<PAGE>

                                                                  Exhibit 10.4

                                EMPLOYMENT AGREEMENT
                                --------------------

     This Employment Agreement is made as of July 1, 2001 between Spiegel,
Inc., a Delaware corporation ("Spiegel") and Martin Zaepfel, of Burr Ridge,
Illinois ("Zaepfel").

     Spiegel and Zaepfel hereby agree as follows:

1. EMPLOYMENT
-------------
     Spiegel agrees to employ Zaepfel in the greater Chicago metropolitan area
     until the effective date of the termination of the employment period, as
     hereinafter provided, and Zaepfel agrees to continue such employment.
     Zaepfel will serve faithfully and to the best of his ability as Vice
     Chairman, President, and Chief Executive Officer of Spiegel reporting to
     the Chairman of the Board of Directors of Spiegel/Chairman of Otto
     Versand Executive Board. Zaepfel will have managerial responsibility for
     Spiegel and its assigned activities. Notwithstanding anything herein to
     the contrary, there are certain transactions, a list of which has been
     provided to Zaepfel, that require the approval of the Board of Directors
     of Spiegel.

2. BEST EFFORTS
---------------
     During the employment period, Zaepfel will devote his best efforts and
     all his business time and attention to the business of Spiegel and will
     faithfully perform his duties subject to the direction of the Board of
     Directors or its designee and generally subject to the employment
     policies of Spiegel as may be promulgated from time to time.

3. TERM OF EMPLOYMENT
---------------------
     The term of this Employment Agreement shall be a period of five (5) years
     (Initial Term) commencing July 1, 2001, and terminating June 30, 2006,
     subject, however, to prior termination as in after provided Section 8
     (Termination for Cause) below.

                                      1

<PAGE>

     If Spiegel elects to terminate this Employment Agreement prior to June
     30, 2006, then Spiegel will pay Zaepfel at time of termination an amount
     equal to Zaepfel's entire compensation and benefit package (including
     pro-rated Annual and Long Term Incentives) then in effect as provided on
     Schedule A and Schedule B and Paragraph 6 herein calculated for a period
     of twenty-four (24) months but shall not exceed Five Million Dollars
     ($5,000,000.00).

     This Employment Agreement shall be automatically renewed and continue in
     full force and effect for additional one year terms without limitation,
     unless either party gives the other party six (6) months' written notice of
     its or his election to terminate this Employment Agreement at the end of
     the then current calendar year. No severance payment shall be due if
     termination is after June 30, 2006.

4. COMPENSATION
---------------
     Spiegel shall pay Zaepfel an annual base salary in accordance with
     Schedule A payable in the manner as is done in the ordinary course of
     business for upper level executives of Spiegel. The Board of Directors
     or its designee shall review this base salary annually and shall have the
     right to increase it at any time during the employment period. An
     increase in base salary shall be evidenced by the Board of Directors or
     its designee approving an amended Schedule A to this Employment
     Agreement, which shall give the amount of the increase in base salary,
     the new total base salary and the period for which the increase shall be
     effective.

5. BONUS
--------
     Zaepfel shall be entitled to an annual cash bonus no later than February
     28th of each year based upon the performance of Spiegel for the most
     recently ended calendar year. The bonus will be in accordance with
     Schedule A. The bonus opportunity shall be determined based upon
     performance criteria mutually and reasonably developed by Spiegel or its
     designee and Zaepfel and agreed to by the Board of Directors with the
     understanding that such criteria will

                                      2

<PAGE>

     provide a fair and professionally challenging achievement rewarding good
     performance. The predetermined performance criteria, and any changes
     mutually agreed upon by Spiegel or its designee and Zaepfel and agreed to
     by the Board of Directors.

6. BENEFITS
-----------
     Zaepfel shall be eligible for all medical and dental benefits, disability
     benefits, long term incentive plans, stock options, profit sharing,
     savings plans, automobile allowance, paid vacation, paid-up split dollar
     and whole life insurance policies then in effect, a membership at a
     country club and other benefits which are or shall be adopted by Spiegel
     covering its senior executive management staff, provided he meets the
     qualification requirements for such benefits. Additional benefits may be
     added during the term of this Agreement by Spiegel.

