to remove $25-30 million in
year-over-year costs that included:
|
|
•
|
|
a $12.4 million reduction in marketing, advertising and promotion costs through the elimination of unproductive advertising, primarily related to lower catalog
circulation to less productive acquired addresses and reductions in store marketing costs, internet advertising and brand marketing expenses;
|
|
|
•
|
|
a $12.8 million decrease in professional services and legal expenses, driven by a reduction in outsourcing of executive, legal, tax, accounting and investor
relations functions; lower expenses for Sarbanes-Oxley compliance; and the non-recurrence of executive recruitment expenses and consulting expenses for cost reduction initiatives incurred during 2007;
|
|
|
•
|
|
a $3.9 million reduction in total incentive and bonus plan accruals for both our corporate employees and store employees;
|
|
|
•
|
|
a $2.8 million reduction in salaries and benefits due primarily to the 123-position reduction in workforce we instituted during the first quarter of 2008;
|
|
|
•
|
|
a $2.3 million decrease in warehousing and distribution expenses primarily driven by reduced personnel and occupancy expenses in our distribution center;
|
|
|
•
|
|
a $2.0 million decrease in depreciation and amortization expense primarily related to the fresh start adjustments on leasehold improvements that we recorded upon
our emergence from bankruptcy which became fully amortized during mid-2007;
|
|
|
•
|
|
a $1.4 million reduction in stock-based compensation expenses; and
|
|
|
•
|
|
a $1.0 million decrease in program-related expenses associated with our customer loyalty program.
|
These decreases in SG&A expenses during fiscal 2008 versus the prior year were partially offset by a $2.8 million unfavorable variance in capitalized
overhead costs due to the lower inventory levels at the end of fiscal 2008 versus 2007, and a $1.7 million increase in shipping costs driven by higher shipping rates due to higher fuel costs.
Gift card breakage reduced SG&A expenses for fiscal 2008 and 2007 by $2.1 million and $2.2 million, respectively.
We have set a target to reduce our SG&A expenses by an additional $10 – 15 million in
fiscal 2009, excluding the impact of non-recurring items and the impact of the 53
rd
week in 2008.
Impairment of indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
Fiscal 2007
(52 weeks)
|
|
Change
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
($ in thousands)
|
|
Impairment of indefinite-lived intangible assets
|
|
$
|
144,574
|
|
$
|
—
|
|
$
|
144,574
|
44
We performed our annual impairment tests of goodwill and trademarks during the fourth quarter of fiscal
2008 consistent with the methodologies used in prior years. The fair value of our trademarks was estimated to be $105 million, which resulted in an impairment charge of $80 million, which we recognized during the fourth quarter of 2008. The fair
value of our trademarks was determined using an income approach, which calculated the discounted present value of estimated future royalty cash flows of our net merchandise sales. The discounted present value was calculated using our five-year
long-range plan, a terminal value growth rate of 3.0%, and a discount rate of 20.0%. The decline in the fair value of our trademarks since the prior year-end was due principally to lower merchandise sales during the fourth quarter of 2008 and
decreases in forecasted net merchandise sales within our five-year long-range plan, driven by the overall downturn in the economy and projected continued declines in consumer retail spending.
The fair value of our enterprise value for purposes of our goodwill impairment test during the fourth quarter of 2008 was also determined using an income
approach, and was estimated using a discounted cash flow model and was further supported by valuations using a market approach (e.g. market comparables for other retail companies) and by the indicated value from our common stock price, including a
control premium. We have one reporting unit for purposes of our goodwill impairment test. Our goodwill impairment test was completed using the two-step approach prescribed in SFAS 142. The first step included a determination of the enterprise
value of the Company using a discounted cash flow model which included our five-year long-range plan related to the future cash flows of our primary assets; a discount rate of 17.0%, which represented our weighted average cost of capital; and a
terminal value growth rate of 3.0%. In order to assess the fair value of the Company in its entirety, following the calculation of the discounted cash flows of our primary assets, the book value of our interest-bearing debt was deducted and the fair
values of the assets not contributing to the discounted cash flows of our primary assets, including our net operating loss carryforwards, were added to derive the fair value of our total net assets. Upon completion of step one of the goodwill
impairment test, the estimated fair value of the Company was less than the carrying value of our net book value and long-term debt. Accordingly, we completed step two of the goodwill impairment test, which included comparing the implied fair value
of the Company with the carrying amount of goodwill. Upon completion of step two of the goodwill impairment test, we recorded an impairment charge of $64.6 million related to our goodwill. Consistent with the decline in the fair value of our
trademarks, the decline in our enterprise value since the prior year-end was driven by the overall downturn in the economy and projected continued declines in consumer retail spending.
Our impairment evaluations of both goodwill and trademarks included reasonable and supportable assumptions and projections and were based on estimates of
projected future cash flows. The long-range projections used in our impairment evaluations assume that we will successfully introduce merchandise assortments that appeal to our core customer tastes and preferences and respond to future changes in
customer style preferences in a timely and effective manner. These estimates of future cash flows are based upon our experience, historical operations of our stores, catalogs and website, estimates of future profitability and economic conditions,
including future consumer retail spending. Future estimates of profitability and economic conditions require estimating such factors as sales growth, employment rates and the overall economics of the retail industry for up to twenty years in the
future, and are therefore subject to variability, are difficult to predict and in certain cases, the factors are beyond our control. The assumptions utilized by management were consistent with those developed in conjunction with our long-range
planning process. If the assumptions and projections underlying these evaluations are not achieved, or should we ultimately adopt and pursue different long-range plans, or general economic conditions which impact retail spending deteriorate more
significantly than the current assumptions, the amount of the impairment could be adversely affected. Accordingly, there can be no assurance that there will not be additional impairment charges in the future based on future events and that the
additional charges would not have a materially adverse impact on our financial position or results of operations.
45
Equity in earnings (losses) of foreign joint ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
|
Fiscal 2007
(52 weeks)
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Equity in earnings (losses) of foreign joint ventures
|
|
$
|
(9,134
|
)
|
|
$
|
(1,147
|
)
|
|
$
|
(7,987
|
)
|
Losses of foreign joint ventures for fiscal 2008 of $9.1 million included losses of $4.1 million
and $5.0 million from Eddie Bauer Germany and Eddie Bauer Japan, respectively. The losses from Eddie Bauer Japan included an impairment charge of $3.7 million recorded during the fourth quarter of 2008 as the estimated fair value of our investment
in Eddie Bauer Japan, based upon future discounted cash flows of its projected royalty revenues, was less than the carrying value of our investment. Accordingly, as the decline in fair value was determined to be other than temporary, we reduced our
investment value.
In February 2008, as a result of prior discussions related to the poor performance of our joint venture in Germany, we
received a required one-year notice from our joint venture partners in Eddie Bauer Germany of their decision to terminate the joint venture arrangement, and as a result, the joint venture, together with a companion license arrangement, would have
terminated in February 2009. In June 2008, we and the other joint venture partners completed the transfer, effective March 1, 2008, of our interests in the joint venture to a third party in return for a release of past and future liabilities.
As a result of the above-mentioned termination notice, we performed an impairment review of our investment in Eddie Bauer Germany during the first quarter of 2008 and determined that an other-than-temporary impairment existed. Accordingly, we
recognized an impairment charge of $3.9 million during the first quarter of 2008, which reduced our investment in Eddie Bauer Germany to zero and also reflected our legal obligation to fund our proportionate share of Eddie Bauer Germany’s
losses for its fiscal year ending February 29, 2008.
Losses of foreign joint ventures for fiscal 2007 of $1.1 million included
our share of losses related to Eddie Bauer Germany of $0.9 million and $0.2 million from Eddie Bauer Japan.
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
Fiscal 2007
(52 weeks)
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Interest expense
|
|
$
|
22,800
|
|
$
|
26,698
|
|
$
|
(3,898
|
)
|
Interest expense during fiscal 2008 decreased $3.9 million as compared to the prior year,
primarily as a result of a $6.5 million decrease in interest expense associated with our Amended Term Loan due to lower average interest rates and also due to a lower average balance outstanding resulting from the refinancing in April 2007 and
prepayments made during the fourth quarter of 2007 and first two quarters of 2008. See further description of the April 2007 refinancing of our term loan, the issuance of our convertible notes, and the prepayments on our Amended Term Loan within
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”
below. This decrease was partially offset by an increase of $1.9 million of interest expense,
including the discount amortization, related to the $75 million of convertible notes we issued in April 2007 and a $1.0 million decrease in interest capitalized due to a decrease in capital expenditures in fiscal 2008 versus fiscal 2007.
As a result of the First Amendment to our Amended Term Loan executed in April 2009, our interest rates on our Amended Term Loan will be significantly
higher in fiscal 2009 and thereafter, and we will be obligated to pay significant fees and issue equity securities to the lenders, thereby resulting in a significant increase to our interest expense for financial reporting purposes. See further
discussion of the amendment in “
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources of Liquidity
” below.
The Company adopted FSP APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement
) (“FSP APB 14-1”)
,
effective with the first quarter of
46
fiscal 2009. While FSP APB 14-1 does not change the economic substance for our convertible notes, due to the accretion of the discounted carrying value of
the convertible notes to their face amount, we anticipate that interest expense will increase. This increase in interest expense will have no effect on our cash flows, liquidity or financial covenants related to our various credit facilities. See a
more detailed discussion of FSP APB 14-1 in “
Note 3
—Notes to Consolidated Financial Statements
” below.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
Fiscal 2007
(52 weeks)
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Net accretion of financing receivables/payables
|
|
$
|
—
|
|
$
|
5,531
|
|
|
$
|
(5,531
|
)
|
|
Gain on sale of net financing receivables/payables
|
|
|
113
|
|
|
9,303
|
|
|
|
(9,190
|
)
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
(3,284
|
)
|
|
|
3,284
|
|
|
Fair value adjustment of convertible note embedded derivative liability
|
|
|
9,040
|
|
|
10,483
|
|
|
|
(1,443
|
)
|
|
Interest rate swap gain
|
|
|
—
|
|
|
228
|
|
|
|
(228
|
)
|
|
Curtailment gain
|
|
|
3,918
|
|
|
—
|
|
|
|
3,918
|
|
|
Interest income and other
|
|
|
314
|
|
|
1,434
|
|
|
|
(1,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
13,385
|
|
$
|
23,695
|
|
|
$
|
(10,310
|
)
|
Other income (expense), net of $13.4 million for fiscal 2008 primarily included $9.0 million of
income related to fair value adjustments on the embedded derivative liability associated with our Notes (see further discussion in “
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources
” below) and the $3.9 million curtailment gain we recorded during the fourth quarter related to decreases in the Company-paid costs for retiree post-retirement benefits. We recognized other income during fiscal 2008 on our
embedded derivative liability due to the decrease in estimated fair value of the conversion features associated with our Notes, which was largely driven by the decrease in our common stock price during fiscal 2008. Effective with the first quarter
of 2009, we will no longer be required to make fair value adjustments as the conversion features of the Notes will no longer be considered an embedded derivative liability.
Other income (expense), net for fiscal 2007 of $23.7 million included $10.5 million of income associated with the change in fair value of our
convertible note embedded derivative liability; a $9.3 million gain on the sale of our net financing receivables; $5.5 million of net accretion income related to the financing receivables/payables prior to their sale in December 2007;
$1.4 million of interest income; and a $0.2 million gain associated with the interest rate swap we terminated in April 2007. These items were partially offset by the $3.3 million loss we recorded related to the extinguishment and
refinancing of our term loan in April 2007.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
Fiscal 2007
(52 weeks)
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Income tax expense
|
|
$
|
4,067
|
|
$
|
69,193
|
|
$
|
(65,126
|
)
|
Income tax expense for fiscal 2008 totaled $4.1 million despite a pre-tax loss of $161.5 million.
The primary differences between our calculated federal tax benefit of $56.5 million (35% of our pre-tax loss of $161.5 million) and our reported tax expense of $4.1 million were the non-deductible goodwill impairment of $64.6 million ($22.6
million tax affected) we recognized during the fourth quarter of 2008 and $46.9 million of tax expense associated with increases to our deferred tax valuation allowances also recorded during the fourth quarter of 2008. As a result of our operating
performance during the fourth quarter of 2008, and our forecasted
47
operating results in fiscal 2009, 2010 and 2011, we determined that a full valuation allowance was required for our net deferred tax assets and recorded
income tax expense of $46.9 million during the fourth quarter.
See “
Fiscal 2007 Compared to Fiscal 2006—Income Tax
Expense
” below for a discussion of our income tax expense for fiscal 2007.
Fiscal 2007 (52 weeks) Compared to Fiscal 2006
(52 weeks)
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Retail & outlet store sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales
|
|
$
|
591,393
|
|
|
$
|
566,451
|
|
|
$
|
24,942
|
|
|
Non-comparable store sales
|
|
|
120,034
|
|
|
|
133,693
|
|
|
|
(13,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total retail & outlet store sales
|
|
|
711,427
|
|
|
|
700,144
|
|
|
|
11,283
|
|
|
Direct sales
|
|
|
277,916
|
|
|
|
256,463
|
|
|
|
21,453
|
|
|
Other merchandise sales
|
|
|
37
|
|
|
|
81
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net merchandise sales
|
|
|
989,380
|
|
|
|
956,688
|
|
|
|
32,692
|
|
|
Shipping revenues
|
|
|
34,220
|
|
|
|
34,022
|
|
|
|
198
|
|
|
Licensing revenues
|
|
|
13,846
|
|
|
|
15,707
|
|
|
|
(1,861
|
)
|
|
Foreign royalty revenues
|
|
|
6,341
|
|
|
|
6,626
|
|
|
|
(285
|
)
|
|
Other revenues
|
|
|
566
|
|
|
|
404
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other revenues
|
|
|
1,044,353
|
|
|
|
1,013,447
|
|
|
|
30,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increase (decrease) in comparable store sales
|
|
|
4.4
|
%
|
|
|
(2.0
|
)%
|
|
|
n/a
|
|
Net merchandise sales increased $32.7 million, or 3.4%, in fiscal 2007 versus fiscal 2006,
which included an increase of $11.3 million, or 1.6%, in our retail and outlet store sales and an increase of $21.5 million, or 8.4%, in our catalog and website sales. The year-over-year increase in net merchandise sales was a result of
more focused marketing efforts, both in-store and through our catalogs, and targeted merchandising emphasizing historically successful items, with fewer colors and styles. Comparable store sales, which includes sales from both our retail and outlet
stores, during fiscal 2007 increased 4.4%, or $24.9 million. Comparable store sales in our retail stores for fiscal 2007 increased 8.9%, or $30.2 million, while comparable store sales in our outlet stores decreased 2.3%, or
$5.3 million, versus the prior year period. Comparable store sales in our retail stores for fiscal 2006 decreased 1.2%, or $4.3 million, while comparable store sales in our outlet stores decreased 3.1%, or $7.0 million, versus the
prior year period.
Non-comparable store sales decreased $13.7 million, or 10.2% during fiscal 2007 versus the prior year period. The
decrease in non-comparable store sales was primarily driven by a $41.5 million impact associated with higher sales from closed stores during 2006 versus 2007 and a $5.9 million decrease related to financial adjustments, which primarily
includes merchandise purchased through our direct channel that is returned to our stores, adjustments for the accrual we make for returned goods, and the impact of our customer loyalty program as discussed further below. These decreases to our
non-comparable sales were partially offset by an increase of $34.0 million in the sales associated with non-comparable stores (sales from retail and outlet stores that have not been open for one complete fiscal year and stores that are expanded
or down-sized by more than 30% and have not been in operation in their new configuration for one complete fiscal year) which was attributable to the addition of 21 new retail stores and eight new outlet stores in fiscal 2007 versus 16 new retail
stores and eight new outlet stores during fiscal 2006.
48
Cost of goods sold, including buying and occupancy and gross margin and gross margin %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Net merchandise sales
|
|
$
|
989,380
|
|
|
$
|
956,688
|
|
|
$
|
32,692
|
|
|
Cost of sales, including buying and occupancy
|
|
$
|
630,853
|
|
|
$
|
603,171
|
|
|
$
|
27,682
|
|
|
Gross margin
|
|
$
|
358,527
|
|
|
$
|
353,517
|
|
|
$
|
5,010
|
|
|
Gross margin as a % of net merchandise sales
|
|
|
36.2
|
%
|
|
|
37.0
|
%
|
|
|
(0.8
|
)%
|
Our gross margin for fiscal 2007 was $358.5 million, an increase of $5.0 million, or
1.4%, from our fiscal 2006 gross margin of $353.5 million. The $27.7 million increase in our costs of sales during fiscal 2007 versus the prior year primarily reflected an increase of $21.2 million in our merchandise costs,
excluding the impact of the customer loyalty award cost (e.g. the amount we reclassify as a reduction to costs of sales and reduction to revenue when the award is used for a purchase). Merchandise costs increased from the prior year as a result of
the corresponding increase in our net merchandise sales and higher inventory markdowns related to excess inventories, particularly in our men’s apparel. Additionally, the total costs of the customer loyalty program, including the award cost,
increased $7.6 million due to an increase in customer loyalty program participants and a full year of expense versus fiscal 2006, which included only a partial year of expense as the program was launched in September 2006. The net impact of our
customer loyalty program for fiscal 2007 was an increase to costs of sales of $2.9 million and a reduction to net merchandise sales (including both retail and outlet stores and our direct channel) of $7.7 million. The net impact of our
customer loyalty program for fiscal 2006 was an increase of $2.0 million to costs of sales and a reduction to net merchandise sales of $1.0 million. The total reduction to our gross margin from our customer loyalty program for fiscal 2007
and fiscal 2006 was $10.6 million and $3.0 million, respectively.
Our gross margin percentage declined to 36.2% in fiscal 2007,
down from 37.0% in fiscal 2006. The 0.8 percentage point decline in our gross margin percentage was due primarily to a 0.8 percentage point impact associated with our customer loyalty program and a 0.7 percentage point decrease in our
merchandise margins driven in part by the higher levels of inventory markdowns in 2007. These decreases to our gross margin percentage were partially offset by a 0.7 percentage point increase in our gross margin associated with the decline in
our occupancy costs as a percentage of our net merchandise sales.
Our warehousing and distribution expenses (excluding occupancy costs
related to our warehouses) and shipping costs are included in selling, general and administrative expenses. As a result, our gross margin and gross margin percentages may not be comparable to those of other retailers. Our warehousing and
distribution expenses reflected in selling, general and administrative expenses for fiscal 2007 and 2006 were $30.2 million and $32.5 million, respectively. Our shipping costs reflected in selling, general and administrative expenses for
fiscal 2007 and 2006 were $25.4 million and $22.3 million, respectively.
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Selling, general and administrative expenses (SG&A)
|
|
$
|
441,875
|
|
|
$
|
411,300
|
|
|
$
|
30,575
|
|
|
SG&A as a % of net merchandise sales
|
|
|
44.7
|
%
|
|
|
43.0
|
%
|
|
|
1.7
|
%
|
SG&A expenses for fiscal 2007 were $441.9 million, representing an increase of
$30.6 million, or 7.4% from the prior year. SG&A expenses as a percentage of net merchandise sales for fiscal 2007 were 44.7%, up from 43.0% in the prior year, primarily as a result of first quarter 2007 non-recurring expenses totaling
49
$16.4 million, which included the $5 million merger termination fee; $8.4 million, including $3.2 million of accelerated stock-based
compensation expense, related to the resignation of our former CEO; $1.4 million of legal and other costs related to our terminated merger agreement; and a $1.6 million charge related to a litigation settlement. SG&A expenses as a
percentage of net merchandise sales for fiscal 2007 excluding these non-recurring expenses was 43.0%. SG&A expense during fiscal 2006 included non-recurring expenses of $3.1 million related to our terminated merger agreement.
SG&A expense during fiscal 2007 also increased versus the prior year period as a result of the following:
|
|
•
|
|
$6.2 million in increased advertising expenses primarily related to brand advertising, website production and advertising and costs associated with changes to
our store signage;
|
|
|
•
|
|
$4.0 million in increased incentive plan expenses including guaranteed incentives for our CEO hired in July 2007;
|
|
|
•
|
|
$5.2 million in increased professional services costs to support compliance with Sarbanes-Oxley, executive recruiting fees and operations consulting;
|
|
|
•
|
|
$3.6 million of increased payroll and benefits costs resulting from an increase in headcount in our corporate offices, higher payroll rates in our stores, and
a $0.6 million sign-on bonus for our CEO hired in July 2007;
|
|
|
•
|
|
$4.0 million of higher building rent and moving related expenses associated with the move of our corporate campus during 2007;
|
|
|
•
|
|
$3.1 million of increased shipping expenses due to an increase in shipping rates combined with more packages shipped due to increased sales and lower average
units per package; and
|
|
|
•
|
|
$1.8 million increase in program-related costs for our customer loyalty program.
|
These increases in SG&A expense during fiscal 2007 were partially offset by the following:
|
|
•
|
|
a $3.5 million reduction in stock compensation expenses, excluding the impact of the accelerated expense related to our former CEO’s resignation;
|
|
|
•
|
|
a $3.1 million decrease in impairment charges associated with fewer planned store closures;
|
|
|
•
|
|
a $2.3 million reduction in our warehousing and distribution costs primarily related to operating efficiencies and reduced headcount;
|
|
|
•
|
|
a decrease of $2.7 million related to our depreciation and amortization expenses primarily due to the fair value adjustments we recorded in conjunction with
our fresh start accounting that became fully depreciated during mid-2007; and
|
|
|
•
|
|
a $1.5 million decrease in our information technology costs.
|
Gift card breakage reduced SG&A expenses for fiscal 2007 and 2006 by $2.2 million and $2.3 million, respectively.
Impairment of indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
Fiscal
2006
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Impairment of indefinite-lived intangible assets
|
|
$
|
—
|
|
$
|
117,584
|
|
$
|
(117,584
|
)
|
We recorded no impairment charges during fiscal 2007 related to our indefinite-lived assets.
50
As a result of interactions with our investment bankers, preliminary indications of interest received
from various third parties during our publicly announced process of evaluating various strategic alternatives, and the significant decline in our common stock price during the third quarter of 2006, we determined that it was more likely than not
that the fair value of our enterprise was below our carrying value. Accordingly, in accordance with SFAS No. 142, we completed impairment tests for our indefinite-lived intangible assets, including our goodwill and trademarks, during the
third quarter of 2006.
The fair value of our trademarks during the third quarter of 2006 was determined using an income approach, which
calculated the discounted present value of estimated future royalty cash flows of our net merchandise sales, which was based upon our five-year long-range plan; a terminal value growth rate of 3.5% and a discount rate of 17.5% and was estimated to
be $185 million, equal to their net book value. Accordingly, no impairment charge was recorded during the third quarter of 2006 related to our trademarks.
Our enterprise value for purposes of our goodwill impairment test during the third quarter of 2006 was estimated using an income approach (e.g. discounted cash flow model) and was further supported by valuations using
market comparables and market transactions for other retail companies and our common stock price, including a control premium. The premise of the discounted cash flow model was based upon our five-year long-range plan related to the future cash
flows of our primary assets. The discounted cash flow valuation used a discount rate of 14.5%, and a terminal value growth rate of 3.5%. In order to assess our fair value in its entirety, following the calculation of the discounted cash flows of our
primary assets, the book value of our interest-bearing debt was deducted and the fair values of the assets not contributing to the discounted cash flows of our primary assets, including our NOL carryforwards, were added to derive the fair value of
our total net assets. Upon completion of step one of the goodwill impairment test, our estimated enterprise fair value was less than the carrying value of our net book value and long-term debt. Accordingly, we completed step two of the goodwill
impairment test, which included comparing the implied fair value of the company with the carrying amount of goodwill. Upon completion of step two of the goodwill impairment test, we recorded an impairment charge of $117.6 million related to our
goodwill.
Equity in losses of foreign joint ventures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Change
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
Equity in losses of foreign joint ventures
|
|
$
|
(1,147
|
)
|
|
$
|
(3,413
|
)
|
|
$
|
2,266
|
Losses of foreign joint ventures for fiscal 2007 of $1.1 million included our share of losses
related to Eddie Bauer Germany of $0.9 million and $0.2 million from Eddie Bauer Japan. Losses of foreign joint ventures for fiscal 2006 of $3.4 million included losses related to Eddie Bauer Germany of $4.2 million and earnings
from Eddie Bauer Japan of $0.8 million. We recognized equity losses of $0.6 million in fiscal 2007 and $0.7 million in fiscal 2006 (December) from Eddie Bauer Germany’s estimated losses related to a number of store closings. See
further discussion above of the termination of our joint venture interest in Eddie Bauer Germany effective March 1, 2008.
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
Fiscal
2006
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Interest expense
|
|
$
|
26,698
|
|
$
|
26,928
|
|
$
|
(230
|
)
|
Despite the fact that interest expense remained relatively flat during fiscal 2007 as compared to
the prior year, interest expense during fiscal 2007 included $4.5 million of interest associated with the $75 million of
51
Notes we issued in April 2007. The $4.5 million of interest expense related to our Notes included $1.6 million of discount amortization. Offsetting
the increase in interest expense from the Notes was a decrease in interest expense of $3.3 million related to our Amended Term Loan due to the lower outstanding principal balance as well as a lower average interest rate resulting from our
refinancing of the term loan in April 2007. Additionally, interest expense on our revolving line of credit decreased $0.5 million due to lower average outstanding borrowings and a lower average interest rate. During fiscal 2007 and 2006, we
capitalized interest of $1.6 million and $0.8 million, respectively.
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
Change
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Net accretion of financing receivables/payables
|
|
$
|
5,531
|
|
|
$
|
1,791
|
|
$
|
3,740
|
|
|
Gain on fair value adjustment of net financing receivables/payables
|
|
|
—
|
|
|
|
466
|
|
|
(466
|
)
|
|
Gain on sale of net financing receivables/payables
|
|
|
9,303
|
|
|
|
—
|
|
|
9,303
|
|
|
Loss on extinguishment of debt
|
|
|
(3,284
|
)
|
|
|
—
|
|
|
(3,284
|
)
|
|
Fair value adjustment of convertible note embedded derivative liability
|
|
|
10,483
|
|
|
|
—
|
|
|
10,483
|
|
|
Interest rate swap gain
|
|
|
228
|
|
|
|
—
|
|
|
228
|
|
|
Interest income and other
|
|
|
1,434
|
|
|
|
774
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
23,695
|
|
|
$
|
3,031
|
|
$
|
20,664
|
|
Other income (expense), net for fiscal 2007 of $23.7 million included $10.5 million of
income associated with the change in fair value of our convertible note embedded derivative liability; a $9.3 million gain on the sale of our net financing receivables; $5.5 million of net accretion income related to the financing
receivables/payables prior to their sale in December 2007; $1.4 million of interest income; and a $0.2 million gain associated with the interest rate swap we terminated in April 2007. These items were partially offset by the
$3.3 million loss we recorded related to the extinguishment and refinancing of our term loan in April 2007. Other income (expense), net for fiscal 2006 included $1.8 million of net accretion income; a $0.5 million net gain associated
with the receivables and liabilities associated with our securitization interests and $0.7 million of interest income. The increase in net accretion income related to our financing receivables/payables in fiscal 2007 versus fiscal 2006 resulted
from an increase in actual and projected collections related to financing charges and principal amounts and higher collections of previously written off accounts. See further discussion of the sale of our financing receivables and the gain we
recognized during the fourth quarter of 2007 within “
Note 5—Notes to Consolidated Financial Statements
” below.
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
Fiscal
2006
|
|
Change
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
($ in thousands)
|
|
Income tax expense
|
|
$
|
69,193
|
|
$
|
65,531
|
|
$
|
3,662
|
Despite having a pre-tax loss for fiscal 2007, we incurred income tax expense of
$69.2 million. The primary differences between our calculated federal tax benefit of $11.4 million (35% of our pre-tax loss of $32.5 million) and our income tax expense of $69.2 million resulted from tax expense associated with
the cash we collected related to our financing receivables, including the cash we collected in December 2007 related to the sale of the receivables, and increases to our valuation allowance requirements associated with our federal and state NOLs.
The cash we collected related to the financing receivables was included in our taxable income; however the majority of the related note payments (equal to 90% of the cash receipts) we made to the Spiegel creditor’s trust
52
were non-deductible for income tax purposes. The cash collected on the receivables and related sale resulted in federal tax expense of $56.6 million for
fiscal 2007.
During the fourth quarter of 2007, we recorded an income tax expense of $23.0 million to increase our valuation
allowance related to our federal NOLs, resulting from several changes in circumstances during 2007. First, we determined that the additional restrictions on federal NOL utilization under Section 382 resulting from the anticipated change in
control upon expiration of the ownership limitations established within our certification of incorporation were no longer likely to occur. We made this conclusion as a result of the terminated merger agreement which occurred in fiscal 2007.
Additionally, we had assumed that our board of directors would lift the ownership restrictions effective January 1, 2008, which did not occur. Accordingly, we used the original Section 382 limitation resulting from the bankruptcy-related
ownership change, and no longer assumed a second change in control upon the lapse of the ownership limitations, when determining the valuation allowance required as of December 29, 2007. This change resulted in a higher Section 382
limitation, allowing for increased NOL utilization in the future. Also, in determining the amount of NOL carryforwards that were more likely than not expected to be realized, we determined that we would take into account only our projected taxable
income for the next three fiscal years. We changed our assumption related to future years in which we could rely on having taxable income due to our recent history of book losses and taxable losses when excluding the taxable income generated by our
financing receivables which we sold in December 2007.
Also during the fourth quarter of 2007, we recognized $1.5 million of income
tax expense related to state NOLs we generated in 2007, which we determined needed a full valuation allowance as we anticipated that these NOLs would expire unused. Additionally, in the course of preparing our 2006 state income tax returns
during the fourth quarter of 2007, we received additional information from our prior parent company, Spiegel, related to certain state NOLs that existed as of our fresh start reporting date that we had previously assumed a full valuation allowance
against. During the fourth quarter of 2007, we recorded income tax expense and an adjustment to goodwill of $2.7 million for a portion of these NOLs which we utilized during the second half of fiscal 2005 and during fiscal 2006.
Despite having a pre-tax loss for fiscal 2006, we incurred income tax expense of $65.5 million primarily as a result of increases to our valuation
allowance requirements, non-deductible impairment charges related to the goodwill impairment we recognized during the third quarter of 2006 and tax expense associated with the non-deductible interest accretion expense on our securitization interest
liability. Our income tax expense for fiscal 2006 included $71.3 million of expense to increase our valuation allowance related to our NOLs.
Liquidity and Capital Resources
Cash Flow Analysis
Fiscal 2008, Fiscal 2007 and Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
|
Fiscal 2007
(52 weeks)
|
|
|
Fiscal 2006
(52 weeks)
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Cash flow data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
61,729
|
|
|
$
|
39,867
|
|
|
$
|
50,424
|
|
|
Net cash used in investing activities
|
|
$
|
(21,014
|
)
|
|
$
|
(56,248
|
)
|
|
$
|
(45,452
|
)
|
|
Net cash used in financing activities
|
|
$
|
(6,538
|
)
|
|
$
|
(10,011
|
)
|
|
$
|
(26,107
|
)
|
Net cash provided by operating activities
Net cash provided by operating activities for fiscal 2008 totaled $61.7 million, compared to $39.9 million for fiscal 2007 and
$50.4 million for fiscal 2006. Cash generated from our operations when excluding non-cash
53
income (i.e., fair value adjustments of convertible note liability; net accretion income and gains on the sale of our financing receivables; and curtailment
gains associated with our retiree benefit plans) and non-cash expenses (i.e., depreciation and amortization; losses and impairments of property and equipment and intangible assets; equity in losses of joint ventures; stock-based compensation
expense; loss on debt extinguishment; and deferred income taxes) totaled $40.2 million for fiscal 2008, $0.1 million for fiscal 2007 and $35.4 million for fiscal 2006. The $40.1 million increase in cash generated from operations when
excluding non-cash items in fiscal 2008 versus fiscal 2007 resulted primarily from reductions of $48.3 million and $3.9 million in our SG&A and interest expense, respectively, which was partially offset by a $15.4 million decrease in our gross
margin. The $35.3 million decrease in cash generated from operations when excluding non-cash items in fiscal 2007 versus fiscal 2006 resulted primarily from the $27.4 million decrease in our operating income when excluding the
$117.6 million goodwill impairment charge recorded in fiscal 2006. The decline in our operating income in fiscal 2007 versus the prior year was driven primarily by the $30.6 million increase in our SG&A expenses.
Changes in our operating assets and liabilities in 2008 resulted in positive cash from working capital of $18.2 million versus $31.4 million in
fiscal 2007 and $14.5 million in fiscal 2006. The $18.2 million of cash generated from our working capital in fiscal 2008 primarily resulted from a $19.2 million reduction in our inventory levels compared to the prior year end, which was driven
by lower inventory at our retail and outlet stores, as well as our distribution center, and also by an increase of $9.7 million in accounts payable due to timing of inventory receipts. These positive increases to our working capital cash were
partially offset by a $17.1 million decrease in our accrued expenses driven by a $7.8 million reduction in current taxes payable and a $3.5 million decrease in accrued sales returns. The cash generated from our working capital of $31.4 million
in fiscal 2007 resulted primarily from $8.7 million of net cash received related to our receivables and liabilities from securitization interests; $18.7 million of cash generated related to our deferred rent obligations primarily resulting
from cash received during fiscal 2007 related to construction allowances; and increases of $4.5 million for both our accrued expenses and accounts payable balances due to timing of payments at year-end. The cash generated from our working
capital of $14.5 million for fiscal 2006 resulted primarily from the $11.5 million of net cash received related to our receivables and liabilities from securitization interests and $10.9 million of cash generated related to our
deferred rent obligations primarily resulting from cash received during fiscal 2006 related to construction allowances, which were partially offset by $11.6 million of higher inventory levels at the end of fiscal 2006 versus fiscal 2005.
In addition to the cash generated from our working capital, in fiscal 2008 and 2007 we received net cash proceeds of $3.4 million and
$7.4 million, respectively, related to the sale of our financing receivables in December 2007.
Net cash used in investing
activities
Net cash used in investing activities for fiscal 2008 totaled $21.0 million compared to $56.2 million and
$45.5 million for fiscal 2007 and fiscal 2006, respectively. Our net cash used in investing activities for fiscal 2008 included $21.0 million of capital expenditures related to new store openings and store remodels and capital expenditures
related to capitalized internal use software. We capitalized approximately $5.0 million in internal use software costs during fiscal 2008, which included costs associated with the enhancement of our eddiebauer.com website and a labor scheduling
system for our stores. Our net cash used in investing activities for fiscal 2007 included $56.6 million of capital expenditures related to new store openings and store remodels and capital expenditures related to the move of our corporate
headquarters facilities in mid-2007. Our net cash used in investing activities for fiscal 2006 included $45.8 million of capital expenditures related to new store openings and store remodels and capital expenditures related to our IT systems
and corporate facilities.
Net cash used in financing activities
Net cash used in financing activities for fiscal 2008 totaled $6.5 million and included $3.4 million of repayments under our Amended Term Loan and a $3.1
million decrease in our bank overdraft position. Net cash
54
used in financing activities for fiscal 2007 totaled $10.0 million and included $80.7 million of repayments of our Amended Term Loan, including
$48.8 million in conjunction with our refinancing of the term loan in April 2007, $20 million of voluntary prepayments in December 2007 and $7.7 million of repayments required as a result of the sale of our financing receivables in
December 2007. These uses of cash in fiscal 2007 were partially offset by the $71.4 million in net cash proceeds we received from the sale of our $75 million principal convertible notes in April 2007. Net cash used in financing activities
for fiscal 2006 totaled $26.1 million, which primarily included $24.0 million of repayments under our term loan.
Sources
of Liquidity
As of March 27, 2009 we had $268.0 million in outstanding debt from three credit vehicles, including $192.8
million outstanding on our Amended Term Loan; $0.2 million outstanding on our Revolver; and $75 million in Notes. Our primary source of cash is the cash generated from our operations and borrowings under our Revolver. We expect that our cash and
cash equivalents, combined with our cash flows from operations and available borrowings under our Revolver, will be sufficient to fund working capital, capital expenditures and other cash requirements for at least the next twelve months. If sales
and operating cash flow do not increase over time, we may not have sufficient capital resources to fund our operating plan, which may result in our need to seek additional sources of liquidity through the sale of assets, the assumption of additional
debt or the issuance of equity. There can be no assurance that we would be successful in borrowing additional funds at reasonable rates of interest or issuing equity at a favorable valuation, or at all.
Senior Secured Revolving Credit Facility
On June 21, 2005, Eddie Bauer, Inc. executed a loan and security agreement with Bank of America, N.A., General Electric Capital Corporation and The CIT Group/Business Credit, Inc (“the Revolver”). The Revolver is comprised of
a revolving line of credit consisting of revolving loans and letters of credit up to $150 million to fund working capital needs. To facilitate the issuance of our convertible senior notes and the amendment and restatement of our senior secured term
loan in April 2007, Eddie Bauer, Inc. executed a First Amendment and Waiver to a loan and security agreement on April 4, 2007 with the revolving lenders to specifically permit our issuance of the convertible senior notes described below. On
November 26, 2008, the Company, Bank of America, N.A., as agent for the lenders, and the lenders under the Revolver executed a letter agreement waiving an event of default by the Company under its covenants resulting from the Company’s
formation of a subsidiary to assist in sourcing negotiations in Hong Kong.
Advances under the Revolver may not exceed a borrowing base
equal to various percentages of Eddie Bauer, Inc.’s eligible accounts receivable balances and eligible inventory, less specified reserves that can be increased by the lenders from time to time. The Revolver is secured by a first lien on Eddie
Bauer, Inc.’s inventory and certain accounts receivable balances and by a second lien on all of Eddie Bauer, Inc.’s other assets other than our Groveport, Ohio distribution facility. The Revolver is guaranteed by Eddie Bauer and certain of
its subsidiaries. Our availability under the Revolver was $88.4 million as of January 3, 2009. As of January 3, 2009, we had $8.7 million of letters of credit outstanding and no amounts drawn under the Revolver.
Borrowings under the Revolver bear interest at:
|
|
•
|
|
LIBOR plus 1.25% if the average aggregate outstanding (based upon the preceding calendar month) is less than $75 million; or
|
|
|
•
|
|
LIBOR plus 1.50% if the average aggregate outstanding is greater than or equal to $75 million.
|
We are required to pay an unused commitment fee of 0.25% per annum on the unused amount, plus a letter of credit fee. The Revolver is scheduled to
mature on June 21, 2010.
55
The loan agreement requires that at any time the availability under the agreement is less than 10% of the
maximum revolver available, we are required to maintain a consolidated fixed charge coverage ratio (as defined therein) of at least 1.25:1.00. The agreement also limits our capital expenditures (net of landlord contributions) to $60 million in 2008,
and $70 million in 2009 and 2010. There are additional covenants that restrict us from entering into certain merger, consolidation and sale transactions outside the normal course of business; from making certain distributions or changes in our
capital stock; from entering into certain guarantees; from incurring debt and liens subject to limits specified within the agreement; and other customary covenants. In addition, receipt of a going concern opinion on the Company’s financial
statements is a default under the Company’s Revolver. A default under the Revolver is also a default under the Company’s Amended Term Loan, should $5 million or more be outstanding on the Revolver at the time of default. As of
January 3, 2009, our availability under the agreement was not less than 10% of the maximum revolver available.
Senior Secured Term
Loan
On June 21, 2005, Eddie Bauer, Inc. entered into a $300 million senior secured term loan agreement (“Prior Term
Loan”) upon its emergence from bankruptcy. On April 4, 2007, Eddie Bauer, Inc. entered into an Amended and Restated Term Loan Agreement with various lenders, Goldman Sachs Credit Partners L.P., as syndication agent, and JP Morgan Chase
Bank, N.A., as administrative agent (the “Amended Term Loan”). The Amended Term Loan amends the Prior Term Loan. In connection with the Amended Term Loan, $48.8 million of the loans were prepaid, reducing the principal balance of the Prior
Term Loan from $273.8 million to $225 million. We recognized a loss on extinguishment of debt of $3.3 million in April 2007, which represented the unamortized deferred financing fees of the Prior Term Loan and was reflected within other income
(expense), net on our statement of operations. We incurred $6.0 million of financing fees related to the Amended Term Loan and convertible notes issuance (discussed further below), which we capitalized as deferred financing fees. These deferred
financing fees are being amortized over the life of the Amended Term Loan and convertible notes. The Amended Term Loan extends the maturity date of the Prior Term Loan to April 1, 2014, and amends certain covenants of the Prior Term Loan. As of
January 3, 2009, $192.8 million was outstanding under the Amended Term Loan.
Interest under the Amended Term Loan is calculated as
the greater of the prime rate or the federal funds effective rate plus one-half of one percent plus an applicable margin rate in the case of base rate loans, or LIBOR plus an applicable margin rate for Eurodollar loans. Margin rates are updated each
quarter based upon the Company’s previous quarters’ financial results.
The margin rate for base rate loans is;
|
|
•
|
|
2.00% if the Company’s consolidated senior leverage ratio (as defined in the Amended Term Loan) is less than 3.25 to 1.00; or
|
|
|
•
|
|
2.25% if the Company’s consolidated senior leverage ratio is greater than or equal to 3.25 to 1.00.
|
The margin rate for Eurodollar loans is:
|
|
•
|
|
3.00% if the Company’s consolidated senior leverage ratio is less than 3.25 to 1.00; or
|
|
|
•
|
|
3.25% if the Company’s consolidated senior leverage ratio is greater than or equal to 3.25 to 1.00.
|
The applicable margin rates used to calculate interest under the Amended Term Loan was 2.25% for base rate loans and 3.25% for Eurodollar loans for the
first, second and third quarters of fiscal 2008 and 2.00% for base rate loans and 3.00% for Eurodollar loans for the fourth quarter of fiscal 2008. Interest rates (exclusive of the margin percentage) for both base rate loans and Eurodollar loans are
reset on a monthly basis. As of January 3, 2009, the loan balance outstanding under the Amended Term Loan included $69.8 million of base rate loans with an interest rate of 3.25% plus 2.00% for a combined interest rate of 5.25% and $123.0
million of
56
Eurodollar loans with interest rates of LIBOR ranging from 0.45% to 0.47% plus 3.00% depending upon the term of the LIBOR tranche. Interest is payable
quarterly on the last day of each March, June, September and December for base rate loans, and for Eurodollar loans having an interest period of three months or less, the last day of such interest period or for Eurodollar loans having an interest
period of longer than three months, each day that is three months after the first day of such interest period.
The Amended Term Loan is
secured by a first lien on certain real estate assets and trademarks and by a second lien on substantially all of the other assets of the Company, Eddie Bauer, Inc. and its subsidiaries.
In accordance with the Amended Term Loan, we are required to repay $0.6 million on a quarterly basis from June 30, 2007 through December 31,
2013, with the remaining balance due upon maturity of the loan on April 1, 2014. The Amended Term Loan includes mandatory prepayment provisions, including prepayment requirements related to asset sales, future indebtedness, capital
transactions, and a requirement that 50% (reduced to 25% if our consolidated senior secured leverage ratio (as defined therein) on the last day of the relevant fiscal year is not greater than 2.00 to 1.00) of any “excess cash flows,” as
defined in the Amended Term Loan and measured on an annual basis be applied to repayment of the loan. As of January 3, 2009, our excess cash flow payment due was $14.7 million, which was included as current portion of long-term debt on our
consolidated balance sheet. Future principal payments are reduced by prepayments in accordance with the terms of the Amended Term Loan. As discussed in
Note 5
—
Notes to Consolidated Financial Statements
, we sold our interest in our
financing receivables in December 2007, and were required to use the net cash proceeds received from the sale as a payment under our Amended Term Loan. Accordingly, we repaid $7.7 million, $1.7 million and $1.7 million of our outstanding term loan
balance in December 2007 and during the first and second quarters of 2008, respectively. As a result of these prepayments and a $20 million voluntary prepayment in December 2007, we are not required to make any of the scheduled repayments under the
terms of the Amended Term Loan and accordingly the remaining balance outstanding under the Amended Term Loan is not required to be repaid until the Amended Term Loan’s maturity date on April 1, 2014. We are required to make repayments to
the Amended Term Loan resulting from “excess cash flows” and “asset sales”, as such are defined within the Amended Term Loan agreement.
The financial covenants under the Amended Term Loan agreement include:
Our consolidated senior secured
leverage ratio (as defined therein) calculated on a trailing four fiscal quarter basis must be equal to or less than:
|
|
•
|
|
5.00 to 1.00 for the fiscal quarter ending December 31, 2008;
|
|
|
•
|
|
4.00 to 1.00 for the fiscal quarters ending March 31, 2009 and June 30, 2009;
|
|
|
•
|
|
3.75 to 1.00 for the fiscal quarter ending September 30, 2009;
|
|
|
•
|
|
3.50 to 1.00 for the fiscal quarter ending December 31, 2009;
|
|
|
•
|
|
3.25 to 1.00 for each of the fiscal quarters in 2010; and
|
|
|
•
|
|
thereafter reducing on a graduated basis to 2.50 at March 31, 2012 to March 31, 2014.
|
In addition, our consolidated fixed charge coverage ratio (as defined therein) calculated on a trailing four fiscal quarter basis must be equal to or
greater than:
|
|
•
|
|
0.90 to 1.00 for the fiscal quarter ending December 31, 2008;
|
|
|
•
|
|
0.95 to 1.00 for the fiscal quarters ending March 31, 2009 and June 30, 2009;
|
|
|
•
|
|
0.975 to 1.00 for the fiscal quarters ending September 30, 2009 and December 31, 2009; and
|
|
|
•
|
|
thereafter increasing on a graduated basis to 1.10 to 1.00 at March 31, 2012 to March 31, 2014.
|
57
The Amended Term Loan also limits our capital expenditures (net of landlord contributions) to $50 million
in 2008, $60 million in 2009 and $70 million in 2010 through 2014. There are additional covenants that restrict us from entering into certain merger, consolidation and sale transactions outside the normal course of business, making certain
distributions or changes in our capital stock, entering into certain guarantees, incurring debt and liens subject to limits specified within the agreement and other customary covenants. As of January 3, 2009, our most recent quarterly
compliance reporting date, we were in compliance with the covenants of the Amended Term Loan.
The tightening of the senior secured
leverage ratio under the Amended Term Loan at the end of each quarter starting with the first quarter in fiscal 2009, combined with the continued downturn and uncertainty in the U.S. economy, increased the risk that we would not be able to meet this
covenant during fiscal 2009. This uncertainty raised questions about our ability to continue as a going concern. These factors, in turn, placed into jeopardy our ability to meet our covenants under the Revolver. As a result, in April 2009, the
Company and its Amended Term Loan lenders entered into a First Amendment to the Amended Term Loan agreement (the “First Amendment”).
Under the First Amendment, we receive relief from our senior secured leverage and fixed charge coverage ratios through January 2, 2010. Our permitted senior secured leverage ratio will increase to 6.25 to 1.00, 8.00 to 1.00, 9.00 to
1.00 and 7.75 to 1.00 as of the end of the first, second, third and fourth quarters of 2009, respectively, and the consolidated fixed charge coverage ratio will decrease to 0.900 to 1.00, 0.800 to 1.00, 0.775 to 1.00 and 0.800 to 1.00, respectively,
for those quarters. The leverage and fixed charge coverage ratios will then return to the levels set forth in the Amended Term Loan unless we have (i) extended the maturity date of the Revolver by one year or replaced it with another revolving
loan facility having a maturity date of not earlier than June 21, 2011, (ii) converted or retired 75% of the Notes, and (iii) raised an additional $40.0 million in new capital. If such are achieved, the permitted senior secured
leverage ratio will be set at 6.63 to 1.00, 5.50 to 1.00, 4.38 to 1.00 and 3.25 to 1.00, and the permitted fixed charge coverage ratio at 0.85 to 1.00, 0.90 to 1.00, 0.95 to 1.00 and 1.00 to 1.00 as of the end of the first, second, third and fourth
quarters of 2010, respectively. As part of the First Amendment, we have agreed to allow the lenders to provide nominees for two of seven board seats, with the right to provide nominees for a third board seat of eight seats, should the Company not
meet the requirements under the Convertible Note Covenant described below within the deadlines provided in the First Amendment. To be considered, a nominee may not be affiliated with the Amended Term Loan lenders, and must be considered
“independent” pursuant to The NASDAQ Marketplace Rules and the SEC’s rules under Regulation S-K. As part of the First Amendment, the interest rate on the Amended Term Loan is increased to the greater of the following: (i) for
base rate loans, 4.25% plus (A) the prime rate, (B) the federal funds effective rate plus one-half of one percent, (C) a rate equal to the Eurodollar Rate for a one month interest period on such day plus 1%, or (D) 4.00%, or
(ii) for Eurodollar loans, LIBOR plus 5.25%, with LIBOR set at a minimum of 3.00% (but with a 350 basis point cap on the increase over the rate under the Amended Term Loan).
