<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED August 1, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
___________
Commission file number 0-11457
-------
CROWN BOOKS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 52-1227415
--------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
</TABLE>
3300 75th Avenue, Landover, Maryland, 20785
-------------------------------------------
(Address of principal executive offices)
(Zip Code)
(301) 226-1200
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
At September 20, 1998, the registrant had 5,288,473 shares of Common Stock,
$.01 par value per share, outstanding.
1
<PAGE> 2
PART I
Item 1. Financial Statements
The consolidated financial statements included herein have been prepared by
Crown Books Corporation ("Crown Books"), without audit (except for the
consolidated balance sheet as of January 31, 1998, which has been derived from
the audited consolidated balance sheet on that date) pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although Crown Books believes
that the disclosures are adequate to make the information presented not
misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Crown Books' Annual Report on Form 10-K for the fiscal year ended
January 31, 1998.
2
<PAGE> 3
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF OPERATIONS, UNAUDITED
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Twenty-six
Weeks Ended Weeks Ended
------------------- -------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 55,074 $ 67,018 $121,074 $133,561
Interest and other income 31 71 132 184
-------- -------- -------- --------
55,105 67,089 121,206 133,745
-------- -------- -------- --------
Expenses:
Cost of sales, store occupancy
and warehousing 50,818 56,671 107,575 111,541
Selling and administrative 10,986 14,722 24,663 28,895
Depreciation and amortization 1,191 1,624 2,392 3,322
Interest expense 562 526 966 699
-------- -------- -------- --------
63,557 73,543 135,596 144,457
-------- -------- -------- --------
Loss before reorganization cost
and income tax benefits (8,452) (6,454) (14,390) (10,712)
Reorganization costs, net (Note 2) 24,281 - 24,281 -
-------- -------- -------- -------
Loss before income tax benefits (32,733) (6,454) (38,671) (10,712)
Income taxes (benefits) - (2,279) - (3,875)
-------- -------- -------- --------
Net loss $(32,733) $ (4,175) $(38,671) $ (6,837)
======== ======== ======== ========
Per share data:
Basic earnings (loss) per share $ (6.19) $ (.79) $ (7.31) $ (1.29)
Diluted earnings (loss) per share (6.19) (.79) (7.31) (1.29)
Weighted average common shares
and common share equivalents
outstanding
Basic 5,288 5,289 5,288 5,289
Diluted 5,288 5,289 5,288 5,289
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
August 1, January 31,
ASSETS 1998 1998
---------- ----------
<S> <C> <C>
Current Assets:
Cash $ 4,092 $ 4,320
Short-term instruments 11 9,558
Accounts receivable 7,226 5,955
Merchandise inventories 69,075 79,457
Prepaid income tax 670 584
Other current assets 508 3,417
-------- --------
Total Current Assets 81,582 103,291
-------- --------
Property and Equipment, at cost:
Furniture, fixtures and equipment 28,448 37,420
Leasehold improvements 8,136 11,547
Property under capital lease 1,187 1,187
-------- --------
37,771 50,154
Accumulated Depreciation and Amortization 23,243 26,819
-------- --------
14,528 23,335
-------- --------
Other Assets 337 300
-------- --------
Total Assets $ 96,447 $126,926
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
August 1, January 31,
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 1998 1998
---------- ----------
<S> <C> <C>
Liabilities Not Subject to Compromise:
Current Liabilities:
Accounts payable, trade $ 2,357 $ 54,096
Short-term borrowings 20,686 -
Accrued expenses -
Salaries and benefits 870 3,960
Taxes other than income - 3,814
Other 1,431 15,257
Gift certificates outstanding - 6,042
Current portion of reserve for
closed stores and restructuring - 1,955
Due to affiliate 302 418
-------- --------
Total Current Liabilities 25,646 85,542
-------- --------
Obligations Under Capital Leases - 1,725
-------- --------
Reserve for Closed Stores and
Restructuring - 3,859
-------- --------
Total Noncurrent Liabilities - 5,584
-------- --------
Liabilities Subject to Compromise: 73,672 -
-------- --------
Commitments and Contingencies
Stockholders' (Deficit) Equity:
Common stock, par value $.01 per share;
20,000,000 shares authorized,
5,612,611 issued 56 56
Paid-in capital 43,809 43,809
Retained earnings (deficit) (41,280) (2,609)
Treasury stock, 324,138 shares of common
stock, at cost (5,456) (5,456)
-------- --------
Total Stockholders' (Deficit) Equity (2,871) 35,800
-------- --------
Total Liabilities and Stockholders' (Deficit) Equity $ 96,447 $126,926
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONSOLIDATED STATEMENTS OF CASH FLOWS, UNAUDITED
(dollars in thousands)
<TABLE>
<CAPTION>
Twenty six Weeks Ended
------------------------
August 1, August 2,
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) $(38,671) $ (6,837)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 2,392 3,322
