Examiner's Report Rips Spiegel

For one analyst covering the long-running meltdown of The Spiegel Group, an independent examiner's report submitted to U.S. District Court in Chicago last week means one thing: The end of the company as it exists is only a matter of time.

“I don't think it will exist going forward,” said Eric Beder, vice president/retailing analyst at Northeast Securities, New York. “At the end of the day, management will sell the pieces, blow this company up and give people their money. It's over for this company. It's going to be a breakup.”

He estimated this would happen by Christmas 2004.

The examiner's report, which was highly critical of Spiegel, referred to 1999 when the company, “facing the need to improve poor sales performance in its retail subsidiaries,” initiated an effort that one of its audit committee members later called “easy credit to pump up sales” as it “tilted its portfolio of credit card customers decidedly in the direction of high-risk subprime borrowers.”

This worked in the short term, and Spiegel reported to its directors that it had achieved a “return to profitability.” But many subprime customers stopped paying their credit card bills when the “economy soured,” and charge-offs of uncollectible credit card receivables climbed drastically.

The report said that as the company's condition worsened in late 2001, it breached all four loan covenants contained in its bank loan agreements. It tried to renegotiate its financing with a consortium of 18 banks, “but a myriad of problems frustrated this effort.”

As Spiegel prepared to file its 2001 Form 10-K annual report due in March 2002, its auditor KPMG advised that it would have to give Spiegel a “going concern” opinion based on Spiegel's inability to conclude its bank refinancing arrangements and other problems, the report stated.

Spiegel decided not to file its Form 10-K with a going concern opinion, and Nasdaq indicated that it would delist Spiegel. At the delisting hearing, the report said, Spiegel assured Nasdaq that it was only “days away” from concluding its refinancing arrangements and that it then would be able to file its Form 10-K without a going concern opinion. After several days, Nasdaq advised Spiegel that it had a last chance to file its Form 10-K and that otherwise it would be immediately delisted.

Spiegel's Chicago-based management — supported by Spiegel outside counsel Kirkland & Ellis and its outside auditors KPMG — strongly recommended that Spiegel file its Form 10-K in late May 2002. But the decision makers for Spiegel were in Germany, the report said.

On May 31, 2002, in Hamburg, the report continued, Spiegel's executive or “board” committee and Spiegel's audit committee rejected the views of Spiegel's management, Kirkland & Ellis and KPMG, and directed Spiegel not to file its already-late 2001 Form 10-K and late first-quarter 2002 Form 10-Q. They also directed Spiegel not to file its remaining 2002 Forms 10-Q.

“It was only the prospect of an SEC Enforcement Division investigation that made Spiegel begin to belatedly file reports in February 2003, after not having filed a single periodic report since November 2001,” the report said. “This 15-month hiatus in periodic reporting left investors without the disclosures and other protections mandated by the federal securities laws. All investors could do during this period was to attempt to piece together several incomplete pieces of information from a few press releases and news stories.”

Beder said that Spiegel's three groups never had “huge” synergies.

“Eddie Bauer, Spiegel Catalog and Newport News all did their own things,” he said. “Spiegel Catalog and Newport News were run by their own credit. They felt the need to push top-line growth. [In the] short term it works, and longer term it bites you in the butt. They get the initial bounce in sales, [but the consumers] can't pay the bills in the long run.”

Beder also discussed the effect of the independent examiner's report on the prospects for the sale of the individual properties.

“[Potential buyers] will look to buy these companies and incorporate them into their own infrastructures — Newport News and Spiegel Catalog, especially,” he said. “You could see a decent catalog company putting them into their infrastructure.”

Eddie Bauer will be the toughest to sell, he said.

“The rumors are that L.L. Bean will buy it,” he said. “It's such an obvious combination since it's the same customer and L.L. Bean doesn't have any retail store network.”

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