As consideration for execution of the First Amendment, we paid the following: (A) an initial cash amendment fee equal to $5.8 million, of which $1.9
million was paid upon execution of the First Amendment and $3.9 million was earned but payment of which was deferred until November 30, 2009; (B) a 500 basis point “payment-in-kind” (“PIK”) fee, which will be added to
the principal amount of the Amended Term Loan, and accrue PIK interest at the interest rate applicable to the Amended Term Loan, however the PIK fees and interest will not be considered for the calculation of covenants under the Amended Term Loan;
and (C) issuance to the lenders under the Amended Term Loan of $.01 warrants exercisable for 19.9% of the Company’s common stock on a fully-diluted basis subject to adjustment for conversion of the Notes (see below), new capital infusions
of less than $40 million (unless otherwise agreed to) and exercise of equity compensation grants.
The First Amendment contains a covenant
(the “Convertible Note Covenant”) pursuant to which we are obligated to either: (1) retire or convert into equity securities at least 75% in principal value of the outstanding Notes, or (2) raise $50 million in new capital, with
the proceeds used to pay down the Amended Term Loan principal balance. If we fail to comply with the Convertible Note Covenant within 90 days following execution of the First Amendment (which time period may be extended under certain circumstances),
we may obtain two 60-day extensions of the performance period, for the payment upon each extension of a 500 basis point PIK
58
amendment fee and the issuance of $.01 warrants exercisable for 15% of the Company’s common stock on the same fully-diluted basis as the initial warrant
issuance. The potential issuance of common stock to the Noteholders under the Convertible Note Covenant, and the issuance of common stock upon exercise of the warrants issued to the Amended Term Loan lenders may significantly dilute existing
stockholders. If, after the 210-day period, we have not performed the Convertible Note Covenant, we may obtain a waiver of nonperformance by the payment of another 500 basis point PIK fee. The First Amendment requires that we limit capital
expenditures in each of 2009 and 2010 to $20 million, and obtain leasehold mortgages on all leases where the Company has the right to grant the mortgage without landlord consent. We will also seek to receive consent to leasehold mortgages from
landlords for certain other leases.
We have agreed to use commercially reasonable efforts to register the resale of common stock issuable
upon exercise of the warrants issued to our term loan lenders. The warrants cannot be separately sold, and expire on maturity of the Amended Term Loan or its earlier repayment.
If the economy has not rebounded in 2009, we may have difficulty meeting the levels of senior secured leverage and fixed charge covenant ratios in the
Amended Term Loan agreement. If we cannot comply with the Convertible Note Covenant, our debt load will increase by approximately $45 million from PIK fees. Our ongoing operations in a weak economy may not be adequate to support the increased
interest rates and debt loads of the Company.
Convertible Notes
On April 4, 2007, we closed our offering of $75 million aggregate principal amount of 5.25% convertible senior notes (“Notes”). The Notes
have a maturity date of April 1, 2014 and pay interest at an annual rate of 5.25% semiannually in arrears on April 1 and October 1 of each year, beginning October 1, 2007 unless earlier redeemed, repurchased or converted.
The Notes are fully and unconditionally guaranteed by all of our existing and future subsidiaries that are parties to any domestic credit
facilities, whether as a borrower, co-borrower or guarantor, including Eddie Bauer, Inc. The Notes are unsecured and senior obligations of us and rank equally in right of payment with all existing and future senior unsecured indebtedness and senior
in right of payment to any subordinated indebtedness.
Under the Indenture governing the Notes, the Notes were not convertible prior to
January 4, 2009 except upon the occurrence of specified corporate transactions. On September 19, 2008, after obtaining the requisite consent of the noteholders in consideration of our payment of a consent fee in the aggregate amount of
approximately $0.2 million, we, certain of our subsidiaries and The Bank of New York Mellon, as trustee, entered into a Supplemental Indenture that amends the Indenture. The Supplemental Indenture allowed us, upon the receipt of the requisite
stockholder consent, to extend the expiration date of the existing 4.75% limitation on ownership of our securities contained in our Certificate of Incorporation from January 4, 2009 to January 1, 2012, provided the Ownership Limitation as
extended does not apply to conversion of the Notes to our common stock. On November 5, 2008, our stockholders approved the amendment to our Certificate of Incorporation to extend the Ownership Limitation to January 1, 2012.
Subsequent to January 4, 2009 and prior to April 1, 2013, holders may convert all or a portion of their Notes under the following
circumstances: (i) during any calendar quarter commencing after June 30, 2007 if the last reported sale price of our common stock is greater than or equal to 120% of the conversion price for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the preceding calendar quarter; (ii) during the five business day period after any 10 consecutive trading-day period (“measurement period”) in which the trading price per
$1,000 principal amount of Notes for each day in the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such day; or (iii) upon the occurrence of specified
corporate transactions, as set forth in the Indenture governing the Notes. On or after April 1, 2013, holders may convert their Notes at any time prior to 5:00 pm, New York City time, on the business day immediately preceding the maturity date.
The initial conversion rate, which is
59
subject to adjustment, for the Notes was 73.8007 shares per $1,000 principal amount of Notes (which represented an initial conversion price of approximately
$13.55 per share). Upon conversion, we have the right to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of our common stock, provided that if the Notes are converted prior to January 4, 2009, we must pay
cash in settlement of the Notes. A holder will receive cash in lieu of any fractional shares.
Upon the occurrence of certain fundamental
changes, including certain change of control transactions as set forth in the Indenture governing the Notes, we will be required to offer to repurchase the Notes for cash at 100% of the principal amount thereof plus accrued and unpaid interest and
additional interest, if any, to but not including the date of repurchase. In the event of certain events of default under the Indenture either the trustee thereunder or the holders of at least 25% in principal amount of the then-outstanding Notes
may declare 100% of the principal of the Notes and accrued and unpaid interest, including additional interest, to be due and payable.
As a
result of the requirement that we settle any conversion of the Notes occurring prior to January 4, 2009 in cash, the conversion features contained within the Notes were deemed to be an embedded derivative under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
(“SFAS 133”). In accordance with SFAS 133, the embedded derivative related to the conversion features required bifurcation from the debt component of the Notes and a separate valuation.
We recognized the embedded derivative as an asset or liability on our balance sheet and measured it at its estimated fair value, and recognized changes in its estimated fair value in other income (expense), net in the period of change.
We estimated the fair value of the embedded derivative using the Black-Scholes model which resulted in an estimated fair value of $1.7 million and
$10.7 million as of January 3, 2009 and December 29, 2007, respectively. The estimated fair value of the conversion features is recorded with the convertible note liability on our balance sheet. We recognized income of $9.0 million and
$10.5 million within other income (expense), net during fiscal 2008 and 2007, respectively, related to the fair value adjustments of the liability. The decline in the estimated fair value of our derivative liability from $21.2 million as of the
issuance date for the Notes was primarily a result of the decline in our common stock price.
As a result of the bifurcation of the
embedded derivative related to the conversion features of the Notes under SFAS 133, the carrying value of the Notes at issuance was $53.8 million. We are accreting the difference between the face value of the Notes and the carrying value, which
totaled $17.3 million and $19.6 million as of January 3, 2009 and December 29, 2007, respectively, as a charge to interest expense using the effective interest rate method over the term of the Notes. We recognized $2.3 million and $1.6
million of discount amortization within interest expense during fiscal 2008 and 2007, respectively, which resulted in an effective interest rate of approximately 11.05% related to the Notes.
Effective for fiscal 2009, we will no longer be required to recognize the changes in the fair value of the conversion features through our statement of
operations as the conversion features will no longer meet the criteria of an embedded derivative liability as we will not be required to settle any conversions in cash after January 4, 2009. Additionally, effective January 4, 2009, the
Company adopted FSP APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement
), which resulted in a portion of the carrying value of the Notes to be reclassified to
stockholders’ equity.
Interest Rate Swap Agreements
We use derivative instruments primarily to manage exposures to fluctuations in interest rates, to lower our overall costs of financing and to manage the
mix of floating- and fixed-rate debt in our portfolio. Our derivative instruments as of January 3, 2009 included an interest rate swap agreement with Bank of America. Additionally, our Notes included an embedded derivative as discussed further
above. The interest rate swap agreement had a notional amount of $98.3 million and $99.3 million as of January 3, 2009 and December 29, 2007, respectively. The interest rate swap agreement effectively converts a portion of the outstanding
amount under the Amended
60
Term Loan, which has a floating rate of interest, to a fixed-rate by having us pay fixed-rate amounts in exchange for the receipt of the amount of the
floating rate interest payments. Under the terms of the interest rate swap agreement, a monthly net settlement is made for the difference between the fixed rate of 5.05% and the variable rate based upon the monthly LIBOR rate on the notional amount
of the interest rate swap. No portion of the interest rate swap was excluded from the assessment of the hedge’s effectiveness. Because all critical terms of the derivative hedging instrument and the hedged forecasted transaction were not
identical, the interest rate swap did not qualify for the “shortcut method” of accounting as defined in SFAS 133. On a quarterly basis, we assess and measure the effectiveness of the cash flow hedge using the changes in variable cash flows
method. In performing our assessments as of January 3, 2009 and December 29, 2007, the fair values of the interest rate swap were determined to be a liabilities of $10.4 million and $4.1 million, respectively, and the changes in the cash
flows of the derivative hedging instrument were within 80 to 125 percent of the opposite change in the cash flows of the hedged forecasted transaction and therefore we concluded that the hedge was highly effective. Accordingly, we recorded the
effective portion of the cash flow hedge, which totaled $10.4 million as of January 3, 2009 and $4.1 million ($2.6 million net of tax) at December 29, 2007, within other comprehensive loss on our balance sheet. No amount of the cash flow
hedge was determined to be ineffective. The amounts reflected in other comprehensive loss will be reclassified into interest expense in the same period in which the hedged debt affects interest expense. We expect the cash flow hedge to be highly
effective and therefore estimate that no amounts will be reclassified into interest expense within the next 12 months. The interest rate swap agreement is scheduled to terminate in April 2012, although the swap agreement can be terminated by Bank of
America if the Company no longer has the Revolver, which expires in 2010, with Bank of America. There is a breakage fee due upon termination of the swap agreement.
As a result of the April 2009 First Amendment to our Amended Term Loan as discussed further above, we will need to reassess the effectiveness of our interest rate swap agreement. If we determine that our interest rate
swap is no longer an effective hedge, we may be required to record changes in the fair value of the swap through our earnings as opposed to other comprehensive income (loss).
Financial Condition
At
January 3, 2009 Compared to December 29, 2007
Our total assets were $596.9 million as of January 3, 2009, down
$214.5 million, or 26.4% from December 29, 2007. Current assets as of January 3, 2009 were $249.9 million, down $24.2 million from $274.1 million as of December 29, 2007. The decline in our current assets was
driven primarily by a $30.7 million decrease in our restricted cash as a result of the collection of the holdback amounts in fiscal 2008 related to our financing receivables which we sold in December 2007 and a $21.8 million decrease in our
inventory balance due to improved inventory management. These decreases in our current assets were partially offset by a $32.8 million increase in our cash and cash equivalents (see further discussion above under
“Liquidity and Capital
Resources—Cash Flow Analysis”
).
Non-current assets as of January 3, 2009 were $347.0 million, down
$190.3 million from $537.3 million as of December 29, 2007. The decline in our non-current assets was driven primarily by decreases in our trademarks and goodwill resulting from the impairment charges of $80.0 million and $64.6
million, respectively, we recorded during the fourth quarter. Additionally, our property and equipment balance declined by $31.6 million due to depreciation and amortization and impairment charges recorded in fiscal 2008.
Our total liabilities were $524.1 million as of January 3, 2009, a decrease of $31.0 million, or 5.6%, from December 29, 2007.
Current liabilities as of January 3, 2009 were $173.6 million, down $28.7 million from $202.3 million as of December 29, 2007. The decline in our current liabilities was driven by a $14.5 million decrease in our accrued
expenses which included decreases of $3.5 million in our allowance for sales returns and $5.4 million in current taxes payable. In addition, our current liabilities to the Spiegel Creditor Trust decreased $30.7 million as a result of our payments
made associated with the holdback amounts we received during the first and second quarters of 2008. These decreases in our current liabilities were partially offset by $14.7 million in current portion of our long-term debt, which represented the
excess cash flow payment we are required to make during the first quarter of fiscal 2009 related to our Amended Term Loan.
61
Non-current liabilities as of January 3, 2009 were $350.5 million, a decrease of
$2.4 million from $352.9 million as of December 29, 2007. The decrease in our non-current liabilities included an $18.1 million decrease in our Amended Term Loan, due to the $14.7 million excess cash flow payment reflected within
current liabilities as of January 3, 2009, and a $6.7 million decrease in our convertible note liability. The decrease in our convertible note liability resulted from a $9.0 million decrease in the estimated fair value of the embedded
derivative we recognize related to the conversion features of our Notes driven by the decrease in our common stock price since the prior year-end, which was partially offset by the discount amortization we recorded in fiscal 2008. These decreases
were offset by a $13.1 million increase in our pension and other post-retirement benefit liability, due to a decline in the fair value of our pension plan assets since the prior year-end, and a $4.8 million increase in our other long-term
liabilities, which reflected an increase in the liability related to the fair value of our interest rate swap.
Our stockholders’
equity as of January 3, 2009 totaled $72.8 million, down $183.5 million from December 29, 2007, driven primarily by our net loss recorded for fiscal 2008.
Cash Requirements
Our primary
cash requirements for fiscal 2009 are to fund working capital to support net merchandise sales; capital expenditures to refurbish and remodel existing stores, open new retail stores and spending to support our corporate functions, including our
distribution center and information technology systems; and to make interest payments on our Amended Term Loan and Notes. The execution of the First Amendment to the Amended Term Loan as discussed further above increases the amount of cash required
in 2009 by $5.8 million of upfront amendment fees and the increase in the interest rate to the greater of the following: (i) for base rate loans, 4.25% plus (A) the prime rate, (B) the federal funds effective rate plus one-half of one
percent, (C) a rate equal to the Eurodollar Rate for a one month interest period on such day plus 1%, or (D) 4.00%, or (ii) for Eurodollar loans, LIBOR plus 5.25%, with LIBOR set at a minimum of 3.00% (but with a 350 basis point cap
on the increase over the rate under the Amended Term Loan).
During fiscal 2008, we spent $21.0 million on capital expenditures excluding
landlord contributions ($16.8 million net of landlord contributions). We anticipate that our capital expenditures for 2009 will be approximately $15.0 million, net of landlord contributions, of which approximately 80% relates to opening and
remodeling of stores in accordance with our plans to realign our stores. The First Amendment limits our capital expenditures in each of 2009 and 2010 to $20 million.
We anticipate opening three new retail and no new outlet stores during fiscal 2009. We finance the opening of new stores through cash provided by operations and our revolving credit facility. We estimate that capital
expenditures to open the new retail stores during fiscal 2009 will approximate $0.8 million. In most cases, this capital investment is funded partially by the landlords of the leased sites. The portion funded by landlords typically ranges from 30%
to 60%. Additionally, we expect initial inventory purchases for the new retail stores to average approximately $0.2 million.
Our liquidity
levels and the need to fund our cash requirements through the use of our revolving credit facility will be driven by our net sales and profitability levels, changes in our working capital, the timing of our capital expenditures and by interest
payments on our Amended Term Loan and Notes. Cash generated from our net sales and profitability, and somewhat to a lesser extent our changes in working capital, are driven by the seasonality of our business, with a disproportionate amount of net
merchandise sales and operating cash flows occurring in the fourth fiscal quarter of each year. Additionally, cash generated from our net sales and profitability are impacted by the levels of and timing of markdowns that we take in order to drive
sales. Seasonality also impacts the levels of our working capital, in that we typically experience higher levels of net accounts receivables and sales driven accrued expenses, such as sales and use taxes, sales allowances, and deferred revenues
during the fourth quarter of each year. Conversely, we typically experience a decline in both our net accounts receivable and sales driven accrued expenses during the first and second quarters of each year. Additionally, we normally increase our
inventory levels during the third quarter in anticipation of higher sales during the third and fourth quarters.
62
We do not anticipate significant cash requirements for U.S. federal income tax payments during 2009 due
to existing, unutilized NOL carryforwards we assumed when Spiegel transferred ownership of its subsidiaries, FSAC and SAC, to us upon our emergence from bankruptcy. We are required to make tax payments associated with income we generate related to
our Canadian operations. We do not anticipate paying any dividends on our common stock in the foreseeable future. In addition, covenants in our Amended Term Loan agreement and revolving credit facility restrict our ability to pay dividends and may
prohibit certain other payments.
Contractual Obligations
Contractual Obligations as of January 3, 2009 (unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
After
5 Years
|
|
|
|
($ in thousands)
|
|
Long-term debt obligations(1)
|
|
$
|
192,769
|
|
$
|
14,693
|
|
$
|
—
|
|
$
|
—
|
|
$
|
178,076
|
|
Interest on long-term debt(2)
|
|
$
|
62,535
|
|
$
|
11,891
|
|
$
|
25,252
|
|
$
|
22,573
|
|
$
|
2,819
|
|
Convertible notes(3)
|
|
$
|
75,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
75,000
|
|
Interest on convertible notes(3)
|
|
$
|
20,913
|
|
$
|
3,981
|
|
$
|
7,963
|
|
$
|
7,963
|
|
$
|
1,006
|
|
Other long-term liabilities(4)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Operating lease obligations(5)
|
|
$
|
422,284
|
|
$
|
73,756
|
|
$
|
121,463
|
|
$
|
83,246
|
|
$
|
143,819
|
|
Purchase obligations(6)
|
|
$
|
155,500
|
|
$
|
155,471
|
|
$
|
29
|
|
$
|
—
|
|
$
|
—
|
|
Other contractual obligations(7)
|
|
$
|
1,790
|
|
$
|
1,736
|
|
$
|
54
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
930,791
|
|
$
|
261,528
|
|
$
|
154,761
|
|
$
|
113,782
|
|
$
|
400,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes principal payments due under our Amended Term Loan excluding any mandatory prepayment provisions subsequent to January 3, 2009 discussed above under
“—
Sources of Liquidity—Senior Secured Term Loan
.” This table does not include any increased principal amounts due to payment-in-kind fees payable in 2014 under the First Amendment to the Amended Term Loan.
|
|
(2)
|
Represents interest due under our Amended Term Loan discussed above under
“
—Sources of Liquidity—Senior Secured Term Loan
”. Interest amounts
include the impact of the interest rate swap agreement we entered into in April 2007. Interest payments include the assumption of approximately 50% of the outstanding loan at a fixed rate of 8.05% (interest rate swap rate of 5.05% plus margin of
3.00%) and 50% of the outstanding loan using implied forward LIBOR rates based upon Eurodollar futures rates plus a margin of 3.00%. See “—
Sources of Liquidity—Interest Rate Swap Agreement
”
above.
|
In April 2009, we executed a First Amendment to our Amended Term Loan which included an increase in our interest rates. Cash
interest payments, after taking into consideration the First Amendment, are estimated to be $18.1 million for fiscal 2009, $36.2 million for fiscal 2010 – 2011, $32.8 million for fiscal 2012 – 2013, and $4.0 million for fiscal 2014. In
addition to the increased interest payments, we are required to pay a cash fee of $5.8 million in fiscal 2009 related to execution of the First Amendment.
|
(3)
|
Interest and principal payments related to our Notes assume no conversion prior to their scheduled maturity date in April 2014. As more fully described above under
“Convertible Notes”
, the holders of the Notes have rights which may cause us to repurchase up to the entire aggregate face amount of the notes then outstanding at certain dates in the future prior to their scheduled maturity date.
|
|
(4)
|
Other long-term liabilities as of January 3, 2009 primarily included the fair value of our interest rate swap, pension and post-retirement obligations, deferred rent incentives
and unfavorable lease liabilities. Other long-term liabilities have been excluded from the contractual obligations table as they either (i) do not require cash payments, such as deferred rent incentives and unfavorable lease liabilities; or
(ii) the timing of payment is uncertain, including our interest rate swap liability and pension and post-retirement obligations. See further discussion below of our pension and post-retirement obligations.
|
|
(5)
|
Includes future minimum lease payments under non-cancelable operating leases for retail stores, corporate headquarters, call center and distribution facilities. Amounts do not
include costs for maintenance, common areas or real estate taxes.
|
|
(6)
|
Includes open purchase orders with vendors for merchandise not yet received or recorded on our balance sheet.
|
|
(7)
|
Includes facility-related contracts, such as utility and telecommunication services; information technology contracts; printing services; and other miscellaneous business
agreements.
|
63
In addition to the above contractual obligations, we had $8.7 million of letters of credit
outstanding as of January 3, 2009 under our Revolver. See further discussion of our letters of credit under “
Off-Balance Sheet Arrangements
” below.
Other Contractual Obligations
Insurance and Self-insurance
We use a combination of insurance and self-insurance to cover a number of risks, including workers’ compensation, general liability, property and
automobile liability and employee-related health care benefits, a portion of which is reimbursed by our employees. Liabilities associated with these risks are estimated in part by considering historical claims experience, demographic factors,
severity factors and other actuarial assumptions. We believe that we have taken reasonable steps to ensure that we are adequately accrued for costs incurred related to these programs at January 3, 2009.
Pension and Other Post-retirement Benefit Obligations
We assumed the Spiegel pension and other post-retirement plans as of the effective date of our emergence from bankruptcy. Our funding obligations and liabilities under the terms of the plans are determined using
certain actuarial assumptions, including a discount rate and an expected long-term rate of return on plan assets. These assumptions are reviewed and updated annually.
Effective December 30, 2006, we adopted SFAS 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132R)
(“SFAS 158”). SFAS 158 requires companies to (i) recognize in their statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (ii) measure a
plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and (iii) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes
occur via reporting them within other comprehensive income (loss). SFAS 158 does not change the amounts recognized in the statement of operations as net periodic benefit cost. In accordance with measurement provisions of SFAS 158, we remeasured
our pension and other post-retirement plan’s assets and obligations as of December 31, 2008.
We assumed a discount rate of 5.50%
for our pension obligation and 6.05% for our other post-retirement obligations, as of December 31, 2008, our most recent measurement date, based upon an analysis of the Moody’s Aa corporate bond rate and the cash flow projections of the
respective benefit programs.
Our expected long-term rate of return on plan assets assumption for our pension plan was derived from a study
which included a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of earnings
expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate. Based upon the
most recent study, we have assumed a long-term return of 8.0% related to our pension assets as of the December 31, 2008 measurement date.
As of December 31, 2008, our most recent measurement date, our estimated unfunded pension obligation was approximately $19.3 million and our estimated unfunded obligation related to our post-retirement benefit plans was
$3.5 million. We made contributions of $0.6 million to our post-retirement benefit plans and no contributions to our pension plan during fiscal 2008. Our contributions to the post-retirement benefit plans and pension plan are estimated to
total $0.2 million and $0.7 million, respectively, for fiscal 2009.
Unrecognized losses in pension assets, including $11.8 million
which we experienced during fiscal 2008, have been reflected in accumulated other comprehensive loss on our balance sheet and will be amortized into
64
pension expense in future periods. In light of the recent market volatility and overall investment losses of our pension assets in fiscal 2008, the funding
requirements to our pension plan for the 2009 fiscal year are greater than previously anticipated and will result in our recognizing pension expense in fiscal 2009 versus a pension benefit that we recognized in fiscal 2008.
Off-Balance Sheet Arrangements
As of January 3, 2009, we had $8.7 million in outstanding stand-by letters of credit. We had no other off-balance sheet financing arrangements as of January 3, 2009. We use stand-by letters of credit to support our workers’
compensation insurance and import customs bond programs. Letters of credit, primarily merchandise vendor letters of credit, are important to our operations because they allow us to have payment on our behalf guaranteed by a bank which then pays the
vendor a given amount of money upon presentation of specific documents demonstrating that merchandise has shipped. We subsequently record the payable to the vendor on our balance sheet at the time of merchandise title transfer. We had no letters of
credit outstanding as of January 3, 2009 for the sourcing or purchase of inventory, and at this time, we are not aware of any material future risks to the availability of letters of credit.
Seasonality
Historically, our operations have been
seasonal, with a disproportionate amount of net merchandise sales occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season. During fiscal 2008, the fourth fiscal quarter accounted for
approximately 37% of our net merchandise sales. As a result of this seasonality, any factors negatively affecting us during the fourth fiscal quarter of any year, including adverse weather or unfavorable economic conditions, could have a material
adverse effect on our financial condition and results of operations for the entire year. The impact of seasonality on results of operations is more pronounced since the level of certain fixed costs, such as occupancy and overhead expenses, do not
vary with sales. Our quarterly results of operations also may fluctuate based upon such factors as the timing of certain holiday seasons, the number and timing of new store openings, the amount of net merchandise sales contributed by new and
existing stores, the timing and level of markdowns, store closings, refurbishments and relocations, competitive factors, weather and general economic conditions. Accordingly, results for individual quarters are not necessarily indicative of the
results to be expected for the entire fiscal year.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and revenues and expenses during the periods
reported. We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.
There are certain estimates that we believe require significant judgment in the preparation of our financial statements. We consider an
accounting estimate to be critical if:
|
|
•
|
|
It requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making
the estimate; and
|
|
|
•
|
|
Changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.
|
We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our
board of directors and the Audit Committee has reviewed our disclosure related to them, as presented below.
65
The following represents the nature of and rationale for our critical accounting estimates. There have
been no significant changes to our critical accounting policies and estimates since our prior year-end.
Revenue recognition
Nature of Critical Estimate
Merchandise sales.
We recognize revenues and the related costs of sales related to our store sales at the time of sale when the customer pays for the merchandise. For sales in our direct channels, including our catalog sales and
sales through our website, revenue and the related costs of sales are recognized when the product is estimated to be received by the customer.
Sales returns.
We are required to make estimates of future sales returns related to current period sales.
Licensing revenues.
We have licensing arrangements with various consumer product manufacturers and other retailers. In certain cases, our licensing revenues are based upon the net sales of the licensed products and therefore we
are reliant on the licensee to provide us with their net sales. At times, the net sales information for the licensed products is not available to us prior to the issuance of our financial statements. In these cases, we are required to make an
estimate of our licensing revenues.
Assumptions/Approach Used
Merchandise sales.
In order to properly state our revenues and related costs of sales related to sales in our direct channels, we defer
revenue and costs of sales of goods estimated to be in transit to the customer based on our experience of delivery times of the carrier used.
Sales returns.
We base our estimates for future sales returns on historical returns experience, taking into consideration current trends.
Licensing revenue.
If net sales of the licensed product are not available, we estimate our licensing revenues based upon historical sales experience for the product and by obtaining estimated net sales
data from the licensee.
Effect if Different Assumptions Used
Merchandise sales.
Our revenue, costs of sales and gross margin would vary if different assumptions were used as to the estimated goods
in-transit to the customer. Our average daily sales from our direct channels for fiscal 2008, 2007 and 2006 were $0.7 million, $0.8 million and $0.7 million, respectively.
Sales returns.
Our revenue, costs of sales and gross margin would vary if different assumptions were used to estimate our sales returns. Our
allowance for sales returns at the end of fiscal 2008 and 2007 were $11.6 million and $15.1 million, respectively.
Licensing
revenue.
Our revenue related to our licensing agreements would vary if actual net sales for the licensed products turn out to be different than our estimates. Our licensing revenues for fiscal 2008, 2007 and 2006 were $12.8 million,
$13.8 million and $15.7 million, respectively.
Inventory valuation
Nature of Critical Estimate
Inventory valuation.
We carry our inventories at the lower of cost or market. Cost is determined by the weighted average cost method and includes certain overhead and internal freight costs capitalized to inventory. Market is
determined based upon the estimated net realizable value, which is generally the estimated selling price
66
of the merchandise. We record reserves against our inventory balance for excess and slow moving inventory that are not expected to be sold at or above cost
plus cost of disposal and a normal selling margin. Excess and slow moving inventories are typically disposed of through markdowns, sales in our outlet stores, or through liquidations.
Assumptions/Approach Used
Inventory valuation.
We base our estimated inventory reserves on historical experience related to the sale and amount of markdowns previously taken on similar categories of inventory, as well as taking into consideration the age
of the inventory; inventory levels for the product, including additional outstanding purchase orders; anticipated methods of disposal and new, similar products expected to be sold.
Effect if Different Assumptions Used
Inventory valuation.
Our results of operations in future periods could be negatively impacted if we fail to properly estimate the amount of write down of our inventory values. Our inventory valuation reserves at the end of
fiscal 2008 and 2007 were $7.5 million and $8.8 million, respectively.
Valuation of long-lived assets
Nature of Critical Estimate
Fair
values of property and equipment.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-lived Assets
(“SFAS 144”), we review finite-lived
long-lived assets, principally consisting of property and equipment and leasehold improvements at our stores, whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. For assets we
intend to hold and use, if the total expected future undiscounted cash flows from the asset group is less than the carrying amount of the asset group, an impairment loss is recognized for the difference between the fair value and the carrying value
of the asset group. For assets we plan to dispose of, an impairment loss is recognized if the carrying amount of the assets in the disposal group is more than the fair value, net of the costs of disposal. The impairment tests require us to estimate
the undiscounted cash flows and fair value of the asset groups.
Fair values of indefinite-lived intangible assets.
We review
indefinite-lived intangible assets, consisting of our trademarks and goodwill, based upon the requirements of SFAS No. 142,
Goodwill and Other Intangible Assets
(“SFAS 142”). SFAS 142 requires us to test our
goodwill and trademarks for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would indicate that the intangible asset may be impaired. We perform our annual impairment reviews for goodwill and
trademarks during the fourth quarter of each fiscal year. The impairment tests require us to estimate the fair value of our trademarks and our overall business enterprise value.
Assumptions/Approach Used
Fair values of property and equipment.
When analyzing finite,
long-lived assets for potential impairment, significant assumptions are used in determining the undiscounted cash flows of the asset group. In the case of our property and equipment at our retail and outlet stores, each asset group represents a
store location. Projected undiscounted cash flows for each store’s asset group are primarily based upon the historical cash flows of the store.
Fair values of indefinite-lived intangible assets.
We estimate the fair value of our trademarks using an income approach, which utilizes a discounted cash flow model. We estimate the fair value of our
overall business enterprise value also using an income approach. We support the value as determined by the discounted cash flow
67
model, by market multiple approach models, and also by taking into consideration our common stock price, including a control premium. Significant assumptions
are used when determining the fair values of our trademarks and overall enterprise valuation, including future cash flows of our primary assets; our terminal value growth rates; and our weighted average cost of capital (e.g. discount rate).
Additionally, we are required to estimate the fair value of our non- primary assets, which includes our tax net operating losses. Estimates of future cash flows are based upon our experience, historical operations of the stores, catalogs and
website, estimates of future profitability and economic conditions. Future estimates of profitability and economic conditions require estimating such factors as sales growth, employment rates and the overall economics of the retail industry for up
to twenty years in the future, and are therefore subject to variability, are difficult to predict and in certain cases, beyond our control.
Effect if Different Assumptions Used
Fair values of property and equipment and indefinite-lived intangible
assets.
The use of different estimates or assumptions within our undiscounted cash flow models could result in cash flows lower than the current carrying values of our asset groups, thereby requiring us to compare the carrying values of the
asset groups to their fair value, which may have not been done using different assumptions. The use of different estimates or assumptions within our discounted cash flow models could result in lower fair values of our property and equipment,
trademarks, or overall business enterprise value which may result in the need to record further impairment charges, which may not have been done using different assumptions. Lastly, the use of a different method of determining fair value, other than
using discounted cash flow and market multiple approach models, could result in lower or higher fair values.
Deferred tax valuation
allowances
Nature of Critical Estimate
Upon our emergence from bankruptcy on June 21, 2005, Spiegel transferred ownership of its subsidiaries, FSAC and SAC, to us. Both FSAC and SAC have significant tax NOLs. Additionally, we have significant deferred
tax assets, excluding our NOLs. We are required to estimate the amount of tax valuation allowances to record against these deferred tax assets, including our NOLs, based upon our assessment of it being more likely than not that these NOLs will
expire or go unused.
Assumptions/Approach Used
In determining the need for tax valuation allowances against our deferred tax assets, including our NOLs, we take into consideration current and past operating performance, projections of future operating results and
projected taxable income or loss, timing of the reversal of our temporary tax differences, length of the carryback and carryforward periods, and any limitations imposed by the IRC Section 382. Section 382 limits NOL utilization based upon
an entity’s estimated enterprise value upon a change in control, including a company’s emergence from bankruptcy.
During fiscal
2006 we recorded income tax expense of $71.3 million to further increase our valuation allowance related to our NOLs due to (i) assumptions related to a change in control upon lapse of ownership restrictions contained in our Certificate of
Incorporation; (ii) changes in our long-range plan which reduced our forecasted taxable income; and (iii) a decline in our estimated enterprise value which impacts the amount of NOLs allowed under Section 382. During the fourth
quarter of 2007, we recorded income tax expense of $27.2 million to increase our valuation allowance related to our federal and state NOLs due to (i) changes in assumptions related to a future change in control; (ii) a decrease to the
number of future years in which we could assume taxable income; and (iii) additional information we received from our former parent, Spiegel, related to our state NOLs that existed as of our fresh start reporting date. See further discussion of
these changes above under “
Results of Operations—Fiscal 2007 Compared to Fiscal 2006—Income Tax Expense
”
.
68
During the fourth quarter of 2008, we concluded that it was more likely than not that all our unutilized
federal and state NOLs would expire unused. We made this determination as a result of our operating results in the fourth quarter of 2008 and also due to our current and expected book losses over the next several fiscal years. Additionally, we
determined that it was more than likely that our net deferred tax assets, excluding our NOLs, would also expire unused. Accordingly, we recorded income tax expense of $46.9 million to increase our valuation allowance during the fourth quarter of
2008.
Our deferred tax valuation allowance related to our deferred tax assets, including our federal and state NOLs, totaled $167.7
million as of January 3, 2009.
Effect if Different Assumptions Used
Different assumptions as to our future profitability and book income or loss, including the number of years in which we base our estimate upon, could
result in different conclusions as to our need for and the level of our tax valuation allowances related to our NOLs. In the future, adjustments to increase or decrease the valuation allowance related to the NOLs may increase or decrease our
provision for income taxes and related tax payments which could be materially impacted as these NOLs are realized or expire unused.
Stock Based Compensation
Nature of Critical Estimate
We account for our stock based compensation in accordance with SFAS No. 123(R),
Share Based Payments
(“SFAS 123(R)”), which we
adopted with our fresh start accounting date of July 2, 2005. SFAS 123(R) requires that stock based awards to employees and directors be recognized in our financial statements at fair value.
Assumptions/Approach Used
In order
to estimate fair value to calculate our stock based compensation expense, with the assistance of a third-party, we use the Black-Scholes option pricing model for our time-vested stock options/SOSARs and a Monte-Carlo simulation model for our
performance-based stock options, which requires the use of subjective assumptions including:
Volatility
—This is a measure of
the amount by which a stock price has fluctuated or is expected to fluctuate. Effective with 2008, we changed the volatility assumptions used in determining the fair values of our stock options. Prior to 2008, our volatility assumptions used in
determining the fair values of our stock options was based upon historical and implied volatility for other companies in the retail industry due to our limited stock price history. During 2008, our volatility assumptions included both (i) our
one-year historical volatility and (ii) six-year historical volatility levels and implied volatility for peer companies in the retail industry. The change in volatility assumptions to include our historical volatility did not have a material
impact on the fair values of our stock options and SOSARs granted during 2008. An increase in the expected volatility will increase stock based compensation expense.
Risk-free interest rate
—This is the U.S. Treasury yield curve in effect as of the grant date having a term equal to the expected term of the option. An increase in the risk-free interest rate will
increase stock based compensation expense.
Expected term
—This is the period of time over which the options granted are
expected to remain outstanding and is based on estimated future exercise behavior. An increase in the expected term will increase stock based compensation expense. We currently estimate the weighted average expected option term for our stock options
using the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107 and SAB No. 110. The simplified method defines the life as the average of the contractual term of the options
69
and the weighted average vesting period for all option tranches. We will continue to utilize this simplified method until we have sufficient historical
exercise data to provide a reasonable basis to estimate the expected term.
Dividend yield
—This is assumed to be zero as we do
not have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease stock based compensation expense.
Forfeitures
—We estimate forfeitures of stock-based awards based on expected future activity and adjust our forfeiture rate on a quarterly basis as actual forfeitures occur. An increase in forfeitures results in a decrease to
stock based compensation expense, which is recognized on a prospective basis over the remaining vesting term of the option grant.
Effect if Different Assumptions Used
Different estimates of the above items could result in higher or lower amounts of
stock based compensation expense recognized. Our stock based compensation expense for fiscal 2008, 2007 and 2006 was $5.3 million, $9.9 million and $10.2 million, respectively.
Valuation of Derivative Instruments
Nature of Critical Estimate
We value certain embedded features within our Notes as derivative liabilities. In accordance
with SFAS 133, the embedded derivative must be recorded at fair value and adjusted to fair value each quarter with differences in the fair value from quarter to quarter reflected in our results of operations.
Assumptions/Approach Used
We
calculate the fair value of our embedded derivative liability associated with the conversion features within our Notes primarily using the Black-Scholes option pricing model, which requires the use of the below subjective assumptions. Effective with
the beginning of fiscal 2008, we adopted SFAS 157,
Fair Value Measurements
, which defined how fair value is to be calculated for our financial assets and liabilities, which included the valuation of our derivative instruments including our
interest rate swap and the embedded derivative related to our Notes. The adoption of SFAS 157 did not have a material impact to the fair value determination of our derivative instruments.
Volatility
—This is a measure of the amount by which a stock price has fluctuated or is expected to fluctuate. Due to our limited stock price
history, expected volatility is based upon historical and implied volatility for other companies in the retail industry in addition to the volatility of our common stock.
Risk-free interest rate
—This is the U.S. Treasury yield curve in effect as of the end of the quarter having a term equal to the expected term of the conversion option.
Expected years to conversion
—This is the period of time over which the conversion options within the Notes are expected to remain
outstanding.
Effect if Different Assumptions Used
Different estimates of the above items could result in higher or lower estimates of the fair value of our embedded derivative liability related to the conversion options at the end of each quarter. Accordingly,
different fair values could result in increases or decreases in the amounts we recognize within other income (expense), net. We estimated the fair value of the conversion features to be $1.7 million and $10.7 million as of January 3, 2009
70
and December 29, 2007, respectively, and recognized $9.0 million and $10.5 million of income within other income (expense), net during fiscal 2008
and 2007, respectively. Effective with the first quarter of 2009, we will no longer be required to make fair value adjustments as the conversion features of the Notes will no longer be considered an embedded derivative liability due to the fact that
we will no longer be required to settle any conversion of the Notes in cash. Additionally, effective January 4, 2009, we adopted FSP APB 14-1
, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement),
which resulted in a portion of the carrying value of the Notes to be reclassified to stockholders’ equity.
Inflation
and Deflation
Our merchandise sales and gross margins are influenced by general economic conditions. Rising prices, resulting
particularly from higher gasoline and food costs, may allow us to increase revenues but also increases our working capital requirements. In addition, because significant components of our expenses are fixed, we may not be able to realize expense
reductions in periods of deflationary pricing. In periods of inflationary pricing, our revenues may be impacted as consumers reduce purchases of our goods. While in periods of deflationary pricing, our margins may be impacted by the need to be more
promotional in the face of competitive pricing.
Recent Accounting Pronouncements
See “
Note 3—Notes to Consolidated Financial Statements
” for a discussion of recent accounting pronouncements.
Related Party Transactions
We had no material
related party transactions during fiscal 2008, 2007 or 2006.
Subsequent Events
See “
Note 17—Notes to Consolidated Financial Statements
” to our audited financial statements, which are included in this
document, for a discussion of material events occurring subsequent to January 3, 2009.
|
Item 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our primary exposures to market risk relate to interest rates, changes in the value of our common stock and foreign exchange rates. We use certain derivative financial instruments, primarily interest rate swaps, to
manage our interest rate risks. We do not use any derivatives to manage our foreign exchange risks. We do not use derivatives for trading purposes, to generate income or to engage in speculative activity.
Market Risk—Interest Rates
We are exposed to
interest rate risk associated with our Revolver, our Amended Term Loan and the Notes we issued in April 2007.
Revolving Credit Facility
Our Revolver bears interest at variable rates based on LIBOR plus a spread. As of January 3, 2009 our availability was approximately $88.4 million
and no amounts had been drawn under the Revolver.
71
Senior Secured Term Loan
On April 4, 2007, we amended and restated the Prior Term Loan. As of January 3, 2009, the outstanding amount of our Amended Term Loan totaled $192.8 million.
Interest under the Amended Term Loan is calculated as the greater of the prime rate or the federal funds effective rate plus one-half of one percent plus
an applicable margin in the case of base rate loans, or LIBOR plus an applicable margin rate for Eurodollar loans. Margin rates are updated each quarter based upon the Company’s previous quarters’ financial results.
The margin rate for base rate loans is:
|
|
•
|
|
2.00% if our consolidated senior leverage ratio (as defined in the Amended Term Loan) is less than 3.25 to 1.00; or
|
|
|
•
|
|
2.25% if our consolidated senior leverage ratio is greater than or equal to 3.25 to 1.00.
|
The margin rate for Eurodollar loans is:
|
|
•
|
|
3.00% if our consolidated senior leverage ratio is less than 3.25 to 1.00; or
|
|
|
•
|
|
3.25% if our consolidated senior leverage ratio is greater than or equal to 3.25 to 1.00.
|
The applicable margin rates used to calculate interest under the Amended Term Loan was 2.25% for base rate loans and 3.25% for Eurodollar loans for the
first, second and third quarters of fiscal 2008 and 2.00% for base rate loans and 3.00% for Eurodollar loans for the fourth quarter of fiscal 2008. Interest rates (exclusive of the margin percentage) for both base rate loans and Eurodollar loans are
reset on a monthly basis. As of January 3, 2009, the loan balance outstanding under the Amended Term Loan included $69.8 million of base rate loans with an interest rate of 3.25% plus 2.00% for a combined interest rate of 5.25% and $123.0
million of Eurodollar loans with interest rates of LIBOR ranging from 0.45% to 0.47% plus 3.00% depending upon the term of the LIBOR tranche. See
“Management’s Discussion and Analysis of Financial Condition—Sources of
Liquidity”
for a more detailed description of our Amended Term Loan agreement.
In April 2009, we executed the First Amendment to
our Amended Term Loan. As part of the First Amendment, the interest rate on the Amended Term Loan is increased to the greater of the following: (i) for base rate loans, 4.25% plus (A) the prime rate, (B) the federal funds effective
rate plus one-half of one percent , (C) a rate equal to the Eurodollar Rate for a one month interest period on such day plus 1%, or (D) 4.00%, or (ii) for Eurodollar loans, LIBOR plus 5.25%, with LIBOR set at a minimum of 3.00% (but
with a 350 basis point cap on the increase over the rate under the Amended Term Loan).
As of January 3, 2009, we had an interest rate
swap agreement with Bank of America with a notional amount of $98.3 million, which has been designated as a cash flow hedge of the Amended Term Loan. The interest rate swap agreement effectively converts a portion of the outstanding amount under the
Amended Term Loan, which has a floating rate of interest to a fixed-rate by having us pay fixed-rate amounts in exchange for the receipt of the amount of the floating rate interest payments. Under the terms of the interest rate swap agreement, a
monthly net settlement is made for the difference between the fixed rate of 5.05% and the variable rate based upon the monthly LIBOR rate on the notional amount of the interest rate swap. The interest rate swap agreement is scheduled to terminate in
April 2012, although the swap agreement can be terminated by Bank of America if the Company no longer has the Revolver, which expires in 2010, with Bank of America. There is a breakage fee due upon termination of the swap agreement.
The fair value of the interest rate swap agreement was estimated to be a liability of $10.4 million as of January 3, 2009. Assuming a 10% increase
in interest rates, the fair value of the new interest rate swap would be a liability of approximately $9.9 million at January 3, 2009. Assuming a 10% decrease in interest rates, the fair value of the interest rate swap would be a liability of
approximately $10.8 million at January 3, 2009.
72
Convertible Notes
On April 4, 2007, we closed our offering of $75 million aggregate principal amount of convertible senior notes. The Notes have a maturity date of April 1, 2014 and pay interest at an annual rate of
5.25% unless earlier redeemed, repurchased or converted. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise.
Market Risk—Change in Value of our Common Stock
Our Notes contain certain features that allow the holder to convert their notes into shares of our common stock upon the occurrence of certain conditions. See further discussion above under
“Management’s Discussion and Analysis
of Financial Condition—Sources of Liquidity”
for a detailed description of the terms of conversion. The fair market value of the convertible notes is subject to market risk due to the convertible feature of the notes. The fair market
value of the convertible notes will generally increase as the market price of our common stock increases and decrease as the market price falls.
As a result of the requirement that we settle any conversion of notes prior to January 3, 2009 in cash, the conversion features contained within the Notes were deemed to be an embedded derivative under SFAS 133. In accordance with
SFAS 133, the embedded derivative related to the conversion features required bifurcation from the debt component of the convertible notes and a separate valuation. We recognized the embedded derivative as an asset or liability on our balance
sheet and measured it at its estimated fair value, and recognized changes in its estimated fair value in other income (expense), net in the period of change. We determined the estimated fair value of the embedded derivative primarily using the
Black-Scholes model and other valuation methodologies which resulted in an estimated fair value of $21.2 million as of the issuance date for the Notes. The Black-Scholes model and other valuation methodologies are complex and require
significant judgments. In applying the Black-Scholes model, changes and volatility in our common stock price and the stock price of other comparable retailers and changes in risk-free interest rates could significantly affect the fair value of this
derivative instrument. We estimated the fair value of the conversion features to be $1.7 million as of January 3, 2009 and accordingly recognized $9.0 million of income within other income (expense), net during fiscal 2008. Effective
with the first quarter of 2009, we will no longer be required to make fair value adjustments as the conversion features of the Notes will no longer be considered an embedded derivative liability due to the fact that we will no longer be required to
settle any conversion of the Notes in cash.
Market Risk—Foreign Exchange
Our foreign currency risks relate primarily to stores that we operate in Canada and with our joint venture investment in Japan, for which we apply the
equity method of accounting as we do not control this entity. Additionally, we have foreign currency risks associated with the purchase of merchandise from foreign entities. We believe that the potential exposure from foreign currency risks is not
material to our long-term financial condition or results of operations; however, short-term volatility in Canadian exchange rates may impact our results of operations by reducing our comparable store sales results and net revenues from Canadian
sales, offset by a decrease as a result of a more favorable exchange rate to U.S. dollars in occupancy costs and in selling, general and administrative expenses incurred in Canada. During fiscal 2008, particularly during the fourth quarter, the
Canadian exchange rate declined which resulted in a negative impact to our net merchandise sales and gross margin related to our retail stores in Canada, which was partially offset by a decline in our operating expenses incurred in Canada. The
estimated negative net impact to our fiscal 2008 results from the Canadian exchange rate fluctuations was approximately $2.0 million. The estimated impact to our results of operations from fluctuations in the exchange rates for the Japanese yen and
its impact to our royalty revenues from Eddie Bauer Japan were favorable by approximately $0.6 million.
73
|
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
Information with respect to this item is set forth under Item 15.
|
Item 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
Item 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of
Disclosure Controls and Procedures
As of January 3, 2009, the Company’s management, with participation of its Chief Executive
Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end
of the period covered by this report (the “Evaluation Date”). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the Company’s disclosure controls and
procedures are adequate and effective to reasonably assure that material information relating to the Company, including its consolidated subsidiaries, would be communicated to management by others within those entities in a timely manner to allow
decisions to be made regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the accuracy and reliability of financial reporting and the preparation
of the Company’s financial statements to accurately and fairly reflect the transactions and dispositions of the Company’s assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles; ensure that receipts and expenditures are being made only in accordance with the authorization of management; and provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisitions, use or disposition of the Company’s assets that could have a material effect on our financial statements. There are inherent limitations in the effectiveness of internal control over financial
reporting, including the possibility that misstatements may not be prevented or detected. Accordingly, even the most effective internal controls over financial reporting can provide only reasonable assurances with respect to financial statement
preparation. Furthermore, the effectiveness of internal controls can change with changes in circumstances.