Reorganization costs in connection with Chapter
11 proceedings 24,281 -
Interest in excess of capital lease payments - 23
Loss on disposal of fixed assets - 269
Changes in assets and liabilities:
Accounts receivable (1,271) 3,470
Merchandise inventories 4,482 (4,606)
Prepaid and refundable income taxes (86) (643)
Other current assets 2,909 250
Accounts payable, trade (51,739) (13,027)
Accrued expenses (26,772) (2,845)
Due to affiliate (116) 34
Deferred income taxes - (3,546)
Income taxes payable - 318
Capital lease obligation (1,725) -
Other assets (316) (173)
Reserve for closed stores and restructuring (5,814) (632)
Liabilities subject to compromise 63,860 -
-------- --------
Net cash used in operating activities before
reorganization items (28,586) (24,623)
-------- --------
Operating cash flows from reorganization items:
Professional fees paid for services rendered
in connection with the Chapter 11 proceeding (1,547) -
-------- --------
Net cash used by reorganization items (1,547)
-------- --------
Net cash used by operating activities $(30,133) $(24,623)
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (328) $ (4,005)
-------- --------
Net cash used in investing activities $ (328) $ (4,005)
-------- --------
Cash Flows from Financing Activities:
Borrowings under revolving credit facilities $ 20,686 $ 16,487
-------- --------
Net cash provided by financing activities $ 20,686 $ 16,487
-------- --------
Net Decrease in Cash and Equivalents $ (9,775) $(12,141)
Cash and Equivalents at Beginning of Year 13,878 16,051
-------- --------
Cash and Equivalents at End of Period $ 4,103 $ 3,910
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 966 $ 699
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
August 1, 1998 and August 2, 1997
NOTE 1 - GENERAL
The accompanying cosolidated financial statements reflect the accounts of Crown
Books Corporation ("Crown Books") and its wholly-owned subsidiaries (Crown
Books and such subsidiaries are herein referred to collectively as the
"Company"), and have been prepared by the Company without audit. All
significant intercompany accounts and transactions have been eliminated.
The unaudited financial statements for the periods ended August 1, 1998 and
August 2, 1997 have been prepared on a consistent basis except as set forth in
the accompanying notes and reflect, in the opinion of management, all
adjustments necessary to present fairly the consolidated financial position of
the Company at such dates and its results of operations and cash flows for the
periods then ended. With respect to the Company's financial statements for the
period ended August 2, 1997, such adjustments consist only of normal recurring
adjustments. With respect to the Company's financial statements at August 1,
1998 and for the periods then ending, such adjustments consist only of normal
and recurring adjustments, additional adjustments consistent with American
Institute of Certified Public Accountants SOP 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, to reflect the Company's
filing of voluntary petitions under Chapter 11 of the United States Bankruptcy
Code on July 14, 1998 and additional adjustments to reflect its subsequent
determination to close and liquidate up to 79 of its 174 stores. See Notes 2, 3
and 4.
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 as of
the dates of the financial statements and the reported revenues and expenses
for the periods then ended. Actual results may differ from such estimates and
assumptions. Accordingly, the interim operating results reported for the
quarter ended August 1, 1998 are not necessarily indicative of actual operating
results for the period indicated, or of the actual operating results to be
achieved for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted.
The Notes to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended January 31, 1998 should be read
in conjunction with the accompanying interim financial statments.
During fiscal 1998, the Company acquired and implemented a new accounts payable
and inventory system. The Company experienced problems during the
implementation of this system. See Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Company is engaged in the business of operating discount specialty retail
book stores in the United States. Its stores offer books, newspapers, magazines
and related accessories. At August 1, 1998, the Company operated 174 stores in
nine geographic markets. However, the Company has adopted and begun to
implement a plan
7
<PAGE> 8
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
August 1, 1998 and August 2, 1997
pursuant to which it may close up to 79 of its stores. At September 15, 1998,
the Company continued to operate 128 stores, of which 38 were conducting "going
out of business" sales, and 42 stores had been closed. See Note 4.
NOTE 2 - REORGANIZATION
On July 14, 1998, each of Crown Books and its wholly-owned subsidiaries filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware. Their
cases are currently pending in that court and are being jointly administered.