7. DISABILITY OF ZAEPFEL
------------------------
     If, during the term of this Employment Agreement, Zaepfel shall become
     disabled by accident, illness, or otherwise, and such disability shall
     continue for a period of six (6) successive months following which he is
     unable to resume his duties hereunder, Spiegel shall have the right to
     terminate the employment period by giving written notice to Zaepfel of
     its intention to do so at least thirty (30) days prior to the effective
     date of such termination, provided, however, Spiegel agrees to pay a lump
     sum at the time of termination in an amount equal to the fair value of
     his entire compensation and benefits package in place at that time
     calculated for a period of six (6) months commencing from the effective
     date of such termination in lieu of continuing to provide such benefits
     in periodic amounts. Any dispute as to whether such a disability has
     occurred shall be resolved by a physician reasonably satisfactory to both
     parties, whose determination shall be final and binding on both parties,

8. TERMINATION FOR CAUSE
------------------------
     Spiegel may terminate the employment period for cause for the following
     reasons other than innocent acts: repetitive and offensive public
     intoxication, a felony conviction, the

                                      3

<PAGE>

     intentional perpetration of a dishonest act of fraud against Spiegel or
     an affiliate or subsidiary thereof, which is significantly injurious in a
     material respect to the financial condition, business, or reputation of
     Spiegel or any of its affiliates or subsidiaries. Spiegel shall have the
     right to terminate the employment period for any above reason by giving
     written notice to Zaepfel of its intention to do so and specifying
     therein the reason and the effective date of termination. In this case a
     severance payment will be reasonably appropriate to the reason for
     termination, and this Agreement will have no further effect.

9. OTHER EMPLOYMENT
-------------------
     Zaepfel covenants and agrees that during the employment period, he will
     not directly or indirectly (except with the written consent of Spiegel)
     become engaged in, be employed by, render services to or for, or permit
     his name to be used in connection with any business other than the
     business of Spiegel and its subsidiaries and affiliates, whether such
     other business is or is not competitive with that business. After
     termination of this Agreement, Zaepfel agrees that for a period of one
     year he will not solicit for engagement or as an employee any person who
     has been employed by the Company within the preceding twelve months as a
     senior level executive.

10. TRADE SECRETS
-----------------
     Zaepfel shall not at any time while this Employment Agreement is in
     force, and for a period of two (2) years after its termination, unless
     authorized by Spiegel, divulge or disclose to any person or corporation
     any confidential or proprietary information relating to the business of
     Spiegel or its subsidiaries and affiliates including, but not in
     limitation, customer list, supplier lists, prices of products, services
     or operational processes. A breach of this confidentiality clause will
     result in no compensation and benefits being paid at the time of
     termination.

                                      4

<PAGE>

11. TOTAL AGREEMENT
-------------------
     This contract contains the complete agreement concerning the employment
     arrangement between the parties and, as of the effective date of this
     agreement, supersedes all other agreements, whether oral or in
     writing, between the parties. This agreement may be modified or added to
     only if evidenced in writing signed by the party to be liable.

12. GENERAL
-----------
     The headings of all the sections are inserted for convenience of
     reference only and will not affect the construction or interpretation of
     this agreement.

13. GOVERNING LAW
-----------------
     This agreement shall be governed by the laws of the State of Illinois
     without regard to principles of conflicts of laws.

IN WITNESS WHEREOF, the parties have executed this Agreement as of July 1,2001.

Spiegel, Inc.

____________________                                ____________________________
Director                                            Martin Zaepfel

                                      5

<PAGE>

                            EMPLOYMENT AGREEMENT
                                 SCHEDULE A
                                 ----------

This Schedule A is made a part of the Employment Agreement between Spiegel,
Inc. and Martin Zaepfel dated July 1, 2001.

Annual compensation effective July 1, 2001 will be One Million Two Hundred
Thousand Dollars ($1,200,000.00)

Bonus opportunity for each year of this contract shall be 80% of base salary.

Dated: July 1, 2001

________________________                          ______________________________
Spiegel, Inc.                                     Martin Zaepfel

<PAGE>

                            EMPLOYMENT AGREEMENT
                                 SCHEDULE B
                                 ----------

This Schedule B is made part of the Employment Agreement between Spiegel, Inc.
and Martin Zaepfel dated ______________________

Bonus is determined by the Executive Committee and the Board of Directors each
year.

The bonus opportunity will be calculated on the weighted average of bonus
achievement of the Company's major businesses as follows:

                                Eddie Bauer           30%
                                Spiegel Catalog       25%
                                FCNB                  25%
                                Newport News          20%
                                                      ---
                                                     100%

Dated:__________________________

___________________________________                   __________________________
Spiegel, Inc.                                         Martin Zaepfel