Management conducted an
evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of January 3, 2009.
The effectiveness of the Company’s internal control over financial reporting as of January 3, 2009, has been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in their
report which is included herein.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the three months ended January 3, 2009 that have
materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Eddie Bauer Holdings, Inc.
Bellevue, Washington
We have audited Eddie Bauer
Holdings, Inc.’s internal control over financial reporting as of January 3, 2009, based on criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Eddie Bauer Holdings, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying “Item 9A, Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of
its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Eddie Bauer
Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 3, 2009, based on the COSO criteria
.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Eddie Bauer Holdings, Inc. as of January 3,
2009 and December 29, 2007 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the years ended January 3, 2009, December 29, 2007 and
December 30, 2006 and our report dated April 2, 2009 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Seattle, Washington
April 2, 2009
75
|
Item 9B.
|
OTHER INFORMATION
|
On April 2,
2009, the Company and its Amended Term Loan lenders entered into a First Amendment (“First Amendment”) to the Amended and Restated Term Loan Agreement with various lenders, Goldman Sachs Credit Partners L.P., as syndication agent, and JP
Morgan Chase Bank, N.A., as administrative agent (the “Amended Term Loan”).
Under the First Amendment, we receive relief from
our senior secured leverage and fixed charge coverage ratios through January 2, 2010, the end of our fiscal 2009. Our permitted senior secured leverage ratio will increase to 6.25 to 1.00, 8.00 to 1.00, 9.00 to 1.00 and 7.75 to 1.00 as of the end of
the first, second, third and fourth quarters of 2009, respectively, and the permitted consolidated fixed charge coverage ratio will decrease to 0.900 to 1.00, 0.800 to 1.00, 0.775 to 1.00 and 0.800 to 1.00, respectively, for those quarters. The
leverage and fixed charge coverage ratios will then return to the levels set forth in the Amended Term Loan unless we have (i) extended the maturity date of the Revolver by one year or replaced it with another revolving loan facility having a
maturity date of not earlier than June 21, 2011, (ii) converted or retired at least 75% of the Notes, and (iii) raised an additional $40.0 million in new capital. If these requirements are achieved, the permitted senior secured
leverage ratio will be set at 6.63 to 1.00, 5.50 to 1.00, 4.38 to 1.00 and 3.25 to 1.00, and the fixed charge coverage ratio at 0.85 to 1.00, 0.90 to 1.00, 0.95 to 1.00 and 1.00 to 1.00 as of the end of the first, second, third and fourth quarters
of 2010, respectively. As part of the First Amendment, we have agreed to allow the lenders to provide nominees for two board seats of seven, with the right to provide nominees for a third board seat of eight total seats should the Company not meet
the requirements under the Convertible Note Covenant described below within the deadlines provided in the First Amendment. To be considered, a nominee may not be affiliated with the Amended Term Loan lenders, and must be considered
“independent” pursuant to The NASDAQ Marketplace Rules and the SEC’s rules under Regulation S-K. As part of the First Amendment, the interest rate on the Amended Term Loan is increased to the greater of the following: (i) for
base rate loans, 4.25% plus (A) the prime rate, (B) the federal funds effective rate plus one-half of one percent, (C) a rate equal to the Eurodollar Rate for a one month interest period on such day plus 1%, or (D) 4.00%, or
(ii) for Eurodollar loans, LIBOR plus 5.25%, with LIBOR set at a minimum of 3.00% (with a 350 basis point cap on the increase over the rate under the Amended Term Loan).
As consideration for execution of the First Amendment, we paid the following: (A) an initial cash amendment fee equal to $5.8 million, of which $1.9
million was paid upon execution of the First Amendment and $3.9 million was earned but payment of which was deferred until November 30, 2009; (B) a 500 basis point “payment-in-kind” (“PIK”) fee, which will be added to the
principal amount of the Amended Term Loan, and accrue PIK interest at the interest rate applicable to the Amended Term Loan, however the PIK fees and interest will not be considered for the calculation of covenants under the Amended Term Loan; and
(C) issuance to the lenders under the Amended Term Loan of $.01 warrants exercisable for 19.9% of the Company’s common stock on a fully-diluted basis subject to adjustment for conversion of the Notes, new capital infusions of less than
$40 million (unless otherwise agreed to) and exercise of equity compensation grants. The warrants cannot be separately sold, and expire on maturity of the Amended Term Loan or its earlier repayment. The warrants will be issued solely to
accredited investors pursuant to the exemption from registration provided for under Regulation D, promulgated under the Securities Act of 1933, as amended. Also, in connection with the issuance of the warrants, the Company, and the holders of
warrants will enter into a registration rights agreement, which requires the Company to use its commercially reasonable efforts to file and cause the effectiveness of a Registration Statement to register the resale of all or part of the outstanding
securities of the Company acquired upon exercise of the warrants.
The First Amendment contains a covenant (the “Convertible Note
Covenant”) pursuant to which we are obligated to either: (1) retire or convert into equity securities at least 75% in principal value of the outstanding Notes, or (2) raise $50 million in new capital, with the proceeds used to pay
down the Amended Term Loan principal balance. If we fail to comply with the Convertible Note Covenant within 90 days following execution of the First Amendment (which time period may be extended under certain circumstances), we may obtain two 60-day
extensions of the performance period, for the payment upon each extension of a 500 basis point PIK
76
amendment fee and the issuance of $.01 warrants exercisable for 15% of the Company’s common stock on the same fully-diluted basis as the initial warrant
issuance. If, after the 210-day period, we have not performed the Convertible Note Covenant, we may obtain a waiver of nonperformance by the payment of another 500 basis point PIK fee. The First Amendment requires that we limit capital expenditures
in each of 2009 and 2010 to $20 million, and obtain leasehold mortgages on all leases where the Company has the right to grant the mortgage without landlord consent. We will also seek to receive consent to leasehold mortgages from landlords for
certain other leases for the benefit of our Amended Term Loan lenders.
77
PART III
|
Item 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Our business is managed by our employees under the direction and oversight of the Board of Directors. Except for McNeil S. Fiske, Jr. (“Neil Fiske”), our President and Chief Executive Officer, none of
the members of our Board of Directors is an employee of Eddie Bauer. Our executive officers are appointed by and serve at the discretion of our Board of Directors. There are no family relationships between any director and any executive officer. We
keep the members of our Board of Directors informed of our business through discussions during and outside of Board meetings, materials we provide to them, visits to our offices and their participation in Board of Directors and committee meetings.
We believe transparent, effective and accountable corporate governance practices are key elements of our relationship with our stockholders.
To help our stockholders understand our commitment to this relationship and our governance practices, several of our key governance initiatives are summarized below.
Corporate Governance Guidelines
Our Board of Directors has adopted Corporate Governance Guidelines
that govern, among other things, the Board of Director’s and each of its member’s authority and responsibilities, director orientation and continuing education, and committee composition and charters. You can access these Corporate
Governance Guidelines, along with other materials such as committee charters, on our website at
http://investors.eddiebauer.com.
Code of
Business Conduct and Ethics
We have adopted a written code of ethics, the “Eddie Bauer Code of Business Conduct and Ethics”
applicable to our Board members and all of our employees and executive officers, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Our Code is designed to provide guidance for upholding our
corporate values and standards and set the standards of business conduct and ethics. The purpose of our Code is to ensure to the greatest possible extent that our business is conducted in a consistently legal and ethical manner. The Code is posted
on our website at
http://investors.eddiebauer.com
. We intend to disclose on our website amendments to, or waivers from, any provision of our Code that applies to our CEO, CFO, Principal Accounting Officer/Controller or persons performing
similar functions, and amendments to, or waivers from, any provision that relates to any element of our Code of Business Conduct and Ethics described in Item 406(b) of Regulation S-K of the Exchange Act (“Regulation S-K”).
Current Board of Directors
The
following table sets forth information concerning our non-employee directors as of March 18, 2009:
|
|
|
|
|
|
|
Non-Employee Directors
|
|
Age
|
|
Present Position
|
|
William T. End
|
|
61
|
|
Chairman of the Board of Directors, Restructuring Committee Member
|
|
John C. Brouillard
|
|
60
|
|
Director, Audit Committee Member, Compensation Committee Member
|
|
Howard Gross
|
|
65
|
|
Director, Nominating and Corporate Governance Committee Member
|
|
Paul E. Kirincic
|
|
58
|
|
Director, Compensation Committee Member
|
|
William Redmond
|
|
49
|
|
Director, Chair of Restructuring Committee, Audit Committee Member
|
|
Kenneth M. Reiss
|
|
66
|
|
Director, Chair of Audit Committee
|
|
Laurie M. Shahon
|
|
57
|
|
Director, Chair of Nominating and Corporate Governance Committee, Audit Committee Member, Restructuring Committee Member
|
|
Edward M. Straw
|
|
70
|
|
Director, Nominating and Corporate Governance Committee Member, Chair of Special Operations Committee (2007)
|
|
Stephen E. Watson
|
|
63
|
|
Director, Chair of Compensation Committee
|
78
Non-employee Directors
William T. End
was named Chair of the Board of Directors of Eddie Bauer in June 2005. From May 2001 until his retirement in May 2003, Mr. End served as chair of Cornerstone Brands, Inc., a privately-held
catalog retailer whose brands include Ballard Designs, Frontgate, Garnet Hill, Smith & Noble, The Territory Ahead and Travel Smith. From 1995 to May 2001, Mr. End served in various capacities with Cornerstone Brands, Inc., including as
chair and chief executive officer. From 1990 to 1995, Mr. End served in various executive positions at Lands’ End, Inc., including president and chief executive officer. Formerly, Mr. End spent 15 years at L.L. Bean, Inc., where
he served as executive vice president and chief marketing officer. Mr. End currently serves as a director of IDEXX Laboratories, Inc. and several non-public companies. Mr. End received a Bachelor of Science degree in Business
Administration from Boston College in 1969 and an MBA from Harvard Business School in 1971.
John C. Brouillard
was named a director
of Eddie Bauer in June 2005. From May 2007 until January 2008, Mr. Brouillard served as interim Chairman, President and CEO of Advance Auto Parts, Inc. From February 1991 to June 2005, Mr. Brouillard served as chief administrative and
financial officer of H.E. Butt Grocery Company. From 1977 to 1991, Mr. Brouillard held various positions at Hills Department Stores, Inc., including president of the company. Mr. Brouillard currently serves as the nonexecutive chairman of
the Board and a director of Advance Auto Parts, Inc. Mr. Brouillard received a Bachelor of Science degree in Mechanical Engineering from the University of Massachusetts in 1970 and an MBA from the University of Pennsylvania in 1974.
Howard Gross
was named a director of Eddie Bauer in June 2005, and served as its interim CEO from February to July 2007. From 1996 to 2004,
Mr. Gross served as president and chief executive officer of HUB Distributing, Millers Outpost and Levi’s Outlet Stores of the American Retail Group, Inc. From 1994 to 1995, Mr. Gross served as president and chief operating officer of
Today’s Man, Inc. Formerly, Mr. Gross spent over 20 years at Limited Brands, Inc., where he held various positions, including president of Victoria’s Secrets Stores and president of the Limited Stores. Mr. Gross currently
serves as a director of Glimcher Realty Trust. Mr. Gross received a Bachelor of Arts degree in Speech and Public Address from the University of Akron in 1965.
Paul E. Kirincic
was named a director of Eddie Bauer in June 2005. From February 2001 through October 2008, Mr. Kirincic served as executive vice president, human resources, communications, corporate
marketing and corporate security at the McKesson Foundation of McKesson Corporation. From November 1998 to January 2001, Mr. Kirincic served as vice president, human resources, for the Consumer Healthcare Division of Pfizer, Inc.
Mr. Kirincic also served in various positions at the Whirlpool Corporation, including as vice president of human resources for Whirlpool Europe. Mr. Kirincic received a Bachelor of Arts degree in History and Communications from St. Norbert
College in 1972 and an MSBA in General Management from Indiana University in 1979.
William E. Redmond, Jr.
was named as a
director of Eddie Bauer in June 2007 and serves as Chair of the Restructuring Committee. Mr. Redmond has served as President and Chief Executive Officer of GenTek Inc. since May, 2005 and a director of GenTek Inc. since November 2003. From 2005
to 2007, Mr. Redmond served as Chairman and a director of Maxim Crane Works and Chairman and a director of Citation Corporation. Mr. Redmond previously served as President and Chief Executive Officer from December 1996 to February 2003,
and as Chairman of the Board of Directors from January 1999 to February 2003 of Garden Way, Inc., a manufacturer of outdoor garden and power equipment. Mr. Redmond received a Bachelor of Science degree in Marketing and Management from Siena
College in 1981.
Kenneth M. Reiss
was named a director of Eddie Bauer in June 2005, and serves as Chair of the Audit Committee.
From 1965 to June 2003, Mr. Reiss worked at Ernst & Young LLP, where he served as Managing Partner of the New York office, Assurance and Advisory Practice, as well as the national director of retail and consumer products for the
Assurance and Advisory Practice. Mr. Reiss has been retired since 2003. He currently serves as a director and audit committee chairman of The Wet Seal, Inc. and Harman International Industries, Inc. Mr. Reiss received a Bachelor of Arts
degree in Economics from Bates College in 1964 and an MBA from Rutgers School of Business in 1965.
79
Laurie M. Shahon
was named a director of Eddie Bauer in June 2005 and serves as Chair of the
Nominating and Corporate Governance Committee. Since 1994, Ms. Shahon has served as President of the Wilton Capital Group, a private direct investment firm headquartered in New York City. The primary focus of Wilton Capital Group is consumer
products retailing, financial institutions, distributors, healthcare and telecommunications. Wilton Capital Group has no affiliation with Eddie Bauer. From 1988 to 1993, Ms. Shahon served as managing director of ‘21’ International
Holdings, Inc. From 1980 to 1988, Ms. Shahon served as vice president and during that period founded the retailing and consumer products group at Salomon Brothers. Ms. Shahon is a director of Knight Capital Group, Inc. and a nonpublic
company. Ms. Shahon received a Bachelor of Arts degree in English and Political Science from Wellesley College in 1974 and an MBA from Columbia Business School in 1976.
Edward M. Straw
was named a director of Eddie Bauer in June 2005 and served as Chair of a Special Operations Committee in 2007. From April 2008,
Mr. Straw has served as executive vice president of PRTM Management Consultants, an operational strategy group. March 2000 to February 2005, Mr. Straw was President, Global Operations of the Estée Lauder Companies. He formerly
served as Senior Vice President, Global Supply Chain and Manufacturing of the Compaq Computer Corporation, and was President of Ryder Integrated Logistics. Mr. Straw also spent over 30 years in the United States Navy, retiring in 1996 as a
Vice Admiral (three stars.) His final assignment, before retiring, was Director (CEO) of the Defense Logistics Agency in Washington, DC. Mr. Straw currently serves as chairman of the board of directors of Document Capture Technologies,
Inc., a provider of secure imaging solutions, and as a director of MeadWestvaco Corporation and several private boards. He received a Bachelor of Science degree in Engineering from the U.S. Naval Academy and an MBA from the George Washington
University.
Stephen E. Watson
was named a director of Eddie Bauer in June 2005 and serves as Chair of the Compensation Committee.
From November 1997 to November 2002, Mr. Watson served as president and chief executive officer of Gander Mountain L.L.C. From 1973 to 1996, Mr. Watson served in various positions with the Dayton Hudson Corporation, including as chairman
and chief executive officer of Dayton Hudson Department Stores Co. and as president of the Dayton Hudson Corporation. Mr. Watson serves as a director of Kohl’s Corporation and Regis Salons. Mr. Watson received a Bachelor of Arts
degree in American History from Williams College in 1967 and an MBA from Harvard Business School in 1973.
Audit Committee
The Audit Committee was established by the Board of Directors. The Audit Committee consists of Kenneth M. Reiss (Chair), John C. Brouillard, Laurie M.
Shahon and William Redmond, each an independent director as the term is defined in Item 407(d)(5)(i)(B) of Regulation S-K and the NASDAQ Global Market listing standards, and each financially literate as required by the NASDAQ Global Market
listing standards. Our Board of Directors has determined that each of the four members of the Audit Committee qualifies as an “audit committee financial expert” as that term is defined in Item 407(d)(5) of Regulation S-K.
Executive Officers
The following
persons serve as our executive officers:
|
|
|
|
|
|
|
Executive Officers
|
|
Age
|
|
Present Position
|
|
Neil Fiske
|
|
47
|
|
President and Chief Executive Officer and Director
|
|
Kimberly Berg
|
|
40
|
|
Senior Vice President, General Merchandising Manager
|
|
Freya Brier
|
|
51
|
|
Senior Vice President, General Counsel and Corporate Secretary
|
|
Ronn Hall
|
|
48
|
|
Senior Vice President, Sourcing and Supply Chain
|
|
R. Thomas Helton
|
|
61
|
|
Senior Vice President and Chief Human Resources Officer
|
|
Pirkko Karhunen
|
|
46
|
|
Senior Vice President, Design
|
|
Ann Perinchief
|
|
55
|
|
Senior Vice President, Customer Experience and Legendary Service
|
|
Marv Toland
|
|
47
|
|
Chief Financial Officer
|
80
Neil Fiske
was named President and Chief Executive Officer and a director of Eddie Bauer in July
2007. From February 2003 to June 2007, Mr. Fiske was chief executive officer of Bath and Body Works of Limited Brands, during which time Mr. Fiske led the turnaround and brand transformation of that retailer. He was recognized as
“Marketer of the Year” and “Retailer of the Year” in 2004 and 2005 by Women’s Wear Daily. Prior to Limited Brands, Mr. Fiske spent fourteen years at Boston Consulting Group focused on the Consumer Goods and Retail
sector. He is the author of “Trading Up: The New American Luxury,” a Business Week bestseller and winner of the American Marketing Association’s Newberry award for best marketing book. Mr. Fiske is a graduate of Harvard Business
School and Williams College.
Kimberly Berg
was named Senior Vice President, General Merchandising Manager of Eddie Bauer in
February 2008. Ms. Berg has been Vice President and General Merchandising Manager for the Company’s retail division since March 2006, Vice President Womens’ and Field and Gear Merchandising from February 2004 to March 2006, and
Divisional Vice President Womens’ Merchandising since April 2002. Prior to joining the Company, Ms. Berg spent seven years at Gap, Inc., most recently as Divisional Merchandise Manager. Ms. Berg studied Merchandising at the University
of Arizona and Textile and Clothing at Arizona State University.
Freya Brier
was named Senior Vice President, General Counsel and
Corporate Secretary in November 2007. Prior to joining Eddie Bauer, from September 1996 through August 2007, Ms. Brier was General Counsel and Corporate Secretary of Wild Oats Markets, Inc., and served as its Vice President, Legal, from 1997
through 2005, and its Senior Vice President, Legal and Real Estate, from 2005 until August 2007. Ms. Brier was formerly a partner with the law firm of Holme Roberts & Owen LLC. Ms. Brier received a Bachelor of Arts degree in
Economics, Business and Languages from Cornell College in 1980 and her J.D. degree from New York University in 1983.
Ronn Hall
was
named Senior Vice President, Sourcing and Supply Chain in November 2007. Mr. Hall joined Eddie Bauer from Coldwater Creek, where he served as Vice President of Sourcing and Production since March 2004. Prior to Coldwater Creek, Mr. Hall
was Vice President, Production and Sourcing for Limited Brands Inc. from July 1997 to February 2002. Prior to 1997, Mr. Hall held positions in manufacturing and sourcing with Pacific Alliance, J. Crew, Inc., and Kellwood Company. Mr. Hall
received a Bachelor of Science degree in Chemical Engineering from Mississippi State University.
R. Thomas (Tom) Helton
was
named Senior Vice President and Chief Human Resources Officer of Eddie Bauer in July 2007. From 2005 to 2007, Mr. Helton was Head, Organization Effectiveness and Human Resources at Sampoerna Strategic and from 2001 to 2005 Mr. Helton
served in the same role for HM Sampoerna, an international consumer goods company based in Southeast Asia. From 1998 to 2001, Mr. Helton was Executive Vice President, Organization Development and Human Resources at United Stationers in Chicago.
Mr. Helton has also held various human resource and labor relations roles at Whirlpool Corporation and Kaiser Aluminum and Chemical Corporation. Mr. Helton has served as an officer in the United States Army and received a Bachelor of Arts
in biology and psychology from Middle Tennessee State University.
Pirkko Karhunen
was named Senior Vice President, Design in August
2008. Prior to joining Eddie Bauer, Ms. Karhunen worked with the CEO and President of Aeropostale in the development of a new product concept. Prior to that, Ms. Karhunen was with Lilly Pulitzer, where she held several design roles between
2005 and 2007, including Senior Vice President of Design. From 1999 to 2004, Ms. Karhunen was Senior Director of Design for Women’s and Children’s with Land’s End. From 1997 to 1999, Ms. Karhunen served as Director of Design
for Gymboree’s Zutopia business. Ms. Karhunen has also worked for Anne Klein in design roles. Ms. Karhunen graduated from the Parsons School of Design in New York.
Ann Perinchief
was named Senior Vice President, Customer Experience and Legendary Service of Eddie Bauer in June 2005. Ms. Perinchief became
Senior Vice President, Retail of Eddie Bauer, Inc. in March 1999. From 1996 to 1999, Ms. Perinchief served as Vice President, Customer Satisfaction and Sales of Eddie Bauer.
81
Ms. Perinchief received a Bachelor of Arts degree in Retail: Clothing and Textiles from Michigan State University in 1975.
Marv Toland
was named Chief Financial Officer of Eddie Bauer in November 2007. Prior to joining Eddie Bauer, Mr. Toland was with London Fog
Group from 1999 through November 2007, where he most recently served as Executive Vice President and Chief Financial Officer with responsibility for the finance, accounting, systems, legal and customer service functions. Prior to joining London Fog
in 1999, Mr. Toland was Chief Financial Officer of Brooks Sports, Inc. and previously held a variety of finance-related positions with Exxon Corporation. Mr. Toland received a Bachelor of Arts degree in Economics from Western Washington
University, and a Masters degree from Carnegie Mellon University in Industrial Administration.
Section 16(A) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires that our executive officers, directors and persons who own more than 10% of
a registered class of our equity securities file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater-than-10% stockholders are required by SEC regulations to furnish us with all Section 16(a)
forms that they file. Based solely upon our review of copies of the forms received by us and written representations from certain reporting persons that they have complied or not complied with the relevant filings requirements, we believe that,
during the fiscal year ended January 3, 2009, all of our executive officers, directors and greater-than-10% stockholders complied with all Section 16(a) filing requirements with the exception of the following: Neil Fiske, for whom two
reports on Form 4 were each filed one day past-due, each reporting purchase of shares of common stock by Mr. Fiske; Kenneth Reiss, for whom one report on Form 4 was filed two days past-due reporting the grant of restricted stock units to
Mr. Reiss; and Kimberly Berg, for whom one report on Form 3, identifying Ms. Berg as a reporting person, was filed 17 days past due.
|
Item 11.
|
EXECUTIVE COMPENSATION
|
Compensation
Discussion & Analysis
Introduction
In March 2003 Spiegel, Inc., together with 19 of its subsidiaries and affiliates, including Eddie Bauer, Inc., filed for Chapter 11 bankruptcy protection. In June 2005, Eddie Bauer emerged from bankruptcy as a
stand-alone company for the first time in 34 years, and Eddie Bauer Holdings, Inc. was created as the parent holding company of Eddie Bauer, Inc. At that time the Company’s Board of Directors was established.
During 2006 and the first quarter of 2007, Eddie Bauer pursued strategic alternatives, including a proposed acquisition by private investors, which was
not approved by the Company’s stockholders. In the second half of 2007, the Company sharpened its focus on hiring a new management team, rebuilding its business and strengthening overall Company performance. We completed building the executive
team and hiring in 2007 a new CEO, CFO, General Counsel and Senior Vice Presidents of Human Resources and of Sourcing and Supply, and in 2008 promoting a new Senior Vice President, General Manager Merchandising, and hiring a Senior Vice President of
Design. The senior management team set initiatives, formulated strategies to achieve these initiatives, and began taking action to implement the initiatives in 2008, with the goal of rebuilding the Eddie Bauer brand as a leader in outerwear and
apparel for an active outdoor lifestyle.
The Compensation Committee of the Board of Directors (the “Committee”) formulates
compensation strategies for the senior executives and, with regard to annual cash and long-term incentives, for all corporate employees, with input from the CEO, the Senior Vice President of Human Resources, the Manager of Compensation and the
compensation consultants described below. The Committee reviews and approves all compensation decisions relating to elected officers, including the CEO and other executive officers identified in the Summary Compensation Table below (the CEO and
other executive officers are defined in this discussion as
82
the “Named Executive Officers” or “NEOs”). The CEO annually reviews the performance of the NEOs and provides input to the Committee on
individual performance to be considered by the Committee as part of their annual salary reviews. Where germane to the understanding of the Company’s compensation philosophies, the disclosure below may contain a broader discussion of the
application of a particular compensation philosophy, policy or practice to corporate employees (those working in the Company’s headquarters, its remote information technology and call centers and in the managerial functions at its distribution
center) of the Company as a whole. See “
Further Information Regarding the Board of Directors—Board Committees—Compensation Committee
” for a narrative description of the Company’s processes and procedures for the
consideration and determination of executive and Board of Director compensation.
Overview of Compensation Program Objectives and Key Compensation
Components
In the second half of 2007, the primary focus of the compensation program objectives for our NEOs shifted from retaining
existing personnel to attracting, retaining and motivating highly-qualified executives in key roles to implement a long-term strategy to improve overall Company performance and rebuild the Eddie Bauer brand during a multi-year effort. To
achieve these objectives, the newly-hired and existing senior executives received compensation packages consisting of the following:
|
|
•
|
|
competitive base salaries;
|
|
|
•
|
|
the potential for significant additional annual cash awards upon the achievement of annual performance objectives;
|
|
|
•
|
|
limited annual cash perquisites;
|
|
|
•
|
|
a broad package of benefits, including 401(k) and Deferred Compensation Plans; and
|
|
|
•
|
|
participation in Change in Control and relocation programs.
|
In some cases, cash sign-on bonuses were also offered.
In addition, newly-hired executives received new
hire equity incentive awards that included:
|
|
•
|
|
stock options vesting pro rata over four years;
|
|
|
•
|
|
restricted stock units that “cliff” vest after four years of service; and
|
|
|
•
|
|
for the CEO, CFO and two Senior Vice Presidents, stock options for which the vesting is tied to the achievement of targeted stock prices on the NASDAQ Global Market
for certain periods of time.
|
The Committee has targeted the 50
th
percentile of comparable peer company compensation levels as an appropriate level of compensation to meet the hiring and retention
objectives for Eddie Bauer NEOs, based on the compensation levels required to attract qualified individuals to complete the amount of work necessary for a successful turnaround of the Company’s business. A significant portion (an additional 70%
to 110% of annual base salary) of each NEO’s potential annual compensation consists of a cash bonus that is contingent on the achievement of specific financial targets designed to align the NEO’s interests with those of our stockholders
and that is at risk if the Company fails to meet certain financial performance targets. The Company made substantial grants of stock options and restricted stock units (“RSUs”) to officers in conjunction with emergence from bankruptcy in
2005, but did not have an annual long-term equity incentive plan prior to 2008, nor has it paid on any regular basis annual cash incentives for performance. As a result, there have not been specific weightings between cash and equity-based
compensation or between annual and long-term incentive compensation. In the second half of 2007, the Committee prepared a management long-term equity compensation program, which was implemented in January 2008. For 2008 and beyond, the amount of
long-term equity incentive grants made to each NEO will be based upon several factors, including achievement of individual and Company performance targets, as well as comparisons of the NEO’s total compensation package to analogous Peer Group
positions. See “
Key Components of CEO/NEO Compensation—Long-Term Incentives—2008 LTIP
” below.
83
The Company’s comparable store sales improved through the first half of 2008, and then declined
slightly in the second half of the year, primarily as a result of the substantial downturns in the national economy and consumer spending in the third and fourth quarters of 2008. Due to a significant decline in the Company’s stock price since
emergence from bankruptcy and particularly in the second half of 2008, all stock options outstanding have exercise prices significantly higher than the current market price of the Company’s common stock and restricted stock units and stock-only
stock appreciation rights (“SOSARs”) held by the Company executives have greatly reduced in value since grant date (as measured by the grant date common stock price versus current stock price). The Committee recognizes the present erosion
of the efficacy of the Company’s current outstanding equity-based compensation to achieve the objectives of attracting, retaining and motivating executives and will take it into consideration in evaluating current and future compensation
strategies.
Review of Compensation Against Peers.
The Compensation Committee, working with Compensation Strategies,
Inc., an independent compensation consultant (the “Consultant”) hired by the Committee in 2006, and members of management, completed a comprehensive review in late 2007 of the key priorities for the Company’s executive compensation
components and the competitiveness of then-current compensation programs at the Company, including whether actual compensation components used to date achieved the goals articulated by the Company. In the past, the Company has reviewed general
retail market data to determine the competitiveness of its compensation levels. The review performed by the Consultant in the fourth quarter of 2007 included an evaluation of the competitiveness of the Company’s compensation for officers as
compared to executive pay at 18 industry retail apparel peers (the “Peer Group”) selected in consultation with the Committee and the CEO, including:
|
|
|
|
|
Abercrombie & Fitch
Aeropostale, Inc.
American Eagle Outfitters
Ann Taylor Stores Corporation
Charming Shoppes, Inc.
Chicos FAS, Inc.
Coldwater Creek, Inc
(The) Childrens Place Retail Stores, Inc.
Coach, Inc.
|
|
The Gap, Inc.
Guess, Inc.
Jones Apparel Group, Inc
Limited Brands, Inc.
Liz Clairborne, Inc.
Pacific Sunwear of California, Inc
Polo Ralph Lauren Corporation
(The) Talbots, Inc.
Tween Brands, Inc.
|
Market data for the Peer Group was size-adjusted using statistical regression analysis to remove
significant swings between raw data points, and to construct market pay levels commensurate with the Company’s comparative revenues to the Peer Group. The Consultant specifically evaluated the competitiveness of the Company’s then-current
base salary and short-term incentives compared to those offered by the Peer Group and the prevalence of certain other components of compensation (benefits, change in control plans, perquisites, relocation programs and discounts) as compared to the
Peer Group. Given that in 2007 the Company had no formal, annual long-term incentive program in place, no analysis of this component for the NEOs was performed, although a Peer Group analysis of long-term incentive compensation was provided by the
Consultant as part of the discussion between the Committee, management and the Consultant regarding structure of a long-term equity incentive program.
Based on the Consultant’s evaluation, the Committee concluded that senior executive base
salaries were generally at or slightly above the 50
th
percentile for the Peer Group, and target bonus levels (as a percentage of salary) were
at or slightly above the 50
th
percentile of target bonus levels for peers, but the Company’s failure to pay bonuses on a consistent basis
over the past several years, along with the lack of a structured long-term equity incentive program, resulted in the Company’s total compensation for senior executives being below the 50
th
percentile as compared to the Peer Group’s compensation levels. The Committee then began discussions with the Consultant, the CEO, the Chief Human Resources Officer, and Compensation personnel
on the structure of new short- and long-term incentive plans for the Company’s NEOs, and included the NEOs in discussions concerning such structure as it applied to their respective directly reporting eligible corporate employees,
84
designed to reinforce the Company’s focus on a return to profitability and motivate future individual performance critical to the achievement of the
Company’s long-term improved financial performance. In early 2009, management reviewed and presented a report to the Committee on the published compensation data for the Peer Group which concluded that the NEO base salaries were on average at
the Peer Group median, and that the base salary of the CFO was below the median base salary for the Peer Group, unadjusted for company size. After taking into account Mr. Fiske’s voluntary 10% salary reduction in January 2009,
Mr. Fiske’s base salary currently is slightly below the Peer Group median.
Key Components of CEO/NEO Compensation
Base Salary.
As noted above, the Company seeks to pay our NEOs base salaries at the 50th percentile of the Peer Group NEO
compensation level. The Committee retains the ability to set actual base salaries based on an assessment of each NEO’s tenure, experience and skill set, as well as competitive and internal equitable considerations. Base salaries are reviewed
and approved annually by the Committee.
NEO Base Salaries.
The
Committee formulated salaries in 2007 for the then newly-hired CFO, General Counsel and Senior Vice Presidents of Human Resources and Sourcing and Supply by evaluating the candidates’ previous salary level, general market data for the area in
which the Company’s headquarters are located, and the Peer Group base salary data for similar positions. The Committee also considered the level of salaries and other elements of compensation necessary to induce the selected candidates to
accept offers with the Company, which was just commencing its turnaround. The Committee reviewed these salaries again in 2008 by evaluating general market data for the area in which the Company’s headquarters are located and the Peer Group base
salary data for similar positions. A reorganization of corporate staff in 2008 resulted in realignment of some responsibilities amongst executives. The Senior Vice President, Customer Experience and Legendary Service was given a salary increase in
recognition of past performance and expansion of responsibilities and a new Senior Vice President, General Merchandising Manager was promoted from within. In July 2008, the Senior Vice President, General Merchandising Manager was given a 5% salary
increase in recognition of her performance and expansion of responsibilities and the salary of the CFO was adjusted in recognition of his added responsibilities, and to bring his salary closer to the 50
th
percentile for the area in which the Company’s corporate headquarters are located.
CEO Base Salary.
For the hiring of our new CEO in July 2007, the Committee evaluated the same factors identified above for the NEOs but focused specifically on Peer Group CEO base salaries, with greater
weighting towards the level of salary and other compensation necessary to induce Mr. Fiske to accept the CEO position, given the Company’s poor historic sales performance, debt level and the long-term nature of a potential turnaround. In
addition, as discussed below, the long-term equity incentive grants made to Mr. Fiske were structured specifically to reward long-term performance and encourage long-term retention. The Committee evaluated Mr. Fiske’s 2007 performance
in March 2008, including his leadership, vision, merchandising strategy, financial results, team building and communication skills. The Committee concluded that Mr. Fiske’s performance was excellent but did not take action to increase his
salary, based on the determination that his initial salary remained reasonable for the remainder of 2008, given the relatively short period of time that had elapsed since his hire date and the relatively early stage of the Company’s turnaround
process. In March 2009, the Committee again concluded that Mr. Fiske’s 2008 performance was excellent after considering the merits of his leadership, talent management, communication skills, progress in rebuilding the Company brand,
development and re-direction of merchandise content, and also the Company’s performance, which was improving until the abrupt decline in consumer spending in the second half of 2008. Despite the review, the Committee concluded that no base
salary increase was appropriate after considering Mr. Fiske’s input and his effort to proactively manage the Company’s cost structure in the context of a deepening economic recession, including his personal voluntary pay reduction in
late January 2009.
Annual Short-Term Incentives Programs.
In January 2008, the Committee and Board of Directors
approved a new short-term incentive program (“STIP”) under which eligible corporate support employees, including NEOs could receive an annual cash incentive. The STIP was designed to encourage the NEOs, as well
85
as other eligible corporate employees, to improve the performance of the Company through annual cash bonuses tied to achievement of overall Company
performance objectives. We targeted the percentage of base salary that could be received in annual incentive bonus opportunities under the STIP at approximately the 50
th
percentile of the Peer Group’s target bonuses for the NEOs. The objectives of the STIP are to assure that incentive bonus awards represent at-risk compensation, to reward our NEOs and other eligible
employees on the basis of corporate financial results on an annual basis, and to provide an incentive bonus award that is competitive with the market for each position.
The STIP provides for annual cash incentive payments if the Company achieves an annual target level of “Consolidated EBITDA”, which is defined in the Company’s $225 million Amended and Restated
Term Loan Agreement (“Consolidated EBITDA”). The Committee, working with management, selected Consolidated EBITDA as the hurdle for STIP payments because it is a preexisting contractual metric, pursuant to the Company’s term loan
credit facility, that approximates a cash profitability target for payment of short-term incentive compensation. The Company accrues, on a quarter-by-quarter basis, funding for the STIP if the Company’s overall Consolidated EBITDA for the
quarter, on a cumulative basis, is on target based on the full-year projection. The Company accrues a percentage of the total estimated payout based upon the quarter’s proportionate cumulative contribution to full-year net revenues. Under the
STIP for fiscal 2008, the target was set at $80 million in Consolidated EBITDA for full payout. In addition, for 2008, if 75% ($60 million) of the Consolidated EBITDA target was achieved, employees would have received approximately 25% of their
target bonus, and if the Company achieved a Consolidated EBITDA of up to 141% of target, employees would have received up to approximately 200% of their target bonus. The Company did not hit either target due to the sharp downturn in the economy in
the second half of 2008. If the target had been met (after funding of the accrual for STIP bonuses), corporate support employees would have received a bonus equal to from approximately 3% to 110% of their base salary, depending upon their position
in the Company. The CEO receives 110% of his base salary, and all other NEOs receive 70% of their base salaries upon achievement by the Company of the Consolidated EBITDA target. The Committee intends for any payments under the STIP to constitute
cash-denominated Performance Awards pursuant to the terms of the 2007 Amendment and Restatement to the Eddie Bauer Holdings, Inc. 2005 Stock Incentive Plan (the “2005 Plan”).
Long-Term Incentives.
In June 2007, the Company received stockholder approval for the 2005 Plan, and increased by
2,250,000 shares the number of shares available for grant under the 2005 Plan, to permit the grant of stock options, SOSARs and restricted stock units to eligible personnel, including our NEOs.
Executive New Hire Grants
.
New hire grants made in 2007 were designed to attract the NEOs, focus their attention on the long-term
performance of the business, and align our NEOs’ financial interests with those of our stockholders, by:
|
|
•
|
|
providing forfeiture of restricted stock units (“RSUs”) granted unless four years of continuous service are provided by the NEO; and
|
|
|
•
|
|
tying the vesting of certain stock options granted to the achievement of stock price targets.
|
CEO Grants.
Neil Fiske, our CEO, received equity grants at the time of his commencement of employment in 2007 comprised of 37,089 RSUs,
calculated by dividing $500,000 by the 30-day average closing stock price for the Company’s common stock prior to his date of hire, with four-year cliff vesting; 100,000 stock options vesting ratably annually over four years; 600,000
performance options, one-half of which have a five-year term and vest if and when the Company’s common stock reaches $25 on the NASDAQ Global Market for 30 consecutive days, and one-half with a seven-year term, vesting if and when the
Company’s common stock reaches $35 for 30 consecutive days.
The Committee designed the performance-based stock options specifically
to align the CEO’s interests with that of stockholders and to provide long-term retention incentives to, and reward the CEO for improvement in the Company’s performance resulting in significant increases in the Company’s stock price
on the NASDAQ Global Market.
86
Senior Officer Grants.
In August 2008, the newly hired Senior Vice President of Design
received a new-hire inducement equity grant of 20,000 RSUs, with a four-year cliff vesting, and options to purchase 30,000 shares of stock, priced at the closing price on the start date of her employment, and vesting ratably over four years.
New-hire equity grants made to the CFO, General Counsel and one Senior Vice President hired in the second half of 2007 were comprised of 11,000 RSUs, with four-year cliff vesting; 20,000 stock options, of which 20% vest ratably annually over four
years and 80% were performance options, one-half of which have a five-year term and vest if and when the Company’s common stock reaches $25 on the NASDAQ Global Market for 30 consecutive days, and one-half with a seven-year term, vesting if and
when the Company’s common stock reaches $35 for 30 consecutive days.
The new-hire inducement grants to the CFO, General Counsel and
certain Senior Vice Presidents were made as inducement grants under an exception to shareholder approval for equity plans contained in Rule 4350 of the NASDAQ Marketplace Rules.
The Committee designed the performance-based stock options specifically to align the NEOs’ interests with that of stockholders and to provide
long-term retention incentives to, and reward the NEOs for improvement in the Company’s performance resulting in significant increases in the Company’s stock price on the NASDAQ Global Market.
2008 LTIP.
The Committee believes that the inclusion of long-term equity
incentive grants in the overall compensation package for key employees is critical to attraction and long-term retention of qualified key employees during the Company’s turnaround, because the Committee believes qualified individuals with
talents necessary to effect the turnaround will view a long-term incentive grant as an attractive inducement to accepting employment, while aligning management’s interest in increasing the Company’s value with the shareholders. In the
fourth quarter of 2007, the Committee, working with the Consultant and management, began structuring a long-term incentive program for annual grants of long-term equity incentives to eligible corporate support personnel. The final structure of the
program was approved in January 2008. Under the newly-approved Long Term Incentive Program (“LTIP”), grant issuances are made annually. The level of grant to each NEO (and other executives) in 2008 was determined by an evaluation of
performance during the prior year, as well as a comparison of the NEO’s compensation levels to those of equivalent positions in the Peer Group. In the future, the Committee, working with the CEO, will establish performance targets for each NEO,
with the achievement of such targets, as well as the competitiveness of the total compensation package as compared to the Peer Group, being factors in the size of any annual equity grants made. The equity grants under the LTIP were intended to bring
total compensation packages to closer to the 50
th
percentile of the Peer Group for total compensation, making the Company’s compensation
packages more competitive with the Peer Group. Grant value is split equally between RSUs, with a cliff vesting after four years, and stock-only stock appreciation rights (“SOSARs”), which give the grantee the right to receive, in shares of
the Company’s common stock, the difference between (x) the closing price of the Company’s stock on the date of grant multiplied by a specified number of SOSARs and (y) the closing price of the Company’s stock on the date of
exercise, multiplied by the same specified number of SOSARs. The grantee will receive a number of shares of the Company’s common stock equal to the difference between the two amounts [(x) and (y) above], divided by the closing price of the
stock on the date of exercise. SOSARs vest ratably annually over four years. The total number of SOSARs and RSUs granted will be determined based on the total amount of equity available for grant under the 2005 Plan, divided by the number of years
until the Committee determines it advisable to seek approval for additional shares from the Company’s shareholders. Allocations of equity grants among eligible employees, including the NEOs, are made pursuant to recommendations of the CEO,
working with the Chief Human Resources Officer and the Manager of Compensation, based upon evaluations of the 50
th
percentile for current total
compensation of each NEO to Peer Group compensation for the equivalent position, as well as performance evaluations. The Company estimates that it only has sufficient stock in the 2005 Plan to make annual grants in 2009 to currently eligible
employees (including the NEOs) and directors, without an increase in the shares available for grant under the 2005 Plan.
87
In determining the level of equity incentive awards that the Company will make in the future, the
Committee is considering the impact of the decline in the Company’s stock price in the second half of 2008 on the objectives that it intended to achieve with past equity compensation awards, as well as the limited remaining pool of shares under
the 2005 Plan available for future equity compensation grants.
In March 2008, a total of 277,520 RSUs and 529,481 SOSARs at $4.30 per
share were granted under the LTIP. NEOs received the following grants:
|
|
|
|
|
|
|
|
|
RSUs
|
|
SOSARs
|
|
Kimberly Berg
|
|
27,512
|
|
52,488
|
|
Tom Helton
|
|
13,756
|
|
26,244
|
|
Ann Perinchief
|
|
22,354
|
|
42,647
|
|
Marv Toland
|
|
24,073
|
|
45,927
|
In May 2008, Mr. Fiske was granted 25,000 RSUs and 25,000 SOSARs at $3.91 per share in
recognition for his contributions to the Company’s improved performance during the prior 12 months, including progress in rebuilding brand identity, development of improved merchandise and marketing strategies, building the senior leadership
team and significantly reducing selling, general and administrative expenses.
Other Benefits
Our NEOs participate in all broad-based employee benefit plans provided by the Company. These include but are not limited to a 401(k) savings plan and
health and welfare insurance. In 2008, the Company contributed a matching amount to 401(k) participant accounts in an amount equivalent to 100% on the first 3%, plus 50% on the next 3% of participant account contributions. Effective March 1,
2009, the Company suspended its 401(k) employer-match as a cost reduction measure. In addition, the Company offers certain additional benefits to key executives, including our NEOs. These executive benefits include a change in control plan,
executive long-term disability insurance, life insurance, a non-qualified deferred compensation plan and a perquisite allowance. Management, under the direction of the Committee, undertook a review in 2008 of the Company’s benefit plans and
agreements with long-term compensation components to ensure compliance with the new requirements on deferred compensation arrangements imposed pursuant to Treasury Regulation 1.409(A) promulgated under Section 409(A) (“Section 409A”)
of the Internal Revenue Code of 1986, as amended. As a result of such review, certain changes, discussed below, were made to the Company’s Senior Officer Change in Control Benefits Plan and Non-Qualified Deferred Compensation Plan, to
Mr. Fiske’s employment agreement and to the Separation Agreement and Release with the Company’s former Chief Executive Officer, Fabian Månsson.
Change in Control Plan.
The Company has a change in control plan in which the NEOs and other key executives participate. The Board has determined that the change in control plan is in the best
interests of the Company and its stockholders to assure that the Company will have the continued dedication of these executives despite the possibility, threat or occurrence of a change in control of the Company. The Eddie Bauer Holdings, Inc.
Senior Officer Change in Control Compensation Benefits Plan, which we refer to as the “Change in Control Plan,” is intended to diminish the distraction to our executives of the uncertainties and risks created by a threatened or pending
“Change in Control” (as defined in the Change in Control Plan) and to provide the executives with compensation arrangements upon a Change in Control that provide the executives with financial security and that are competitive with the Peer
Group.
The Change in Control Plan provides that during the period within six months prior to a Change in Control, but subsequent to such
time as negotiations or discussions that ultimately lead to a Change in Control commenced, and two years following the date of a Change in Control, the executive shall be entitled to specified separation benefits if the executive’s employment
is terminated by the Company other than for “Cause,” death, disability or retirement, or is terminated by the executive for “Good Reason” (each as defined in the Change in Control Plan). In such event, the Company will pay such
executive a lump sum payment, within 15 days after the
88
date of termination (and delayed for a period of time for individuals whose receipt may be impacted by the requirements of Section 409A), representing
certain severance benefits (in lieu of further salary payments and in lieu of any severance benefits to which the executive would otherwise be entitled under any general severance policy or other severance plan maintained by the Company for its
management). These severance benefits for NEOs consist of: (i) his or her accrued and unpaid salary with respect to vacation days accrued but not taken through the date of termination; (ii) his or her accrued and unpaid base salary;
(iii) any earned but unpaid annual incentive bonuses from the fiscal year immediately preceding the fiscal year in which the date of termination occurs; (iv) if the date of termination occurs subsequent to a fiscal year in which the Change
in Control occurs, a pro-rated bonus equal to the product of (a) the greater of (1) (x) the executive’s target annual bonus amount under the AIP for the fiscal year in which the date of termination occurs and (y) the
executive’s average annual bonus for the three full fiscal years prior to the date of termination, or such lesser number of fiscal years during which the executive was employed by the Company or an affiliate, and (2) the annual bonus
amount under the AIP determined based on the performance to date for the performance period that includes the date of termination, multiplied by (b) a fraction, the numerator of which is the number of days in the then current fiscal year
through the date of termination and the denominator of which is 365; and (v) an amount equal to a “benefit multiplier” of 2.0 for Senior Vice Presidents of the Company (or 3.0 in the case of the CEO) multiplied by the sum of
(a) the executive’s annual base salary plus (b) the greater of (1) his or her target annual bonus for the fiscal year in which the termination occurs and (2) the executive’s average annual bonus for the three full
fiscal years prior to the date of termination, or such lesser number of fiscal years during which the executive was employed by the Company or an affiliate. In addition, such executive will receive: (i) continued health, medical, life and
long-term disability insurance coverage for the executive and his or her family for a period equal to the executive’s benefit multiplier at substantially similar levels of coverage, or if the applicable plan, program, practice or policy does
not permit the participation of the executive or his or her family, payment to the executive of an amount equal to the standard after-tax cost of such insurance coverage; and (ii) outplacement services for a period equal to the number of years
of the executive’s benefit multiplier; provided, however, that the maximum aggregate amount of such outplacement services will not exceed $25,000 ($50,000 in the case of the CEO).