Since July 14, 1998, each debtor has continued to operate its business as a
debtor-in-possession. As such, each debtor is authorized to operate its
business in the ordinary course but may not engage in transactions outside the
ordinary course of business without Bankruptcy Court approval.
Crown Books intends to present a plan of reorganization to the Bankruptcy Court
to reorganize the Company's business and restructure the Company's indebtedness.
Under provisions of the Bankruptcy Code, the Company has the exclusive right to
file a plan at any time during the 120 day period following July 14, 1998, which
time period may be extended by the Bankruptcy Court at the Company's request.
In the event that a plan of reorganization is approved by the Bankruptcy Court,
continuation of the business after reorganization will be dependent upon the
success of future operations and the Company's ability to consumate its plan of
reorganization and to meet its obligations as they become due. In the event
that such a plan of reorganization is not approved by the Bankruptcy Court and a
restructuring plan is not consummated, the ability of the Company to continue as
a going concern depends on the success of future operations and the ability of
the Company to generate sufficient cash from operations and financing sources to
meet its obligations as they become due to finance its operations. The
accompanying financial statements have been prepared on a going concern basis,
which, except as disclosed, contemplates continuity of operations, realization
of assets and discharge of liabilities in the ordinary course of business. As a
result of the Chapter 11 filing, the Company may have to sell or otherwise
dispose of assets and discharge or settle liabilities for amounts other than
those reflected in the financial statements. Further, a plan of reorganization
could materially change the amounts currently recorded in the financial
statements. The financial statements do not give effect to all adjustments to
the carrying value of assets, or amounts and classification of liabilities that
might be necessary as a consequence of the proceeding. The appropriateness of
using the going concern basis is dependent upon, among other things,
confirmation of a plan of reorganization, success of future operations and the
ability to generate sufficient cash from operations and financing sources to
meet obligations.
In addition, valuation methods used in Chapter 11 reorganization cases vary
depending on the purpose for which they are prepared and used and are rarely
based on GAAP, the basis on which the accompanying financial statements are
prepared.
8
<PAGE> 9
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
August 1, 1998 and August 2, 1997
Accordingly, the values set forth in the accompanying financial statements are
not likely to be indicative of the values presented to or used by the
Bankruptcy Court. As a result, valuations of the Company based on the
accompanying financial statements may be significantly higher than valuations
used by the Company in determining the amounts to be received, if any, by each
class of creditors under a plan of reorganization.
During the 13 weeks ended August 1, 1998, the Company recorded the following
reorganization costs (in thousands):
<TABLE>
<S> <C>
Closed store reserve $ 9,011
Write-down fixed assets 6,855
Inventory revaluation 5,900
Profession consulting fees 1,783
Other 732
--------
$ 24,281
========
</TABLE>
NOTE 3 - LIABILITIES SUBJECT TO COMPROMISE
As a result of the commencement of the debtors' bankruptcy cases, (i) all then
existing debts, liabilities and obligations of the debtors (collectively,
"Pre-petition Indebtedness") matured and became due and payable, and (ii) all
acts to collect Pre-petition Indebtedness and to enforce other existing
contractual obligations of the debtors were stayed. Pre-Petition Indebtedness
has been reflected on the Company's Consolidated Balance Sheet at August 1,
1998 as Liabilities Subject to Compromise, consisting of the following (in
thousands):
<TABLE>
<S> <C>
Accounts payable $ 35,090
Accrued salary and benefits 2,806
Accrued taxes other than income 1,495
Closed Store reserve 14,457
Capital lease obligation 1,749
Due to affiliate 1,559
Gift certificates outstandings 5,232
Accrued expense 11,284
--------
$ 73,672
========
</TABLE>
All amounts presented above may be subject to future adjustments depending on
Bankruptcy Court actions, further developments with respect to disputed claims,
determination as to the security of certain claims, the value of any collateral
securing such claims, or other events.
Under the Bankruptcy Code, liabilities and obligations first incurred after the
commencement of the bankruptcy cases in connection with the operation of the
Company's business generally enjoy priority in right to payment over
Pre-petition Indebtedness and may be paid by the Company in the ordinary course
of business. Such liabilities are reflected on the Company's Consolidated
Balance Sheet as Liabilities Not Subject to Compromise.
Under the Bankruptcy Code, the Company may, subject to certain conditions,
assume or reject executory contracts, including store leases, existing upon the
commencement of the bankruptcy cases. The rejection of an executory contract
or lease is treated as a breach thereof occuring immediately before the filing
of the debtors' bankruptcy petitions, and liabilities of the Company arising as
a result of the rejection of executory contracts and leases will be included in
Liabilities Subject to Compromise. At August 1, 1998, the Company had a
reserve for closed stores of approximately $14.5 million as a result of
estimated lease rejection
9
<PAGE> 10
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
August 1, 1998 and August 2, 1997
claims, which amount is included in Liabilities Subject to Compromise.
