Spiegel Auditor: 'Substantial Doubt' About Company's Future

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Distressed direct marketer The Spiegel Group was battered this week by its auditor questioning its continued existence, the departure of a senior executive and the release of dismal January sales figures.


Complicating the uncertainty at the Spiegel Group, executive vice president and chief financial officer James R. Cannataro resigned yesterday. The company said Cannataro will take a similar position in another industry.


A letter from audit firm KPMG LLP to the company's board of directors listed problems, including that Spiegel "was not in compliance with certain restrictive covenants in its debt agreements," that all the company's debt "is currently due and payable" and that Spiegel "has been unable to negotiate amended agreements with its lenders."


"These matters raise substantial doubt about the company's ability to continue as a going concern for a reasonable period of time," the letter said.


Spokeswoman Debbie Koopman minimized KPMG's assessment, saying, "That's typical accounting language. We've been working to get our loan agreements renegotiated."


Spiegel's bad-debt levels started to soar two years ago as the company targeted the sub-prime market -- consumers with troubled credit histories who are willing to pay high interest rates. The losses drained capital at Spiegel's federally insured bank, First Consumers National Bank, Beaverton, OR.


The company formalized a plan in its 2001 fiscal fourth quarter to sell the bankcard segment and expects to complete the sale by April. If Spiegel, Downers Grove, IL, is unable to complete the sale, the company has said it will liquidate the bankcard segment as part of a liquidation of First Consumers National Bank.


"The company has a number of initiatives under way," Koopman said. "Our highest priority is to work with the bank group to get the loan agreements in place. We're working on initiatives to improve the health of our business. It's an ongoing process."


Spiegel has stopped seeking a buyer for much of its credit card business because of a deterioration in market conditions, the Chicago Sun-Times reported last week.


Adding to uncertainty at Spiegel was last week's resignation of executive vice president and chief financial officer James R. Cannataro, who, according to wire reports, left to become executive vice president of Nintendo's U.S. unit. Cannataro joined Spiegel in 1984.


The company also is being investigated by the Securities and Exchange Commission because of late filings of financial reports. Koopman said the investigation "was a recent development -- within the last few weeks. We filed the 10-K for 2001 [on Feb. 4, 2003] and we're moving forward toward filing the three 10-Qs for 2002."


Spiegel also announced dismal sales last week of $135.8 million for the four weeks ending Jan. 25, down from $162.6 million in the comparable period last year. Total direct sales nosedived 26 percent compared with last year, which the company attributed to a planned reduction in catalog circulation and lower customer response.


That news followed the release last month of the company's 2002 numbers, which included a sales decline of 18 percent to $2.28 billion compared with 2001. Sales fell 11 percent at Eddie Bauer, 25 percent at Newport News and 29 percent at Spiegel Catalog.


Late last month, Spiegel laid off 300 employees at call centers in Bothell, WA, and Hampton, VA. Some layoffs were related to a slowdown in sales after the holidays and an increase in use of the company's online shopping sites.


Meanwhile, a Feb. 14 deadline was announced for those wishing to be a lead plaintiff in a securities fraud class-action lawsuit on behalf of purchasers of Spiegel common stock from April 24, 2001 to April 19, 2002. The suit charges that Spiegel issued false and misleading statements regarding its business and financial condition.


"[The lawsuit is] nothing new," Koopman said. "It's been out there for some time. The 10-K mentions four shareholder lawsuits pending against the firm, all containing the same allegations ... against the company and certain officers. The company believes they lack merit and intends to defend against them vigorously."


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