Upon a Change in Control, or in the event an executive’s employment is terminated prior to a Change in Control in a manner that entitles the
executive to separation benefits under the previous paragraph, the executive shall be entitled to (i) the immediate vesting of all previously granted awards of stock options, SOSARs, restricted stock and restricted stock units under any equity
compensation plan or arrangement maintained by the Company that are outstanding at the time of the Change in Control or date of termination, as the case may be; (ii) a long-term incentive amount equal to the greatest of (a) the
executive’s target long-term incentive opportunity for each outstanding performance award in effect on the Change in Control date; (b) the average annual performance award payout, including any portion thereof that has been earned but
deferred (and annualized for any fiscal year consisting of less than 12 full months or during which the executive was employed for less than 12 full months), the executive received from the Company, if any, during the three full fiscal years of the
Company immediately preceding the Change in Control date, or such lesser number of fiscal years during which the executive was employed with the Company or any affiliate; and (c) the amount determined under the performance award based on the
performance to date for the performance period that includes the Change in Control date; and (iii) an amount equal to the greater of (a) (1) the executive’s target annual bonus amount under the AIP for the performance period in
which the Change in Control occurs and (2) the executive’s average annual bonus for the three full fiscal years prior to the Change in Control date, or such lesser number of fiscal years during which the executive was employed by the
Company or an affiliate, and (b) the amount determined under the annual bonus based on the performance to date for the performance period that includes the Change in Control date.
In the case of the NEOs, the agreements also provide that if any payment by the Company results in excise tax under the parachute payment rules of
Section 280G of the Code, then the executive is entitled to a gross-up payment so that the net amount retained will be equal to his or her payment less ordinary and normal taxes (but not less the excise tax).
89
In the event we pursue a strategic alternative, including a sale of the Company, the benefits under the
Change in Control Plan may be triggered. Our Board of Directors may amend or terminate the Change in Control Plan at any time; provided, however, no modification or termination adversely affecting any participant will be effective unless such
participant provides written consent or is given one year advance notice. In 2008, in compliance with Section 409A, the Change in Control Plan was amended to: (i) clarify the definition of “Good Reason”; (ii) clarify the
method of payment and reimbursement of continued benefits for participants; and (iii) define the date on which reimbursements occur, if such reimbursements are treated as deferrals of compensation under Section 409A.
Executive Long-Term Disability Insurance.
Our NEOs participate in the Company’s executive long-term disability program. This plan
provides up to 60% of salary replacement, to a maximum of $25,000 per month, for nonwork-related approved medical absences and is paid for by the Company.
Executive Life Insurance.
Our NEOs participate in the Company’s executive life insurance plan. This plan provides four times annual base salary, up to a maximum of $1.5 million, in the
form of a death benefit. The Company pays the full cost of the program.
Non-Qualified Deferred Compensation.
Our NEOs
are eligible to participate in the Company’s Non-Qualified Deferred Compensation Plan (“DCP”). The DCP provides each NEO the opportunity to defer up to 75% of his or her base salary and 100% of earned bonuses on a pretax basis. If an
NEO elects to defer a portion of his or her compensation, such amount is allocated to either (i) an account that tracks the performance of our common stock or (ii) an account which pays a fixed rate of return (based on the 10 Year
Treasury Note). If the former, each deferred amount is assigned a number of hypothetical shares of our common stock at the time of the deferral based on the fair market value of the common stock on that date. The value of the deferred amount
fluctuates with the value of our common stock and may lose value. At the elected time pursuant to the nonqualified deferred compensation plan, the value of the deferred amount is paid to the NEO in cash. Currently, Mr. Fiske is the only NEO who
participates in this plan. Under Mr. Fiske’s employment agreement (see
Employment Agreements and Letters
—
Neil Fiske
below), the Company made a contribution of $1.5 million to the DCP on Mr. Fiske’s behalf at
the time of his hire, with the amount vesting over three years in three equal amounts of $500,000 each.
In 2008, the DCP was amended to:
(i) identify circumstances following a termination of the DCP that require distribution in lump sum of participant accounts, and allowable periods for such distribution, and (ii) provide for delayed lump sum payments to “specified
employees” (as defined in Section 409A) until the date that is the earlier of six months after such employee’s separation from service or his/her death.
Officer Relocation Benefits.
The Company offers relocation benefits to officers, which generally include temporary housing expenses and duplicate housing mortgage assistance for up to four
months, and payment of moving expenses, commission on sale of primary residence and some closing costs arising from the purchase of new residence, together with tax related costs. The Committee intends the benefit to neutralize a candidate’s
concerns with the economic impact of employment related relocation and considers it an important component in the creation of a competitive compensation offer by the Company.
Perquisite Allowance.
Our NEOs and certain other executives receive an executive perquisite allowance. This is to defray the cost of
auto expenses and/or financial, tax and estate planning costs. The allowance is paid in equal installments along with the NEO’s regular paycheck and varies by individual. The perquisite allowance is offered to be competitive with the market and
to continue to attract and retain highly qualified executive talent.
Employment and Separation Agreements.
During
fiscal year 2008, the employment of each of Mr. Fiske, Mr. Helton and Ms. Boyer, former SVP, Merchandising, was subject to an employment agreement.
90
In June 2007, upon the hiring of Mr. Fiske as the Company’s new President and Chief Executive
Officer, the Company and Mr. Fiske entered into an Employment Agreement dated June 12, 2007, with a term of three years, pursuant to which Mr. Fiske receives base salary, bonuses, and certain equity grants. The Employment Agreement
since has been amended three times: first in August 2008, to extend the period for reimbursement of costs of relocation and closing costs on permanent housing; second in December 2008, to bring his agreement into compliance with Section 409A;
and, once in January 2009, to evidence Mr. Fiske’s voluntary 10% reduction in base salary.
In July 2007, the Company hired Tom
Helton as its Senior Vice President, Chief Human Resources Officer, and in connection therewith, entered into an employment letter pursuant to which Mr. Helton received certain guaranteed severance in the event that his employment was
terminated under certain circumstances prior to the one year anniversary of his hire date.
On January 14, 2008, Ms. Boyer
tendered her resignation, effective January 31, 2008. In connection with her resignation, the Company agreed to make certain payments, totaling $607,590, in accordance with her employment agreement dated July 12, 2004, and pursuant to a
Separation Agreement, Waiver and Release, dated February 19, 2008.
The specifics regarding Mr. Fiske’s Employment
Agreement, Mr. Helton’s employment letter and Ms. Boyer’s Separation Agreement, and change in control payments for the NEOs are described in the section titled “
Employment Agreements; Termination and Change in Control
Payments
” below.
Deductibility of Executive Compensation
Certain awards made under the Company’s 2005 Plan qualify as performance-based compensation that will be fully deductible for federal income tax purposes under the $1 million cap rules of Section 162(m)
of the Code. However, in order to design compensation programs that address the Company’s needs, the Company has not established a policy which mandates that all compensation must be deductible under Section 162(m). The 2008 payment to
Mr. Fiske of a $600,000 bonus for 2007 guaranteed by his Employment Agreement, does not qualify as performance-based compensation under Section 162(m). For 2008, approximately $750,000 of compensation paid by the Company to Neil Fiske was
not deductible under Section 162(m) because certain amounts received as base salary, perquisite allowance, bonus, and relocation and legal cost reimbursements did not qualify as performance-based compensation and exceeded $1 million.
91
Summary Compensation Table
The following table sets forth all compensation paid or earned by our CEO, CFO, and each of our other three most highly compensated executive officers (whose compensation exceeded $100,000 during the last fiscal year)
for services rendered to us in the last three fiscal years, including the fiscal year ended January 3, 2009. In addition, disclosure is made for one additional individual (Kathleen Boyer) who, but for her resignation prior to the end of fiscal
2008, would have been considered an NEO.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)(1)
|
|
|
Stock
Awards
($)(2)
|
|
|
Option
Awards
($)(2)
|
|
|
NonEquity
Incentive
Plan
Compensation
($)
|
|
Change in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
|
All Other
Compensation
($)(3)
|
|
Total
($)
|
|
PEO-
|
|
Neil Fiske
|
|
2008
|
|
1,112,010
|
|
—
|
|
|
144,199
|
|
|
1,305,037
|
|
|
—
|
|
534,561
|
(5)
|
|
67,645
|
|
3,163,452
|
|
|
|
CEO
(4)
|
|
2007
|
|
528,846
|
|
1,200,000
|
(6)
|
|
61,174
|
|
|
619,798
|
|
|
—
|
|
—
|
|
|
625,822
|
|
3,035,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFO-
|
|
Marv Toland
|
|
2008
|
|
354,231
|
|
—
|
|
|
39,348
|
|
|
32,362
|
|
|
—
|
|
—
|
|
|
29,586
|
|
455,527
|
|
|
|
CFO
(7)
|
|
2007
|
|
42,967
|
|
—
|
|
|
2,442
|
|
|
1,480
|
|
|
—
|
|
—
|
|
|
2,529
|
|
49,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
Kimberly Berg
(8)
|
|
2008
|
|
412,500
|
|
18,000
|
(9)
|
|
136,106
|
|
|
61,970
|
|
|
—
|
|
—
|
|
|
24,779
|
|
653,355
|
|
|
|
SVP General Merchandising Manager
|
|
2007
|
|
272,593
|
|
42,000
|
(9)
|
|
226,354
|
|
|
45,360
|
|
|
10,157
|
|
—
|
|
|
20,186
|
|
616,650
|
|
|
|
|
2006
|
|
232,596
|
|
—
|
|
|
288,476
|
|
|
45,360
|
|
|
—
|
|
—
|
|
|
19,621
|
|
586,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
|
|
Ann Perinchief
|
|
2008
|
|
426,250
|
|
22,500
|
(10)
|
|
282,239
|
|
|
108,374
|
|
|
—
|
|
—
|
|
|
31,439
|
|
870,802
|
|
|
|
SVP, Customer Experience and Legendary Service
|
|
2007
|
|
381,538
|
|
52,500
|
(10)
|
|
528,160
|
|
|
105,840
|
|
|
22,126
|
|
—
|
|
|
31,698
|
|
1,121,862
|
|
|
|
|
2006
|
|
365,000
|
|
—
|
|
|
673,111
|
|
|
105,840
|
|
|
—
|
|
—
|
|
|
29,647
|
|
1,173,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D
|
|
Tom Helton
|
|
2008
|
|
392,404
|
|
—
|
|
|
46,754
|
|
|
97,053
|
|
|
—
|
|
—
|
|
|
55,036
|
|
591,247
|
|
|
|
SVP and Chief Human Resources Officer
(11)
|
|
2007
|
|
192,500
|
|
235,000
|
|
|
14,239
|
|
|
37,047
|
|
|
—
|
|
—
|
|
|
48,609
|
|
527,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E
|
|
Kathleen Boyer
(12)
|
|
2008
|
|
50,481
|
|
30,000
|
(13)
|
|
(268,311
|
)
|
|
(16,818
|
)
|
|
—
|
|
—
|
|
|
628,553
|
|
423,905
|
|
|
|
Former SVP Merchandising
|
|
2007
|
|
520,673
|
|
70,000
|
(13)
|
|
528,160
|
|
|
105,840
|
|
|
30,172
|
|
—
|
|
|
34,047
|
|
1,288,892
|
|
|
|
|
2006
|
|
500,000
|
|
—
|
|
|
673,111
|
|
|
105,840
|
|
|
—
|
|
—
|
|
|
33,704
|
|
1,312,655
|
|
(1)
|
Bonuses are reported in the year earned. Signing bonuses are reported in the year employment is accepted. Performance-based bonuses are earned in the year of performance.
Retention-based bonuses are earned in the year vested.
|
|
(2)
|
The dollar amounts in these columns reflect the compensation expense/(income) recognized for financial statement reporting purposes for the fiscal year ended January 3, 2009,
in accordance with SFAS 123(R), and include amounts from awards granted prior to and during fiscal 2008. The assumptions used in the calculation of these amounts are included in
“Note 13—Notes to Consolidated Financial
Statements”
, with the exception that a forfeiture rate of 0% was assumed, other than for Ms. Boyer. Actual individual forfeitures in 2008 of certain awards made in 2005 to Ms. Boyer occurred as result of Ms. Boyer’s
resignation prior to the full vesting of such awards, and such forfeitures impact the compensation expense/(income) only for the stock and option awards to Ms. Boyer.
|
|
(3)
|
Specifics of the components of “All Other Compensation” are contained in the table below.
|
|
(4)
|
Mr. Fiske became President and CEO of the Company as of July 9, 2007, and so had a partial year of compensation in 2007.
|
|
(5)
|
Consists of the vesting on July 9, 2008 of $500,000, which is the first of three equal installments of a Company-provided allocation in the aggregate of $1,500,000 credited to
the Company DCP for Mr. Fiske’s benefit under the terms of Mr. Fiske’s Employment Agreement dated June 12, 2007, together with earnings accrued from July 9, 2007 to January 3, 2009 on such first installment. See
“Employment Agreement and Letters—Neil Fiske.”
|
|
(6)
|
Consists of a $600,000 signing bonus and a $600,000 guaranteed performance bonus for fiscal 2007. The performance bonus was paid in 2008.
|
|
(7)
|
Mr. Toland was hired as Chief Financial Officer effective November 14, 2007, and therefore had a partial year of compensation in 2007.
|
|
(8)
|
Ms. Berg was promoted to Senior Vice President, General Manager Merchandising effective February 1, 2008.
|
|
(9)
|
Ms. Berg received a retention bonus of $60,000, payable in three installments in April and September 2007 and January 2008.
|
|
(10)
|
Ms. Perinchief received a retention bonus of $75,000, payable in three installments in April and September 2007 and January 2008.
|
|
(11)
|
Mr. Helton commenced employment as Senior Vice President, Chief Human Resources Officer on July 2, 2007, and therefore had a partial year of compensation in 2007.
Mr. Helton received a $155,000 signing bonus in 2007 and a guaranteed performance bonus for fiscal 2007 of $80,000, paid in 2008. See
“Employment Agreements and Letters—Tom Helton.”
|
|
(12)
|
Ms. Boyer resigned her position effective January 31, 2008, and therefore has a partial year of compensation for 2008.
|
|
(13)
|
Ms. Boyer received a retention bonus in 2007 of $100,000, payable in three installments in April and September 2007 and January 2008.
|
92
All Other Compensation shown in the above Summary Compensation table consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Executive
|
|
Year
|
|
Perquisite
Allowance
|
|
VIP Long
Term
Disability
Premiums
|
|
Value of
Supplemental
Life
Insurance
Premiums
|
|
401(k)
Contribution
|
|
Other
|
|
|
Other
Cash
Payments
|
|
|
Total
|
|
PEO-
|
|
Neil Fiske
|
|
2008
|
|
$
|
20,385
|
|
$
|
3,500
|
|
$
|
2,304
|
|
$
|
—
|
|
$
|
41,456
|
(1)
|
|
$
|
—
|
|
|
$
|
67,645
|
|
|
|
|
|
2007
|
|
|
9,615
|
|
|
1,458
|
|
|
768
|
|
|
—
|
|
|
613,981
|
(2)
|
|
|
—
|
|
|
|
625,822
|
|
|
|
|
|
|
|
|
|
|
|
|
PFO-
|
|
Marv Toland
|
|
2008
|
|
|
14,269
|
|
|
2,427
|
|
|
1,536
|
|
|
10,679
|
|
|
675
|
(3)
|
|
|
—
|
|
|
|
29,586
|
|
|
|
|
|
2007
|
|
|
1,615
|
|
|
198
|
|
|
128
|
|
|
588
|
|
|
—
|
|
|
|
—
|
|
|
|
2,529
|
|
|
|
|
|
|
|
|
|
|
|
|
A.
|
|
Kimberly Berg
|
|
2008
|
|
|
13,992
|
|
|
3,436
|
|
|
1,536
|
|
|
5,115
|
|
|
700
|
(3)
|
|
|
—
|
|
|
|
24,779
|
|
|
|
|
|
2007
|
|
|
11,000
|
|
|
2,695
|
|
|
1,521
|
|
|
4,720
|
|
|
250
|
(3)
|
|
|
—
|
|
|
|
20,186
|
|
|
|
|
|
2006
|
|
|
11,000
|
|
|
2,435
|
|
|
1,437
|
|
|
4,749
|
|
|
—
|
|
|
|
—
|
|
|
|
19,621
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
|
Ann Perinchief
|
|
2008
|
|
|
14,269
|
|
|
3,500
|
|
|
2,243
|
|
|
10,752
|
|
|
675
|
(3)
|
|
|
—
|
|
|
|
31,439
|
|
|
|
|
|
2007
|
|
|
14,000
|
|
|
3,499
|
|
|
2,247
|
|
|
11,702
|
|
|
250
|
(3)
|
|
|
—
|
|
|
|
31,698
|
|
|
|
|
|
2006
|
|
|
14,000
|
|
|
3,500
|
|
|
2,247
|
|
|
9,900
|
|
|
—
|
|
|
|
—
|
|
|
|
29,647
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
|
Tom Helton
|
|
2008
|
|
|
25,961
|
|
|
2,695
|
|
|
1,536
|
|
|
—
|
|
|
24,844
|
(3)(4)
|
|
|
—
|
|
|
|
55,036
|
|
|
|
|
|
2007
|
|
|
12,500
|
|
|
1,123
|
|
|
640
|
|
|
—
|
|
|
34,346
|
(3)(5)
|
|
|
—
|
|
|
|
48,609
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
|
Kathleen Boyer
|
|
2008
|
|
|
1,730
|
|
|
292
|
|
|
384
|
|
|
2,521
|
|
|
6,139
|
(3)(6)
|
|
|
617,487
|
(7)
|
|
|
628,553
|
|
|
|
|
|
2007
|
|
|
18,000
|
|
|
3,500
|
|
|
2,304
|
|
|
10,043
|
|
|
200
|
(3)
|
|
|
—
|
|
|
|
34,047
|
|
|
|
|
|
2006
|
|
|
18,000
|
|
|
3,500
|
|
|
2,304
|
|
|
9,900
|
|
|
—
|
|
|
|
—
|
|
|
|
33,704
|
|
(1)
|
Consists of $23,508 in temporary housing, $8,454 reimbursement of related tax costs, and $9,494 in travel costs.
|
|
(2)
|
Consists of $38,676 for temporary housing, $567,817 for security in response to a work-related threat of violence and $7,488 for travel costs.
|
|
(3)
|
Company-paid parking costs.
|
|
(4)
|
Consists of $9,151 in moving expenses, $3,291 reimbursement of related tax costs and $11,727 in household shipping costs.
|
|
(5)
|
Consists of $21,409 in temporary housing expenses, $8,937 reimbursement of related tax costs, $2,025 in travel costs and $1,826 in storage costs.
|
|
(6)
|
Company-paid medical and dental insurance premiums paid in conjunction with Separation Agreement.
|
|
(7)
|
Consists of $597,590 in severance related pay, $10,000 in relocation reimbursements and $9,897 in accrued and unpaid vacation.
|
93
Grants of Plan-Based Awards Table
The following table sets forth certain information regarding the grant of plan-based awards made during the fiscal year ended January 3, 2009, to the NEOs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
Under Non-Equity Incentive
Plan Award(1)
|
|
Estimated Future
Payouts Under Equity
Incentive Plan Awards
|
|
All Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#)
|
|
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(2)
|
|
Exercise
of Base
Price of
Option
Awards
($/Sh)
|
|
Closing
Market
Price
on
Date of
Grant
($)
|
|
Grant
Date
Fair
Value
of
Stock
and
Option
Award
($)
|
|
|
|
Name
|
|
Grant
Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Max
($)
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Max
(#)
|
|
|
|
|
|
|
PEO-
|
|
Neil Fiske
(3)
|
|
—
|
|
302,500
|
|
1,210,000
|
|
2,420,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
5/2/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
25,000
|
|
—
|
|
—
|
|
3.91
|
|
97,750
|
|
|
|
|
|
5/2/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
25,000
|
|
—
|
|
3.91
|
|
52,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFO-
|
|
Marv Toland
(4)
|
|
—
|
|
63,000
|
|
252,000
|
|
504,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
24,073
|
|
—
|
|
|
|
4.30
|
|
103,514
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
45,927
|
|
—
|
|
4.30
|
|
106,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.
|
|
Kimberly Berg
(5)
|
|
—
|
|
73,500
|
|
294,000
|
|
588,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
27,512
|
|
—
|
|
—
|
|
4.30
|
|
118,302
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
52,488
|
|
—
|
|
4.30
|
|
121,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
|
Ann Perinchief
(6)
|
|
—
|
|
74,375
|
|
297,500
|
|
595,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
22,354
|
|
—
|
|
—
|
|
4.30
|
|
96,122
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
42,647
|
|
—
|
|
4.30
|
|
98,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
|
Tom Helton
(7)
|
|
—
|
|
67,375
|
|
269,500
|
|
539,000
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,756
|
|
—
|
|
—
|
|
4.30
|
|
59,151
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
26,244
|
|
—
|
|
4.30
|
|
60,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
|
Kathleen Boyer
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1)
|
Specified targets were not met for 2008 and no STIP payouts were made. Under the 2008 STIP, bonuses were funded from a payout pool once specified targets based on consolidated
EBITDA were exceeded. The funding of this pool equates to roughly 100% of payout target. The threshold, target and maximum is based on the target percentage of base salary for bonus calculations set for the individual NEO multiplied by the annual
base salary at fiscal year end. For disclosure of the material features of the STIP and funding thereof, see “
2008 STIP
”.
|
|
(2)
|
For disclosure concerning the features of stock-only stock appreciation rights see “
2008 LTIP
”.
|
|
(3)
|
Mr. Fiske received a grant on May 2, 2008 of 25,000 RSUs with a fouryear cliff vest and 25,000 SOSARs vesting ratably over four years beginning on the first anniversary of
the grant date.
|
|
(4)
|
Mr. Toland received a grant on March 19, 2008 of 24,073 RSUs with a four year cliff vest and 45,927 SOSARs vesting ratably over four years beginning on the first
anniversary of the grant date with a ten year expiration date.
|
|
(5)
|
Ms. Berg received a grant on March 19, 2008 of 27,512 RSUs with a four year cliff vest and 52,488 SOSARs vesting ratably over four years beginning on the first anniversary
of the grant date with a ten year expiration date.
|
|
(6)
|
Ms. Perinchief received a grant on March 19, 2008 of 22,354 RSUs with a four year cliff vest and 42,647 SOSARs vesting ratably over four years beginning on the first
anniversary of the grant date with a ten year expiration date.
|
|
(7)
|
Mr. Helton received a grant on March 19, 2008 of 13,756 RSUs with a four year cliff vest and 26,244 SOSARs vesting ratably over four years beginning on the first
anniversary of the grant date with a ten year expiration date.
|
94
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth, for each of the NEOs, certain information regarding outstanding equity awards on January 3, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
Name
|
|
Grant
Date
|
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
|
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or Units
of Stock
that
Have
Not
Vested
(#)
|
|
Market
Value
of
Shares
or
Units
of
Stock
that
Have
Not
Vested
($)(1)
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
that
Have
Not
Vested
(#)
|
|
Equity
Incentive
Plan
Awards:
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
that
Have
Not
Vested
($)
|
|
PEO-
|
|
Neil Fiske
(2)
|
|
7/9/07
|
|
25,000
|
|
75,000
|
|
—
|
|
13.48
|
|
7/9/2017
|
|
37,089
|
|
28,188
|
|
—
|
|
—
|
|
|
|
|
|
7/9/07
|
|
—
|
|
300,000
|
|
—
|
|
13.48
|
|
7/9/2012
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
7/9/07
|
|
—
|
|
300,000
|
|
—
|
|
13.48
|
|
7/9/2014
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
5/2/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
25,000
|
|
19,000
|
|
—
|
|
—
|
|
|
|
|
|
5/2/08
|
|
—
|
|
25,000
|
|
—
|
|
3.91
|
|
5/2/2018
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PFO-
|
|
Marv Toland
(3)
|
|
11/14/07
|
|
1,000
|
|
3,000
|
|
—
|
|
6.90
|
|
11/14/2017
|
|
11,000
|
|
8,360
|
|
—
|
|
—
|
|
|
|
|
|
11/14/07
|
|
—
|
|
8,000
|
|
—
|
|
6.90
|
|
11/14/2012
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
11/14/07
|
|
—
|
|
8,000
|
|
—
|
|
6.90
|
|
11/14/2014
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
24,073
|
|
18,295
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
45,927
|
|
—
|
|
4.30
|
|
3/19/2018
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A.
|
|
Kimberly Berg
(4)
|
|
11/3/05
|
|
15,750
|
|
—
|
|
—
|
|
23.37
|
|
11/3/2015
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
27,512
|
|
20,909
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
52,488
|
|
—
|
|
4.30
|
|
3/19/2018
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
|
Ann Perinchief
(5)
|
|
11/3/05
|
|
36,750
|
|
—
|
|
—
|
|
23.37
|
|
11/3/2015
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
22,354
|
|
16,989
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
42,647
|
|
—
|
|
4.30
|
|
3/19/2018
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.
|
|
Tom Helton
(6)
|
|
7/2/07
|
|
14,500
|
|
43,500
|
|
—
|
|
12.75
|
|
7/2/2017
|
|
11,000
|
|
8,360
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
13,756
|
|
10,455
|
|
—
|
|
—
|
|
|
|
|
|
3/19/08
|
|
—
|
|
26,244
|
|
—
|
|
4.30
|
|
3/19/2018
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
|
Kathleen Boyer
(7)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1)
|
Market value based on the closing price on the NASDAQ Global Market on January 2, 2009, the last business day in fiscal year 2008, which was $0.76.
|
|
(2)
|
On July 9 2007, Mr. Fiske received 100,000 stock options vesting ratably over four years with a ten-year expiration date, and two 300,000 option grants, each performance
based, vesting on the achievement of a $25 and $35 per share stock price for 30 consecutive days and expiring in five and seven years, respectively. Both the 100,000 time-vested options and 600,000 performance-based options have a strike price of
$13.48, which was the 30-day average closing price prior to Mr. Fiske’s date of hire. Of the 100,000 time-vested stock options, 25,000 vested and became exercisable on July 9, 2008. On May 2, 2008, Mr. Fiske received an
additional grant of 25,000 SOSARs at $3.91 per share vesting ratably over four years with a ten year expiration date and 25,000 RSUs with a four-year cliff vest.
|
|
(3)
|
On November 14, 2007, Mr. Toland received 4,000 stock options vesting ratably over four years with a ten-year expiration date, and two 8,000 option grants, each
performance based, vesting on the achievement of a $25 and $35 per share stock price for 30 consecutive days and expiring in five and seven years, respectively. 1,000 of the 4,000 stock options vested and became exercisable on November 14,
2008. On March 19, 2008, Mr. Toland received an additional grant of 45,927 SOSARs at $4.30 per share vesting ratably over four years with a ten year expiration date and 24,073 RSUs with a four-year cliff vest.
|
|
(4)
|
Ms. Berg’s remaining 3,938 stock options from her November 3, 2005 grant vested and became exercisable on November 3, 2008, and her remaining 9,750 RSUs from her
November 3, 2005 grant vested on July 1, 2008, which settlement was delayed to August 14, 2008. On March 19, 2008, Ms. Berg received an additional grant of 52,488 SOSARs at $4.30 per share vesting ratably over four years
with a ten year expiration date and 27,512 RSUs with a four-year cliff vest.
|
|
(5)
|
Ms. Perinchief’s remaining 9,188 stock options from her November 3, 2005 grant vested and became exercisable on November 3, 2008, and her remaining 22,750 RSUs
from her November 3, 2005 grant vested on July 1, 2008, which settlement was delayed to August 14, 2008. On March 19, 2008, Ms. Perinchief received an additional grant of 42,647 SOSARs at $4.30 per share vesting ratably over
four years with a ten year expiration date and 22,354 RSUs with a four-year cliff vest.
|
|
(6)
|
On July 2, 007 Mr. Helton received 58,000 stock options with an exercise price of $12.75 per share vesting ratably annually over four years with a ten-year expiration
date. 14,500 of the 58,000 vested and became exercisable on July 2, 2008. On March 19, 2008, Mr. Helton received an additional grant of 26,244 SOSARs at $4.30 per share vesting ratably over four years with a ten year expiration date
and 13,756 RSUs with a four-year cliff vest.
|
|
(7)
|
Ms. Boyer resigned effective January 31, 2008, and all unvested options and restricted stock units were forfeited at such time. Ms. Boyer did not exercise vested
stock options prior to their expiration, which occurred three months after her resignation.
|
95
Option Exercises and Stock Vested
The following table sets forth, for each of the NEOs, the amounts received upon the exercise of options or similar instruments, and the vesting of restricted stock or similar instruments, during the fiscal year ended
January 3, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
Name
|
|
|
|
Number of Shares
Acquired
on Exercise (#)
|
|
Value Realized
on Exercise
($)
|
|
Number of Shares
Acquired
on Vesting (#)
|
|
Value Realized
on Vesting
($)
|
|
|
PEO-
|
|
Neil Fiske
|
|
2008
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
PFO-
|
|
Marv Toland
|
|
2008
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
A.
|
|
Kimberly Berg
|
|
2008
|
|
—
|
|
—
|
|
9,750
|
|
39,683
|
(1)
|
|
B.
|
|
Ann Perinchief
|
|
2008
|
|
—
|
|
—
|
|
22,750
|
|
92,593
|
(1)
|
|
C.
|
|
Tom Helton
|
|
2008
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
D.
|
|
Kathleen Boyer
(2)
|
|
2008
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(1)
|
RSUs held by NEOs, including Ms. Berg and Ms. Perinchief, vested on July 1, 2008 (based on a price of $4.07 per share). However, as a result of certain trading
restrictions, the Company offered the NEOs the opportunity to defer settlement of the RSUs and issuance of the underlying stock until August 14, 2008. Ms. Berg and Ms. Perinchief deferred settlement of the RSUs until August 14,
2008. The value realized by each of Ms. Berg and Ms. Perinchief at the August 14, 2008 settlement date (based on a closing price of $6.74 per share) was $65,715 and $153,335, respectively.
|
|
(2)
|
Ms. Boyer resigned effective January 31, 2008, and all 9,188 unvested options and 22,750 RSUs were forfeited at such time. Ms. Boyer did not exercise remaining vested
stock options in the aggregate amount of 27,562 prior to their expiration three months, which occurred after her resignation.
|
Nonqualified Deferred Compensation
The following table sets forth for each of the NEOs the contributions and earnings with
respect to the Company’s DCP for the fiscal year ended January 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Executive
|
|
Executive
Contributions in
Last Fiscal
Year($)
|
|
Registrant
Contributions in
Last Fiscal Year
|
|
Aggregate
Earnings in Last
Fiscal Year($)
|
|
|
Aggregate
Withdrawals
Distributions
|
|
Aggregate Balance
at Last Fiscal
Year End($)
|
|
PEO
|
|
Neil Fiske
(1)
|
|
500,000
|
|
—
|
|
34,561
|
(2)
|
|
—
|
|
534,561
|
|
PFO
|
|
Marv Toland
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
A.
|
|
Kimberly Berg
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
B.
|
|
Ann Perinchief
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
C.
|
|
Tom Helton
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
D.
|
|
Kathleen Boyer
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
(1)
|
A Company-provided allocation of $1,500,000 (the “Deferred Compensation Award”) was credited to a Company contribution account on behalf of Mr. Fiske
on his hire date July 9, 2007 (the “Start Date”). The Deferred Compensation Award vests in three equal installments on each of the three consecutive anniversaries. The first installment of $500,000 together with earnings thereon from
July 9, 2007 through January 3, 2009, are reported above under
Aggregate Balance at Last Fiscal Year End
, and also in the
Summary Compensation Table
for 2008 under
Change in Pension Value & Nonqualified Deferred
Compensation Earnings.
The account balance will be paid to Mr. Fiske on the third anniversary of his Start Date. If Mr. Fiske leaves the Company voluntarily before a vesting date, he will forfeit any unvested portion of the balance
including any interest that has been credited to the account based on the unvested value. In the event his employment is terminated by the Company for reasons other than misconduct or he terminates for “Good Reason” before the third
anniversary of his date of hire, his deferred compensation award including interest earned on the vested portion will become vested on a pro rata basis equal to the
|
96
|
|
percentage determined by dividing (x) the sum of : (i) the number of full months of completed service (based on the anniversary of his start date),
plus (ii) 12 months, by (y) 36 months. The amount will be distributable as soon as practical, but in no event earlier than six months following termination as a key employee. In the event his employment terminates on account of death or
disability or if he continues to be employed upon the occurrence of a Change in Control, his deferred compensation award will become fully vested and immediately distributable. Distribution will be in the form of a lump sum. For disclosure of
general material features of the DCP, see “
Nonqualified Deferred Compensation
” above.
|
|
(2)
|
Mr. Fiske selected as his investment option an account which pays a fixed rate of return based on the Ten Year Treasury Note. Interest is accrued and credited on a quarterly
basis, and is readjusted annually based on the prior year September monthly average for a 10 Year Treasury Note. For 2008, the interest was fixed at 1.1113% quarterly, 4.52% annualized. For 2007, the interest was fixed at 1.1379% quarterly, 4.63%
annualized.
|
Employment Agreements and Letters; Termination and Change in Control Payments
During fiscal 2008, we had employment agreements or letters with Neil Fiske, President and Chief Executive Officer and Tom Helton, Senior Vice President
and Chief Human Resources Officer, and an employment agreement with Kathleen Boyer, former SVP, Merchandising, who resigned in January 2008. The Company entered into a Separation Agreement with Ms. Boyer upon her resignation. Each of these
agreements provides for payments upon certain termination events. In addition, each of our current NEOs is eligible to participate in the Change in Control Plan, which was established in November 2005, and amended and restated in June 2006, and
amended for Section 409A in December 2008. For a description of the Change in Control Plan, see
“Compensation Discussion and Analysis—Other Benefits—Change in Control”
above. Fabian Månsson, former President,
Chief Executive Officer and a director, resigned in February 2007, and the separation agreement connected to his resignation obligated the Company to make certain payments to him, as described below under
Other—Fabian Månsson
.
Neil Fiske
Salary and Equity.
Under the terms of the Employment Agreement with Mr. Fiske, Mr. Fiske’s annual salary is $1,100,000 and he is eligible to earn annual target bonuses of 110% of salary, based on achieving
specific target performance criteria. The target bonus opportunity ranges from 0% to 200% of base salary. As provided by the terms of his Employment Agreement Mr. Fiske received a sign-on bonus in the amount of $600,000, and a guaranteed 2007
performance bonus in the amount of $600,000 paid in 2008. Mr. Fiske was entitled to receive reimbursement for certain legal fees, up to a maximum of $20,000, in connection with negotiating his agreement with the Company, as well as reasonable
relocation expenses and a relocation bonus of up to $200,000 if Mr. Fiske incurs a loss on the sale of his personal residence in Columbus, Ohio. The Company and Mr. Fiske entered into the First Amendment to Employment Agreement on
August 5, 2008, providing for an extension through July 8, 2009 of coverage of temporary housing expenses, house hunting costs and the reimbursement of relocation costs, together with commuting costs between Seattle and Columbus, and an
extension through July 8, 2010 of the coverage of closing costs for the purchase of a permanent residence, the moving allowance and the relocation bonus for coverage of loss from the sale of his current residence.
On December 31, 2008, the Company and Mr. Fiske entered into the Second Amendment to Letter Agreement. The Letter Agreement provided that,
under certain circumstances, severance benefits would be governed by the provisions of the CIC Plan, unless the CIC Plan was modified in a manner that would result in a reduction of severance benefits payable, in which case the terms of the Letter
Agreement would control. Under the terms of the Letter Agreement, in the event of termination of employment by Mr. Fiske for Good Reason, or by the Company for reasons other than misconduct, and in the absence of a change in control,
Mr. Fiske would be entitled to benefits including an amount equal to two times salary and bonus, and in the event of termination in change of control circumstances, three times salary and bonus. In order to comply with Section 409A, the
Letter Agreement has been amended to: (i) conform the definition of “Change in Control” therein to the definition provided in Section 409A; and (ii) change severance payments from periodic to lump-sum.
97
In January 2009, as part of the cost reductions being taken by the Company, Mr. Fiske requested and
the Board agreed to reduce his base salary by 10% for the remainder of 2009, as reflected by the Third Amendment to Letter Agreement dated January 29, 2009.
DCP Contribution.
Mr. Fiske is entitled to a Company-provided allocation of $1,500,000 (the “Deferred Compensation Award”) to be credited to a Company contribution account for his benefit
under the terms of the Company’s Non-Qualified Deferred Compensation Plan. The Deferred Compensation Award vests in three equal installments of one-third of the account balance on each of the first three anniversaries of the Start Date, and
$500,000 was credited to a deferred compensation account for Mr. Fiske in July 2008.
Termination without Cause.
If
Mr. Fiske’s employment is terminated during the term of the Agreement by the Company for other than Misconduct (as defined in the Agreement), or by Mr. Fiske for Good Reason (as defined in the Agreement), he is entitled to accrued but
unpaid bonuses, severance pay, payable in monthly installments, equal to two times base salary and target bonus, payable over 24 months, accelerated vesting of the restricted stock units and stock options and group health continuation coverage,
in addition to accrued but unpaid base salary, accrued vacation and unpaid business expense reimbursements.
Change In
Control.
If Mr. Fiske is employed by the Company upon the occurrence of a change in control, Mr. Fiske’s restricted stock units will become fully vested, the time vested stock options and SOSARs will become immediately
exercisable, the Deferred Compensation Award will become fully vested and immediately distributable and the performance based options will vest if the per share consideration in the change in control is equal to or exceeds the $25 or $35 vesting
thresholds. If Mr. Fiske’s employment is terminated within 24 months of a change in control, he will be entitled to severance pay equal to three times base salary plus three times the target bonus, payable in lump sum.
As part of his Agreement, Mr. Fiske is subject to confidentiality obligations, a covenant not to solicit or hire management personnel of the
Company, and a 24-month noncompetition covenant pursuant to which Mr. Fiske may not work for certain identified retail competitors of the Company. As an officer of the Company, Mr. Fiske is entitled to participate in the Company’s
executive benefit plans and programs.
Tom Helton
Salary and Equity.
Under the terms of the employment letter with Mr. Helton, Mr. Helton’s annual salary is $385,000; he is
eligible to earn annual target bonuses of 70% of base salary, based on achieving specific individual and Company target performance criteria, reimbursement for certain reasonable relocation expenses, and $25,000 annual perquisite allowance payable
bi-monthly. As an officer of the Company, Mr. Helton is entitled to participate in the Company’s executive benefit plans and programs.
Kathleen Boyer
Separation Agreement with Kathleen Boyer.
On January 14, 2008, Ms. Boyer
resigned from her position as Senior Vice President, Chief Merchandising Officer, effective January 31, 2008. In connection with Ms. Boyer’s resignation, the Company and Ms. Boyer entered into a Separation Agreement, Waiver and
Release, which provided for the payment to Ms. Boyer of the following amounts, which are substantially the amounts Ms. Boyer was entitled to receive in the event of termination without Cause under her employment letter agreement entered
into July 12, 2004: (i) accrued but unpaid compensation through January 31, 2008 and severance compensation; (ii) unused benefits, such as vacation days through January 31, 2008; (iii) 105% of Ms. Boyer’s
annual base salary of $525,000 and the average of bonuses paid for the preceding two years; and (iv) a relocation payment of $10,000.
98
Other—Fabian Månsson
Separation Agreement with Fabian Månsson.
The Company believes that the amount of payment made to Mr. Månsson as
contractually required pursuant to the terms of his Separation Agreement and General Release makes disclosure hereunder appropriate, although not required. Mr. Månsson was not a Named Executive Officer or Director at any time during
fiscal 2008, having resigned from his position as Chief Executive Officer and President of the Company and as a member of the Board of Directors of the Company effective February 9, 2007. In connection with such resignation, the Company and
Mr. Månsson entered into Separation Agreement and Release. Pursuant to the terms of the Separation Agreement and Release, in 2008 the Company paid Mr. Månsson $2,092,930, an amount equivalent to his base annual salary plus
bonus, plus certain residential closing costs and shipping fees related to Mr. Månsson’s relocation. In December 2008, the Separation Agreement and General Release with Mr. Månsson was amended to conform with
Section 409A to (i) delete a date that has already occurred for performance of certain obligations previously performed, and (ii) modify provisions relating to medical benefits, which were no longer available to Mr. Månsson
in any event, to prohibit limitation of the amount eligible for reimbursement of payment in one calendar year from affecting the amount eligible in any other calendar year, and to limit the nature and timing of payment of medical expenses and
reimbursements.
99
Eddie Bauer Termination Benefits
For purposes of the following termination benefits table, we have assumed that as of January 3, 2009, no NEO had (i) accrued and unpaid base salary, (ii) accrued and unpaid salary with respect to
vacation days accrued but not taken through the date of termination, and (iii) any amounts or benefits earned, accrued or owing under any Company plan or program, which we collectively refer to as the “Accrued Compensation.” Upon a
termination “By Company for Cause” or “By Officer Without Good Reason,” NEOs are entitled solely to Accrued Compensation. Since we have assumed that no Accrued Compensation is owing as of January 3, 2009, we have not
included these termination amounts in the table below. After Ms. Boyer’s resignation in January 2008, she was not eligible to receive payments upon a Change in Control, and therefore is not included within the Change of Control information
below. Mr. Fiske’s employment agreement provides for severance benefits upon certain non-change in control termination events. The supplemental severance benefits provided under Mr. Helton’s employment letter agreement expired in
July 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Separation
Benefit(1)
|
|
Value of
Accelerated
Equity
Awards(2)
|
|
Deferred
Compensation(3)
|
|
Excise Tax
Gross
Up(4)
|
|
Life
Insurance
Proceeds(5)
|
|
Long-
Term
Disability
Payments
|
|
Total
|
|
Neil Fiske
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company Without Cause
|
|
$
|
4,652,042
|
|
$
|
17,030
|
|
$
|
861,238
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,530,310
|
|
By Officer for Good Reason
|
|
$
|
4,652,042
|
|
|
17,030
|
|
|
861,238
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,530,310
|
|
Change in Control
|
|
$
|
8,238,063
|
|
|
47,188
|
|
|
1,069,123
|
|
|
3,024,980
|
|
|
—
|
|
|
—
|
|
|
12,379,354
|
|
Death
|
|
$
|
—
|
|
|
47,188
|
|
|
1,069,123
|
|
|
—
|
|
|
1,500,000
|
|
|
—
|
|
|
2,616,311
|
|
Disability
|
|
$
|
—
|
|
|
47,188
|
|
|
1,069,123
|
|
|
—
|
|
|
—
|
|
|
5,325,000
|
|
|
6,441,311
|
|
Marv Toland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company Without Cause
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
By Officer for Good Reason
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in Control
|
|
$
|
1,530,168
|
|
|
26,655
|
|
|
—
|
|
|
579,613
|
|
|
—
|
|
|
—
|
|
|
2,136,436
|
|
Death
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,440,000
|
|
|
—
|
|
|
1,440,000
|
|
Disability
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,798,000
|
|
|
3,798,000
|
|
Kimberly Berg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company Without Cause
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
By Officer for Good Reason
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in Control
|
|
$
|
1,770,486
|
|
|
20,909
|
|
|
—
|
|
|
627,506
|
|
|
—
|
|
|
—
|
|
|
2,418,901
|
|
Death
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,500,000
|
|
|
—
|
|
|
1,500,000
|
|
Disability
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,532,999
|
|
|
6,532,999
|
|
Ann Perinchief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company Without Cause
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
By Officer for Good Reason
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in Control
|
|
$
|
1,793,318
|
|
|
16,989
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,810,307
|
|
Death
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,500,000
|
|
|
—
|
|
|
1,500,000
|
|
Disability
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,811,814
|
|
|
2,811,814
|
|
Tom Helton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By Company Without Cause
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
By Officer for Good Reason
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in Control
|
|
$
|
1,626,295
|
|
|
18,815
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,645,110
|
|
Death
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,500,000
|
|
|
—
|
|
|
1,500,000
|
|
Disability
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
924,000
|
|
|
924,000
|
|
(1)
|
All the NEOs are covered by the Company’s Change in Control Plan. Unvested equity grants vest upon a change-in-control, while cash severance and medical benefits coverage are
only paid following a change in control if there is an involuntary termination without Cause or voluntary termination for Good Reason (as defined in the Plan). Neil Fiske’s employment agreement provides severance benefits following
non-change-in-control termination.
|
|
(2)
|
Under the terms of Mr. Fiske’s employment agreement, upon an involuntary not for cause termination or a voluntary for good reason separation, a portion of his restricted
stock and time-vested stock options’ vesting will accelerate. Upon termination as a result of death or disability, the vesting of all unvested restricted stock and time-vested stock options accelerates.
|
|
(3)
|
Following a change-in-control or upon termination resulting from death or disability, all of Mr. Fiske’s unvested deferred compensation balance vest. Upon an involuntary
termination not for cause or a voluntary termination for good reason, a portion of Mr. Fiske’s unvested deferred compensation balance vests.
|
100
|
(4)
|
All NEOs are eligible to receive tax gross-ups should they be subject to excise tax following a change in control. Ms. Perinchief’s and Mr. Helton’s change in
control payment calculations do not trigger excise tax under the current assumptions. If it is determined that Mr. Fiske is entitled to a gross-up payment and a reduction in change in control benefit payments by $50,000 or less would eliminate
his excise tax liability, benefit amounts payable shall be reduced so that excise tax does not apply.
|
|
(5)
|
Up to four times base salary, with maximum benefit capped at $1.5 million.
|
Director Compensation
In 2008, directors were entitled to receive the following compensation for service on the
Company’s Board of Directors and committees of the Board:
|
|
|
|
|
|
|
Payment Classification
|
|
Amount Per Period
|
|
Payable
|
|
Director Retainer
|
|
$65,000/year
|
|
Quarterly in advance
|
|
2005 Initial Option Grant
|
|
$150,000 in value
(1)
|
|
One-time option grant
|
|
Director Annual Equity Grants
|
|
$100,000 in RSUs
(2)
|
|
Annually after annual meeting
|
|
Chair of the Board
|
|
$65,000/year
|
|
Quarterly in advance
|
|
Board meeting fee
|
|
$1,500/mtg
|
|
Quarterly in arrears
|
|
Committee meeting fee
|
|
$1,250/mtg
|
|
Quarterly in arrears
|
|
Chair of Audit Committee
|
|
$20,000/year
|
|
Quarterly in advance
|
|
Chair of Compensation Committee
|
|
$15,000/year
|
|
Quarterly in advance
|
|
Chair of Nominating and Corporate Governance Committee
|
|
$10,000/year
|
|
Quarterly in advance
|
|
(1)
|
Members of the Board in 2005 received an initial grant of stock options in 2005 equal to $150,000 on the date of grant, based on the closing price of the Company’s common stock
on the date of grant. No additional stock options have been granted.
|
|
(2)
|
Board members received an annual grant of RSUs in 2008 equal to $100,000 on the date of grant, based on the closing price of the Company’s common stock on the NASDAQ market on
such day. RSUs vest ratably over three years.
|
Non-employee directors may, at their election, defer any portion of or their
entire cash retainer, meeting fees and any other fees under our nonqualified deferred compensation plan. Directors also may defer, at the time of grant, RSUs granted to the deferred compensation plan, provided the deferral is made at least
12 months prior to the date of vesting. When a director elects to defer a portion of his or her cash compensation such amount is allocated to an account that tracks the performance of our common stock. Each deferred amount is assigned a number
of hypothetical shares of our common stock at the time of the deferral based on the fair market value of the common stock on that date. The value of the deferred amount fluctuates with the value of our common stock and may lose value. At the elected
time pursuant to the nonqualified deferred compensation plan, the value of the deferred amount is paid to the director in cash. Deferrals of RSUs are tracked in share amounts and the shares reflected in the deferred RSUs are distributed to the
director at the elected distribution time.
Effective as of January 1, 2009, in recognition of the difficult economic times and to
facilitate a cost-reduction program announced by the Company in January 2009, the Board eliminated all meeting fees, fees for chairs of the Board and committees, and reduced the value of the annual Board equity grants from $100,000 to $80,000. In
addition, the Board suspended for 2009 the Board annual equity grant.