Pursuant to certain orders of the court, the Company paid prepetition payroll
and payroll taxes before August 1, 1998 and such amounts are not included in
Liabilities Subject to Compromise.
NOTE 4 - STORE CLOSING PLAN AND SETTLEMENT WITH SUPPLIER
At the time of the Company's bankruptcy filing, it operated a chain of 174
retail book stores in nine distinct geographic markets located throughout the
United States. Subsequently, the Company determined that it was desirable to
close up to 79 of its retail stores (such 79 stores are referred to herein as
the "Closed Stores").
On July 22, 1998, the Company filed a motion with the Bankruptcy Court seeking
an order, among other things, (a) approving the closing of the Closed Stores,
(b) authorizing "going out of business" sales at certain Closed Stores, and (c)
authorizing the Company to enter into an agency agreement with a liquidator
providing for the liquidation of the inventory and trade fixtures of other
Closed Stores. Thereafter, the liquidator and the Company entered into an
agreement (the "Agency Agreement") authorizing the liquidator to liquidate 38
of the closed Stores in return for the payment of approximately $12.5 million,
subject to adjustments for returned goods. On August 14, the Court entered an
order (the "Order") substantially granting the relief requested in the motion.
The Order also authorized the Company to close up to an additional 41 Closed
Stores (the "Additional Stores"). The company has entered into an agreement
with its major inventory supplier (the "Return Agreement") pursuant to which
the inventory at the Additional Stores will be returned to the supplier in
exchange for a revolving line of credit in like amount. Under the Return
Agreement, the Company will receive credit against the cost of the returned
inventory estimated to be approximately $12.3 million. This credit will
eliminate the Company's Pre-petition Indebtedness to this creditor.
On August 31, 1998, the Company closed one additional store as a result of the
expiration of the lease.
NOTE 5 - DEBTOR-IN-POSSESSION FINANCING
After the filing of the Chapter 11 cases, Crown Books and its subsidiaries
entered into a Loan and Security Agreement (the "Loan Agreement") with certain
commercial lenders to obtain debtor-in-possession financing. The Loan
Agreement, as amended, provides that the lenders will establish for the Company
a revolving credit facility permitting borrowings, from time to time, in an
aggregate amount equal to the lesser of (a) $40,000,000, or (b) the sum of (i)
Standard Borrowings and (ii) Additional Borrowings (each as hereafter defined).
"Standard Borrowings" means borrowings in an amount equal to the lesser of (i)
55% of the value of the Company's acceptable inventory, at cost, or (ii) 85% of
the liquidation value of such inventory. "Additional Borrowings" means
borrowings in excess of the
10
<PAGE> 11
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
August 1, 1998 and August 2, 1997
Standard Borrowings in an amount equal to the lesser of (i) 7.5% of the value
of the Company's acceptable inventory, at cost, or (ii) 15% of the liquidation
value of such inventory. The Loan Agreement provides a separate sub-limit of
$5,000,000 for outstanding letters of credit. All borrowings under the Loan
Agreement mature and are payable on August 16, 2000.
Borrowings under the Loan Agreement are secured by a first priority security
interest in substantially all of the Company's assets and a super-priority
administrative expense claim under Section 364(c)(1) of the Bankruptcy Code.
Interest is payable on Standard Borrowings at a floating rate equal to the
lenders' base rate plus 1.25%, and on Additional Borrowings at a floating rate
equal to the lenders' base rate plus 8.5%. Interest is payable monthly, in
arrears.
In connection with its borrowings under the Loan Agreement, the Company has
agreed to pay the lenders a $600,000 committment fee and maintenance fees at a
rate of $120,000 per year. If the Company elects to pre-pay the unpaid balance
of its loans after July 15, 1998, it will also become obligated to pay, subject
to certain exceptions, a pre-payment premium of $750,000.
Under the Loan Agreement, the Company is required to satisfy certain financial
reporting and inventory content and balance covenants.
The Company used approximately $16.9 million in borrowings under the Loan
Agreement on July 16, 1998 to repay borrowings under its previous credit
facility. At September 17, 1998, the Company's borrowings under the Loan
Agreement aggregated $11.5 million, and there was approximately $8.3 million
available for borrowing under the Loan Agreement.
NOTE 6 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the lower of cost or market using the
first-in, first-out method or market.