101
The following summarizes the compensation paid by the Company to each non-employee director for the
fiscal year ended January 3, 2009. Mr. Fiske, as an employee of the Company, does not receive compensation for services on the Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees Earned
or Paid in
Cash
($)
|
|
Stock
Awards
($)(1)(2)
|
|
Option
Awards
($)(1)(3)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings($)(4)
|
|
|
All Other
Compensation
($)(5)
|
|
Total
($)
|
|
|
William End
|
|
$
|
78,000
|
|
$
|
101,107
|
|
$
|
56,051
|
|
—
|
|
$
|
(240,923
|
)
|
|
$
|
—
|
|
$
|
(5,765
|
)
|
|
John Brouillard
|
|
|
96,750
|
|
|
101,107
|
|
|
56,051
|
|
—
|
|
|
(44,227
|
)
|
|
|
—
|
|
|
209,681
|
|
|
Neil Fiske
(6)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
Howard Gross
|
|
|
80,500
|
|
|
129,075
|
|
|
56,051
|
|
—
|
|
|
(33,103
|
)
|
|
|
38,357
|
|
|
270,880
|
|
|
Paul Kirincic
|
|
|
86,750
|
|
|
101,107
|
|
|
56,051
|
|
—
|
|
|
(22,251
|
)
|
|
|
5,808
|
|
|
227,465
|
|
|
William Redmond
|
|
|
82,750
|
|
|
53,822
|
|
|
—
|
|
—
|
|
|
—
|
|
|
|
16,924
|
|
|
153,496
|
|
|
Kenneth Reiss
|
|
|
102,375
|
|
|
101,107
|
|
|
56,051
|
|
—
|
|
|
—
|
|
|
|
39,663
|
|
|
299,196
|
|
|
Laurie Shahon
|
|
|
99,250
|
|
|
101,107
|
|
|
56,051
|
|
—
|
|
|
—
|
|
|
|
39,663
|
|
|
296,071
|
|
|
Edward Straw
|
|
|
81,750
|
|
|
101,107
|
|
|
56,051
|
|
—
|
|
|
(22,103
|
)
|
|
|
19,837
|
|
|
236,642
|
|
|
Stephen Watson
|
|
|
99,250
|
|
|
101,107
|
|
|
56,051
|
|
—
|
|
|
—
|
|
|
|
39,663
|
|
|
296,071
|
|
|
(1)
|
The dollar amounts in these columns reflect the compensation expense/(income) recognized for financial statement reporting purposes for the fiscal year ended January 3, 2009,
in accordance with SFAS 123(R), and include amounts from awards granted prior to and during fiscal 2008. The assumptions used in the calculation of these amounts are included in
“Note 13—Notes to Consolidated Financial
Statements”
.
|
|
(2)
|
At January 3, 2009, each non-employee director held 33,111 stock units with the exception of Mr. Gross and Mr. Redmond, who held 39,472 and 30,599 RSUs, respectively.
|
|
(3)
|
At January 3, 2009, each non-employee director held options to purchase 17,000 shares of the Company’s common stock, with an exercise price of $23.37 per share with
the exception of Mr. Redmond, who held no stock options.
|
|
(4)
|
Change in value of deferred compensation indexed to performance of our common stock.
|
|
(5)
|
Value of RSUs received in prior years at settlement dates in 2008.
|
|
(6)
|
Mr. Fiske, as an employee, does not receive compensation for his service on the Board of Directors.
|
Share Ownership Guidelines.
The Board of Directors has established a formal share ownership guidelines for members of the Board of
Directors equal to five times each Board member’s annual retainer based on the price paid on the date of purchase, to be achieved within five years from the later of implementation of the policy or commencement of Board service. The Board has
not established formal ownership guidelines for the Company’s NEOs; however, the Company will explore implementing formal share ownership guidelines for NEOs in the future.
102
Report of the Compensation Committee
The information in this Compensation Committee Report shall not be deemed to be “soliciting material,” or to be “filed” with the Securities and Exchange Commission or to be subject to
Regulation 14A or 14C as promulgated by the Securities and Exchange Commission, or to the liabilities of Section 18 of the Securities and Exchange Act of 1934.
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K. Based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report.
|
|
|
The Compensation Committee
|
|
|
|
Stephen E. Watson (Chair)
|
|
John C. Brouillard
|
|
Paul E. Kirincic
|
Compensation Committee Interlocks and Insider Participation
During fiscal year 2008, the Compensation Committee of our Board of Directors consisted of Stephen E. Watson, John C. Brouillard and Paul E. Kirincic.
None of our directors, other than Howard Gross, who served as Interim Chief Executive Officer from February 9, 2007 to July 9, 2007 and Neil Fiske , who is our current President and Chief Executive Officer, has at any time served as an
officer or employee of Eddie Bauer or any of its subsidiaries. None of our executive officers served as a member of the Board of Directors or Committee of any entity that has or has had one or more executive officers serving as a member of our
Board of Directors or Committee.
|
Item 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The following table sets forth information regarding beneficial ownership of our common stock as of February 17, 2009, by:
|
|
•
|
|
each of our non-employee directors;
|
|
|
•
|
|
all of our directors and NEOs as a group; and
|
|
|
•
|
|
all other stockholders known by us to beneficially own more than five percent of our outstanding common stock.
|
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (“SEC”). Beneficial ownership
information is based on most recent Form 3, 4 and 5 and Schedules 13D and 13G filings with the SEC and reports made directly to the Company. In computing the number of shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options, restricted stock, warrants, convertibles notes and/or restricted stock units (“RSU”) held by that person that are currently exercisable or exercisable within 60 days of
February 16, 2009 are deemed outstanding, with the exception of SOSARs. SOSARs currently exercisable or exercisable within 60 days of February 16, 2009 have been excluded from the table below as shares of stock cannot be issued if the
strike price of an SOSAR is less than the current trading price, which was the case for all outstanding SOSARs as of February 16, 2009. For disclosure of the features of the SOSARs, see “
2008- LTIP”.
These shares, however, are
not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the notes to
103
this table, and except pursuant to applicable community property laws, each stockholder named in the table has sole voting and investment power with respect
to the shares shown as beneficially owned by them. Percentage ownership is based on 30,829,530 shares of common stock outstanding on February 17, 2009. Unless otherwise indicated, the address for each of the stockholders listed below is
c/o Eddie Bauer Holdings, Inc., 10401 NE 8th Street, Suite 500, Bellevue, WA 98004.
|
|
|
|
|
|
|
|
|
|
Number of Shares
of Common Stock
Beneficially
Owned
|
|
Percent of
Common Stock
Outstanding
|
|
|
Wellington Management Company, LLP
(1)
|
|
3,998,055
|
|
13.0
|
%
|
|
FMR LLC
(2)
|
|
2,381,362
|
|
7.7
|
%
|
|
Peninsula Capital Management, LP, Peninsula Master Fund, Ltd. and Scott Bedford
(3)
|
|
2,377,381
|
|
7.7
|
%
|
|
H Partners Capital, LLC, H Partners Management, LLC, H Partners, LP and Rehan Jaffer
(4)
|
|
2,000,000
|
|
6.5
|
%
|
|
Royce & Associates LLC
(5)
|
|
1,763,745
|
|
5.7
|
%
|
|
William T. End
(6)
|
|
168,931
|
|
*
|
|
|
John C. Brouillard
(7)
|
|
33,537
|
|
*
|
|
|
Howard Gross
(8)
|
|
26,628
|
|
*
|
|
|
Paul E. Kirincic
(9)
|
|
73,791
|
|
*
|
|
|
William Redmond
(10)
|
|
3,511
|
|
*
|
|
|
Kenneth M. Reiss
(11)
|
|
68,814
|
|
*
|
|
|
Laurie M. Shahon
(12)
|
|
38,814
|
|
*
|
|
|
Edward M. Straw
(13)
|
|
33,377
|
|
*
|
|
|
Stephen E. Watson
(14)
|
|
43,814
|
|
*
|
|
|
Neil Fiske
(15)
|
|
85,000
|
|
*
|
|
|
Marv Toland
(16)
|
|
36,000
|
|
*
|
|
|
Kimberly Berg
(17)
|
|
37,571
|
|
*
|
|
|
Ann Perinchief
(18)
|
|
113,439
|
|
*
|
|
|
Tom Helton
(19)
|
|
51,450
|
|
*
|
|
|
Kathleen Boyer
(20)
|
|
45,500
|
|
*
|
|
|
All directors and executive officers as a group (17 persons)
(21)
|
|
846,421
|
|
2.7
|
%
|
|
*
|
Indicates less than one percent.
|
|
(1)
|
Information based on Schedule 13G/A, Amendment No. 2, filed on February 17, 2009, with the SEC by Wellington Management Company, LLP (“Wellington
Management”). According to the Schedule 13G, Wellington Management has (a) shared voting power over 2,459,173 shares and (b) shared dispositive power over 3,998,055 shares. The shares listed above are owned of record by
clients of Wellington Management. Wellington Management acknowledges that, in its capacity as investment advisor, it may be deemed the beneficial owner of the shares listed above. The address for Wellington Management is 75 State Street, Boston,
Massachusetts 02109.
|
|
(2)
|
Information based on Schedule 13G/A, Amendment No. 5, filed on February 17, 2009, with the SEC by FMR LLC. According to the Schedule 13G/A: Fidelity
Management & Research Company (“Fidelity”) beneficially owns 2,381,362 shares as a result of acting as an investment adviser to various investment companies registered under Section 8 of the Investment Company Act of 1940;
the number of shares beneficially owned by the investment companies includes 1,309,962 shares resulting from the assumed conversion of $17,750,000 principal amount of Eddie Bauer 5.25% Convertible Notes (73.8007 shares of Common Stock for each
$1,000 principal amount of debenture); Edward C. Johnson 3d and FMR LLC, through its control of Fidelity, and the funds each has sole power to dispose of 2,381,362 shares; members of the family of Edward C. Johnson 3d, Chairman of FMR LLC, are the
predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC; the Johnson family group and all other Series B shareholders have entered into a shareholders’
|
104
|
|
voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common shares; and,
Edward C. Johnson 3d, Chairman of FMR LLC and certain members of his family, collectively, may form a controlling group with respect to FMR LLC. The address of each entity and Edward C. Johnson 3d is 82 Devonshire Street, Boston, Massachusetts
02109.
|
|
(3)
|
Information based on the Schedule 13G/A, Amendment No. 2, filed on January 27, 2009, with the SEC by Peninsula Capital Management, LP and Scott Bedford reporting
beneficial ownership of 2,377,381 shares, and 1,545,000 shares by Peninsula Master Fund, Ltd. According to the Schedule 13G/A, Peninsula Capital Management, LP and Scott Bedford have shared voting and dispositive power over all
shares; Peninsula Master Fund, Ltd. shares voting and dispositive power over 1,545,000 shares; and Peninsula Capital Management, LP, Peninsula Master Fund, Ltd. and Scott Bedford disclaim beneficial ownership in the shares except to the extent of
each such person’s respective pecuniary interest therein. The address of Peninsula Capital Management, LP, Peninsula Master Fund, Ltd. and Scott Bedford is 235 Pine Street, Suite 1600, San Francisco, CA 94104.
|
|
(4)
|
Information based on Schedule 13G/A, Amendment No. 1, filed on February 17, 2009, with the SEC by H Partners
Capital, LLC, H Partners Management, LLC, H Partners, LP and Rehan Jaffer (“H Partners Reporting Persons”). According to the Schedule 13G/A, H Partners Reporting Persons share voting and dispositive power over 1,435,500 shares, and H
Partners Management LLC and Rehan Jaffer have shared voting power and shared dispositive power over all 2,000,000 shares. Each of the H Partners Reporting Persons disclaim beneficial ownership in the shares, except to the extent of his or its
pecuniary interest therein. The address for the H Partners Reporting Persons is 888 Seventh Avenue, 29
th
Floor, New York, New York 10019.
|
|
(5)
|
Information based on Schedule 13G filed on January 23, 2009, with the SEC by Royce & Associates, LLC, reporting beneficial ownership of 1,763,745 shares. According to
the Schedule 13G, Royce & Associates, LLC has sole voting and dispositive power over all shares. The address for Royce & Associates, LLC is 1414 Avenue of the Americas, New York, NY 10019.
|
|
(6)
|
Consists of 148,000 shares, 3,937 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within 60 days
of February 17, 2009, held by Mr. End. Does not include 7,877 shares subject to vested RSUs deferred under the Company’s deferred compensation plan (“DCP”). See
“Compensation Discussion and
Analysis—Director Compensation”
above for a description of the ability to defer RSUs.
|
|
(7)
|
Consists of 12,600 shares, 3,937 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Mr. Brouillard. Does not include 7,877 shares subject to vested RSUs deferred under the Company’s DCP.
|
|
(8)
|
Consists of 9,628 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within 60 days of
February 17, 2009, held by Mr. Gross. Does not include 5,366 shares subject to vested RSUs deferred under the Company’s DCP.
|
|
(9)
|
Consists of 50,000 shares, 6,791 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Mr. Kirincic. Does not include 5,023 shares subject to vested RSUs deferred under the Company’s DCP.
|
|
(10)
|
Consists of 1,000 shares and 2,511 shares subject to vested RSUs exercisable within 60 days of February 17, 2009, held by Mr. Redmond.
|
|
(11)
|
Consists of 40,000 shares, 11,814 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Mr. Reiss.
|
|
(12)
|
Consists of 10,000 shares, 11,814 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Ms. Shahon.
|
|
(13)
|
Consists of 8,500 shares, 7,877 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Mr. Straw. Does not include 3,937 shares subject to vested RSUs deferred under the Company’s DCP.
|
|
(14)
|
Consists of 15,000 shares, 11,814 shares subject to vested RSUs and 17,000 shares reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Mr. Watson.
|
105
|
(15)
|
Consists of 60,000 shares and 25,000 shares reserved for issuance upon exercise of stock options that are exercisable within 60 days of February 17, 2009, held by
Mr. Fiske.
|
|
(16)
|
Consists of 35,000 shares and 1,000 shares reserved for issuance upon exercise of stock options that are exercisable within 60 days of February 17, 2009, held by
Mr. Toland.
|
|
(17)
|
Consists of 5,000 shares, 16,821 shares subject to vested RSUs and 15,750 shares reserved for issuance upon exercise of stock options that are exercisable within 60 days of
February 17, 2009, held by Ms. Berg. The total includes 5,000 shares held by Ms. Berg’s spouse. Ms. Berg disclaims beneficial ownership of the shares held by Mr. Berg.
|
|
(18)
|
Consists of 12,155 shares, 52,459 shares subject to vested RSUs and 48,825 shares reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Ms. Perinchief. The total includes 13,030 shares subject to vested RSUs and 12,075 shares of common stock reserved for issuance upon exercise of stock options that are exercisable within
60 days of February 17, 2009, held by Mr. Don Perinchief, her spouse. Ms. Perinchief disclaims beneficial ownership of the shares held by Mr. Perinchief.
|
|
(19)
|
Consists of 36,950 shares of common stock and 14,500 shares reserved for issuance upon exercise of stock options that are exercisable within 60 days of February 17, 2009, held
by Mr. Helton.
|
|
(20)
|
Consists of 45,500 shares subject to vested RSUs exercisable within 60 days of February 17, 2009, held by Ms. Boyer.
|
|
(21)
|
Includes shares directly and indirectly owned, and shares subject to stock options exercisable within 60 days of February 17, 2009, for executive officers and directors as
a group.
|
Securities Authorized for Issuance Under Equity Compensation Plans
At the end of fiscal 2008, the Company had one shareholder-approved equity compensation plan (the 2005 Plan, as amended and restated in 2007), and ten
equity compensation plans not approved by shareholders.
Plans Not Approved by Shareholders.
As of January 3, 2009,
the Company had made inducement equity grants pursuant to Section 4350(i) of the NASDAQ Marketplace Rules to ten individuals to accept employment with the Company as officers (the “Inducement Grants”). For purposes of the table below,
we have assumed that all Inducement Grants made to a single individual, regardless of the terms of the grant or type (RSUs or stock options) as described below, are made under a single plan. Four types of Inducement Grants were made:
|
|
•
|
|
RSUs vesting after four years of service;
|
|
|
•
|
|
Time-vested stock options, vesting ratably annually over four years, with a ten-year expiration;
|
|
|
•
|
|
Performance stock options, vesting after the Company’s common stock has had a closing price of $25 per share on the NASDAQ Global Market for 30 consecutive
days, with a five-year expiration; and
|
|
|
•
|
|
Performance stock options, vesting after the Company’s common stock has had a closing price of $35 per share on the NASDAQ Global Market for 30 consecutive
days, with a seven-year expiration.
|
Each stock option granted as an Inducement Grant has an exercise price equal to the
closing price of the Company’s common stock on the NASDAQ Global Market on the date of grant. In the event of termination of employment, other than in the event of a Change in Control, the following equity forfeitures will occur: (i) for
termination without cause or by resignation of the employee: (A) all unvested stock options and RSUs are forfeited and (B) all vested stock options may be exercised within 90 days following the termination of employment; (ii) for
termination of employment for cause, all unvested and vested stock options and unvested RSUs are forfeited as of the date of termination. Stock issued upon vesting of RSUs is not subject to forfeiture. See
“Compensation Discussion and
Analysis—Other Benefits—Change in Control Plan”
above for a description of accelerated vesting of equity compensation in the event of a Change in Control.
106
Equity Compensation Plans.
The following table sets forth certain information
concerning shares of the Company’s common stock authorized for issuance under the Company’s eleven equity compensation plans as of January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)(#)
|
|
|
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)($)(1)
|
|
Number of Securities
Remaining Available for
Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a)(c)
|
|
Equity compensation plans approved by security holders: 2005 Plan
|
|
2,364,668
|
(2)
|
|
$
|
16.68
|
|
1,122,661
|
|
Equity compensation plans not approved by security holders (ten plans)
|
|
207,518
|
(3)
|
|
|
6.26
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
2,572,186
|
|
|
|
15.62
|
|
1,122,661
|
|
(1)
|
Consists of weighted-average exercise price of outstanding options to purchase shares of common stock.
|
|
(2)
|
Reflects securities issued under the Company’s 2005 Plan. Includes stock options to acquire 1,193,975 shares of common stock at a weighted-average exercise price of $16.68 per
share, 521,675 SOSARs, and 649,018 RSUs.
|
|
(3)
|
Reflects securities issued under the equity compensation plans not approved by security holders. Includes stock options to acquire 135,750 shares of common stock at a
weighted-average exercise price of $6.26 per share and 71,768 RSUs.
|
|
Item 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|
In accordance with its charter, our Audit Committee is responsible for reviewing and approving in advance all related party transactions that are referred
to the Audit Committee by management, which would require disclosure pursuant to the SEC rules, and other related-party transactions required by Company policy to be reviewed and approved.
We request information by questionnaire and receive responses thereto from all members of management and our Board regarding transactions that would be
considered related party transactions. Except as disclosed below, neither our directors or executive officers, nor, to our knowledge after inquiry, any stockholder owning more than five percent of our issued shares, nor any of their respective
associates or affiliates, had any material interest, direct or indirect, in any material transaction to which we were a party during fiscal 2008, or which is presently proposed.
We believe, based on our reasonable judgment, but without further investigation, that the terms of each of the following transactions or arrangements
between us and our affiliates, officers, directors or stockholders which were parties to the transactions were, on an overall basis, at least as favorable to us as could then have been obtained from unrelated parties.
Donald Perinchief’s Employment
Donald
Perinchief, the husband of Ann Perinchief, one of our NEOs, currently is employed, and was employed during fiscal year 2008, as Vice President, Licensing. In 2008, the Company paid Mr. Perinchief a base salary of $229,308. On March 19,
2008, Mr. Perinchief received a grant of 16,403 SOSARs, vesting ratably over the next four-years and a grant of 8,597 RSUs with a four-year cliff vesting. For a discussion of the features of a SOSAR, see “
2008- LTIP
.”
Mr. Perinchief’s remaining 7,475 RSUs from his November 3, 2005 grant vested and settled on August 14, 2008 and remaining 3,019 stock options from his November 3, 2005 grant vested on November 3, 2008.
Mr. Perinchief did not receive an STIP bonus in 2008.
107
Director Independence
NASDAQ Global Market listing standards require listed companies to have a board of directors with at least a majority of independent directors. Our Board of Directors has determined that nine of the ten current
directors are independent under the NASDAQ Global Market listing standards. Our independent directors are: William T. End, John C. Brouillard, Howard Gross, Paul E. Kirincic, Kenneth M. Reiss, Laurie M. Shahon, Edward M. Straw, William Redmond and
Stephen E. Watson. Neil Fiske, our CEO and director of the Board, is not deemed independent because of his status as a current employee of the Company. In addition, all of the directors currently serving on the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee are independent under the NASDAQ Global Market listing standards.
|
Item 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The following table sets forth the aggregate fees billed to us by BDO Seidman, LLP, our independent registered public accounting firm, for professional services rendered during the fiscal years ended January 3, 2009 and
December 29, 2007.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Audit Fees
|
|
$
|
1,058,905
|
|
$
|
1,145,570
|
|
Audit Related Fees
(1)
|
|
|
90,200
|
|
|
108,818
|
|
Tax Fees
(2)
|
|
|
14,718
|
|
|
9,505
|
|
All Other Fees
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,163,823
|
|
$
|
1,263,893
|
|
|
|
|
|
|
|
|
|
(1)
|
Audit related fees include fees related to the audit of the Company’s benefit plans.
|
|
(2)
|
Tax fees include fees for professional services rendered by BDO Seidman, LLP for tax compliance related to state and federal tax returns.
|
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
The Audit Committee is responsible for appointing, setting the compensation of and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit Committee
has established a policy with respect to the pre-approval of audit, audit-related and permissible non-audit services and fees provided by the independent registered public accounting firm. The Audit Committee’s pre-approval policy requires that
all audit, audit-related and permissible non-audit services and fees be either pre-approved or specifically approved by the Audit Committee. Pursuant to the pre-approval policy, one or more of the Audit Committee’s independent members may be
delegated pre-approval authority, provided he or she reports those approvals at the next meeting of the Audit Committee. The term of any pre-approval granted by the Audit Committee with respect to a given service is 12 months. The payment of
all fees in excess of pre-approved levels requires specific pre-approval by the Audit Committee. All audit and permissible non-audit services provided to us in 2008 were approved by the Audit Committee.
108
PART IV
|
Item 15.
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
|
(a)
|
Index to Financial Statements
|
|
|
|
|
|
|
|
Page
|
|
Financial Statements
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
110
|
|
Consolidated Balance Sheets as of January 3, 2009 and December 29, 2007
|
|
111
|
|
Consolidated Statements of Operations for the years ended January 3, 2009, December 29, 2007 and December
30, 2006
|
|
112
|
|
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the years ended January
3, 2009, December 29, 2007 and December 30, 2006
|
|
113
|
|
Consolidated Statements of Cash Flows for the years ended January 3, 2009, December 29, 2007 and December
30, 2006
|
|
114
|
|
Notes to Consolidated Financial Statements
|
|
115
|
|
Financial Statement Schedules—Schedule II
|
|
159
|
|
Exhibits required as part of this report are listed in the Exhibit Index.
|
|
|
109
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Eddie Bauer Holdings, Inc.
Bellevue, Washington
We have audited the accompanying
consolidated balance sheets of Eddie Bauer Holdings, Inc. as of January 3, 2009 and December 29, 2007 and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for the
years ended January 3, 2009, December 29, 2007 and December 30, 2006. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. 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 Eddie Bauer Holdings, Inc. at January 3, 2009 and December 29, 2007, and the results of its operations and its cash flows for the years ended January 3,
2009, December 29, 2007 and December 30, 2006, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement 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.
As discussed in the notes to the consolidated financial statements, during 2006 and 2008, the Company adopted SFAS No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans
and during 2007, the Company adopted FIN 48,
Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.
We also have audited in accordance with the standards of the Public Accounting Oversight Board (United States), Eddie Bauer Holdings,
Inc.’s internal control over financial reporting as of January 3, 2009, based on criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated April 2, 2009, expressed an unqualified opinion thereon.
|
|
|
/s/ BDO Seidman, LLP
|
|
Seattle, Washington
|
|
April 2, 2009
|
110
EDDIE BAUER HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
January 3,
2009
|
|
|
As of
December 29,
2007
|
|
|
|
|
($ in thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
60,425
|
|
|
$
|
27,596
|
|
|
Restricted cash
|
|
|
180
|
|
|
|
30,862
|
|
|
Accounts receivable, less allowances for doubtful accounts of $241 and $983, respectively
|
|
|
25,181
|
|
|
|
30,122
|
|
|
Inventories
|
|
|
136,423
|
|
|
|
158,223
|
|
|
Prepaid expenses
|
|
|
27,667
|
|
|
|
27,297
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
249,876
|
|
|
|
274,100
|
|
|
Property and equipment, net
|
|
|
163,498
|
|
|
|
195,103
|
|
|
Goodwill
|
|
|
43,174
|
|
|
|
107,748
|
|
|
Trademarks
|
|
|
105,065
|
|
|
|
185,000
|
|
|
Other intangible assets, net
|
|
|
14,559
|
|
|
|
21,668
|
|
|
Other assets
|
|
|
20,748
|
|
|
|
27,813
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
596,920
|
|
|
$
|
811,432
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
50,041
|
|
|
$
|
45,102
|
|
|
Bank overdraft
|
|
|
9,770
|
|
|
|
12,915
|
|
|
Accrued expenses
|
|
|
92,527
|
|
|
|
107,036
|
|
|
Deferred tax liabilities—current
|
|
|
6,408
|
|
|
|
6,356
|
|
|
Current liabilities to Spiegel Creditor Trust
|
|
|
180
|
|
|
|
30,870
|
|
|
Current portion of long-term debt
|
|
|
14,693
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
173,619
|
|
|
|
202,279
|
|
|
Deferred rent obligations and unfavorable lease obligations, net
|
|
|
43,035
|
|
|
|
42,811
|
|
|
Deferred tax liabilities—noncurrent
|
|
|
34,707
|
|
|
|
30,490
|
|
|
Senior term loan
|
|
|
178,076
|
|
|
|
196,162
|
|
|
Convertible note and embedded derivative liability, net of discount of $17,284 and $19,629, respectively
|
|
|
59,418
|
|
|
|
66,113
|
|
|
Other long-term liabilities
|
|
|
12,617
|
|
|
|
7,802
|
|
|
Pension and other post-retirement benefit liabilities
|
|
|
22,638
|
|
|
|
9,503
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
524,110
|
|
|
|
555,160
|
|
|
Commitments and Contingencies (See “
Note 14
”)
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
$0.01 par value, 100 million shares authorized; 30,824,275 and 30,672,631 shares issued and outstanding as of January 3,
2009 and December 29, 2007, respectively
|
|
|
308
|
|
|
|
307
|
|
|
Treasury stock, at cost
|
|
|
(157
|
)
|
|
|
(157
|
)
|
|
Additional paid-in capital
|
|
|
593,621
|
|
|
|
588,302
|
|
|
Accumulated deficit
|
|
|
(502,288
|
)
|
|
|
(336,818
|
)
|
|
Accumulated other comprehensive (loss) income, net of taxes of $0 and $2,848, respectively
|
|
|
(18,674
|
)
|
|
|
4,638
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
72,810
|
|
|
|
256,272
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
596,920
|
|
|
$
|
811,432
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
111
EDDIE BAUER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
|
Fiscal 2007
(52 weeks)
|
|
|
Fiscal 2006
(52 weeks)
|
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net sales and other revenues
|
|
$
|
1,023,437
|
|
|
$
|
1,044,353
|
|
|
$
|
1,013,447
|
|
|
Costs of sales, including buying and occupancy
|
|
|
628,191
|
|
|
|
630,853
|
|
|
|
603,171
|
|
|
Impairment of indefinite-lived intangible assets
|
|
|
144,574
|
|
|
|
—
|
|
|
|
117,584
|
|
|
Selling, general and administrative expenses
|
|
|
393,585
|
|
|
|
441,875
|
|
|
|
411,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,166,350
|
|
|
|
1,072,728
|
|
|
|
1,132,055
|
|
|
Operating loss
|
|
|
(142,913
|
)
|
|
|
(28,375
|
)
|
|
|
(118,608
|
)
|
|
Interest expense
|
|
|
(22,800
|
)
|
|
|
(26,698
|
)
|
|
|
(26,928
|
)
|
|
Other income (expense), net
|
|
|
13,385
|
|
|
|
23,695
|
|
|
|
3,031
|
|
|
Equity in losses of foreign joint ventures
|
|
|
(9,134
|
)
|
|
|
(1,147
|
)
|
|
|
(3,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax expense
|
|
|
(161,462
|
)
|
|
|
(32,525
|
)
|
|
|
(145,918
|
)
|
|
Income tax expense
|
|
|
4,067
|
|
|
|
69,193
|
|
|
|
65,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(165,529
|
)
|
|
|
(101,718
|
)
|
|
|
(211,449
|
)
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(165,529
|
)
|
|
$
|
(101,718
|
)
|
|
$
|
(211,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per basic and diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations per share
|
|
$
|
(5.38
|
)
|
|
$
|
(3.33
|
)
|
|
$
|
(7.04
|
)
|
|
Loss from discontinued operations per share
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(5.38
|
)
|
|
$
|
(3.33
|
)
|
|
$
|
(7.06
|
)
|
|
|
|
|
|
|
Weighted average shares used to compute income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,749,922
|
|
|
|
30,524,191
|
|
|
|
30,012,896
|
|
|
Diluted
|
|
|
30,749,922
|
|
|
|
30,524,191
|
|
|
|
30,012,896
|
|
The accompanying notes are an integral part of these consolidated financial statements.
112
EDDIE BAUER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
(# of
Shares)
|
|
Common
Stock
($)
|
|
Treasury
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
|
|
|
Balances at December 31, 2005
|
|
29,992
|
|
$
|
300
|
|
$
|
(157
|
)
|
|
$
|
568,205
|
|
|
$
|
(22,788
|
)
|
|
$
|
(540
|
)
|
|
$
|
545,020
|
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
(211,983
|
)
|
|
|
—
|
|
|
|
(211,983
|
)
|
|
Fair value adjustments of cash flow hedge, net of income taxes of $358
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
583
|
|
|
|
583
|
|
|
Foreign currency translation adjustment, net of income taxes of $91
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
258
|
|
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(211,142
|
)
|
|
Unrecognized obligations related to pension and post-retirement plans, net of income taxes of $1,401
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,281
|
|
|
|
2,281
|
|
|
Reversal of additional minimum pension liability, net of income taxes of $179
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
282
|
|
|
|
282
|
|
|
Stock based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
10,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,200
|
|
|
Shares issued for vested RSU awards
|
|
318
|
|
|
3
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 30, 2006
|
|
30,310
|
|
$
|
303
|
|
$
|
(157
|
)
|
|
$
|
578,402
|
|
|
$
|
(234,771
|
)
|
|
$
|
2,864
|
|
|
$
|
346,641
|
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
(101,718
|
)
|
|
|
—
|
|
|
|
(101,718
|
)
|
|
Reclassification of fair value adjustment of cash flow hedge, net of income taxes of ($358)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(583
|
)
|
|
|
(583
|
)
|
|
Fair value adjustment of cash flow hedge executed in April 2007, net of income taxes of $(1,571)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,559
|
)
|
|
|
(2,559
|
)
|
|
Foreign currency translation adjustment, net of income taxes of $1,332
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,169
|
|
|
|
2,169
|
|
|
Unrecognized obligations related to pension and post-retirement benefit obligations, net of income taxes of $1,686
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,747
|
|
|
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,944
|
)
|
|
Shares issued for vested RSU awards
|
|
363
|
|
|
4
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
9,904
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,904
|
|
|
Cumulative effect of accounting change related to adoption of FIN 48
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
(329
|
)
|
|
|
—
|
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 29, 2007
|
|
30,673
|
|
$
|
307
|
|
$
|
(157
|
)
|
|
$
|
588,302
|
|
|
$
|
(336,818
|
)
|
|
$
|
4,638
|
|
|
$
|
256,272
|
|
|
Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
(165,529
|
)
|
|
|
—
|
|
|
|
(165,529
|
)
|
|
Fair value adjustment of cash flow hedge executed, net of income taxes of $1,571
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,801
|
)
|
|
|
(7,801
|
)
|
|
Foreign currency translation adjustment, net of income taxes of ($1,332)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(836
|
)
|
|
|
(836
|
)
|
|
Unrecognized obligations related to pension and post-retirement benefit obligations, net of income taxes of ($3,087)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,675
|
)
|
|
|
(14,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188,841
|
)
|
|
Shares issued for vested RSU awards
|
|
151
|
|
|
1
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
5,320
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,320
|
|
|
Cumulative effect of accounting change related to adoption of measurement provisions of SFAS 158, net of income taxes of $38
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
59
|
|
|
|
—
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 3, 2009
|
|
30,824
|
|
$
|
308
|
|
$
|
(157
|
)
|
|
$
|
593,621
|
|
|
$
|
(502,288
|
)
|
|
$
|
(18,674
|
)
|
|
$
|
72,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
113
EDDIE BAUER HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
(53 weeks)
|
|
|
Fiscal 2007
(52 weeks)
|
|
|
Fiscal 2006
(52 weeks)
|
|
|
|
|
($ in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(165,529
|
)
|
|
$
|
(101,718
|
)
|
|
$
|
(211,983
|
)
|
|
Adjustments to reconcile net loss to net cash provided from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on disposals of property and equipment
|
|
|
(210
|
)
|
|
|
119
|
|
|
|
1,057
|
|
|
Impairment of property and equipment
|
|
|
8,310
|
|
|
|
1,255
|
|
|
|
3,451
|
|
|
Equity in losses of foreign joint ventures
|
|
|
9,134
|
|
|
|
1,147
|
|
|
|
3,413
|
|
|
Depreciation and amortization
|
|
|
44,898
|
|
|
|
50,333
|
|
|
|
55,494
|
|
|
Impairment of indefinite-lived intangible assets
|
|
|
144,574
|
|
|
|
—
|
|
|
|
117,584
|
|
|
Stock-based compensation expense
|
|
|
5,320
|
|
|
|
9,904
|
|
|
|
10,200
|
|
|
Gain on sale of net financing receivables
|
|
|
(113
|
)
|
|
|
(9,303
|
)
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
3,284
|
|
|
|
—
|
|
|
Other non-cash income
|
|
|
(3,918
|
)
|
|
|
(5,759
|
)
|
|
|
(2,257
|
)
|
|
Proceeds from settlement of interest rate swap agreement
|
|
|
—
|
|
|
|
1,015
|
|
|
|
—
|
|
|
Proceeds from sale of net financing receivables
|
|
|
3,413
|
|
|
|
7,420
|
|
|
|
—
|
|
|
Change in fair value of convertible note embedded derivative liability
|
|
|
(9,040
|
)
|
|
|
(10,483
|
)
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
6,730
|
|
|
|
61,284
|
|
|
|
58,487
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,634
|
|
|
|
(1,648
|
)
|
|
|
1,057
|
|
|
Inventories
|
|
|
19,201
|
|
|
|
(2,090
|
)
|
|
|
(11,574
|
)
|
|
Prepaid expenses
|
|
|
2,385
|
|
|
|
(3,488
|
)
|
|
|
(1,011
|
)
|
|
Financing receivables and securitization interests
|
|
|
—
|
|
|
|
87,260
|
|
|
|
115,624
|
|
|
Other assets
|
|
|
(1,080
|
)
|
|
|
(7
|
)
|
|
|
(2,110
|
)
|
|
Accounts payable
|
|
|
9,658
|
|
|
|
4,545
|
|
|
|
5,524
|
|
|
Accrued expenses
|
|
|
(17,145
|
)
|
|
|
4,491
|
|
|
|
1,385
|
|
|
Liabilities related to securitization note
|
|
|
—
|
|
|
|
(78,534
|
)
|
|
|
(104,061
|
)
|
|
Pension and other post-retirement liabilities
|
|
|
(466
|
)
|
|
|
(1,394
|
)
|
|
|
(1,273
|
)
|
|
Deferred rent and unfavorable lease obligations
|
|
|
905
|
|
|
|
18,681
|
|
|
|
10,919
|
|
|
Other non-current liabilities
|
|
|
68
|
|
|
|
3,553
|
|
|
|
—
|
|
|
Operating cash flows related to discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
61,729
|
|
|
|
39,867
|
|
|
|
50,424
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(21,014
|
)
|
|
|
(56,636
|
)
|
|
|
(45,814
|
)
|
|
Distributions from foreign joint venture
|
|
|
—
|
|
|
|
388
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(21,014
|
)
|
|
|
(56,248
|
)
|
|
|
(45,452
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of senior term loan, including refinancing fees
|
|
|
(3,393
|
)
|
|
|
(80,662
|
)
|
|
|
(24,000
|
)
|
|
Net proceeds from issuance of convertible notes
|
|
|
—
|
|
|
|
71,358
|
|
|
|
—
|
|
|
Change in bank overdraft
|
|
|
(3,145
|
)
|
|
|
(707
|
)
|
|
|
(2,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(6,538
|
)
|
|
|
(10,011
|
)
|
|
|
(26,107
|
)
|
|
Effect of exchange rate changes on cash
|
|
|
(1,348
|
)
|
|
|
814
|
|
|
|
123
|
|
|
Net change in cash and cash equivalents
|
|
|
32,829
|
|
|
|
(25,578
|
)
|
|
|
(21,012
|
)
|
|
Cash and cash equivalents at beginning of period
|
|
|
27,596
|
|
|
|
53,174
|
|
|
|
74,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
60,425
|
|
|
$
|
27,596
|
|
|
$
|
53,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
5,360
|
|
|
$
|
5,952
|
|
|
$
|
3,107
|
|
|
Cash paid for interest
|
|
|
21,288
|
|
|
|
23,505
|
|
|
|
27,287
|
|
The accompanying notes are an integral part of these consolidated financial statements.
114
EDDIE BAUER HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands except per share amounts, unless otherwise noted)
|
(1)
|
Description of Business
|
Eddie Bauer Holdings, Inc.
(“Eddie Bauer”, “Eddie Bauer Holdings”, “Company”) is a specialty retailer that sells mens’ and womens’ outerwear, apparel and accessories for the active outdoor lifestyle. Eddie Bauer products are sold
through retail and outlet stores located in the U.S. and Canada and through its direct sales channel, which consists of its Eddie Bauer catalogs and its website located at
www.eddiebauer.com
The accompanying consolidated financial statements
include the results of Eddie Bauer, Inc. and its subsidiaries, as well as the related supporting operations that provide logistics support, call center support and information technology support to Eddie Bauer. The related supporting operations of
the Company include the following: Eddie Bauer Fulfillment Services, Inc. (“EBFS”) which provides catalog and retail distribution services for Eddie Bauer; Eddie Bauer Information Technology, LLC; and Eddie Bauer Customer Services Inc.
(“EBCS”), which provides call center support.
In February 2005, the Company announced its plans to discontinue operating its
“Eddie Bauer Home” concept during 2005. Except as otherwise noted, all amounts and disclosures reflect only the Company’s continuing operations.
|
(2)
|
Summary of Significant Accounting Policies
|
|
|
(a)
|
Basis of Consolidation
|
The consolidated
financial statements include Eddie Bauer and its majority-owned and controlled subsidiaries. All significant transactions and balances among the consolidated operations have been eliminated upon consolidation.
The Company’s fiscal year
ends on the Saturday closest to December 31. The 2008 fiscal year reflects a 53 week period from December 30, 2007 to January 3, 2009. The 2007 fiscal year reflects a 52 week period from December 31, 2006 to December 29,
2007 and the 2006 fiscal year reflects a 52 week period from January 1, 2006 to December 30, 2006.
Historically, the
Company’s operations have been seasonal, with a disproportionate amount of net sales occurring in the fourth fiscal quarter, reflecting increased demand during the year-end holiday selling season. The impact of seasonality on results of
operations is more pronounced since the level of certain fixed costs, such as occupancy and overhead expenses, do not vary with sales. The Company’s quarterly results of operations also may fluctuate based upon such factors as the timing of
certain holiday seasons and promotions, the number and timing of new store openings and store closings, the amount of net sales contributed by new and existing stores, the timing and level of markdowns, store refurbishments and relocations,
competitive factors, weather and general economic conditions. Accordingly, results for individual quarters are not necessarily indicative of the results to be expected for the entire fiscal year.
The preparation of
financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are used when
115
accounting for certain items, including inventory valuation, allowance for doubtful accounts, fair values of goodwill and other intangible assets, long-lived
asset impairments, future gift card redemptions, customer loyalty program accruals, legal reserves, sales returns and allowances, deferred tax valuation allowances, deferred revenue, royalty receivables, stock-based compensation expenses, and the
fair value of derivative instruments, including the embedded derivative within the Company’s convertible notes and the Company’s interest rate swap.
The Company’s liquidity is
affected by many factors including, among others, the level of net sales and gross margin as a result of the seasonality of the retail business and the current global economic conditions which has resulted in a decline in consumer retail spending.
Additionally, the Company’s liquidity is impacted by its availability and amounts currently outstanding under its existing financing arrangements and the related financial covenants associated with these financing arrangements. The tightening
of the senior secured leverage ratio under the Amended Term Loan at the end of each quarter starting with the first quarter in fiscal 2009, combined with the continued downturn and uncertainty in the U.S. economy, increased the risk that the Company
would not be able to meet this covenant during fiscal 2009. This uncertainty raised questions about the Company’s ability to continue as a going concern.
In April 2009, the Company and its Amended Term Loan lenders entered into a First Amendment to the Amended Term Loan agreement (the “First Amendment”). As a result of the amendment of its senior term loan in
April 2009, as further discussed in “
Note 17—Subsequent Events
”, the Company anticipates that it will remain in compliance with the financial covenants under its senior term loan for at least the next twelve months. However,
there can be no assurance that events in the future will not require the Company to seek additional capital or further amendments to its financing arrangements or, if so required, that such capital will be available on terms acceptable to the
Company.
In accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 131,
Disclosures about Segments of an Enterprise and Related Information,
(“SFAS 131”) the Company has identified the following three operating segments (i) retail
stores, (ii) outlet stores and (iii) direct, including catalog and website sales. The three operating segments have been aggregated and are presented as one reportable segment, as permitted by SFAS 131, based on their similar economic
characteristics, products, production processes, target customers, distribution methods and shared use of the Eddie Bauer brand name and trademarks. Each operating segment generates revenue from the sale of menswear, womenswear, gear and
accessories. Since product level information is not tracked in the Company’s financial systems, it is impracticable, and potentially misleading to report sales or sales trends at this level.
Revenues of the Company’s Canadian retail operations were $91.9 million, $94.2 million and $80.6 million for fiscal 2008, fiscal 2007 and
fiscal 2006, respectively. Long-lived assets of the Canadian operations were $6.7 million and $9.2 million as of the end of fiscal 2008 and 2007, respectively. All other revenues and long-lived assets of the Company’s operations, with the
exception of the Company’s investment in a foreign joint venture (See “
Note 7
”), relate to the United States.
|
|
(g)
|
Cash and cash equivalents
|
The Company
considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. Cash balances are primarily deposits at federally insured financial institutions; while cash equivalents represent highly liquid triple
A rated instruments. Cash accounts with negative balances at the end of each reporting period are reflected as bank overdrafts if no right of offset exists. As of January 3, 2009 and December 29, 2007, the Company had restricted cash
balances of $180 and $30,862, respectively, resulting from the sale of its financing receivables. See further discussion in “
Note 5
”.
116
Accounts receivable
primarily consists of credit card receivables, construction allowances due from landlords, receivables from the Company’s licensing partners and royalty receivables from its foreign joint venture. Allowances for doubtful accounts are recorded
based on specific identification of known matters affecting its creditors and general historical experience. Included in accounts receivable as of January 3, 2009 and December 29, 2007 was $6,433 and $7,220, respectively, due from World
Financial Network National Bank (“WFNNB”), a subsidiary of Alliance Data Systems (“ADS”), of which $5,137 and $5,780, respectively, represented 10% of holdback amounts on the outstanding principal portion of credit card
receivables of WFNNB, generated from sales of the Company’s products that are charged to the Company’s proprietary credit card. Additionally, the Company is subject to a holdback related to accounts receivable of MasterCard and VISA sales
related to the Company’s U.S. direct sales and Canadian retail store credit card sales. The amount of this holdback totaled $3,165 and $1,493 as of January 3, 2009 and December 29, 2007, respectively.
Inventories, principally
merchandise available for sale, are stated at the lower of cost or market. Cost is determined by the weighted average cost method and includes certain overhead and freight costs capitalized to inventory based on normal operations. Market is
determined based on estimated net realizable value, which generally is the estimated merchandise selling price less cost of disposal. Markdowns of inventory below cost are recorded immediately as a reduction of the inventory carrying value and as
costs of sales.
|
|
(j)
|
Property and Equipment
|
Property and
equipment is stated at cost less accumulated depreciation and amortization. The Company’s property and equipment was revalued to its fair value as of its fresh start reporting date of July 2, 2005. Depreciation of property and equipment is
computed using the straight-line method over the estimated useful lives of the assets. Depreciable lives range from 3 to 40 years for buildings and improvements and 3 to 10 years for fixtures and equipment. Leasehold improvements are
amortized over the lesser of the initial term of the lease or expected asset life. Depreciation and amortization related to the Company’s retail and outlet store leasehold improvements, warehouse facilities and call centers is reflected within
costs of sales. Depreciation and amortization of the Company’s corporate facility leasehold improvements, furniture and fixtures and information technology hardware and software is reflected in selling, general and administrative expenses and
totaled $13,767, $16,204 and $18,905 for fiscal 2008, fiscal 2007 and fiscal 2006, respectively. The cost of maintenance and repairs of property and equipment is charged to operating expense when incurred. Construction in progress primarily includes
costs related to the build out of new stores.
Interest costs related to assets under construction are capitalized during the construction
period. Interest of $551, $1,589 and $754 was capitalized for fiscal 2008, fiscal 2007 and fiscal 2006, respectively.
Upon the Company’s
adoption of SFAS No. 142,
Goodwill and Other Intangible Assets
(“SFAS 142”), goodwill and trademarks were determined to have indefinite useful lives and are not amortized into results of operations, but instead are
reviewed for impairment annually, or more often if impairment indicators arise, and written down and charged to results of operations only in the periods in which the carrying amount of goodwill or trademarks is greater than its fair value. The
Company’s intangible assets related to its licensing agreements are being amortized over an estimated useful life of six years.
The
Company uses the two-phase process prescribed in SFAS 142 for impairment testing of goodwill and has selected the fourth quarter of each fiscal year to perform its annual impairment test. Additionally, the Company completed an impairment review
of its goodwill and trademarks during the third quarter of 2006. The first phase identifies indications of impairment; while the second phase (if necessary), measures the impairment. See “
Note 6
” for further discussion of the
Company’s intangible assets and related impairment charges recorded based upon the Company’s reviews.
117
|
|
(l)
|
Investments in Joint Venture
|
Investments in
joint ventures for which the Company owns less than 50% of the voting interest and does not demonstrate any other indicators of control are accounted for under the equity method. As a result of the timing of receipt of financial information, the
Company records its equity in the earnings (losses) of foreign joint venture on a one-month lag basis. See “
Note 7
”.
|
|
(m)
|
Software Development Costs
|
Software
development costs are capitalized when the software has reached the level of being technologically feasible through the date of implementation, and are amortized on a straight-line basis over the estimated useful life of the asset not to exceed
three years. Software development costs, net of amortization, included in other assets as of January 3, 2009 and December 29, 2007 were $6,277 and $2,368, respectively. During fiscal 2008, the Company capitalized approximately $5.0 million
in internal use software costs, which included costs associated with the enhancement of the Company’s
eddiebauer.com
website and a labor scheduling system for its retail stores.
|
|
(n)
|
Deferred Financing Costs
|
Debt financing
costs are capitalized and amortized as interest expense over the terms of the underlying obligation. Deferred financing costs included in other assets as of January 3, 2009 and December 29, 2007 were $4,474 and $5,329, respectively.
The Company records
deferred revenue associated with the sale of gift cards. The Company reduces the deferred revenue liability and records revenue when the gift card is redeemed by the customer. Gift card breakage, the estimated amount of gift cards that will go
unredeemed, is recorded as a reduction of selling, general and administrative expense, when redemption is determined to be remote, which is estimated based upon historical breakage percentages. Gift card breakage for fiscal 2008, fiscal 2007 and
fiscal 2006 was $2,066, $2,241 and $2,301, respectively.
|
|
(p)
|
Customer Loyalty Program
|
Under the
Company’s customer loyalty program, a customer earns points based upon merchandise purchases. Accumulated points are then converted into rewards certificates after reaching a specified threshold that can be used towards the purchase of the
Company’s products. Both accumulated points and issued rewards certificates expire after a stated period of time. The Company records costs of sales and a liability for points earned by the customer, net of an estimated breakage amount or the
amount of accumulated points and rewards certificates estimated to go unredeemed. The Company reduces the liability when a reward certificate is redeemed by the customer and records a reduction to costs of sales and a corresponding reduction to
revenue, which therefore has no impact to the Company’s gross margin when the reward certificate is redeemed. The net impact of the customer loyalty program for fiscal 2008 was a decrease to costs of sales of $1,030 and a reduction of net
merchandise sales of $11,894, for a total gross margin impact of $10,864. The net impact of the customer loyalty program for fiscal 2007 was an increase to costs of sales of $2,866 and a reduction of net merchandise sales of $7,747, for a total
gross margin impact of $10,613. The net impact of the customer loyalty program for fiscal 2006 was an increase to costs of sales of $1,999 and a reduction of net merchandise sales of $1,042, for a total gross margin impact of $3,041. Program costs,
including marketing, printing and administration of the program, are reflected within selling, general and administrative expenses.
|
|
(q)
|
Derivative Instruments
|
The Company uses
derivative instruments primarily to manage exposure to fluctuations in interest rates, to lower its overall costs of financing and to manage the mix of floating- and fixed-rate debt in its portfolio.
118
Additionally, the Company’s convertible notes issued in April 2007 included an embedded derivative related to the conversion features of the notes.
Derivative instruments are not used for trading or speculative purposes. In accordance with SFAS No. 133,
Derivative Instruments and Hedging Activities
(“SFAS 133”), all derivatives, whether designated in hedging
relationships or not, are recorded on the balance sheet at fair value. To qualify for hedge accounting treatment, each derivative must be designated as a hedge at inception and evaluated for effectiveness throughout the hedge period. If the
derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in the statement of operations. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in the statement of operations when the hedged item affects earnings. Changes in fair values of
derivative instruments that are not designated as hedging instruments and ineffective portions of cash flow hedges are immediately recognized in the statement of operations in other income (expense), net.
Hedge accounting is discontinued prospectively if and when it is determined that either the derivative instrument no longer meets the requirements for
hedge accounting as defined in SFAS 133; the derivative instrument expires or is sold, terminated, or exercised; or management determines that the designation of the derivative instrument as a hedging instrument is no longer appropriate. When
hedge accounting is discontinued, the derivative instrument will continue to be carried at fair value on the balance sheet, with changes in fair value immediately recognized in the statement of operations, unless the derivative instrument has
expired or been sold, terminated, or exercised. Cash flows from derivative instruments designated in hedging relationships are classified in the statements of cash flows under the same categories as the cash flows from the corresponding hedged
assets or liabilities.
See “
Note 9
” for further discussion of the Company’s adoption of SFAS No. 157,
Fair
Value Measurements
(“SFAS 157”), and the fair values of the Company’s derivative instruments.
|
|
(r)
|
Insurance/Self-Insurance
|
A combination of
insurance and self-insurance is used to cover a number of risks, including workers’ compensation, general liability, property and automobile liability and employee-related health care benefits, a portion of which is reimbursed by the employee.
Liabilities associated with these risks are estimated in part by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.
|
|
(s)
|
Deferred Compensation
|
The Company sponsors
a non-qualified deferred compensation plan wherein certain eligible employees can defer a portion of their salary, bonus and equity incentive compensation. Employee deferred cash compensation earns interest. Additionally, non-employee directors
may, at their election, defer any portion of their cash compensation or equity compensation into the plan. Deferred non-employee director cash compensation is assigned a number of hypothetical shares of the Company's common stock at the time of
deferral based upon the fair market value of the common stock on that date, and accordingly, fluctuates with the fair value of the Company’s common stock, however such deferred compensation is paid in cash when withdrawn. The liability for
compensation deferred under the Company’s deferred compensation plan, including both deferred employee and non-employee director cash compensation was $873 and $428 as of January 3, 2009 and December 29, 2007,
respectively, and primarily included deferred compensation of $500 annually for three years beginning in June of 2007 related to the Company’s CEO’s employment agreement. Additionally, during fiscal 2008 and fiscal 2007, 25,086
and 4,994 shares, respectively, of non-employee director vested restricted stock units (“RSUs”) were deferred into the plan.
The Company records
revenues at the point of sale for retail and outlet stores and at estimated date of receipt by the customer for catalog and website sales. Taxes imposed by governmental agencies on revenue-producing
119
transactions, including sales and excise taxes, are recorded on a net basis on the Company’s balance sheet, therefore no revenue or costs of sales are
recognized. The Company reduces revenue for estimated sales returns at the time of sale based upon projected merchandise returns, which are based primarily on historical experience. Shipping and handling revenues and costs are included in other
revenues and in selling, general and administrative expense, respectively. Shipping and handling expense was $27,061, $25,380 and $22,316 for fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Net sales and other revenues also include royalty
and licensing income, which are recognized when earned based on contractually specified percentages applied to reported sales.
|
|
(u)
|
Operating leases, Deferred rent obligations and Unfavorable lease obligations
|
The Company leases office facilities, distribution centers, retail store space and data processing equipment under operating leases. Many of the
Company’s lease agreements, primarily related to retail store space, provide for tenant improvement allowances, rent escalation clauses and/or contingent rent. The majority of the Company’s retail store leases require payment of a
specified minimum rent, plus a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold. Minimum rental expenses, which include defined scheduled rent increases, are recognized over the term of the
lease. The Company recognizes minimum rental expenses on a straight-line basis beginning on the earlier of when possession of the property is taken from the landlord or when the Company controls the use of the space, which date normally precedes
store opening to provide for a construction period. The current portion of excess straight-line rent expense over scheduled payments is recorded within accrued liabilities and the non-current portion is recorded in deferred rent obligations on the
Company’s balance sheets.
Tenant improvement allowances, which are reflected in deferred rent obligations on the Company’s
balance sheets, are amortized on a straight-line basis over the term of the lease as a reduction to rent expense in the statement of operations.
Unfavorable lease obligations associated with the remeasurement of the Company’s leases upon its emergence from bankruptcy and its related adoption of fresh start accounting are being amortized on a straight-line basis over the
remaining term of the leases.
|
|
(v)
|
Impairment of Long-Lived Assets and Store Closing Costs
|
Long-lived assets, including property and equipment, capitalized software and definite-lived intangible assets are tested for recoverability whenever events or changes in circumstances indicate the carrying amount may
not be recoverable as prescribed by SFAS No. 144,
Accounting for the Impairment of Long-Lived Assets
. Factors which may trigger an impairment review include significant underperformance relative to expected operating results, significant
changes in the use of the assets or the strategy for the overall business and significant negative industry or economic trends. Recoverability of asset groups is measured by a comparison of the carrying amount of an asset group to projected
undiscounted net cash flows expected to be generated by the asset group. In the case of the Company’s retail and outlet stores, each asset group represents a store location. For retail and outlet stores in which the projected undiscounted cash
flows are less than the carrying value of the asset group, an impairment is recognized for the carrying amount of the asset group. During the fourth quarter of fiscal 2008, the Company recognized $7,453 of impairment losses related to store
leasehold improvements and furniture and fixtures with selling, general and administrative expenses for retail stores that will remain in operation. The impairment losses recognized during the fourth quarter resulted from the decrease in historical
and projected future operating cash flows at certain of the Company’s retail and outlet stores.
Impairment charges for fixed assets
and costs related to early termination of leases for store closings are reflected in selling, general and administrative expenses. Costs related to early termination of leases consist of lease buyout expense or the difference between the
Company’s rent and the rate at which it expects to be able to sublease the properties, net of related costs and discounted using a credit adjusted risk-free rate in accordance
120
with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activitie
s. The majority of the Company’s store closures occur
upon the lease expiration.
Costs incurred for the
production and distribution of direct response catalogs are capitalized and amortized over their expected period of future benefit. The Company accounts for catalog costs in accordance with SOP 93-7,
Reporting on Advertising Costs
(“SOP 93-7”). SOP 93-7 requires that the amortization of capitalized advertising costs be the amount computed using the ratio of current period revenues that the catalog cost pool bears to the total of current and estimated future
period revenues for that catalog cost pool. The capitalized costs of the Company’s direct response advertising are amortized, commencing with the date catalogs are mailed, over the duration of the expected revenue stream, which is generally
three months or less. Unamortized costs as of January 3, 2009 and December 29, 2007 were $7,795 and $9,949, respectively, and are included in prepaid expenses. All other advertising costs for catalog, website and retail operations are
expensed as incurred or upon first run for media advertising. Total advertising expense, including the amortization of the above mentioned catalog costs, was $91,272, $103,663 and $95,698 for fiscal 2008, fiscal 2007 and fiscal 2006, respectively.
|
|
(x)
|
Store Preopening Costs
|
Preopening and lease
negotiation costs for new retail and outlet stores are expensed as incurred.
|
|
(y)
|
Stock-Based Compensation Expense
|
The
Company accounts for its stock-based compensation expense in accordance with SFAS No. 123(R),
Share-Based Payment
(“SFAS 123(R)”). SFAS 123(R) requires that new, modified and unvested share-based payment
transactions with employees and directors, such as stock options/SOSARs and RSUs, be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period, net of estimated forfeitures. The
Company estimates the fair value of its stock option/SOSAR awards using the Black-Scholes option valuation and Monte-Carlo simulation models. See “
Note 13
” for the Company’s stock-based compensation transactions.
|
|
(z)
|
Foreign Currency Translation and Exchange Rates
|
The financial statements of the Company’s Canadian operations and international joint venture are translated into U.S. dollars using the exchange rate in effect at the end of each period for assets and liabilities and the average
exchange rates in effect during the period for results of operations and cash flows. The related unrealized gains or losses resulting from translation are reflected as a component of accumulated other comprehensive income or loss in
stockholders’ equity. Foreign currency transaction losses, which were $640, $783 and $588 for fiscal 2008, fiscal 2007 and fiscal 2006, respectively, primarily relate to the purchase of merchandise and are included in costs of sales.
Deferred income tax assets and
liabilities are determined based on differences between financial reporting and income tax bases of assets and liabilities and are measured using the enacted income tax rates and laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company reports a liability for unrecognized tax benefits
resulting from uncertain tax positions taken or expected to be taken on a tax return. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense.
|
|
(bb)
|
Other Comprehensive Income (Loss)
|
Comprehensive income or loss measures all changes in equity of an enterprise that do not result from transactions with stockholders. The Company’s other comprehensive income or loss includes foreign currency
121
translation adjustments, unrealized gains and losses related to the Company’s cash flow hedge, and unrecognized net actuarial gains/losses and prior
service credits related to the Company’s pension and other post-retirement benefits.
The Company has applied the
measurement and disclosure provisions of FASB Interpretation No. 45 (“FIN 45”),
“Guarantor’s Accounting and Disclosure Requirements for Guarantees of the Indebtedness of Others,”
to agreements that contain
guarantee and certain other indemnification clauses. FIN 45 requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under the guarantee. The Company is
party to various contractual agreements under which it may be obligated to indemnify the other party for certain matters. These contracts include commercial contracts, operating leases, trademarks, financial agreements and various other agreements.
Under these contracts, the Company may provide certain routine indemnifications relating to representations and warranties. The terms of these indemnifications range in duration and may not be explicitly defined. The Company is unable to estimate
the potential liability for these types of indemnifications as the agreements generally do not specify a maximum amount, and the amounts are often dependent on the outcome of future events, the nature and likelihood of which cannot be determined at
this time; however the Company believes that the initial fair value of any of these guarantees would be immaterial. Historically, the Company has not made any significant indemnification payments under such agreements and no amounts have been
accrued in the Company’s financial statements.
|
(3)
|
Recent Accounting Pronouncements
|
In December 2008,
the Financial Accounting Standards Board (“FASB”) issued FSP 132(R)-1,
Employers’ Disclosures about Postretirement Benefit Plan Assets
, (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 amends FASB No. 132,
Employers’ Disclosures about Pensions and Other Postretirement Benefits
, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan including: (i) how investment
allocation decisions are made; (ii) the major categories of plan assets; (iii) the inputs and valuation techniques used to measure the fair value of plan assets; (iv) the effect of fair value measurements using significant
unobservable inputs (Level 3 inputs) on plan assets for the period; and (v) significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Company will adhere to
the disclosure requirements of FSP FAS 132(R)-1 effective with fiscal 2009.
In June 2008, the FASB issued FSP EITF 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,
(“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those years. FSP EITF 03-6-1 requires that all prior-period earnings per share data presented shall be adjusted retrospectively to conform to the provisions of the FSP. The
Company’s adoption of FSP EITF 03-6-1 effective with the first quarter of fiscal 2009 did not have a material impact on its earnings per share calculations as per the Company’s 2005 Stock Incentive Plan, holders of unvested share-based
payment awards do not have any of the rights of a holder with respect to any shares of the Company’s common stock subject to such award unless and until such holder has satisfied all requirements for vesting or exercise of the share-based
payment award.
In June 2008, the Emerging Issues Task Force (“EITF”) issued EITF 07-05,
Determining Whether an Instrument (or
an Embedded Feature) Is Indexed to an Entity’s Own Stock
, (“EITF 07-05”). EITF 07-05 supersedes prior guidance that defines the meaning of the phrase ‘indexed to an entity’s own stock and revises the criteria to be used
to determine if an equity-linked instrument, including embedded features, can be classified
122
within shareholder’s equity. EITF 07-05 is effective for fiscal years beginning after December 15, 2008. The Company adopted EITF 07-05 effective
with the first quarter of fiscal 2009 as it relates to the Company’s convertible notes and related features, which did not have a material impact to the Company’s results of operations or financial position. See further discussion of the
Company’s convertible debt and related features in “
Note 8
”.
In May 2008, the FASB issued SFAS No. 162,
The
Hierarchy of Generally Accepted Accounting Principles
, (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States. SFAS 162 was effective as of November 15, 2008. The adoption of SFAS 162 did not have a material
impact to the Company’s results of operations or financial position.
In May 2008, the FASB issued FSP APB 14-1,
Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),
(“FSP APB 14-1”). FSP APB 14-1 amends previous guidance associated with convertible debt instruments that at conversion may
be settled wholly or partly with cash. Convertible debt that at conversion must always be settled entirely in shares (other than fractional shares) and convertible debt instruments deemed to have an embedded derivative under SFAS 133 are outside the
scope of FSP APB 14-1. FSP APB 14-1 requires cash-settleable convertible instruments to be separated into their debt and equity components at issuance and prohibits the use of the fair-value option for such instruments. The value assigned to the
debt component is the estimated value of a similar debt instrument without conversion features as of the issuance or modification date. The difference between the net proceeds for the convertible debt issued, or carrying value in the case of a
modification, and the amount reflected as a debt liability must be recorded as additional paid-in capital. Any difference between the amount recorded for the debt liability and the principal amount of the debt (e.g. debt discount) must be amortized
to interest expense over the expected life of the debt, thereby reflecting a market rate of interest. Upon extinguishment of the debt, either by conversion to shares, cash settlement or a combination of cash and shares, a gain or loss is recognized
for the difference between the fair value of the debt component at the extinguishment date and its carrying value on the balance sheet. Excess consideration is recorded as a reduction to additional paid-in capital. The Company adopted FSP APB 14-1
effective with the first quarter of fiscal 2009. While FSP APB 14-1 does not change the economic substance for the Company’s convertible notes, due to the accretion of the discounted carrying value of the notes to their face amount, the Company
anticipates that interest expense will increase. This increase in interest expense will have no effect on the Company’s cash flows, liquidity or financial covenants related to the Company’s various credit facilities. See further discussion
of the Company’s convertible notes and related features in “
Note 8
”.
In April 2008, the FASB issued FSP FAS 142-3,
Determination of the Useful Life of Intangible Assets,
(“FSP FAS 142-3”). FSP FAS 142-3 amends the list of factors an entity should consider in developing renewal or extension assumptions when determining the useful life of
recognized intangible assets under FASB No. 142,
Goodwill and Other Intangible Assets,
(“FAS 142”). FSP FAS 142-3 applies to (i) intangible assets that are acquired individually or with a group of other assets and
(ii) intangible assets acquired in both business combinations and asset acquisitions. FAS FASP 142-3 removes the requirement in FAS 142 for an entity to consider whether an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions. FSP FAS 142-3 replaces the previous useful-live assessment criteria with a requirement that an entity consider its own experience in renewing similar arrangements. FSP FAS 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively only to intangible assets acquired after the FSP’s effective date. The Company will adhere to FSP FAS 142-3 for intangible
assets acquired beginning with the first fiscal quarter of 2009.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133
, (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including disclosing the
fair values of derivative instruments
123
and their gains and losses in a tabular format to provide a more complete picture of the location in an entity’s financial statements of both the
derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adhere to the enhanced disclosure provisions of SFAS 161 effective with
the first quarter of fiscal 2009.
In February 2008, the FASB issued FSP FAS 157-2,
Effective Date of FASB Statement No. 157
(“FSP FAS 157-2”). FSP FAS 157-2 delays the effective date of FASB Statement No. 157,
Fair Value Measurements
(see further discussion of SFAS 157 below), for nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). For purposes of FSP FAS 157-2, nonfinancial assets and nonfinancial liabilities would include all assets and liabilities other
than those meeting the definition of a financial asset or financial liability as defined in paragraph 6 of FASB Statement No. 157. FSP FAS 157-2 defers the effective date for items within its scope to fiscal years beginning after
November 15, 2008. See “
Note 9
” for further discussion of the Company’s adoption of SFAS 157 and related pronouncements.
In February 2008, the FASB issued FSP FAS 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13
(“FSP FAS 157-1”). FSP FAS 157-1 amends FASB Statement No. 157,
Fair Value Measurements
, to exclude FASB Statement No. 13,
Accounting for Leases
, and other accounting
pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB Statement No. 13. However, this scope exception does not apply to leasing assets and liabilities acquired and assumed in a
business combination that are required to be measured at fair value under FASB Statement No. 141R (see further discussion of FASB Statement No. 141R below). FSP FAS 157-1 is effective with an entity’s initial adoption of SFAS 157. See
“
Note 9
” for further discussion of the Company’s adoption of SFAS 157 and related pronouncements.
In December 2007,
the FASB issued SFAS No. 141R,
Business Combinations
(“SFAS 141R”). SFAS 141R replaces and revises previously issued SFAS No. 141,
Business Combinations
. SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business combination. SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration,
contingencies, acquisition costs, in-process research and development and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination
(including under fresh start accounting) after the measurement period will impact income tax expense. SFAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. Accordingly, the Company will
adhere to the requirements of SFAS 141R for any business combinations entered into subsequent to its fiscal year beginning January 4, 2009. Additionally, future changes in the Company’s deferred tax valuation allowance associated with its
NOLs it recorded with its fresh start accounting upon emergence from bankruptcy, will be reflected within income tax expense (benefit). See further discussion of the Company’s deferred tax valuation allowances in “
Note 11
”.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements—an amendment of
Accounting Research Bulletin No. 51
(“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is
124
deconsolidated. SFAS 160 will change the current accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests
and classified as a component of equity. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective as of the
beginning of an entity’s fiscal year that begins after December 15, 2008, and was adopted by the Company in the first quarter of fiscal 2009. As the Company has no noncontrolling interests, the adoption of SFAS 160 did not have a material
impact on its consolidated results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159,
The Fair
Value Option for Financial Assets and Financial Liabilities
(“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to provide additional information that will help investors and other financial
statement users to more easily understand the effect of the company’s choice to use fair value on its earnings. Finally, SFAS 159 requires entities to display the fair value of those assets and liabilities for which the company has chosen to
use fair value on the face of the balance sheet. The Company’s adoption of SFAS 159 effective fiscal 2008 did not have a material impact on the Company’s financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157”). SFAS 157 provides enhanced guidance for
using fair value to measure assets and liabilities and also expands information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements
on earnings. SFAS 157 applies whenever other accounting standards require or permit assets and liabilities to be measured at fair value and does not expand the use of fair value in any new circumstances. See above discussion of FSP FAS 157-2, which
delayed the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). See “
Note
9
” for further discussion of the Company’s adoption of SFAS 157 and related pronouncements.
The following table presents
the computation of income (loss) per basic and diluted share for fiscal 2008, fiscal 2007 and fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Loss from continuing operations
|
|
$
|
(165,529
|
)
|
|
$
|
(101,718
|
)
|
|
$
|
(211,449
|
)
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(165,529
|
)
|
|
$
|
(101,718
|
)
|
|
$
|
(211,983
|
)
|
|
Weighted average common shares outstanding
(a)
|
|
|
30,749,922
|
|
|
|
30,524,191
|
|
|
|
30,012,896
|
|
|
Net effect of dilutive stock options
(b)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Net effect of convertible notes
(c)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding
|
|
|
30,749,922
|
|
|
|
30,524,191
|
|
|
|
30,012,896
|
|
|
Income (loss) per basic and diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(5.38
|
)
|
|
$
|
(3.33
|
)
|
|
$
|
(7.04
|
)
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5.38
|
)
|
|
$
|
(3.33
|
)
|
|
$
|
(7.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Weighted average common shares outstanding for fiscal 2008 and fiscal 2007 included 30,080 and 4,994, respectively, vested RSUs, for which settlement has been deferred under the
Company’s deferred compensation plan. Settlement of the deferred RSUs is required with shares of the Company’s common stock.
|
125
|
(b)
|
As of January 3, 2009, December 29, 2007 and December 30, 2006, there were 1,851,400, 1,343,500 and 590,375, respectively, common stock options and stock-only stock
appreciation rights (“SOSARs”) and 720,786, 390,739 and 603,533, respectively, unvested restricted stock units (“RSUs”) outstanding that were antidilutive and therefore were excluded from the calculation of diluted earnings per
share.
|
|
(c)
|
As discussed further in
“Note 8
,” on April 4, 2007, the Company issued $75 million in convertible notes. As a result of the Company’s ownership
limitations contained in its Certificate of Incorporation, the convertible notes were not convertible, except upon the occurrence of certain specified corporate transactions, until January 4, 2009. In the event that the certain specified
corporate transactions resulted in a conversion of the notes prior to January 4, 2009, the Company was required to settle the convertible notes for cash. Accordingly, the Company excluded the dilutive effect, if any, of the convertible notes
from its earnings per share calculation. Effective with fiscal 2009, the dilutive effect of the Company’s convertible notes will be included in the Company’s earnings per share calculations.
|
|
(5)
|
SAC Securitization Interest and Related Eddie Bauer Holdings Promissory Note
|
In conjunction with the Company’s emergence from bankruptcy, ownership of Spiegel Acceptance Corporation (“SAC”), a special-purpose entity created by Spiegel in prior years to accomplish securitizations
of certain credit card receivable portfolios, was transferred to Eddie Bauer. SAC owned a securitization interest in subordinated amounts that arose from post-emergence recoveries in certain pre-petition securitization transactions to which Spiegel
and its subsidiaries were a party. As of the Company’s fresh start reporting date, the fair value of the SAC securitization interest was estimated to be $130,616. In addition, in connection with its emergence from bankruptcy proceedings, Eddie
Bauer issued a non-recourse promissory obligation to a liquidating trust (the “Promissory Note”) established for the benefit of the creditors of Spiegel (the “Creditor Trust”) pursuant to which Eddie Bauer was obligated to pay to
the Creditor Trust 90% of any proceeds received by SAC in respect of its securitization interests.
During the bankruptcy process, the
Company entered into a settlement agreement with MBIA Insurance Corporation (a guarantor of payments of the Spiegel Credit Card Master Note Trust, the “Note Trust”). Pursuant to the settlement agreement, SAC assigned to the MBIA Settlement
Trust (the “Settlement Trust”) certain rights that SAC had in its seller’s interest, collateral and other interest in the Note Trust as of the effective date of the settlement agreement. During fiscal 2006, $115,624 in cash payments
were received related to the outstanding receivables, of which 90%, or $104,061, was paid to the Creditor Trust. As a result of the cash received, the obligations to the original note holders within the Settlement Trust were settled and the related
expenses of MBIA were paid from a portion of the cash proceeds received during fiscal 2006. The Settlement Trust was terminated during December 2006 at which time SAC became entitled to receive any residual payments from the Settlement Trust. Also
upon the termination of the Settlement Trust, the Note Trust was no longer accounted for as a qualifying special purpose entity and accordingly, the outstanding receivables and related liabilities under the Promissory Note were revalued to their
fair values of $45,978 and $41,380, respectively. The Company recognized a net gain of $466 within other income (expense), net in its statement of operations in fiscal 2006 which related to the net increase in fair value of the SAC subordinated
interest held prior to the re-conveyance by the Settlement Trust.
During fiscal 2007 and prior to the sale of the receivables as discussed
further below, $87,260 in cash was received related to the outstanding receivables under the SAC securitization interests. In accordance with the terms of the non-recourse promissory obligation established for the benefit of the creditors of
Spiegel, 90% of the cash proceeds, which totaled $78,534, were paid to the Creditor Trust during fiscal 2007.
126
The table below reflects the statement of operations activity related to the accretion of the receivables
and liabilities prior to their sale in fiscal 2007 and for fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Statement of Operations:
|
|
|
|
|
|
|
|
|
|
Accretion income related to receivables from securitization interests
|
|
$
|
55,306
|
|
|
$
|
17,898
|
|
|
Accretion expense related to liabilities from securitization interests
|
|
|
(49,775
|
)
|
|
|
(16,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net accretion income recorded in other income (expense), net
|
|
$
|
5,531
|
|
|
$
|
1,791
|
|
A rollforward of the accretable yield related to the receivables was as follows:
|
|
|
|
|
|
|
Accretable Yield Upon Settlement Trust Termination:
|
|
|
|
|
|
Cash flows expected to be collected as of acquisition date
|
|
$
|
50,158
|
|
|
Less: Carrying value as of acquisition date
|
|
|
45,978
|
|
|
|
|
|
|
|
|
Accretable Yield as of December 30, 2006
|
|
$
|
4,180
|
|
|
Reclassification from nonaccretable difference during fiscal 2007
(a)
|
|
|
207,823
|
|
|
Accretion income recognized during fiscal 2007
|
|
|
(55,306
|
)
|
|
|
|
|
|
|
|
Accretable Yield as of December 2007
(the sale date by the
Company—see below)
|
|
$
|
156,697
|
|
|
|
|
|
|
|
|
(a)
|
The reclassification from nonaccretable difference during fiscal 2007 resulted from an increase in actual and projected collections related to financing charges, principal amounts
of the receivables and higher collections of previously written off accounts.
|
In December 2007, the Company sold the
remaining interest in its financing receivables, which were held by its SAC subsidiary, for an aggregate sales price of $113.9 million. Seventy percent, or $79.7 million, of the aggregate selling price was received by the Company in December 2007.
Ninety percent of the cash received in December, net of expenses, or $69.3 million, was paid to the Creditor Trust, while 10% of the cash received in December, net of expenses, or $7.4 million, was retained by SAC. The remaining 30% of the aggregate
selling price, or $34.2 million, was placed in escrow (“holdback”). Under the terms of the sale agreement, one-half of the remaining holdback was paid during the first quarter of 2008 and one-half was paid during the second quarter of 2008
with the exception of $200 which remains held in escrow until final release in mid-2009.
In February 2008, the Company received payment of
the first one-half of the holdback amount from escrow of $17,044, of which 90%, or $15,339, was paid to the Creditor Trust. In June 2008, the Company received payment of the remaining one-half of the holdback amount from escrow of $17,088, of which
90%, or $15,380, was paid to the Creditor Trust. Additionally, in June, upon receipt of the final holdback amount, all purchase price adjustments were settled, which resulted in the Company recognizing an additional gain on sale of the net
receivables of $113 as the final purchase price adjustments were less than originally estimated and reserved for. The additional gain was reflected in other income (expense), net on the Company’s statement of operations. Under the terms of the
Company’s Amended Term Loan, $1,709 and $1,684 of the June and February proceeds, respectively, was required to be used to pay down the principal amount of its Amended Term Loan. See “
Note 8
”.
127
Carrying Values of
Intangible Assets and Amortization Expense
Summarized below are the carrying values for the major classes of intangible assets that
are amortized under SFAS 142 as well as the carrying values of those intangible assets that are not amortized.
|
|
|
|
|
|
|
|
|
|
|
|
|
At
January 3,
2009
|
|
|
At
December 29,
2007
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
Customer lists—Useful life of 3.5 years
|
|
|
|
|
|
|
|
|
|
Gross amount
|
|
$
|
—
|
|
|
$
|
9,000
|
|
|
Accumulated amortization
|
|
|
—
|
|
|
|
(7,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
Licensing agreements—Useful life of 6 years
|
|
|
|
|
|
|
|
|
|
Gross amount
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
|
Accumulated amortization
|
|
|
(20,441
|
)
|
|
|
(14,582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
14,559
|
|
|
$
|
20,418
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
43,174
|
|
|
$
|
107,748
|
|
|
Trademarks
|
|
$
|
105,065
|
|
|
$
|
185,000
|
|
The following table presents the estimated amortization expense related to the Company’s
intangible assets subject to amortization for each of the following periods:
|
|
|
|
|
|
Estimated Amortization Expense for Fiscal Years:
|
|
|
|
|
2009
|
|
$
|
5,833
|
|
2010
|
|
$
|
5,833
|
|
2011
|
|
$
|
2,893
|
|
|
|
|
|
|
|
|
$
|
14,559
|
The following table provides a rollforward of goodwill for the fiscal years ended January 3,
2009, December 29, 2007 and December 30, 2006:
|
|
|
|
|
|
|
Goodwill balance as of December 31, 2005
|
|
$
|
220,481
|
|
|
Impairment charge recorded during three months ended September 30, 2006
|
|
|
(117,584
|
)
|
|
Adjustment to goodwill balance recorded as of December 30, 2006
(a)
|
|
|
11,868
|
|
|
|
|
|
|
|
|
Goodwill balance as of December 30, 2006
|
|
$
|
114,765
|
|
|
Adjustment to goodwill balance recorded as of December 29, 2007
(b)
|
|
|
(7,017
|
)
|
|
|
|
|
|
|
|
Goodwill balance as of December 29, 2007
|
|
$
|
107,748
|
|
|
Impairment charge recorded during the three months ended January 3, 2009
|
|
|
(64,574
|
)
|
|
|
|
|
|
|
|
Goodwill balance as of January 3, 2009
|
|
$
|
43,174
|
|
|
(a)
|
After discovering prior period errors in the Company’s goodwill and deferred tax asset balances, the Company recorded an adjustment to its goodwill balance of $11,868 in the
fourth quarter of 2006 as the Company determined that the cumulative impact of the errors were not material to prior periods.
|
|
(b)
|
In the course of preparing its 2006 state income tax returns during the fourth quarter of 2007, the Company received additional information from its prior parent company,
Spiegel, related to certain state NOLs that existed as of the Company’s fresh start reporting date. In accordance with SFAS 109, the Company recorded a reduction to its goodwill balance to recognize these tax benefits. See further
discussion of these adjustments and the Company’s income taxes in “
Note 11
”.
|
128
Impairment Charges of Indefinite-Lived Intangible Assets
Fiscal 2008
The Company performed its
annual impairment tests of its goodwill and trademarks during the fourth quarter of fiscal 2008 consistent with the methodologies used in prior years. The fair value of the Company’s trademarks was estimated to be $105 million, which resulted
in an impairment charge of $80 million, which the Company recognized during the fourth quarter of 2008 in impairment of indefinite-lived intangible assets on its statement of operations. The fair value of the Company’s trademarks was determined
using an income approach, which calculated the discounted present value of estimated future royalty cash flows of the Company’s net merchandise sales. The discounted present value was calculated using the Company’s five-year long-range
plan, a terminal value growth rate of 3.0%, and a discount rate of 20.0%. The decline in the fair value of the Company’s trademarks since the prior year-end was due principally to lower merchandise sales during the fourth quarter of 2008 and
decreases in forecasted net merchandise sales in the Company’s five-year long-range plan, driven by the overall downturn in the economy and projected continued declines in consumer retail spending.
The fair value of the Company’s enterprise value for purposes of its goodwill impairment test during the fourth quarter of 2008 was also determined
using an income approach, and was estimated using a discounted cash flow model and was further supported by valuations using a market approach (e.g. market comparables for other retail companies) and by the indicated value from the Company’s
common stock price, including a control premium. The Company has one reporting unit for purposes of its goodwill impairment test. The Company’s goodwill impairment test was completed using the two-step approach prescribed in SFAS 142. The
first step included a determination of the enterprise value of the Company using a discounted cash flow model which included the Company’s five-year long-range plan related to the future cash flows of the Company’s primary assets; a
discount rate of 17.0%, which represented the Company’s weighted average cost of capital; and a terminal value growth rate of 3.0%. In order to assess the fair value of the Company in its entirety, following the calculation of the discounted
cash flows of the Company’s primary assets, the book value of the Company’s interest-bearing debt was deducted and the fair values of the assets not contributing to the discounted cash flows of the Company’s primary assets, including
the Company’s net operating loss carryforwards, were added to derive the fair value of the Company’s total net assets. Upon completion of step one of the goodwill impairment test, the estimated fair value of the Company was less than the
carrying value of the Company’s net book value and long-term debt. Accordingly, the Company completed step two of the goodwill impairment test, which included comparing the implied fair value of the Company with the carrying amount of goodwill.
Upon completion of step two of the goodwill impairment test, the Company recorded an impairment charge of $64,574 related to its goodwill, which was reflected in impairment of indefinite-lived intangible assets on the Company’s statement of
operations. Consistent with the decline in the fair value of the Company’s trademarks, the decline in the Company’s enterprise value since the prior year-end was driven by the overall downturn in the economy and projected continued
declines in consumer retail spending.
Fiscal 2007
The Company performed its annual impairment tests of its goodwill and trademarks during the fourth quarter of fiscal 2007. The fair value of the Company’s trademarks during the fourth quarter of 2007 was
determined consistent with the income approach used in fiscal 2006, and was based upon the Company’s five-year long-range plan; a terminal value growth rate of 3.5%; and a discount rate of 16.0%. No impairment charge was recorded during the
fourth quarter of 2007 as the estimated fair value exceeded the carrying value of the Company’s trademarks.
The fair value of the
Company’s enterprise value for purposes of its goodwill impairment test during the fourth quarter of 2007 was estimated using a methodology consistent with fiscal 2006, using a discounted cash flow model which included the Company’s
five-year long-range plan related to the future cash flows of the Company’s primary assets; a discount rate of 13.0%; and a terminal value growth rate of 3.5%. The Company’s estimated enterprise value as of the fourth quarter of 2007
exceeded its net carrying value and, accordingly, the Company concluded that it passed step one of its goodwill impairment test.
129
Fiscal 2006
As a result of interactions with the Company’s investment bankers, preliminary indications of interest received from various third parties during the Company’s publicly announced process of evaluating
various strategic alternatives, and the significant decline in the Company’s common stock price during the third quarter of 2006, the Company determined that it was more likely than not that the fair value of its enterprise was below its
carrying value. Accordingly, in accordance with SFAS 142, the Company completed impairment tests for its indefinite-lived intangible assets, including its goodwill and trademarks, during the third quarter of 2006.
The fair value of the Company’s trademarks during the third quarter of 2006, as determined using the income approach, was estimated to be
$185 million, equal to the Company’s net carrying value for its trademarks. Accordingly, no impairment charge was recorded during the third quarter of 2006 related to the Company’s trademarks. The fair value was based upon the
Company’s five-year long-range plan; a terminal value growth rate of 3.5%; and a discount rate of 17.5%.
The fair value of the
Company’s enterprise value for purposes of its goodwill impairment test during the third quarter of 2006 was determined using the income approach. The first step included a determination of the enterprise value of the Company using a discounted
cash flow model which was based upon the Company’s five- year long-range plan related to the future cash flows of the Company’s primary assets; a discount rate of 14.5%; and a terminal value growth rate of 3.5%. Upon completion of step one
of the goodwill impairment test, the estimated fair value of the Company was less than the carrying value of the Company’s net book value and long-term debt. Accordingly, the Company completed step two of the goodwill impairment test, which
included comparing the implied fair value of the Company with the carrying amount of goodwill. Upon completion of step two of the goodwill impairment test, the Company recorded an impairment charge of $117,584 related to its goodwill, which was
reflected in impairment of indefinite-lived intangible assets on the Company’s statement of operations. The decline in the fair value of the Company as of the third quarter of fiscal 2006 from its fresh start reporting date of July 2, 2005
was due principally to lower than projected revenues and gross margins.
During the fourth quarter of 2006, the Company completed its
annual impairment tests for both its goodwill and trademarks consistent with the testing performed during the third quarter of 2006. The Company concluded that its enterprise value and the fair value of its trademarks approximated the values as
determined during its impairment tests during the third quarter of 2006 because there were no significant changes in the Company’s long-range plan, discount rates or terminal value growth rates. Additionally, the Company’s results of
operations during the fourth quarter of 2006 were generally consistent with the long-range plan used during its third quarter impairment review. The Company’s estimated enterprise value as of the fourth quarter of 2006 exceeded its net carrying
value and, accordingly, the Company concluded that it passed step one of its goodwill impairment test.
The Company’s impairment
evaluations during each of the fiscal years of both goodwill and trademarks included reasonable and supportable assumptions and projections and were based on estimates of projected future cash flows. The long-range projections used in the
Company’s impairment evaluations assume that the Company will successfully introduce merchandise assortments that appeal to its core customer tastes and preferences and respond to future changes in customer style preferences in a timely and
effective manner. These estimates of future cash flows are based upon the Company’s experience, historical operations of the stores, catalogs and website, estimates of future profitability and economic conditions, including future consumer
retail spending. Future estimates of profitability and economic conditions require estimating such factors as sales growth, employment rates and the overall economics of the retail industry for up to twenty years in the future, and are therefore
subject to variability, are difficult to predict and in certain cases, the factors are beyond the Company’s control. The assumptions utilized by management were consistent with those developed in conjunction with the Company’s long-range
planning process. If the assumptions and projections underlying these evaluations are not achieved, or should the Company ultimately adopt and pursue different long-range plans, or general economic conditions which impact retail spending deteriorate
more significantly than the current assumptions, the amount of the impairment could be adversely affected. Accordingly, there can be no assurance that there will not be
130
additional impairment charges in the future based on future events and that the additional charges would not have a materially adverse impact on the
Company’s financial position or results of operations.
|
(7)
|
Investments in Foreign Joint Ventures
|
Eddie
Bauer Japan
The Company has a 30% interest in Eddie Bauer Japan, Inc. (“Eddie Bauer Japan”), a joint venture established to
sell Eddie Bauer merchandise in Japan. The remaining 70% interest is held by a joint venture, half of which is owned by Otto Sumisho, Inc. (a joint venture company of Otto KG, a former Spiegel affiliate, and Sumitomo Corporation).
As a result of a decrease in net sales and operating profits of Eddie Bauer Japan and a decrease in the Company’s forecasted royalty revenues, the
Company performed an impairment review of its investment in Eddie Bauer Japan during the fourth quarter of 2008. The Company estimated the fair value of its investment in Eddie Bauer Japan based upon the net present value of the projected discounted
cash flows of the joint venture and determined that the estimated fair value was less than the carrying value. Accordingly, the Company recorded an impairment charge of $3,678 during the fourth quarter of 2008 within equity in losses of foreign
joint ventures as the Company concluded that the decline in its investment was other-than-temporary.
Eddie Bauer Germany
Prior to March 1, 2008, the Company had a 40% interest in Eddie Bauer GmbH & Co. (“Eddie Bauer Germany”), a
joint venture established to sell Eddie Bauer merchandise in Germany. The remaining 60% was held by Heinrich Heine GmbH and Sport-Scheck GmbH (both former Spiegel affiliates and subsidiaries of Otto KG). In February 2008, the Company received a
required one-year notice from its joint venture partners in Eddie Bauer Germany of their decision to terminate the joint venture arrangement, and as a result, the joint venture, together with a companion license arrangement, would have terminated in
February 2009. In June 2008, the Company and the other joint venture partners completed the transfer, effective March 1, 2008, of their interests in the joint venture to a third party in return for a release of past and future liabilities. As
part of the transfer of the joint venture interest, the Company terminated the prior licensing agreement with Eddie Bauer Germany and entered into a new licensing arrangement to license the use of its tradename and trademarks to Eddie Bauer Germany
for a five-year period in exchange for specified royalties. Due to the receipt of the termination notice, the Company performed an impairment review of its investment in Eddie Bauer Germany during the first quarter of 2008 and determined that an
other-than-temporary impairment existed. Accordingly, the Company recognized an impairment charge of $3.9 million during the first quarter of 2008, which was reflected within equity in losses of foreign joint ventures. The impairment charge reduced
the Company’s investment in Eddie Bauer Germany to zero and also reflected the Company’s legal obligation to fund its proportionate share of Eddie Bauer Germany’s losses for its fiscal year ending February 29, 2008. As a result
of the transfer of the joint venture interest during the second quarter of 2008, the Company recorded a loss of $606 associated with the write-off of the receivable from Eddie Bauer Germany within selling, general and administrative expenses.
Equity losses for fiscal 2007 and fiscal 2006 included $0.6 million and $0.7 million, respectively, related to the Company’s
proportionate share of Eddie Bauer Germany’s losses related to store closings and impairment charges as a result of Eddie Bauer Germany’s decision to close all of its retail stores. Additionally, during fiscal 2007 and fiscal 2006, the
Company forgave collections of $1.5 million and $1.9 million, respectively, of royalty accounts receivables from Eddie Bauer Germany to fund its portion of the Company’s share of losses related to Eddie Bauer Germany’s store
closing costs and previously unfunded losses of Eddie Bauer Germany. These represented non-cash transactions that the Company reflected as a reduction to its accounts receivable balance and an increase to its investment in Eddie Bauer Germany during
fiscal 2007 and fiscal 2006.
The investments in the joint ventures are accounted for using the equity method and are included in other
assets on the consolidated balance sheets. As of December 29, 2007, the carrying value of the Company’s
131
investment in Eddie Bauer Japan and Eddie Bauer Germany exceeded the Company’s share of the underlying reported net assets by $3,678 and $1,911,
respectively, which resulted from the fresh start adjustments recorded by the Company in conjunction with its emergence from bankruptcy, and in accordance with SFAS 142 was not being amortized. The impairment charge recorded during the fourth
quarter of 2008 related to Eddie Bauer Japan and the impairment charge recorded during the first quarter of 2008 related to Eddie Bauer Germany included write-offs of these fresh start adjustments.
During fiscal 2007 and fiscal 2006, the Company received distributions of $388 and $362, respectively, from Eddie Bauer Japan related to distributions of
its earnings as approved by the board of directors of Eddie Bauer Japan.
The Company had accounts receivable, investment balances and
royalty income of:
|
|
|
|
|
|
|
|
|
|
|
Eddie Bauer
Japan
|
|
Eddie Bauer
Germany
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
January 3, 2009
|
|
$
|
1,677
|
|
$
|
—
|
|
December 29, 2007
|
|
|
1,671
|
|
|
987
|
|
Investment:
|
|
|
|
|
|
|
|
January 3, 2009
|
|
$
|
9,464
|
|
$
|
—
|
|
December 29, 2007
|
|
|
12,717
|
|
|
3,786
|
|
Royalty income:
|
|
|
|
|
|
|
|
2008
|
|
$
|
4,753
|
|
$
|
208
|
|
2007
|
|
|
4,440
|
|
|
1,901
|
|
2006
|
|
|
4,647
|
|
|
1,979
|
Senior Secured Revolving Credit
Facility
On June 21, 2005, Eddie Bauer, Inc. executed a loan and security agreement with Bank of America, N.A., General
Electric Capital Corporation and The CIT Group/Business Credit, Inc (“the Revolver”). The Revolver is comprised of a revolving line of credit consisting of revolving loans and letters of credit up to $150 million to fund working capital
needs. To facilitate the issuance of the Company’s convertible senior notes and the amendment and restatement of its senior secured term loan in April 2007, Eddie Bauer, Inc. executed a First Amendment and Waiver to a loan and security
agreement on April 4, 2007 with the revolving lenders to specifically permit the Company’s issuance of the convertible senior notes described below. On November 26, 2008, the Company, Bank of America, N.A., as agent for the lenders,
and the lenders under the Revolver executed a letter agreement waiving an event of default by the Company under its covenants resulting from the Company’s formation of a subsidiary to assist in sourcing negotiations in Hong Kong.
Advances under the Revolver may not exceed a borrowing base equal to various percentages of Eddie Bauer, Inc.’s eligible accounts receivable
balances and eligible inventory, less specified reserves. The Revolver is secured by a first lien on Eddie Bauer, Inc.’s inventory and certain accounts receivable balances and by a second lien on all of Eddie Bauer, Inc.’s other assets
other than the Company’s Groveport, Ohio distribution facility. The Revolver is guaranteed by Eddie Bauer and certain of its subsidiaries. The Company’s availability under the Revolver was $88.4 million as of January 3, 2009. As of
January 3, 2009, the Company had $8.7 million of letters of credit outstanding and no amounts drawn under the Revolver.
Borrowings
under the Revolver bear interest at:
|
|
•
|
|
LIBOR plus 1.25% if the average aggregate outstanding (based upon the preceding calendar month) is less than $75 million; or
|
132
|
|
•
|
|
LIBOR plus 1.50% if the average aggregate outstanding is greater than or equal to $75 million.
|
The weighted average interest rate paid by the Company on the outstanding revolving credit facility for fiscal 2008, fiscal 2007 and fiscal 2006 was
4.3%, 6.5% and 7.2%, respectively. In addition, the Company is required to pay an unused commitment fee of 0.25% per annum on the unused amount, plus a letter of credit fee. The Revolver is scheduled to mature on June 21, 2010.
The loan agreement requires that at any time the availability under the agreement is less than 10% of the maximum revolver available, the Company is
required to maintain a consolidated fixed charge coverage ratio (as defined therein) of at least 1.25:1.00. The agreement also limits the Company’s capital expenditures (net of landlord contributions) to $60 million in 2008, and $70 million in
2009 and 2010. There are additional covenants that restrict the Company from entering into certain merger, consolidation and sale transactions outside the normal course of business; from making certain distributions or changes in its capital stock;
from entering into certain guarantees; from incurring debt and liens subject to limits specified within the agreement; and other customary covenants. In addition, receipt of a going concern opinion on the Company’s financial statements is a
default under the Company’s Revolver. A default under the Revolver is also a default under the Amended Term Loan, should $5 million or more be outstanding on the Revolver at the time of default. As of January 3, 2009, the Company’s
availability under the agreement was not less than 10% of the maximum revolver available.
Senior Secured Term Loan
On June 21, 2005, Eddie Bauer, Inc. entered into a $300 million senior secured term loan agreement (“Prior Term
Loan”) upon its emergence from bankruptcy. On April 4, 2007, Eddie Bauer, Inc. entered into an Amended and Restated Term Loan Agreement with various lenders, Goldman Sachs Credit Partners L.P., as syndication agent, and JP Morgan Chase
Bank, N.A., as administrative agent (the “Amended Term Loan”). The Amended Term Loan amends the Prior Term Loan. In connection with the Amended Term Loan, $48.8 million of the loans were prepaid, reducing the principal balance of the Prior
Term Loan from $273.8 million to $225 million. The Company recognized a loss on extinguishment of debt of $3.3 million in April 2007, which represented the unamortized deferred financing fees of the Prior Term Loan and was reflected within other
income (expense), net on its statement of operations. The Company incurred $6.0 million of financing fees related to the Amended Term Loan agreement and convertible notes issuance (discussed further below), which it capitalized as deferred
financing fees. These deferred financing fees are being amortized over the life of the Amended Term Loan agreement and convertible notes. The Amended Term Loan extends the maturity date of the Prior Term Loan to April 1, 2014, and amends
certain covenants of the Prior Term Loan. As of January 3, 2009, $192.8 million was outstanding under the Amended Term Loan.
Interest
under the Amended Term Loan is calculated as the greater of the prime rate or the federal funds effective rate plus one-half of one percent plus an applicable margin rate in the case of base rate loans, or LIBOR plus an applicable margin rate for
Eurodollar loans. Margin rates are updated each quarter based upon the Company’s previous quarters financial results.
The margin rate
for base rate loans is:
|
|
•
|
|
2.00% if the Company’s consolidated senior leverage ratio (as defined in the agreement) is less than 3.25 to 1.00; or
|
|
|
•
|
|
2.25% if the Company’s consolidated senior leverage ratio is greater than or equal to 3.25 to 1.00.
|
The margin rate for Eurodollar loans is:
|
|
•
|
|
3.00% if the Company’s consolidated senior leverage ratio is less than 3.25 to 1.00; or
|
|
|
•
|
|
3.25% if the Company’s consolidated senior leverage ratio is greater than or equal to 3.25 to 1.00.
|
The applicable margin rates used to calculate interest under the Amended Term Loan was 2.25% for base rate loans and 3.25% for Eurodollar loans for the
first, second and third quarter of fiscal 2008 and 2.00% for base
133
rate loans and 3.00% for Eurodollar loans for the fourth quarter of fiscal 2008. Interest rates (exclusive of the margin percentage) for both base rate loans
and Eurodollar loans are reset on a monthly basis. As of January 3, 2009, the loan balance outstanding under the Amended Term Loan included $69.8 million of base rate loans with an interest rate of 3.25% plus 2.00% for a combined interest rate
of 5.25% and $123.0 million of Eurodollar loans with interest rates of LIBOR ranging from 0.45% to 0.47% plus 3.00% depending upon the term of the LIBOR tranche. Interest is payable quarterly on the last day of each March, June, September and
December for base rate loans, and for Eurodollar loans having an interest period of three months or less, the last day of such interest period or for Eurodollar loans having an interest period of longer than three months, each day that is three
months after the first day of such interest period.
The Amended Term Loan is secured by a first lien on certain real estate assets and
trademarks and by a second lien on substantially all of the other assets of the Company, Eddie Bauer, Inc. and its subsidiaries.
In
accordance with the Amended Term Loan, the Company is required to repay $0.6 million on a quarterly basis from June 30, 2007 through December 31, 2013, with the remaining balance due upon maturity of the loan on April 1, 2014. The
Amended Term Loan includes mandatory prepayment provisions, including prepayment requirements related to asset sales, future indebtedness, capital transactions, and a requirement that 50% (reduced to 25% if the Company’s consolidated senior
secured leverage ratio (as defined therein) on the last day of the relevant fiscal year is not greater than 2.00 to 1.00) of any “excess cash flows,” as defined in the Amended Term Loan and measured on an annual basis be applied to
repayment of the loan. As of January 3, 2009, the Company’s excess cash flow payment due was $14,693, which was included as current portion of long-term debt on the Company’s consolidated balance sheet. Future principal payments are
reduced by prepayments in accordance with the terms of the Amended Term Loan. The Company sold its interest in its financing receivables in December 2007, and was required to use the net cash proceeds received from the sale as a payment under the
Amended Term Loan. Accordingly, the Company repaid $7.7 million, $1.7 million and $1.7 million of its outstanding term loan balance in December 2007 and during the first and second quarters of 2008, respectively. As a result of these prepayments and
a $20 million voluntary prepayment in December 2007, the Company is not required to make any of the scheduled repayments under the terms of the Amended Term Loan and accordingly the remaining balance outstanding under the Amended Term Loan is not
required to be repaid until the Amended Term Loan’s maturity date on April 1, 2014. The Company is required to make repayments to the Amended Term Loan resulting from “excess cash flows” and “asset sales”, as such are
defined within the Amended Term Loan agreement.
The financial covenants under the Amended Term Loan agreement include:
The Company’s consolidated senior secured leverage ratio (as defined therein) calculated on a trailing four fiscal quarter basis must be equal to or
less than:
|
|
•
|
|
5.00 to 1.00 for the fiscal quarter ending December 31, 2008;
|
|
|
•
|
|
4.00 to 1.00 for the fiscal quarters ending March 31, 2009 and June 30, 2009;
|
|
|
•
|
|
3.75 to 1.00 for the fiscal quarter ending September 30, 2009;
|
|
|
•
|
|
3.50 to 1.00 for the fiscal quarter ending December 31, 2009;
|
|
|
•
|
|
3.25 to 1.00 for each of the fiscal quarters in 2010; and
|
|
|
•
|
|
Thereafter reducing on a graduated basis to 2.50 at March 31, 2012 to March 31, 2014.
|
In addition, the Company’s consolidated fixed charge coverage ratio (as defined therein) calculated on a trailing four fiscal quarter basis must be
equal to or greater than:
|
|
•
|
|
0.90 to 1.00 for the fiscal quarter ending December 31, 2008;
|
134
|
|
•
|
|
0.95 to 1.00 for the fiscal quarters ending March 31, 2009 and June 30, 2009;
|
|
|
•
|
|
0.975 to 1.00 for the fiscal quarters ending September 30, 2009 and December 31, 2009; and
|
|
|
•
|
|
thereafter increasing on a graduated basis to 1.10 to 1.00 at March 31, 2012 to March 31, 2014.
|
The Amended Term Loan also limits the Company’s capital expenditures (net of landlord contributions) to $50 million in 2008, $60 million in 2009 and
$70 million in 2010 through 2014. There are additional covenants that restrict the Company from entering into certain merger, consolidation and sale transactions outside the normal course of business, making certain distributions or changes in its
capital stock, entering into certain guarantees, incurring debt and liens subject to limits specified within the agreement and other customary covenants. As of January 3, 2009, the Company’s most recent quarterly compliance reporting date,
the Company was in compliance with the covenants of the Amended Term Loan.
See “
Note 17—Subsequent
Events
” for discussion of the Company’s execution in April 2009 of a First Amendment to its Amended Term Loan.
Convertible Notes
On April 4, 2007, the Company closed its offering of $75 million aggregate principal amount
of 5.25% convertible senior notes (“Notes”). The Notes have a maturity date of April 1, 2014 and pay interest at an annual rate of 5.25% semiannually in arrears on April 1 and October 1 of each year, beginning
October 1, 2007 unless earlier redeemed, repurchased or converted.
The Notes are fully and unconditionally guaranteed by all of the
Company’s existing and future subsidiaries that are parties to any domestic credit facilities, whether as a borrower, co-borrower or guarantor, including Eddie Bauer, Inc. The Notes are unsecured and senior obligations of the Company and rank
equally in right of payment with all existing and future senior unsecured indebtedness and senior in right of payment to any subordinated indebtedness. The Company has not provided separate financial statements for the guarantor subsidiaries or
consolidating financial statements of the Company as Eddie Bauer Holdings, Inc. and the non-guarantor subsidiaries do not conduct any operations and do not have significant assets.
Under the Indenture governing the Notes, the Notes were not convertible prior to January 4, 2009 except upon the occurrence of specified corporate
transactions. On September 19, 2008, after obtaining the requisite consent of the noteholders in consideration of the Company’s payment of a consent fee in the aggregate amount of approximately $0.2 million, Eddie Bauer, certain of its
subsidiaries and The Bank of New York Mellon, as trustee, entered into a Supplemental Indenture that amends the Indenture. The Supplemental Indenture allowed the Company, upon the receipt of the requisite stockholder consent, to extend the
expiration date of the existing 4.75% limitation on ownership of the Company’s securities contained in its Certificate of Incorporation from January 4, 2009 to January 1, 2012, provided the Ownership Limitation as extended does not
apply to conversion of the Notes to the Company’s common stock. On November 5, 2008, the Company’s stockholders approved the amendment to its Certificate of Incorporation to extend the Ownership Limitation to January 1, 2012.
Subsequent to January 4, 2009 and prior to April 1, 2013, holders may convert all or a portion of their Notes under the
following circumstances: (i) during any calendar quarter commencing after June 30, 2007 if the last reported sale price of the Company’s common stock is greater than or equal to 120% of the conversion price for at least 20 trading
days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (ii) during the five business day period after any 10 consecutive trading-day period (“measurement period”) in which
the trading price per $1,000 principal amount of Notes for each day in the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such day; or (iii) upon
the occurrence of specified corporate transactions, as set forth in the Indenture governing the Notes. On or after April 1, 2013, holders may convert their Notes at any time prior to 5:00 pm, New York City time, on the business day immediately
preceding the maturity date. The initial
135
conversion rate, which is subject to adjustment, for the Notes was 73.8007 shares per $1,000 principal amount of Notes (which represented an initial
conversion price of approximately $13.55 per share). Upon conversion, the Company has the right to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of its common stock.
Upon the occurrence of certain fundamental changes, including certain change of control transactions as set forth in the Indenture governing the Notes,
the Company will be required to offer to repurchase the Notes for cash at 100% of the principal amount thereof plus accrued and unpaid interest and additional interest, if any, to but not including the date of repurchase. In the event of certain
events of default under the Indenture either the trustee thereunder or the holders of at least 25% in principal amount of the then-outstanding Notes may declare 100% of the principal of the Notes and accrued and unpaid interest, including additional
interest, to be due and payable.
As a result of the requirement that the Company settle any conversion of the Notes occurring prior to
January 4, 2009 in cash, the conversion features contained within the Notes were deemed to be an embedded derivative under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
(“SFAS 133”). In
accordance with SFAS 133, the embedded derivative related to the conversion features required bifurcation from the debt component of the Notes and a separate valuation. The Company recognized the embedded derivative as an asset or liability on its
balance sheet and measured it at its estimated fair value, and recognized changes in its estimated fair value in other income (expense), net in the period of change. See “
Note 9
” for a discussion of the Company’s adoption of
SFAS 157, including the estimated fair value calculation for the embedded derivative liability associated with the Company’s Notes. Effective for fiscal 2009, the Company will no longer be required to recognize the changes in the fair value of
the conversion features through its statement of operations as the conversion features will no longer meet the criteria of an embedded derivative liability as the Company will not be required to settle any conversions in cash after January 4,
2009. Additionally, effective January 4, 2009, the Company adopted FSP APB 14-1,
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement
), which resulted in a portion of
the carrying value of the Notes to be reclassified to stockholders’ equity.
As a result of the bifurcation of the embedded derivative
related to the conversion features of the Notes under SFAS 133, the carrying value of the Notes at issuance was $53,775. The Company is accreting the difference between the face value of the Notes and the carrying value, which totaled $17,284 as of
January 3, 2009, as a charge to interest expense using the effective interest rate method over the term of the Notes. The Company recognized $2,345 and $1,596 of discount amortization during fiscal 2008 and fiscal 2007, respectively, within
interest expense, which resulted in an effective interest rate of approximately 11.05% related to the Notes.
Maturities of Long-term
Debt
Maturities of the Company’s long-term debt, including the $75 million in convertible notes, totaled $267,769 as of
January 3, 2009. With the exception of the Company’s excess cash flow payment of $14,693 which will be paid in the first quarter of fiscal 2009, the remaining amount is due in 2014. The amount to be paid in 2014 excludes any mandatory
prepayment provisions under the Company’s Amended Term Loan subsequent to that due as of January 3, 2009 and assumes no conversion of the Notes prior to their scheduled maturity date of April 1, 2014.
|
(9)
|
Fair Value of Financial Instruments
|
The carrying
values of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are a reasonable estimate of their fair value due to the short-term nature of these instruments.
The carrying value of the Company’s Amended Term Loan as of January 3, 2009 and December 29, 2007 was $192.8 million and
$196.2 million, respectively. The Company estimated the fair value of its Amended Term
136
Loan to be $75.2 million and $176.5 million as of January 3, 2009 and December 29, 2007, respectively. The fair value estimate was based upon
market quotes obtained from external sources.
The Company adopted SFAS 157 during the first quarter of fiscal 2008, which resulted in no
material impact to its financial statements. SFAS 157 applies to all assets and liabilities that are being measured and reported on a fair value basis, with the exception of nonfinancial assets and nonfinancial liabilities, for which fair value
measurement requirements were deferred in accordance with FSP FAS 157-2 See “
Note 3
”. SFAS 157 enables the reader of the financial statements to assess the inputs used to develop fair value measurements by establishing a hierarchy
for ranking the quality and reliability of the information used to determine fair values. SFAS 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Level 1 primarily consists of financial instruments whose value is based on quoted market prices. This category also includes financial instruments that are valued using alternative approaches but for which
independent external valuation information is available. The Company currently has no assets or liabilities for which it utilizes Level 1 inputs.
Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility
factors, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or
are supported by observable levels at which transactions are executed in the marketplace. The Company’s assets and liabilities that utilize Level 2 inputs include their interest rate swap and embedded derivative liability associated with its
Notes as discussed further below.
Level 3 is comprised of financial instruments whose fair value is estimated based on internally
developed models or methodologies utilizing significant inputs that are generally less readily observable. The Company’s fair value measurements that utilize Level 3 inputs consist primarily of nonfinancial assets and nonfinancial liabilities
for which the provisions of SFAS 157 have been deferred in accordance with FSP FAS 157-2.
The following table summarizes the estimated
fair values of the Company’s interest rate swap and embedded derivative related to its Notes as of January 3, 2009, both of which primarily utilize Level 2 inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Derivative instrument—interest rate swap
|
|
$
|
(10,360
|
)
|
|
$
|
(10,360
|
)
|
|
Derivative instrument—embedded derivative liability associated with the conversion features of the Company’s convertible
notes
|
|
$
|
(1,702
|
)
|
|
$
|
(1,702
|
)
|
The Company uses derivative instruments primarily to manage exposure to fluctuations in interest
rates, to lower its overall costs of financing and to manage the mix of floating- and fixed-rate debt in its portfolio. The Company’s derivative instruments as of January 3, 2009 included an interest rate swap agreement with Bank of
America and an embedded derivative related to its Notes.
Interest Rate Swap Agreement
The Company’s interest rate swap agreement had notional amounts of $98,250 and $99,250 as of January 3, 2009 and December 29, 2007. The
interest rate swap agreement effectively converts a portion of the outstanding
137
amount under the Amended Term Loan, which has a floating rate of interest, to a fixed-rate by having the Company pay fixed-rate amounts in exchange for the
receipt of the amount of the floating-rate interest payments. Under the terms of the interest rate swap agreement, a monthly net settlement is made for the difference between the fixed rate of 5.05% and the variable rate based upon the monthly LIBOR
rate on the notional amount of the interest rate swap. On a quarterly basis, the Company assesses and measures the effectiveness of the cash flow hedge using the changes in variable discounted cash flows method. In performing its assessments as of
January 3, 2009 and December 29, 2007, the fair value of the interest rate swap was determined to be liabilities of $10,360 and $4,130, respectively, and the changes in the cash flows of the derivative hedging instrument were within 80 to
125 percent of the opposite change in the cash flows of the hedged forecasted transaction and therefore the Company concluded that the hedge was highly effective. Accordingly, the Company recorded the effective portion of the cash flow hedge, which
totalled $10,360 as of January 3, 2009 and $4,130 ($2,559 net of tax) as of December 29, 2007 within other comprehensive loss on its balance sheet. No amount of the cash flow hedge was determined to be ineffective. The amount reflected in
other comprehensive loss as of January 3, 2009 will be reclassified into interest expense in the same period in which the hedged debt affects interest expense. The Company expects the cash flow hedge to be highly effective and therefore
estimates that no amounts will be reclassified into interest expense within the next 12 months. No amounts were recognized in the statement of operations resulting from a cash flow hedge for which it was not probable that the original forecasted
transaction would occur. The interest rate swap agreement is scheduled to terminate in April 2012, although the swap agreement can be terminated by Bank of America if the Company no longer has the Revolver, which expires in 2010, with Bank of
America. There is a breakage fee due upon termination of the swap agreement.
The valuation of the Company’s interest rate swap
agreement in accordance with SFAS 157 is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the interest rate swap and the offsetting hedged transaction. The fair valuation
uses the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected cash receipts (or payments). This analysis reflects the contractual terms of the derivative, including the period to
maturity, and uses observable market-based inputs, including forward LIBOR rates based upon Eurodollar futures rates. To comply with the provisions of SFAS 157, the Company incorporates credit valuation adjustments to appropriately reflect both its
own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement. Although the Company has determined that the majority of the inputs used to value its interest rate swap fall within Level 2 of the
fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs. However, as of January 3, 2009, the Company assessed the significance of the effect of the credit valuation adjustments on the
overall valuation of its interest rate swap and determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company concluded that the valuation of its interest rate swap is classified in Level 2
of the fair value hierarchy.
Convertible Note Embedded Derivative Liability
As discussed in
“Note 8
” above, the conversion features contained within the Company’s Notes were deemed to be an embedded
derivative under SFAS 133, and accordingly were reflected at their fair value on the Company’s balance sheet. The Company was required to update the fair value as of each reporting date with any difference reflected within other income
(expense), net. The Company estimated the fair value of the embedded derivative using a Black-Scholes model. The Black-Scholes model used to estimate the fair value of the conversion features of the Company’s Notes incorporated the following
assumptions, which were deemed to be Level 2 inputs: (i) trading price of its common stock; (ii) exercise price upon maturity; (iii) risk free rate of return; and (iv) volatility of the Company’s common stock price and stock
price of its peer companies. SFAS 157 also requires that the fair value measurement of a liability reflect credit valuation adjustments, including the nonperformance risk of the entity. The fair value of the conversion features of the Company’s
Notes reflected the nonperformance risk of the Company when issued in April 2007. The Company has concluded that changes in the Company’s creditworthiness since issuance of the Notes would not result in a material impact to the fair value of
the conversion features as of January 3, 2009. The Company estimated the fair value of the liability
138
associated with the conversion features to be $1,702 as of January 3, 2009 and recognized $9,040 of income within other income (expense), net during
fiscal 2008. The Company estimated the fair value of the conversion features to be $10,742 as of December 29, 2007 and recognized $10,483 of income within other income (expense), net during fiscal 2007. The decline in the estimated fair value
of the Company’s derivative liability since the issuance date for the Notes was primarily a result of the decline in the Company’s common stock price.
|
(10)
|
Supplemental Financial Information
|
Supplemental Statement of Operations Information:
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
Fiscal
2007
|
|
Fiscal
2006
|
|
Depreciation and amortization of property and equipment
|
|
$
|
33,408
|
|
$
|
39,222
|
|
$
|
44,247
|
|
Amortization of internal-use software
|
|
|
1,101
|
|
|
508
|
|
|
1,090
|
|
Amortization of deferred financing costs
|
|
|
935
|
|
|
955
|
|
|
788
|
|
Amortization of convertible note discount
|
|
|
2,345
|
|
|
1,596
|
|
|
—
|
|
Amortization of intangible assets
|
|
|
7,109
|
|
|
8,052
|
|
|
9,369
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
44,898
|
|
$
|
50,333
|
|
$
|
55,494
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
Net accretion of financing receivables/payables
|
|
$
|
—
|
|
$
|
5,531
|
|
|
$
|
1,791
|
|
Gain on fair value adjustment of net financing receivables/payables
|
|
|
—
|
|
|
—
|
|
|
|
466
|
|
Gain on sale of net financing receivables/payables
|
|
|
113
|
|
|
9,303
|
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
(3,284
|
)
|
|
|
—
|
|
Fair value adjustment of convertible note embedded derivative liability
|
|
|
9,040
|
|
|
10,483
|
|
|
|
—
|
|
Interest rate swap gain
|
|
|
—
|
|
|
228
|
|
|
|
—
|
|
Curtailment gain
|
|
|
3,918
|
|
|
—
|
|
|
|
—
|
|
Interest income and other
|
|
|
314
|
|
|
1,434
|
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
13,385
|
|
$
|
23,695
|
|
|
$
|
3,031
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Balance Sheet Information:
Property and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3,
2009
|
|
|
December 29,
2007
|
|
|
Land
|
|
$
|
7,471
|
|
|
$
|
7,471
|
|
|
Buildings and improvements
|
|
|
50,473
|
|
|
|
50,233
|
|
|
Leasehold improvements
|
|
|
141,327
|
|
|
|
145,740
|
|
|
Fixtures and equipment
|
|
|
70,204
|
|
|
|
67,889
|
|
|
Construction in progress
|
|
|
3,475
|
|
|
|
14,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272,950
|
|
|
|
285,660
|
|
|
Less: accumulated depreciation and amortization
|
|
|
(109,452
|
)
|
|
|
(90,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
163,498
|
|
|
$
|
195,103
|
|
|
|
|
|
|
|
|
|
|
|
139
Accrued Expenses:
|
|
|
|
|
|
|
|
|
|
|
January 3,
2009
|
|
December 29,
2007
|
|
Salaries and wages
|
|
$
|
16,397
|
|
$
|
16,904
|
|
Sales, payroll and business taxes
|
|
|
11,103
|
|
|
12,301
|
|
Allowance for sales returns
|
|
|
11,603
|
|
|
15,142
|
|
Gift cards and other customer deposits
|
|
|
44,052
|
|
|
45,322
|
|
Other accrued expenses
|
|
|
9,372
|
|
|
17,367
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
92,527
|
|
$
|
107,036
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3,
2009
|
|
|
December 29,
2007
|
|
|
Net foreign currency translation, net of tax
|
|
$
|
(10,360
|
)
|
|
$
|
2,169
|
|
|
Fair value adjustment of cash flow hedge, net of tax
|
|
|
1,333
|
|
|
|
(2,559
|
)
|
|
Unrecognized obligations related to pension and post-retirement plans,
net of tax
|
|
|
(9,647
|
)
|
|
|
5,028
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
(18,674
|
)
|
|
$
|
4,638
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
Income (loss) from continuing operations before income tax expense for fiscal 2008, fiscal 2007 and fiscal 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Loss from U.S. operations
|
|
$
|
(164,580
|
)
|
|
$
|
(44,881
|
)
|
|
$
|
(158,287
|
)
|
|
Income from foreign operations
|
|
|
3,118
|
|
|
|
12,356
|
|
|
|
12,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income tax expense
|
|
$
|
(161,462
|
)
|
|
$
|
(32,525
|
)
|
|
$
|
(145,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income tax expense for fiscal 2008, fiscal 2007 and fiscal 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,266
|
)
|
|
$
|
2,082
|
|
|
$
|
1,739
|
|
|
State
|
|
|
335
|
|
|
|
632
|
|
|
|
—
|
|
|
Foreign
|
|
|
(1,798
|
)
|
|
|
5,195
|
|
|
|
5,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,729
|
)
|
|
$
|
7,909
|
|
|
$
|
7,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,969
|
|
|
$
|
60,455
|
|
|
$
|
49,909
|
|
|
State
|
|
|
503
|
|
|
|
1,436
|
|
|
|
9,211
|
|
|
Foreign
|
|
|
324
|
|
|
|
(607
|
)
|
|
|
(633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,796
|
|
|
|
61,284
|
|
|
|
58,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
4,067
|
|
|
$
|
69,193
|
|
|
$
|
65,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140
Foreign tax expense (benefit) relates to income (loss) generated by the Company’s Canadian
operations.
The differences between the benefit for income taxes at the U.S. statutory rate and the income tax expense shown in the
consolidated statements of operations for fiscal 2008, fiscal 2007 and fiscal 2006 are included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007 (Restated)
|
|
|
Fiscal
2006
|
|
|
Income tax benefit at U.S. statutory rate
|
|
$
|
(56,512
|
)
|
|
$
|
(11,384
|
)
|
|
$
|
(51,259
|
)
|
|
State income tax benefit (net of federal income taxes)
|
|
|
(3,544
|
)
|
|
|
(539
|
)
|
|
|
(664
|
)
|
|
Increase in valuation allowances
|
|
|
46,945
|
|
|
|
27,162
|
|
|
|
71,265
|
|
|
Non-deductible goodwill impairment
|
|
|
22,601
|
|
|
|
—
|
|
|
|
41,154
|
|
|
Non-deductible interest expense and gain on sale of financing receivables
|
|
|
—
|
|
|
|
46,524
|
|
|
|
5,814
|
|
|
Increase (decrease) to liabilities for unrecognized tax benefits
|
|
|
(1,332
|
)
|
|
|
1,927
|
|
|
|
—
|
|
|
Basis difference in foreign subsidiaries
|
|
|
(2,862
|
)
|
|
|
2,659
|
|
|
|
203
|
|
|
Non-deductible compensation
|
|
|
1,022
|
|
|
|
2,009
|
|
|
|
645
|
|
|
Other items
|
|
|
(2,251
|
)
|
|
|
835
|
|
|
|
(1,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
4,067
|
|
|
$
|
69,193
|
|
|
$
|
65,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
Other items in fiscal 2008 includes a benefit of $2,610 related to a transfer pricing adjustment which resulted from the Company completing a study related to the transfer pricing of costs between its U.S subsidiaries
and Canadian subsidiaries. As a result of this study, when completing its 2007 Canadian tax return in the second quarter of 2008, the Company determined that $7,540 of taxable income for 2007 previously allocated to its Canadian subsidiaries should
be included in its U.S. taxable income. The corresponding increase in U.S. taxable income for 2007 had no impact on the effective tax rate as it was offset by a reduction in the valuation allowance against the net operating loss carryforward. See
further discussion below of the increases to the Company’s valuation allowance.
Fiscal 2007 and 2006
The increase in the Company’s income tax provision related to the non-deductible interest expense and gain on the sale of its financing receivables
for fiscal 2007 and fiscal 2006 resulted primarily from the fact that the cash the Company collected related to the financing receivables was included in the Company’s taxable income; however the majority of the related note payments (equal to
90% of the cash receipts) the Company made to the Creditor’s Trust were non-deductible for income tax purposes. See further discussion of the Company’s financing receivables, including their sale in December 2007, in “
Note
5
”.
The Company restated its presentation of its fiscal 2007 income tax rate reconciliation and deferred tax liabilities below
due to a change in treatment of the tax impacts associated with the market value adjustments and discount amortization related to its convertible notes. In fiscal 2007, the Company concluded that these differences represented permanent differences
between their book income and taxable income. During the fourth quarter of fiscal 2008, the Company determined that these differences should have been treated as temporary differences in accordance with SFAS 109. There was no impact to the
Company’s fiscal 2007 income tax expense or net deferred tax liabilities due to a corresponding decrease in the Company’s federal and state valuation allowances.
141
Deferred Tax Assets and Liabilities
Significant components of the Company’s deferred income tax assets and liabilities were as follows as of January 3, 2009 and December 29,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3,
2009
|
|
|
December 29,
2007 (Restated)
|
|
|
Deferred tax assets—current:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
—
|
|
|
$
|
88
|
|
|
Allowance for sales returns
|
|
|
2,410
|
|
|
|
3,302
|
|
|
Accrued vacation
|
|
|
2,326
|
|
|
|
2,387
|
|
|
Accrued severance
|
|
|
449
|
|
|
|
1,080
|
|
|
Reserve for store closings
|
|
|
75
|
|
|
|
412
|
|
|
Deferred revenue
|
|
|
2,034
|
|
|
|
1,084
|
|
|
Other
|
|
|
1,400
|
|
|
|
3,241
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
8,694
|
|
|
|
11,594
|
|
|
Less: Valuation allowance
|
|
|
(7,534
|
)
|
|
|
(7,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets—current
|
|
|
1,160
|
|
|
|
4,223
|
|
|
Deferred tax liabilities—current:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(4,842
|
)
|
|
|
(3,198
|
)
|
|
Capitalized inventory costs
|
|
|
(2,726
|
)
|
|
|
(7,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities—current
|
|
|
(7,568
|
)
|
|
|
(10,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)—current
|
|
$
|
(6,408
|
)
|
|
$
|
(6,356
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets—non-current:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
138,586
|
|
|
$
|
139,340
|
|
|
Deferred rent obligations/Unfavorable lease obligations, net
|
|
|
18,730
|
|
|
|
18,830
|
|
|
Pension and other post-retirement benefit liabilities
|
|
|
8,985
|
|
|
|
4,038
|
|
|
Stock-based compensation
|
|
|
4,536
|
|
|
|
2,713
|
|
|
AMT credits
|
|
|
6,865
|
|
|
|
6,661
|
|
|
Equity investments in foreign joint ventures
|
|
|
2,149
|
|
|
|
—
|
|
|
Interest rate swap
|
|
|
4,006
|
|
|
|
1,597
|
|
|
Other
|
|
|
1,369
|
|
|
|
1,574
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
185,226
|
|
|
|
174,753
|
|
|
Less: Valuation allowance
|
|
|
(160,167
|
)
|
|
|
(107,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets—non-current
|
|
$
|
25,059
|
|
|
$
|
67,083
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities—non-current:
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net
|
|
$
|
(45,849
|
)
|
|
$
|
(79,910
|
)
|
|
Property and equipment, net
|
|
|
(6,669
|
)
|
|
|
(7,195
|
)
|
|
Unremitted foreign earnings
|
|
|
—
|
|
|
|
(4,294
|
)
|
|
Equity investments in foreign joint ventures
|
|
|
—
|
|
|
|
(1,268
|
)
|
|
Market value adjustments and discount amortization of convertible
note liability
|
|
|
(6,627
|
)
|
|
|
(3,436
|
)
|
|
Other
|
|
|
(621
|
)
|
|
|
(1,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities—non-current
|
|
|
(59,766
|
)
|
|
|
(97,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)—non-current
|
|
$
|
(34,707
|
)
|
|
$
|
(30,490
|
)
|
|
|
|
|
|
|
|
|
|
|
142
NOLs and Valuation Allowances
In conjunction with the Company’s emergence from bankruptcy, ownership of two Spiegel subsidiaries, FSAC and SAC, were transferred to Eddie Bauer.
Both FSAC and SAC had significant U.S. federal and state net operating losses (“NOLs”).
The Internal Revenue Code’s
Section 382 places certain limitations on the annual amount of net operating loss carryforwards that can be utilized if certain changes to a company’s ownership occur. The Company had originally intended to avail itself of an exception to
the change in ownership rules arising from the issuance of the Eddie Bauer common stock to the respective creditors upon its emergence from bankruptcy. That exception would have required the Company not to have had another ownership change for two
years following the bankruptcy stock issuance. As a consequence, the Company established within its Certification of Incorporation certain trading restrictions and ownership limitations (“Ownership Limitation”) relating to its common stock
such that until January 4, 2009: (i) no person could acquire or accumulate 4.75% or more of the Company’s common stock or other class of equity and (ii) no person owning directly or indirectly 4.75% or more of the Company’s
common stock or other class of equity could acquire additional shares without meeting certain notice and prior approval requirements as set forth in the Company’s Certificate of Incorporation. Any transfers of the Company’s common stock in
violation of the Ownership Limitation would be null and void, unless the transferor or transferee, upon providing at least 15 days prior written notice of the transfer, obtains written consent for the proposed transfer from a majority of the
Company’s board of directors. On November 5, 2008, at a special meeting of the Company’s stockholders, the stockholders approved an amendment to the Company’s Certificate of Incorporation to extend from January 4, 2009 to
January 1, 2012 the limitation on direct or indirect ownership of the Company’s equity securities contained in the Company’s Certificate of Incorporation.
Fiscal 2006
The Company’s income tax expense for fiscal 2006 included $71,265 of expense to
increase the Company’s valuation allowance related to its federal NOLs. At December 30, 2006, the Company concluded that a partial valuation allowance was required against its federal NOLs. The Company considered the following issues in
reaching its conclusion to record a partial valuation allowance: (i) the Company assumed because of an anticipated change in control that its NOLs would be further limited under Section 382 beyond what had been assumed upon the
Company’s emergence from bankruptcy; (ii) the Company performed an updated valuation of its enterprise value and concluded that the Company’s enterprise value had declined, thereby decreasing the amount of expected NOL utilization;
and (iii) the Company reassessed its long-range plan, which resulted in a decrease in the Company’s projected taxable income and an increase in the projected amounts of NOLs expected to expire unused.
Fiscal 2007
The Company’s
income tax expense for fiscal 2007 included $22,970 (restated for the change in assumption for convertible note liability temporary differences as noted above) to increase its partial valuation allowance related to its federal NOLs. The Company
determined in fiscal 2007 that a higher Section 382 limitation should apply as the Company concluded that a second change in control would not occur, which would increase the amount of anticipated NOL utilization in future years. However, based
on the Company’s recent history of book losses when excluding the taxable income generated by the Company’s financing receivables which it sold in December 2007, it determined that it would not likely use a significant portion of its
federal NOLs before they expired. Using these assumptions, the Company estimated that a partial valuation allowance of $103,227 (restated for the change in assumption for convertible note liability temporary differences as noted above) was required
as of December 29, 2007 related to its federal NOLs. This increase to the Company’s valuation allowance was offset by a reduction to the Company’s federal NOLs and related valuation allowance by $4,583 in conjunction with its
liabilities for unrecognized tax benefits discussed further below.
During the fourth quarter of 2007, in the course of preparing its
2006 state income tax returns, the Company received additional information from its prior parent company, Spiegel, related to certain state NOLs that existed
143
as of the Company’s fresh start reporting date, which the Company had previously assumed a full valuation allowance against. The Company recorded an
adjustment to reduce goodwill by $6,587 during the fourth quarter of 2007 which included $2,725 for NOLs utilized during the second half of fiscal 2005 and during fiscal 2006 (with an increase to income tax expense); $1,496 for NOLs utilized during
fiscal 2007 (which was reflected in the Company’s fiscal 2007 state income tax expense); and $2,366 for state NOLs which will be utilized in future years and not expire unused. As of the end of fiscal 2007, in accordance with
SFAS 109, if a valuation allowance was recognized for some portion or all of an entity’s deferred tax assets at a fresh start reporting date (including NOLs), tax benefits for those items recognized in financial statements for a subsequent
year should first be applied to reduce any goodwill related to the acquisition. Effective with the Company’s adoption of SFAS 141(R),
Business Combinations
, for fiscal 2009, future changes in the Company’s valuation allowance
associated with its NOLs that existed as of its fresh start reporting date, will be reflected within income tax expense (benefit). Additionally, the Company generated $1,467 (restated for the change in assumption for convertible note liability
temporary differences as noted above) of state NOLs during fiscal 2007 which the Company provided a full valuation allowance as the Company expected these state NOLs to expire unused. The Company’s valuation allowance related to its state NOLs
totaled $11,814 as of December 29, 2007 (restated for the change in assumption for convertible note liability temporary differences as noted above).
Fiscal 2008
As a result of the Company’s operating performance during the fourth quarter of
2008, and the Company’s forecasted operating results in fiscal 2009, 2010 and 2011 the Company determined that a full valuation allowance was required for its net deferred tax assets and recorded income tax expense of $46,945 during
the fourth quarter of fiscal 2008. The Company’s valuation allowance for its federal and state deferred tax assets, including its NOLs, totaled $151,281 and $16,420, respectively, as of January 3, 2009.
The Company also recorded a full valuation allowance through other comprehensive loss against its net deferred tax assets within accumulated other
comprehensive loss, which totaled $7,221 as of January 3, 2009.
The Company’s federal NOLs as of January 3, 2009 were
estimated to be approximately $124.2 million (tax affected) and expire in 2022 through 2028. The Company’s state NOLs as of January 3, 2009 were estimated to be approximately $14.4 million (tax affected) and expire in 2008
through 2027. As noted above, the Company has recorded a full valuation allowance against its federal and state NOLs.
FIN 48
Adoption and Liabilities for Unrecognized Tax Benefits
The Company adopted the provisions of FIN 48 on January 1, 2007. As a
result of the implementation of FIN 48, the Company recognized an increase of $467 in its liabilities for unrecognized tax benefits which was accounted for as an increase to its January 1, 2007 balance of accumulated deficit of $329 and an
increase in the balance of non-current deferred tax assets of $138. A rollforward of the Company’s liabilities for unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
Unrecognized tax benefits balance at beginning of period
|
|
$
|
2,105
|
|
|
$
|
467
|
|
Increases for tax positions of prior years
|
|
|
24
|
|
|
|
279
|
|
Decreases for tax positions of prior years
|
|
|
(1,468
|
)
|
|
|
—
|
|
Increases for tax positions of current year
|
|
|
637
|
|
|
|
1,359
|
|
Decreases for tax positions of current year
|
|
|
(544
|
)
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
|
|
—
|
|
Lapse in statute of limitations
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits balance at end of period
|
|
$
|
754
|
|
|
$
|
2,105
|
|
|
|
|
|
|
|
|
|
144
As discussed above, the Company determined that it had certain state NOLs as of its fresh start reporting
date that were not known to the Company until fiscal 2007 that impacted the liabilities recorded by the Company upon its adoption of FIN 48. As a result of these state NOLs, the Company recorded an adjustment in the fourth quarter of 2007 to
increase its income tax expense and reduce its goodwill by $430 related to its unrecognized tax benefits that existed as of the Company’s fresh start reporting date.
The decrease in the Company’s liability for unrecognized tax benefits during fiscal 2008, for both tax positions of prior years and in the current year, relates primarily to unpaid intercompany loan balances
between the Company’s U.S. and Canadian subsidiaries. During the fourth quarter of 2008, the Company declared and paid a dividend from its Canadian subsidiary, Eddie Bauer of Canada, Inc. to Eddie Bauer, Inc., thereby reducing its tax
liabilities for unremitted foreign earnings. As of January 3, 2009, the Company’s unrecognized tax liabilities included $24 related to interest and penalties, which are recorded by the Company within income tax expense. Also included in
the balance at January 3, 2009 was $1,184 of tax positions which, if recognized, would affect the Company’s effective tax rate in a future period. While it is expected that the amount of unrecognized tax benefits will change during 2009,
the Company does not expect the change to have a significant impact on its results of operations or financial position.
The Company or one
of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal and state and local examinations by tax authorities for years prior to
2004, subject to certain exceptions. The Canadian Revenue Authority (“CRA”) commenced an examination of the Company’s subsidiaries’ Canadian federal income tax returns for 2002-2003 and 2004-2005 (Eddie Bauer Customer Services,
Inc.—“EBCS”) and 2003-2004 (Eddie Bauer Canada, Inc.—“EBC”). As of January 3, 2009, the CRA has not proposed significant adjustments to the tax returns as filed for EBCS for 2004-2005 and EBC for 2003-2004. The CRA
proposed an assessment to EBCS for 2002-2003 but the Company strongly believes that these claims are barred by bankruptcy law and will not result in significant assessment. The Company filed a Notice of Objection with the CRA to protest the
assessment. The Company is not currently able to anticipate whether or not adjustments would result in a material change to its financial position.
|
(12)
|
Employee Benefit Plans
|
Historically, Eddie Bauer,
Inc. participated in certain Spiegel employee benefit plans. Upon Eddie Bauer, Inc.’s emergence from bankruptcy, the Spiegel post-retirement, defined-benefit healthcare and life insurance plans and pension plan were transferred to and assumed
in total by Eddie Bauer Holdings. Accordingly, on such date, the liabilities associated with these plans, in addition to those liabilities related to the Company’s employees, were reflected in the consolidated balance sheet of the Company.
401(k) Saving and Profit Sharing Plan
Eligible employees may elect to contribute up to 75% of their before-tax base salary and up to 5% of their after-tax base salary to a 401(k) savings plan, subject to IRS annual dollar limits. Eligible associates who
are age 50 or older may also make “catch up” contributions in accordance with IRS guidelines. Prior to February 28, 2009, the Company matched the employee contribution amount dollar for dollar on the first 3% of before-tax base
salary and 50 cents on the dollar for the next 3% of before-tax salary for salaried employees. Effective March 1, 2009, the Company suspended its matching contribution. Employees are 100% vested in their salary deferral contributions and
after-tax contributions. Since January 1, 2006, employees have been 100% vested in any Company matching contributions. Employer matching contributions prior to January 1, 2006 are subject to vesting requirements as defined in the
Company’s 401(k) plan. The Company’s cost of matching employees’ contributions to the plan was $2,409, $2,480 and $1,554 for fiscal 2008, fiscal 2007 and fiscal 2006, respectively.
145
Adoption of SFAS 158 Measurement Provisions
During the first quarter of fiscal 2008, the Company adopted the measurement provisions of SFAS 158,
Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans (an amendment of FASB
Statements No. 87, 88, 106, and 132R)
(“SFAS 158”). The measurement provisions of SFAS 158 require a company to measure a plan’s assets and its obligations
that determine its funded status as of the end of the employer’s fiscal year. Prior to adopting the measurement provisions of SFAS 158, the Company measured the plan assets and obligations for its post-retirement healthcare and life insurance
plans and its pension plan as of the end of the third quarter.
In accordance with SFAS 158, in lieu of remeasuring the plan assets and
obligations as of December 31, 2007, the Company utilized the measurements determined as of the end of the third quarter of 2007. The periodic benefit cost for the period of October 1, 2007 through January 3, 2009 has been allocated
between the portion to be recognized as an adjustment to retained earnings (equal to three-fifteenths of net periodic expense/benefit) upon adoption of the measurement provisions and the portion to be reflected in the Company’s statement of
operations during fiscal 2008 (equal to twelve-fifteenths of net periodic expense/benefit). As a result, the Company recognized a pre-tax reduction to retained earnings of $148 ($91 net of tax) related to its post-retirement healthcare and life
insurance plans and a pre-tax increase to retained earnings of $245 ($150 net of tax) related to its pension plan as of January 1, 2008.
Post-retirement Healthcare and Life Insurance Plans
The Company, through the former Spiegel post-retirement plans,
provides certain medical/dental and life insurance benefits for eligible retired employees. The retirement plan is a defined benefit post-retirement health care and life insurance plan. The medical benefits continue until the earlier of death or
age 65. For fiscal 2009, as a result of economic conditions, retirees will pay all of the retiree medical/dental premiums. The life insurance plan is closed to new participants and provides benefits for participants until death.
The cost of these plans, the balances of plan obligations and related assumptions are included in the tables below. The obligations as of January 3,
2009 and December 29, 2007 are based upon actuarial valuations as of the Company’s annual measurement dates of December 31, 2008 and September 30, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
January 3,
2009
|
|
|
As of
December 29,
2007
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
3,501
|
|
|
$
|
7,954
|
|
|
Fair value of plan assets
|
|
|
—
|
|
|
|
—
|
|
|
Funded status
|
|
$
|
(3,501
|
)
|
|
$
|
(7,954
|
)
|
|
Unrecognized net actuarial (gain)/loss
|
|
|
—
|
|
|
|
—
|
|
|
Unrecognized net prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit cost
|
|
$
|
(3,501
|
)
|
|
$
|
(7,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
January 3,
2009
|
|
|
As of
December 29,
2007
|
|
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued benefit liability—current
|
|
|
(198
|
)
|
|
|
(572
|
)
|
|
Accrued benefit liability—noncurrent
|
|
|
(3,303
|
)
|
|
|
(7,382
|
)
|
|
Accumulated other comprehensive income, pre-tax
|
|
|
(3,803
|
)
|
|
|
(3,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(7,304
|
)
|
|
$
|
(11,078
|
)
|
|
|
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
Benefit obligation as of beginning of period
|
|
$
|
8,061
|
|
|
$
|
8,475
|
|
|
Impact of eliminating early measurement date
|
|
|
91
|
|
|
|
—
|
|
|
Service cost
|
|
|
288
|
|
|
|
250
|
|
|
Interest cost
|
|
|
498
|
|
|
|
485
|
|
|
Participant contributions
|
|
|
405
|
|
|
|
519
|
|
|
Benefits paid
|
|
|
(1,002
|
)
|
|
|
(1,098
|
)
|
|
Actuarial (gain)/loss
|
|
|
100
|
|
|
|
(570
|
)
|
|
Plan amendments
|
|
|
(1,358
|
)
|
|
|
—
|
|
|
Curtailment gain
|
|
|
(3,582
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation as of end of period
|
|
$
|
3,501
|
|
|
$
|
8,061
|
|
|
|
|
|
|
|
|
|
|
|
The “Impact of eliminating the early measurement date” included in the fiscal 2008 table
above reflects the service and interest costs recorded to beginning of year retained earnings as a result of the Company’s adoption of the measurement provisions of SFAS 158, which were partially offset by the contributions received during the
fourth quarter of 2007. As discussed above, in fiscal 2009, the Company will no longer subsidize the retiree medical/dental premiums. As a result of this change, the Company recognized reductions of $1,358 and $3,582 to the projected benefit
obligation as of January 3, 2009 related to current retirees and future retirees, respectively.
The benefit obligation at
December 29, 2007 of $8,061 per the projected benefit obligation rollforward above represents the Company’s benefit obligations as of the Company’s measurement date of September 30, 2007. The accrued benefit cost of $7,954 per
the funded status table above has been adjusted for contributions of $107 which were made during the fourth quarter of 2007. There was no difference between the benefit obligation and the funded status for fiscal 2008 due to the Company’s
adoption of the measurement provisions of SFAS 158.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Fair Value of Plan Assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets as of beginning of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Employer contributions
|
|
|
597
|
|
|
|
579
|
|
|
Participant contributions
|
|
|
405
|
|
|
|
519
|
|
|
Benefits paid
|
|
|
(1,002
|
)
|
|
|
(1,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets as of end of period
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Net benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
288
|
|
|
$
|
250
|
|
|
$
|
247
|
|
|
Interest cost
|
|
|
498
|
|
|
|
485
|
|
|
|
472
|
|
|
Amortization of prior service cost
|
|
|
(71
|
)
|
|
|
(71
|
)
|
|
|
(71
|
)
|
|
Amortization of net actuarial (gain)/loss
|
|
|
(122
|
)
|
|
|
(82
|
)
|
|
|
(80
|
)
|
|
Curtailment gain
|
|
|
(3,918
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense (benefit)
|
|
$
|
(3,325
|
)
|
|
$
|
582
|
|
|
$
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The curtailment gain of $3,918 recognized within net benefit cost during fiscal 2008 reflects the
curtailment gain of $3,582 related to the change in the Company no longer subsidizing medical/dental premiums of future
147
retirees and the unrecognized prior service cost of $336. The curtailment gain was reflected in other income (expense), net during the fourth quarter of
fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Other changes in Plan Assets and Benefit Obligations recognized in Other Comprehensive (Income) Loss:
|
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Prior service cost (credit)
|
|
|
(1,358
|
)
|
|
|
(424
|
)
|
|
Net actuarial (gain) loss
|
|
|
100
|
|
|
|
(2,700
|
)
|
|
Amortization of net transition obligation (asset)
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of prior service cost (including charge to beginning of year retained earnings of $18 and curtailment gain of
$336)
|
|
|
425
|
|
|
|
—
|
|
|
Amortization of net actuarial (gain) loss (including charge to beginning of year retained earnings of $31)
|
|
|
154
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income, pre-tax
|
|
$
|
(679
|
)
|
|
$
|
(3,124
|
)
|
|
|
|
|
|
|
|
|
|
|
The estimated amounts of prior service costs/(credits) and net actuarial losses/(gains) expected
to be amortized from other comprehensive income into net periodic benefit cost during fiscal 2009 are $(105) and $(161), respectively.
Assumptions:
For measurement of the Company’s net benefit cost, an 8.5% and 9% annual rate of increase in the per
capita cost of covered health care benefits (i.e., health care cost trend rate) was assumed for fiscal 2007 and 2006, respectively. No health care cost trend was assumed for the Company’s fiscal 2008 measurement as in fiscal 2009, the Company
will no longer subsidize the retiree health care premiums. The health care cost trend rate is intended to represent the underlying cost of each health care delivery type and includes other components such as general and medical inflation, overall
changes in utilization and mix of services, aging of total population, technology, malpractice, cost shifting from non-paying individuals and other external influences and is expected to decrease over the next several years with an ultimate rate of
5.0% in fiscal 2014. The discount rates utilized to calculate the figures included above were 6.05% and 6.14% as of January 3, 2009 and December 29, 2007, respectively.
Contributions:
In fiscal 2009,
expected contributions to the post-retirement benefit plans are $198, which reflect the Company’s estimated contributions to the post-retirement life insurance plan. Due to the change in the retiree medical/dental program as mentioned above, in
fiscal 2009, the Company will no longer be required to make contributions associated with the medical/dental benefits.
Estimated Future
Benefit Payments:
The following is a schedule of estimated future post-retirement benefits payments as of January 3, 2009 related
to the post-retirement life insurance plan:
|
|
|
|
|
|
Fiscal
|
|
|
|
|
2009
|
|
$
|
198
|
|
2010
|
|
|
209
|
|
2011
|
|
|
220
|
|
2012
|
|
|
231
|
|
2013
|
|
|
241
|
|
2014 – 2018
|
|
|
1,338
|
148
Pension Plan
As discussed above, the Company assumed the costs and obligations associated with the former Spiegel pension plan upon the Company’s emergence from bankruptcy. In accordance with the terms of the Spiegel pension
plan, no new participants have been or will be added to the pension plan subsequent to the Company’s emergence from bankruptcy. Included in the tables below are the assets and obligations as of January 3, 2009 and December 29, 2007,
which are based upon actuarial valuations prepared as of December 31, 2008 and September 30, 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
January 3,
2009
|
|
|
As of
December 29,
2007
|
|
|
Funded Status:
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
48,728
|
|
|
$
|
48,275
|
|
|
Fair value of plan assets
|
|
|
29,393
|
|
|
|
46,155
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(19,335
|
)
|
|
$
|
(2,120
|
)
|
|
Unrecognized net actuarial loss/(gain)
|
|
|
13,451
|
|
|
|
(4,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension cost
|
|
$
|
(5,884
|
)
|
|
$
|
(7,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
January 3,
2009
|
|
|
As of
December 29,
2007
|
|
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability—current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accrued benefit liability—non-current liabilities
|
|
|
(19,335
|
)
|
|
|
(2,120
|
)
|
|
Accumulated other comprehensive loss/(income), pre-tax
|
|
|
13,451
|
|
|
|
(4,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(5,884
|
)
|
|
$
|
(7,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of period
|
|
$
|
48,275
|
|
|
$
|
52,056
|
|
|
Impact of eliminating early measurement date
|
|
|
(513
|
)
|
|
|
—
|
|
|
Service cost
|
|
|
—
|
|
|
|
—
|
|
|
Interest cost
|
|
|
2,740
|
|
|
|
2,849
|
|
|
Benefits paid
|
|
|
(4,734
|
)
|
|
|
(4,897
|
)
|
|
Actuarial loss/(gain)
|
|
|
2,960
|
|
|
|
(1,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of period
|
|
$
|
48,728
|
|
|
$
|
48,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Fair value of Plan Assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
46,155
|
|
|
$
|
44,470
|
|
|
Impact of eliminating early measurement date
|
|
|
(269
|
)
|
|
|
—
|
|
|
Actual return on plan assets
|
|
|
(11,759
|
)
|
|
|
5,891
|
|
|
Employer contributions
|
|
|
—
|
|
|
|
691
|
|
|
Benefits paid
|
|
|
(4,734
|
)
|
|
|
(4,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
$
|
29,393
|
|
|
$
|
46,155
|
|
|
|
|
|
|
|
|
|
|
|
149
The “Impact of eliminating the early measurement date” included in the fiscal 2008 tables above
reflects the interest costs, expected return on assets and expected benefit payments recorded to beginning of year retained earnings as a result of the Company’s adoption of the measurement provisions of SFAS 158.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
|
Fiscal
2006
|
|
|
Net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
|
2,740
|
|
|
|
2,849
|
|
|
|
2,924
|
|
|
Expected return on plan assets
|
|
|
(3,713
|
)
|
|
|
(3,607
|
)
|
|
|
(3,687
|
)
|
|
Amortization of net actuarial gain
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefit
|
|
$
|
(981
|
)
|
|
$
|
(758
|
)
|
|
$
|
(763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
Fiscal
2007
|
|
|
Other changes in Plan Assets and Benefit Obligations recognized in Other Comprehensive (Income) Loss:
|
|
|
|
|
|
|
|
|
Transition obligation
|
|
$
|
—
|
|
$
|
—
|
|
|
Prior service cost (credit)
|
|
|
—
|
|
|
—
|
|
|
Net actuarial loss/(gain)
|
|
|
18,434
|
|
|
(4,991
|
)
|
|
Amortization of net transition obligation (asset)
|
|
|
—
|
|
|
—
|
|
|
Amortization of prior service cost
|
|
|
—
|
|
|
—
|
|
|
Amortization of net actuarial gain/(loss)
|
|
|
8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive loss/(income), pre-tax
|
|
$
|
18,442
|
|
$
|
(4,991
|
)
|
|
|
|
|
|
|
|
|
|
The estimated net actuarial loss expected to be amortized from other comprehensive loss into net
periodic pension cost during fiscal 2009 is $425.
Assumptions:
The weighted-average assumptions used to determine the benefit obligation as of the December 31, 2008 and September 30, 2007 measurement dates
included discount rates of 5.5% and 6.0%, respectively.
The weighted-average assumptions used to determine the net periodic pension cost
(benefit) for fiscal 2008, fiscal 2007 and fiscal 2006 included discount rates of 6.0%, 5.75% and 5.5%, respectively, and expected returns on plan assets of 8.50% for all three periods.
The actuarial assumptions used to compute the net periodic pension costs and obligations are based upon information available, including, market interest
rates, past experience and management’s best estimate of future economic conditions. Changes in these assumptions may impact future benefit costs and obligations. In computing future costs and obligations, the Company must make assumptions
about such things as discount rate, expected rate of return on plan assets, employee mortality and turnover and expected future cost increases.
The expected rate of return on plan assets and discount rate generally have the most significant impact on the level of costs and obligations. The Company’s expected long-term rate of return on plan assets assumption was derived from a
study which included a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plan to determine the average rate of
earnings expected on the funds invested to provide for the pension plan benefits. While the study gives appropriate consideration to recent fund performance and historical returns, the assumption is primarily a long-term, prospective rate. Based
upon the most recent study, the Company has assumed a long-term return on plan assets of 8.0%. The Company’s discount rate was based upon Moody’s Aa corporate bond rate.
150
Plan Assets:
The pension plan asset allocations as of the December 31, 2008 and September 30, 2007 measurement dates by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2008
|
|
|
As of
September 30,
2007
|
|
|
Asset Category:
|
|
|
|
|
|
|
|
Equity securities
|
|
61
|
%
|
|
62
|
%
|
|
Debt securities
|
|
38
|
%
|
|
37
|
%
|
|
Real estate
|
|
0
|
%
|
|
0
|
%
|
|
Other
|
|
1
|
%
|
|
1
|
%
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
The Company maintains target allocation percentages among various asset classes based on an
investment policy established for the pension plan, which is designed to achieve long-term objectives of return, while mitigating against downside risk and considering expected cash flows. The weighted-average target asset allocation percentages as
of December 31, 2008 were: equity securities of 60%; debt securities of 38%; and other of 2%. The Company reviews its investment policy from time to time to ensure consistency with its long-term objective of meeting the plan’s minimum
required contributions.
Contributions:
The Company made no contributions to its pension plan during fiscal 2008 and expects to make contributions of $672 during fiscal 2009.
Estimated Future Benefit Payments:
The following is a schedule of estimated future pension benefit
payments, which reflect expected future service, as appropriate:
|
|
|
|
|
|
Fiscal:
|
|
2009
|
|
$
|
4,710
|
|
2010
|
|
|
4,603
|
|
2011
|
|
|
4,488
|
|
2012
|
|
|
4,379
|
|
2013
|
|
|
4,228
|
|
2014 – 2018
|
|
|
18,879
|
|
(13)
|
Stock Based Compensation
|
In August 2005, the
Company’s board of directors adopted the Eddie Bauer Holdings, Inc. 2005 Stock Incentive Plan (the “Stock Incentive Plan”), which was amended on November 3, 2005, December 8, 2005 and April 29, 2007 and approved by the
Company’s stockholders on June 12, 2007. The Stock Incentive Plan will remain effective for ten years if not sooner terminated by the Company’s board of directors. The Stock Incentive Plan provides for the grant of incentive stock
options, nonstatutory stock options, SOSARs, restricted stock awards, performance awards, stock appreciation rights and inducement awards, which may be granted to directors, employees and consultants of the Company or its affiliates. In accordance
with the Stock Incentive Plan, the Company has reserved 4.35 million shares of common stock for awards under the plan. As of January 3, 2009, the number of shares of common stock available for grants under the Stock Incentive Plan was
1.1 million.
151
During fiscal 2008, the Company began granting SOSARs. SOSARs give the grantee the right to receive, in
shares of the Company’s common stock, the difference between (x) the closing price of the Company’s stock on the date of grant multiplied by a specified number of SOSARs and (y) the closing price of the Company’s stock on
the date of exercise, multiplied by the same specified number of SOSARs. The grantee will receive a number of shares of the Company’s common stock equal to the difference between the two amounts [(x) and (y) above], divided by the closing
price of the stock on the date of exercise. The Company satisfies stock option/SOSAR exercises and the vesting of RSUs with newly issued shares. Stock options/SOSARs and RSUs are forfeited by employees whose employment terminates prior to vesting,
with limited exceptions. Compensation expense for RSUs and stock options/SOSARs is recognized ratably over the vesting period. Compensation expense for RSUs is based upon the market price of the shares underlying the awards on the grant date.
Compensation expense for time-vested stock options/SOSARs has been estimated on the grant date using a Black-Scholes option-pricing model and for performance-vested stock options using a Monte-Carlo simulation model. Compensation expense for both
RSUs and stock options/SOSARs is adjusted for expected forfeitures which the Company estimates using historical data.
Stock
Options/SOSARs
Stock option/SOSARs are granted at an exercise price equal to the market value of the underlying common stock on the
date of grant, and generally have a term of ten years. Time-vested stock options/SOSARs have a four-year ratable vesting. The fair value of time-vested stock option/SOSAR awards is determined using a Black-Scholes model which utilizes a range of
assumptions related to dividend yield, expected volatility, risk-free interest rate and expected term. Prior to 2008, the Company’s volatility assumptions used in determining the fair values of its stock options/SOSARs were based upon
historical and implied volatility for other companies in the retail industry due to the Company’s limited stock price history. Effective with fiscal 2008, the Company’s volatility assumptions include both (i) the Company’s
one-year historical volatility and (ii) six-year historical volatility levels and implied volatility for peer companies in the retail industry. The change in volatility assumptions to include the Company’s historical volatility did not
have a material impact on the fair values of the Company’s stock options/SOSARs granted during fiscal 2008. The risk-free interest rate represents the U.S. Treasury yield curve in effect at the time of the stock option/SOSAR grant. The
weighted average expected option term for the stock options reflects the application of the simplified method set out in SEC Staff Accounting Bulletin (“SAB”) No. 107 and SAB No. 110. The simplified method defines the
life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.
During fiscal
2007, the Company awarded 648,000 performance-vested stock options which consist of 324,000 five-year performance options and 324,000 seven-year performance options. The five-year performance options will vest only if the closing price of the
Company’s common stock reaches $25 per share for 30 consecutive trading days within five years of the respective grant dates. The seven-year performance options will vest only if the closing price of the Company’s common stock reaches $35
per share for 30 consecutive trading days within seven years of the respective grant dates. No performance-vested stock options have been granted subsequent to fiscal 2007.
152
The fair value of time and performance-vested stock options/SOSARs and related assumptions included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Time-vested options/SOSARs:
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
2.82 – 3.56
|
%
|
|
3.54 – 5.06
|
%
|
|
|
4.47
|
%
|
|
Expected term in years
|
|
6.25
|
|
|
6.25
|
|
|
|
6.25
|
|
|
Dividend yield
|
|
0.0
|
%
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
Expected volatility
|
|
52 – 57
|
%
|
|
37 – 45
|
%
|
|
|
46
|
%
|
|
Weighted-average fair value of time-vested options granted
|
|
$2.45
|
|
|
$6.04
|
|
|
$
|
7.34
|
|
|
|
|
|
|
|
Performance-vested options:
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
n/a
|
|
|
3.28 – 5.07
|
%
|
|
|
n/a
|
|
|
Dividend yield
|
|
n/a
|
|
|
0.0
|
%
|
|
|
n/a
|
|
|
Expected volatility
|
|
n/a
|
|
|
37 – 45
|
%
|
|
|
n/a
|
|
|
Requisite service period in years (5-year performance-based options)
|
|
n/a
|
|
|
2.3 – 3.5
|
|
|
|
n/a
|
|
|
Requisite service period in years (7-year performance-based options)
|
|
n/a
|
|
|
3.8 – 4.9
|
|
|
|
n/a
|
|
|
Weighted-average fair value of 5-year performance based options granted
|
|
n/a
|
|
|
$5.02
|
|
|
|
n/a
|
|
|
Weighted-average fair value of 7-year performance based options granted
|
|
n/a
|
|
|
$5.31
|
|
|
|
n/a
|
|
The following table summarizes information about the Company’s time-vested stock option/SOSAR
transactions during fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at beginning of year
|
|
695,500
|
|
|
$
|
20.43
|
|
Awards granted
|
|
649,356
|
|
|
$
|
4.53
|
|
Awards forfeited
|
|
(141,456
|
)
|
|
$
|
18.07
|
|
Awards exercised
|
|
—
|
|
|
|
n/a
|
|
Awards expired
|
|
—
|
|
|
|
n/a
|
|
Outstanding at end of year
|
|
1,203,400
|
|
|
$
|
12.13
|
|
Exercisable at end of year
|
|
453,273
|
|
|
$
|
22.22
|
The total fair value of stock options/SOSARs vested during fiscal 2008, fiscal 2007 and fiscal
2006 was $1,310, $1,882 and $1,822, respectively. The weighted average remaining contractual term for the time-vested stock options outstanding and exercisable at January 3, 2009 was 8.3 years and 7.0 years, respectively.
The Company had 648,000 performance-vested options outstanding at the beginning and end of fiscal 2008 with a weighted average exercise price of
$12.97. There were no performance-vested options granted, forfeited, exercised or expired during fiscal 2008. None of the outstanding performance-vested options were exercisable as of January 3, 2009. The weighted average remaining contractual
term for the performance-vested stock options outstanding at January 3, 2009 was 8.5 years.
Compensation expense related to
stock options/SOSARS totaled $2,640, with no deferred tax benefits for fiscal 2008 (due to the Company recognizing a full valuation allowance on tax benefits generated during fiscal 2008); $2,464, before deferred tax benefits of $961 for fiscal
2007; and $1,695, with no deferred tax benefits for fiscal 2006 (due to the Company recognizing a full valuation allowance on tax benefits generated during fiscal 2006). No amounts of compensation expense were capitalized as part of the cost of an
asset. As of January 3, 2009 and December 29, 2007, there was $3,445 and $4,867, respectively, of unrecognized compensation costs related to stock options/SOSARs. The remaining cost of unrecognized compensation related to the
Company’s
153
stock options/SOSARs as of January 3, 2009 is expected to be recognized over a weighted-average period of 2.4 years. No stock options/SOSARs were
exercised during fiscal 2008, fiscal 2007 or fiscal 2006 and accordingly, no cash or income tax benefits were received from stock option/SOSAR exercises during fiscal 2008, fiscal 2007 or fiscal 2006.
Restricted Stock Units (“RSUs”)
RSUs granted are valued at the closing market price of the Company’s common stock on the grant date. RSUs granted to the Company’s board of directors and to employees prior to January 1, 2007 vest ratably over a three-year
term. RSUs granted to employees subsequent to January 1, 2007 have a four-year cliff vesting.
The following table summarizes
information about RSU transactions during fiscal 2008:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Nonvested
Restricted
Stock Units
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested awards at beginning of year
|
|
390,739
|
|
|
$
|
17.18
|
|
Granted
|
|
577,838
|
|
|
$
|
4.27
|
|
Vested
(a)
|
|
(176,730
|
)
|
|
$
|
20.39
|
|
Forfeited
|
|
(71,061
|
)
|
|
$
|
18.17
|
|
Nonvested awards at end of year
|
|
720,786
|
|
|
$
|
5.95
|
|
(a)
|
Of the vested RSUs during fiscal 2008, 25,086 shares were deferred under the Company’s deferred compensation plan.
|
The weighted average fair value of RSUs granted during fiscal 2008, 2007 and 2006 was $4.27, $12.14 and $14.35, respectively. Compensation expense
related to RSUs totaled $2,680 with no deferred tax benefits for fiscal 2008 (due to the Company recognizing a full valuation allowance on tax benefits generated during fiscal 2008); $7,440, before deferred tax benefits of $2,902, for fiscal 2007;
and $8,505, with no tax benefits recorded during fiscal 2006 (due to the Company recognizing a full valuation allowance on tax benefits generated during fiscal 2006). No amounts were capitalized as part of the cost of an asset. The fair value of
RSUs vested during fiscal 2008, fiscal 2007 and fiscal 2006 totaled $3,604, $8,343 and $7,437, respectively. As of January 3, 2009 and December 29, 2007, there was $2,940 and $4,326, respectively, of unrecognized compensation costs related
to unvested RSUs. The remaining cost of unrecognized compensation related to the Company’s RSUs as of January 3, 2009 is expected to be recognized over a weighted-average period of 2.7 years. Tax benefits associated with vested RSUs
for fiscal 2008, fiscal 2007 and fiscal 2006 totaled $377, $1,264 and $439, respectively.
|
(14)
|
Commitments and Contingencies
|
Lease
Commitments
The Company leases office facilities, distribution centers, retail store space and data processing equipment. Lease
terms for office facilities, distribution centers and data processing equipment generally are less than fifteen years. Retail store lease terms are typically ten years with some leases containing renewal options. All store leases require the Company
to pay specified taxes, insurance, utilities and maintenance costs, either on a pro rata basis or based upon the actual expenses incurred. Substantially all retail store leases provide for minimum annual rentals plus additional rentals based upon
percentage of sales, which range from 3% to 10%. During fiscal 2008, 2007, and 2006, only a small number of the Company’s stores met the requirement to pay additional rent based upon percentage of sales. Many of the leases also call for
escalating minimum rental payments. Lease expense attributable to minimum rental payments has been recognized on a straight-line basis. The deferred rent obligation represents the excess of expense recognized over payments made on such leases.
154
Rent expense for fiscal 2008, fiscal 2007 and fiscal 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
Fiscal
2007
|
|
Fiscal
2006
|
|
Minimum rent—stores and corporate facilities
|
|
$
|
76,370
|
|
|
$
|
76,479
|
|
$
|
74,197
|
|
Percentage rent—stores
|
|
|
131
|
|
|
|
20
|
|
|
253
|
|
Minimum rent—other
|
|
|
(1,588
|
)
|
|
|
2,477
|
|
|
2,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,913
|
|
|
$
|
78,976
|
|
$
|
77,435
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a schedule by year of future minimum lease payments required under operating
leases that have initial or remaining non-cancelable lease terms in excess of one year as of January 3, 2009:
|
|
|
|
|
|
|
|
Amount
|
|
Fiscal:
|
|
|
|
|
2009
|
|
$
|
73,756
|
|
2010
|
|
|
65,876
|
|
2011
|
|
|
55,587
|
|
2012
|
|
|
44,673
|
|
2013
|
|
|
38,573
|
|
Thereafter
|
|
|
143,819
|
|
|
|
|
|
|
|
|
$
|
422,284
|
|
|
|
|
|
Litigation
In June 2006, a class action suit captioned
Tara Hill v. Eddie Bauer, Inc.
, was filed in Los Angeles Superior Court, State of California. The suit
alleged that the Company violated the California Labor Code and Business and Professions Code relating to the adequacy of wage statements, reimbursements for business expenses, meal and rest periods and other claims, on behalf of a class comprised
of all employees in the Company’s California stores. The Company reached a settlement with the plaintiff in April 2007, and has provided notice to class members regarding the potential settlement. A hearing on final court approval of the
settlement occurred on July 10, 2008, at which the plaintiff in the
Scherer v. Eddie Bauer, Inc.
suit referenced below objected to the settlement on various grounds. The court took the parties’ positions under advisement but has not
yet issued a ruling. In connection with the proposed settlement, the Company accrued $1.6 million in the first quarter of 2007 to cover settlement payments and attorneys’ fees. The settlement payments are proposed to be made partly in cash and
partly in Company gift cards. In a status conference held on March 30, 2009, the judge indicated that he would sign an order approving settlement.
In September 2007, a purported class action suit related to the
Hill
suit and captioned
Kristal Scherer, on behalf of herself, all others similarly situated v. Eddie Bauer, Inc. and Does 1 to 100
was
filed in Superior Court of California, County of San Diego, alleging violations of the California Labor Code and Business and Professions Code relating to the payment of incentive bonuses and the Company’s policy on forfeiture of personal days.
The case has been removed to U.S. District Court, Southern District of California. In December 2007, the Company filed a partial motion to dismiss certain counts of plaintiff’s complaint for failure to state a claim. That motion was denied in
June 2008. The complaint was amended in January 2008 to add an additional named plaintiff. The Company filed an answer in July 2008 denying the claims made. The parties have agreed to postpone discovery pending issuance of a ruling on the settlement
in the
Hill
suit referenced above.
In September 2008, a complaint was filed under the caption
Landmark Technologies vs. Zale
Corporation, Blue Nile, Inc., Canon USA, Inc., Eddie Bauer, Inc., Kohl’s Corporation, Lowe’s Companies, Inc., Walgreen Co.,
Golfsmith International Holdings, Inc. and Bidz.com, Inc.
, in the Eastern District of Texas. The suit
alleges infringement by the defendants of three U.S. patents exclusively licensed to Landmark—U.S. Patent Nos. 5,576,951; 6,289,319; and 7,010,508. Neither the Complaint nor a subsequently filed First Amended Complaint
155
specifies the allegedly infringing actions, but the claims are apparently directed to the defendants’ use of its website to sell goods. The amended
complaint seeks injunctive relief, and an unspecified amount of damages, costs and attorneys’ fees. The Company intends to vigorously defend the case. The Company has been served but other defendants have not been served, and discovery has not
commenced. A number of the defendants, including the Company, have entered into a joint defense agreement related to defense of the suit. The Company is unable at this time to estimate the likelihood or probability of damages. The Company and other
defendants tentatively reached an agreement with the plaintiff to settle the suit for a nominal amount.
In November 2006, three purported
class action complaints were filed by putative stockholders of the Company in the Superior Court of the State of Washington, King County against the Company and its Board of Directors. The complaints alleged, among other things, that the Board of
Directors breached its fiduciary duties in connection with a proposed merger of the Company with an affiliate of Sun Capital Partners, Inc. and Golden Gate Capital that was ultimately rejected by the Company’s shareholders, and that the
consideration to have been paid to holders of Eddie Bauer’s common stock was inadequate. The complaints sought, among other things, to enjoin the consummation of the merger. An order of dismissal without prejudice with respect to one of the
complaints was entered in December 2006, and the remaining two actions were subsequently consolidated. In June 2007, plaintiffs’ motion for an award of attorneys’ fees was denied, and plaintiffs appealed. In December 2007, after a
stipulated motion to dismiss was filed by the plaintiffs, the Court of Appeals dismissed the appeal, and in January 2008, the Superior Court of the State of Washington dismissed the remaining case with prejudice.
In the ordinary course of business, the Company may be subject from time to time to various other proceedings, lawsuits, disputes or claims. These
actions may involve commercial, intellectual property, product liability, labor and employment related claims and other matters. Although the Company cannot predict with assurance the outcome of any litigation, it does not believe there are
currently any such actions that, if resolved unfavorably, would have a material impact on the Company’s financial condition or results of operations except as disclosed herein.
The Company sources a significant
percentage of its merchandise through Eddie Bauer International, Ltd. (“EBI”). The Company’s agreement with EBI is on a commission-rate basis and is automatically renewed each year, unless terminated by either party upon one year
written notice. If the Company’s agreement with EBI is terminated or if the terms of the agreement were modified substantially and it does not find an appropriate replacement in a timely manner and on reasonable terms or if it is unable to
transition such functions in-house in a cost-effective manner, the Company may experience shortages or delays in receipt of its merchandise, higher costs and quality control issues. Any of these events could have a material adverse effect on the
Company’s business, financial condition and results of operations.
|
(16)
|
Quarterly Information (Unaudited)
|
The following
table includes the Company’s quarterly financial data for fiscal 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(a), (b), (c)
|
|
|
|
|
($ in thousands, except per share data)
|
|
|
2008(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other revenues
|
|
$
|
213,244
|
|
|
$
|
233,006
|
|
|
$
|
207,289
|
|
|
$
|
369,898
|
|
|
Operating income (loss)
|
|
|
(25,411
|
)
|
|
|
237
|
|
|
|
(9,392
|
)
|
|
|
(108,347
|
)
|
|
Net loss
|
|
|
(19,299
|
)
|
|
|
(70
|
)
|
|
|
(18,630
|
)
|
|
|
(127,530
|
)
|
|
Net loss per basic and diluted share
|
|
$
|
(0.63
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(4.13
|
)
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(c)
|
|
|
|
|
($ in thousands, except per share data)
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and other revenues
|
|
$
|
213,985
|
|
|
$
|
226,986
|
|
|
$
|
210,952
|
|
|
$
|
392,430
|
|
|
Operating income (loss)
|
|
|
(39,237
|
)
|
|
|
(10,119
|
)
|
|
|
(26,538
|
)
|
|
|
47,519
|
|
|
Net loss
|
|
|
(44,781
|
)
|
|
|
(22,248
|
)
|
|
|
(16,440
|
)
|
|
|
(18,249
|
)
|
|
Net loss per basic and diluted share
|
|
$
|
(1.47
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
(0.59
|
)
|
|
(a)
|
Fiscal 2008 includes 53 weeks versus 52 weeks in fiscal 2007. The additional week is reflected in the fourth quarter of fiscal 2008.
|
|
(b)
|
Fourth quarter 2008 includes impairment charges of $64,574 and $80,000 related to the Company’s goodwill and trademarks, respectively. See further discussion in
“
Note 6
”.
|
|
(c)
|
The Company recorded income tax expense associated with increases to its tax valuation allowance of $46,945 and $27,162, during the fourth quarters of 2008 and 2007, respectively.
See further discussion in “
Note 11
”.
|
The tightening of the senior
secured leverage ratio under the Amended Term Loan at the end of each quarter starting with the first quarter in fiscal 2009, combined with the continued downturn and uncertainty in the U.S. economy, increased the risk that the Company would not be
able to meet this covenant during fiscal 2009. This uncertainty raised questions about the Company’s ability to continue as a going concern. These factors, in turn, placed into jeopardy the Company’s ability to meet its covenants under the
Revolver. As a result, in April 2009, the Company and its Amended Term Loan lenders entered into a First Amendment to the Amended Term Loan agreement.
Under the First Amendment, the Company receives relief from its senior secured leverage and fixed charge coverage ratios through January 2, 2010. The permitted senior secured leverage ratio will increase to 6.25
to 1:00, 8.00 to 1:00, 9.00 to 1:00 and 7.75 to 1:00 as of the end of the first, second, third and fourth quarters of 2009, respectively, and the permitted consolidated fixed charge coverage ratio will decrease to 0.900 to 1:00, 0.800 to 1:00, 0.775
to 1:00 and 0.800 to 1:00, respectively, for those quarters. The leverage and fixed charge coverage ratios will then return to the levels set forth in the Amended Term Loan unless the Company has (i) extended the maturity date of the Revolver
by one year or replaced it with another revolving loan facility having a maturity date of not earlier than June 21, 2011, (ii) converted or retired 75% of the Notes, and (iii) raised an additional $40.0 million in new capital. If such
are achieved, the permitted senior secured leverage ratio will be set at 6.63 to 1:00, 5.50 to 1:00, 4.38 to 1:00 and 3.25 to 1:00, and the permitted fixed charge coverage ratio at 0.85 to 1:00, 0.90 to 1:00, 0.95 to 1:00 and 1.00 to 1:00 as of the
end of the first, second, third and fourth quarters of 2010, respectively. As part of the First Amendment, the Company has agreed to allow the lenders to provide nominees for two board seats of seven, with the right to provide nominees for a third
board seat of eight total seats should the Company not meet the requirements under the Convertible Note Covenant described below within the deadlines provided in the First Amendment. To be considered, a nominee may not be affiliated with the Amended
Term Loan lenders, and must be considered “independent” pursuant to The NASDAQ Marketplace Rules and the SEC’s rules under Regulation S-K. As part of the First Amendment, the interest rate on the Amended Term Loan is increased to the
greater of the following: (i) for base rate loans, 4.25% plus (A) the prime rate, (B) the federal funds effective rate plus one-half of one percent, (C) a rate equal to the Eurodollar Rate for a one month interest period on such
day plus 1%, or (D) 4.00%, or (ii) for Eurodollar loans, LIBOR plus 5.25%, with LIBOR set at a minimum of 3.00% (but with a 350 basis point cap on the increase over the rate under the Amended Term Loan).
As consideration for execution of the First Amendment, the Company paid the following: (A) an initial cash amendment fee equal to $5.8 million, of
which $1.9 million was paid upon execution of the First Amendment and $3.9 million was earned but payment of which was deferred until November 30, 2009; (B) a 500 basis point “payment-in-kind” (“PIK”) fee, which will be
added to the principal amount of the Amended Term Loan, and accrue PIK interest at the interest rate applicable to the Amended Term Loan, however the PIK fees and interest will not be considered for the calculation of covenants under the Amended
Term Loan; and (C) issuance to the
157
lenders under the Amended Term Loan of $.01 warrants exercisable for 19.9% of the Company’s common stock on a fully-diluted basis subject to adjustment
for conversion of the Notes (see
Note 8
), new capital infusions of less than $40 million (unless otherwise agreed to) and exercise of equity compensation grants.
The First Amendment contains a covenant (the “Convertible Note Covenant”) pursuant to which, the Company is obligated to either: (1) retire or convert into equity securities at least 75% in principal
value of the outstanding Notes, or (2) raise $50 million in new capital, with the proceeds used to pay down the Amended Term Loan principal balance. If the Company fails to comply with the Convertible Note Covenant within 90 days following
execution of the First Amendment (which time period may be extended under certain circumstances), it may obtain two 60-day extensions of the performance period, for the payment upon each extension of a 500 basis point PIK amendment fee and the
issuance of $.01 warrants exercisable for 15% of the Company’s common stock on the same fully-diluted basis as the initial warrant issuance. If, after the 210-day period, the Company has not performed the Convertible Note Covenant, it may
obtain a waiver of nonperformance by the payment of another 500 basis point PIK fee. The First Amendment requires that the Company limit capital expenditures in each of 2009 and 2010 to $20 million, and obtain for the benefit of our lenders
leasehold mortgages on all leases where the Company has the right to grant the mortgage without landlord consent. The Company will also seek to receive consent to leasehold mortgages from landlords for certain other leases.
The Company has agreed to use commercially reasonable efforts to register the resale of common stock issuable upon exercise of the warrants issued to our
Amended Term Loan lenders. The warrants cannot be separately sold, and expire on maturity of the Amended Term Loan or its earlier repayment.
158
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Charged to
Costs and
Expenses
|
|
|
Deduction
|
|
|
Ending
Balance
|
|
|
|
($ in thousands)
|
|
Inventory valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
$
|
8,825
|
|
$
|
8,188
|
|
|
$
|
(9,465
|
)
|
|
$
|
7,548
|
|
Fiscal 2007
|
|
|
4,118
|
|
|
12,359
|
|
|
|
(7,652
|
)
|
|
|
8,825
|
|
Fiscal 2006
|
|
|
5,494
|
|
|
8,059
|
|
|
|
(9,435
|
)
|
|
|
4,118
|
|
|
|
|
|
|
|
Allowance for sales returns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
$
|
15,142
|
|
$
|
160,241
|
|
|
$
|
(163,780
|
)
|
|
$
|
11,603
|
|
Fiscal 2007
|
|
|
15,566
|
|
|
166,012
|
|
|
|
(166,436
|
)
|
|
|
15,142
|
|
Fiscal 2006
|
|
|
14,592
|
|
|
174,806
|
|
|
|
(173,832
|
)
|
|
|
15,566
|
|
|
|
|
|
|
|
Deferred tax valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
|
|
$
|
115,041
|
|
$
|
55,237
|
(e)
|
|
$
|
(2,577
|
)(f)
|
|
$
|
167,701
|
|
Fiscal 2007 (restated)
(d)
|
|
|
84,840
|
|
|
35,337
|
(b)
|
|
|
(5,136
|
)(c)
|
|
|
115,041
|
|
Fiscal 2006
|
|
|
35,053
|
|
|
71,265
|
|
|
|
(21,478
|
)(a)
|
|
|
84,840
|
|
(a)
|
Includes reversal of original amount recorded in conjunction with fresh start accounting related to state NOLs of $19,800 and $1,678 reduction due to an immaterial error related to
prior periods.
|
|
(b)
|
Includes $10,900 of valuation allowance related to state NOLs that the Company determined during fiscal 2007 existed as of the Company’s fresh start reporting date.
|
|
(c)
|
Represents a reduction in the Company’s federal and state NOL valuation allowances related to unrecognized tax liabilities. See “
Note 11—Notes to Consolidated
Financial Statements
” for further discussion.
|
|
(d)
|
Fiscal 2007 amounts have been restated to reflect the Company’s change in treatment of the tax impacts associated with the market value adjustments and discount amortization
associated with it Notes. See “
Note 11—Notes to Consolidated Financial Statements
” for further discussion.
|
|
(e)
|
Includes $7,221 of valuation allowance for deferred tax assets reflected within accumulated other comprehensive loss and $1,009 related to unrecognized tax liabilities.
|
|
(f)
|
Represents reduction in NOL deferred tax valuation allowance for transfer pricing adjustments between the Company’s U.S. and foreign subsidiaries. See “
Note
11—Notes to Consolidated Financial Statements
” for further discussion.
|
159
EXHIBIT INDEX
The following exhibits to this report are filed pursuant to the requirements of Item 601 of Regulation S-K:
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
2.1**
|
|
Modified First Amended Joint Plan of Reorganization of Affiliated Debtors pursuant to Chapter 11 of the Bankruptcy Code, dated as of May 23, 2005.(1)
|
|
|
|
|
3.1**
|
|
Certificate of Incorporation of Eddie Bauer Holdings, Inc.(2)
|
|
|
|
|
3.2**
|
|
Amended & Restated Bylaws of Eddie Bauer Holdings, Inc.(3)
|
|
|
|
|
4.1**
|
|
Article V of the Certificate of Incorporation of Eddie Bauer Holdings, Inc., included in Exhibit 3.1.(2)
|
|
|
|
|
10.1**
|
|
Term Loan Agreement, dated as of June 21, 2005, among Eddie Bauer Holdings, Inc., Eddie Bauer, Inc. as Borrower, the Lenders, General Electric Capital Corporation as Syndication Agent,
Credit Suisse as Documentation Agent and JPMorgan Chase Bank, N.A. as Administrative Agent.(4)
|
|
|
|
|
10.2**
|
|
Guarantee and Collateral Agreement made by Eddie Bauer Holdings, Inc., Eddie Bauer, Inc. and certain of its subsidiaries in favor of JPMorgan Chase Bank, N.A. as Administrative Agent, dated
June 21, 2005.(4)
|
|
|
|
|
10.3**
|
|
Pledge Agreement, dated as of June 21, 2005, by and between Eddie Bauer Holdings, Inc. as Pledgor, and Bank of America, N.A. as Agent.(1)
|
|
|
|
|
10.4**
|
|
Pledge Agreement, dated as of June 21, 2005, by and between Eddie Bauer, Inc. as Pledgor and Bank of America, N.A. as Agent.(1)
|
|
|
|
|
10.5**
|
|
First Amendment, Waiver and Agreement, dated as of April 13, 2006, to and under the Term Loan Agreement.(1)
|
|
|
|
|
10.6**
|
|
Loan and Security Agreement, dated as of June 21, 2005, among the Lenders, Bank of America, N.A. as Agent, Banc of America Securities LLC as Sole Lead Arranger and Book Manager, Bank of
America, N.A. and the CIT Group/Business Credit, Inc. as Co-Syndication Agents, GE Capital Corporation as Documentation Agent, Eddie Bauer, Inc. as Borrower and Eddie Bauer Holdings, Inc., Eddie Bauer Services, LLC, Distribution Fulfillment
Services, Inc. (DFS) and Eddie Bauer Information Technology, LLC as Guarantors.(4)
|
|
|
|
|
10.7**
|
|
Waiver, effective April 14, 2006, under the Loan and Security Agreement.(4)
|
|
|
|
|
10.8**
|
|
Intercreditor Agreement, dated as of June 21, 2005, by and between Bank of America, N.A., as agent, JPMorgan Chase Bank, N.A. as administrative agent, Eddie Bauer Holdings, Inc., Eddie
Bauer, Inc. and certain direct and indirect subsidiaries of Eddie Bauer, Inc.(1)
|
|
|
|
|
10.9**
|
|
Amended and Restated Term Loan Agreement dated April 4, 2007, among Eddie Bauer Holdings, Inc., Eddie Bauer, Inc., as Borrower, the Several Lenders from Time to Time Parties Thereto,
Goldman Sachs Credit Partners L.P., as Syndication Agent and JPMorgan Chase Bank, N.A., as Administrative Agent.(5)
|
|
|
|
|
10.10**
|
|
Amended and Restated Guarantee and Collateral Agreement dated April 4, 2007, among Eddie Bauer Holdings, Inc., Eddie Bauer, Inc. and certain of its subsidiaries in favor of JPMorgan Chase
Bank, N.A., as Administrative Agent.(5)
|
|
|
|
|
10.11**
|
|
First Amendment and Waiver to Loan and Security Agreement dated April 4, 2007, among Eddie Bauer, Inc., the guarantors, the Lenders, Bank of America, N.A., The CIT Group/Business Credit,
Inc. and General Electric Capital Corporation.(5)
|
|
|
|
|
10.12**
|
|
Indenture dated April 4, 2007, among Eddie Bauer Holdings, Inc. and The Bank of New York, as trustee.(5)
|
160
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
10.13**
|
|
Supplemental Indenture dated September 19, 2008, among Eddie Bauer Holdings, Inc., the subsidiaries of the Company listed on the signature page thereto and The Bank of New York, Mellon, as
Trustee.(6)
|
|
|
|
|
10.14**
|
|
Registration Rights Agreement dated April 4, 2007, among Eddie Bauer Holdings, the subsidiaries of the Company listed on the signature page thereto and J.P. Morgan Securities Inc. and Goldman,
Sachs & Co.(5)
|
|
|
|
|
10.15**
|
|
Placement Agency Agreement dated March 28, 2007, among J.P. Morgan Securities Inc. and Goldman, Sachs & Co.(5)
|
|
|
|
|
10.16**
|
|
Joint Venture Agreement, dated September 28, 1993, between Eddie Bauer, Inc. and Otto-Sumisho Inc.(1)
|
|
|
|
|
10.17**
|
|
Joint Venture Agreement, dated June 6, 1995, by and between Eddie Bauer, Inc., Handelsgesellschaft Heinrich Heine GmbH and Sport-Scheck GmbH.(1)
|
|
|
|
|
10.18**
|
|
Share Purchase and Transfer Agreement dated June 26, 2008, by and between Eddie Bauer, Inc., Werner Schultz Eddie Bauer GmbH and Co. KG, Verwaltung Eddie Bauer GmbH, and Eddie Bauer
International Development, LLC.(7)
|
|
|
|
|
10.19**
|
|
Buying Agency Agreement, dated June 29, 2005, by and between Eddie Bauer International, Ltd. and Eddie Bauer, Inc.(1)
Buying Agency Agreement, dated June 29, 2005, by and between Eddie Bauer International, Ltd.
(Americas) and Eddie Bauer, Inc.(1)
|
|
|
|
|
10.20**
|
|
Vendor Payment Services Agreement, dated June 29, 2005, between Eddie Bauer, Inc. and Otto International (Hong Kong) Limited.(1)
|
|
|
|
|
10.21**
|
|
Private Label Credit Card Program Agreement, dated May 2, 2003, between World Financial Network National Bank, Spiegel, Inc. and Eddie Bauer, Inc.(8)
|
|
|
|
|
10.22**
|
|
Lease dated December 14, 2005 between Lincoln Square Office, LLC and Eddie Bauer, Inc.(1)
|
|
|
|
|
10.23**
|
|
First Lease Addendum dated May 15, 2006 between Lincoln Square Office, LLC and Eddie Bauer, Inc.(4)
|
|
|
|
|
10.24**
|
|
Lease dated January 23, 2001, by and among Plaza Corp Retail Properties, Spiegel Group Teleservices—Canada, Inc. and Spiegel, Inc., as guarantor, as amended by a First Amendment dated
June 18, 2001 and a Second Amendment dated December 11, 2001.(1)
|
|
|
|
|
10.25**
|
|
Purchase and Sale Agreement between Spiegel Acceptance Corporation and RAC Trust, dated December 5,
2007.(9)
|
|
|
|
|
10.26**
|
|
Purchase and Sale Agreement between Spiegel Acceptance Corporation and Midland Funding LLC, dated December 4, 2007.(9)
|
|
|
|
|
10.27**
|
|
Purchase and Sale Agreement between Spiegel Acceptance Corporation and eCast Settlement Corporation, dated December 5, 2007.(9)
|
|
|
|
|
10.28**
|
|
Amendment to Purchase and Sale Agreement between Spiegel Acceptance Corporation and eCast Settlement Corporation, dated January 9, 2008.(9)
|
|
|
|
|
10.29#**
|
|
Amended and Restated Employment Agreement, dated December 14, 2005, by and between Eddie Bauer Holdings, Inc. and Fabian Månsson.(1)
|
|
|
|
|
10.30#**
|
|
Separation Agreement and General Release dated as of February 9, 2007 among Eddie Bauer Holdings, Inc., Eddie Bauer, Inc. and Fabian Månsson.(10)
|
161
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
10.31#**
|
|
Letter Agreement dated February 9, 2007 by and between Eddie Bauer Holdings, Inc. and Howard Gross.(10)
|
|
|
|
|
10.32#**
|
|
Letter Agreement dated March 5, 2007 by and between Eddie Bauer, Inc. and Kathy Boyer.(10)
|
|
|
|
|
10.33#**
|
|
Letter Agreement dated April 5, 2007 by and between Eddie Bauer, Inc. and Shelley Milano.(10)
|
|
|
|
|
10.34#**
|
|
Letter Agreement dated March 5, 2007 by and between Eddie Bauer, Inc. and Ann Perinchief.(10)
|
|
|
|
|
10.35#**
|
|
Letter Agreement dated June 12, 2007 by and between Eddie Bauer Holdings, Inc. and Eddie Bauer, Inc. and Neil S. Fiske.(11)
|
|
|
|
|
10.36#**
|
|
First Amendment to Letter Agreement dated August 5, 2008 by and between Eddie Bauer Holdings, Inc. and Neil S. Fiske.(7)
|
|
|
|
|
10.37#**
|
|
Second Amendment to Letter Agreement dated December 31, 2008 by and between Eddie Bauer Holdings, Inc. and Neil S. Fiske.(2)
|
|
|
|
|
10.38#+
|
|
Third Amendment to Letter Agreement dated January 29, 2009 by and between Eddie Bauer Holdings, Inc. and Neil S. Fiske.
|
|
|
|
|
10.39#**
|
|
Employment Letter dated May 14, 2007 by and between Eddie Bauer, Inc. and Tom Helton.(9)
|
|
|
|
|
10.40#+
|
|
Employment Letter dated July 17, 2008 by and between Eddie Bauer, Inc. and Pirkko Karhunen.
|
|
|
|
|
10.41#**
|
|
Eddie Bauer Holdings, Inc. 2005 Stock Incentive Plan as amended and restated on April 29, 2007.(12)
|
|
|
|
|
10.42#**
|
|
Form of Stock Option Agreement.(1)
|
|
|
|
|
10.43#**
|
|
Form of Restricted Stock Unit Award Certificate.(1)
|
|
|
|
|
10.44#**
|
|
Form of Restricted Stock Award Certificate.(1)
|
|
|
|
|
10.45#**
|
|
Form of Restricted Stock Unit Award for individual equity incentive plan inducement grant.(9)
|
|
|
|
|
10.46#**
|
|
Form of Stock Option Agreement for individual equity incentive plan inducement grant.(9)
|
|
|
|
|
10.47#**
|
|
Form of Stock-Only Stock Appreciation Right Agreement.(13)
|
|
|
|
|
10.48#**
|
|
Form of Non-Employee Director Stock Option Agreement.(1)
|
|
|
|
|
10.49#**
|
|
Form of Non-Employee Director Restricted Stock Unit Award Certificate.(1)
|
|
|
|
|
10.50#**
|
|
Form of Non-Employee Director Restricted Stock Award Certificate.(1)
|
|
|
|
|
10.51#**
|
|
2007 Eddie Bauer Holdings, Inc. Senior Officer Change in Control Compensation Benefits Plan (amended and restated effective December 31, 2008).(2)
|
|
|
|
|
10.52#**
|
|
Form of Amended and Restated Senior Officer Change in Control Compensation Benefits Plan Participation Agreement.(1)
|
|
|
|
|
10.53#**
|
|
Eddie Bauer Holdings, Inc. Non-Qualified Deferred Compensation Plan (amended and restated effective December 31, 2008).(2)
|
|
|
|
|
10.54#**
|
|
Eddie Bauer Holdings, Inc. 2005 Annual Incentive Plan.(1)
|
|
|
|
|
10.55#**
|
|
Eddie Bauer Holdings, Inc. 2006 Annual Incentive Plan.(1)
|
|
|
|
|
10.56#**
|
|
Spiegel Group Severance Plan.(1)
|
162
|
|
|
|
|
Exhibit No.
|
|
Document
|
|
10.57#**
|
|
Form of Indemnification Agreement for Directors and Executive Officers of Eddie Bauer Holdings, Inc.(1)
|
|
|
|
|
10.58#**
|
|
Eddie Bauer 2004 Bridge Incentive Plan.(1)
|
|
|
|
|
21+
|
|
Subsidiaries of Eddie Bauer Holdings, Inc.
|
|
|
|
|
23+
|
|
Consent of BDO Seidman, LLP
|
|
|
|
|
24.1+
|
|
Power of Attorney
|
|
|
|
|
31.1+
|
|
Rule 13a-14(a)/15-14(a) Certification of Chief Executive Officer
|
|
|
|
|
31.2+
|
|
Rule 13a-14(a)/15-14(a) Certification of Chief Financial Officer
|
|
|
|
|
32.1+
|
|
Section 1350 Certification of Chief Executive Officer
|
|
|
|
|
32.2+
|
|
Section 1350 Certification of Chief Financial Officer
|
|
(1)
|
Incorporated by reference to the company’s registration statement on Form 10, filed on May 1, 2006 (SEC
File No. 000-51676).
|
|
(2)
|
Incorporated by reference to the company’s registration statement on Form 8-K, filed on January 2, 2009 (SEC File No.
001-33070).
|
|
(3)
|
Incorporated by reference to the company’s current report on Form 8-K filed on February 18, 2009 (SEC
File No. 001-33070).
|
|
(4)
|
Incorporated by reference to the company’s registration statement on Form 10G/A, filed on June 27, 2006 (SEC File No.
000-51676).
|
|
(5)
|
Incorporated by reference to the company’s current report on Form 8-K dated April 4, 2007 (SEC File No. 001-33070).
|
|
(6)
|
Incorporated by reference to the company’s quarterly report on Form 10-Q for the period ended September 27, 2008 (SEC File No. 001-33070).
|
|
(7)
|
Incorporated by reference to the company’s quarterly report on Form 10-Q for the period ended June 28, 2008 (SEC File No. 001-33070).
|
|
(8)
|
Incorporated by reference to the company’s registration statement on Form 10G/A, filed on October 12, 2006 (SEC File No. 000-51676).
|
|
(9)
|
Incorporated by reference to the company’s annual report on Form 10-K for the year ended December 29, 2007 (SEC File No. 001-33070).
|
|
(10)
|
Incorporated by reference to the company’s quarterly report on Form 10-Q for the period ended March 31, 2007 (SEC File No. 001-33070).
|
|
(11)
|
Incorporated by reference to the company’s quarterly report on Form 10-Q for the period ended June 30, 2007 (SEC File No. 001-33070).
|
|
(12)
|
Incorporated by reference from Appendix A of the company’s Schedule 14A Definitive Proxy Statement for the 2007 Annual Meeting of Shareholders, filed on May 11, 2007
(SEC File No. 001-33070).
|
|
(13)
|
Incorporated by reference to the company’s quarterly report on Form 10-Q for the period ended March 29, 2008 (SEC File No. 001-33070).
|
|
#
|
Management Compensation Plan.
|
163
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
Eddie Bauer Holdings, Inc.
|
|
|
|
/s/ M
C
N
EIL
S. F
ISKE
,
J
R
.
|
|
McNeil S. Fiske, Jr.
Chief Executive Officer
(Principal Executive Officer)
|
Date: April 2, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ M
C
N
EIL
S. F
ISKE
,
J
R
.
McNeil S. Fiske, Jr.
|
|
President and Chief Executive Officer and Director (Principal Executive Officer)
|
|
April 2, 2009
|
|
|
|
|
|
/s/ M
ARVIN
E
DWARD
T
OLAND
Marvin Edward Toland
|
|
Chief Financial Officer (Principal Financial and Accounting Officer)
|
|
April 2, 2009
|
|
|
|
|
|
+
William T. End
|
|
Chairman
|
|
April 2, 2009
|
|
|
|
|
|
+
John C. Brouillard
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
+
Howard Gross
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
+
Paul E. Kirincic
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
+
William E. Redmond, Jr.
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
+
Kenneth M. Reiss
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
+
Laurie M. Shahon
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
+
Edward M. Straw
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
+
Stephen E. Watson
|
|
Director
|
|
April 2, 2009
|
|
|
|
|
|
By:
|
|
/s/ F
REYA
R. B
RIER
Attorney-in-Fact
|
|
|
|
Freya R. Brier, as Attorney-in-Fact April 2, 2009
|
164
Eddie Bauer Holdings (MM) (NASDAQ:EBHI)
Historical Stock Chart
From Nov 2024 to Dec 2024
Eddie Bauer Holdings (MM) (NASDAQ:EBHI)
Historical Stock Chart
From Dec 2023 to Dec 2024