The Company takes a physical count of its store and warehouse inventories
annually. The Company uses a gross profit method to determine inventories for
periods when complete physical counts are not taken. The Company did not take
physical inventories during the 26 weeks ended August 1, 1998.
In addition, the Company recorded an inventory write-down of approximately $5.9
million during the 13 weeks ended August 1, 1998 due to the impact of the
"going out of business" sales and inventory returns pursuant to the Return
Agreement.
NOTE 7 - PROPERTY AND EQUIPMENT
In connection with the reorganization, the Company reassessed all of its stores
for impairment of fixed assets. For the 79 stores that are being closed (see
Note 4) the Company has recorded an additional impairment of approximately
$6.9 million.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward Looking Information
Except for historical information, the statements in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including without limitation the ability of the Company to reorganize
under Chapter 11, to open new stores and close other stores, the sufficiency of
recorded reserves for closed stores, uncertainties regarding the availability
of sufficient liquidity to continue operations, the effect of national and
regional economic conditions and other risks described from time to time in the
Company's filings with the Securities and Exchange Commission. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect future events or circumstances.
General
On July 14, 1998, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware. Since then, the Company has continued to
operate its business as a debtor-in-possession. As such, the Company is
authorized to operate its business in the ordinary course but may not engage in
transactions outside the ordinary course of business without Bankruptcy Court
approval.
As a result of the Company's bankruptcy, (i) all then existing debts,
liabilities and obligations of the Company (collectively, "Pre-petition
Indebtedness") matured and became due and payable, and (ii) all acts to collect
Pre-petition Indebtedness and to enforce other existing contractual obligations
of the Company were stayed.
Under the Bankruptcy Code, the Company generally may not currently make
payments on Pre-petition Indebtedness. Liabilities and obligations first
incurred after the commencement of the bankruptcy case in connection with the
operation of the Company's business generally enjoy priority in right to
payment over Pre-petition Indebtedness and may be paid by the Company in the
ordinary course of business.
Under the Bankruptcy Code, the Company may, subject to certain conditions,
assume or reject executory contracts, including store leases, existing upon the
commencement of the Company's bankruptcy case. The rejection of an executory
contract or lease is treated as a breach thereof occurring immediately before
the filing of the Company's bankruptcy petition, and liabilities of the Company
arising as a result of the rejection of executory contracts and leases will be
treated as Pre-petition Indebtedness. The Company has recorded an additional
closed store reserve of approximately $9.0 million to reflect obligations that
may arise from store closings to bring the total closed store reserve to
approximately $14.5 million.
At July 31, 1998, the Company operated 174 stores in nine local markets, of
which 130 were Super Crown Books stores. However, the Company has, with Court
approval, adopted and begun to implement a plan pursuant to which it may close
up to 79 of its stores. At September 15, 1998, the Company continued to
operate 94 stores (including 71 Super Crown Books stores), and an additional
38 stores (including 30 Super Crown
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Books stores) were conducting "going out of business" sales. The Company has
entered into an agreement with a liquidator to liquidate the assets of certain
stores included in the store closing plan in return for a guaranteed payment,
subject to certain adjustments, estimated to be approximately $12.5 million.
The Company has also entered into an agreement with its principal inventory
supplier to return inventory located at other stores included in the plan in
return for a partial credit against the unpaid purchase price of such
inventory. Following the implementation of its store closing plan, the Company
expects to continue to operate in five geographic markets.
After the filing of the Company's Chapter 11 case, the Company entered into a
Loan and Security Agreement (the "Loan Agreement") with certain commercial
lenders to obtain debtor-in-possession financing. The Loan Agreement, as
amended, provides that the lenders will establish for the Company a revolving
credit facility permitting borrowings, from time to time, in an aggregate
amount equal to the lesser of (a) $40,000,000, or (b) the sum of (i) Standard
Borrowings and (ii) Additional Borrowings (each as hereafter defined).
"Standard Borrowings" means borrowings in an amount equal to the lesser of (i)
55% of the value of the Company's acceptable inventory, at cost, or (ii) 85% of
the liquidation value of such inventory. "Additional Borrowings" means
borrowings in excess of the Standard Borrowings in an amount equal to the
lesser of (i) 7.5% of the value of the Company's acceptable inventory, at cost,
or (ii) 15% of the liquidation value of such inventory. The Loan Agreement
provides a separate sub-limit of $5,000,000 for outstanding letters of credit.
All borrowings under the Loan Agreement mature and are payable on August 16,
2000.
Borrowings under the Loan Agreement are secured by a first priority security
interest in substantially all of the Company's assets and a super-priority
administrative expense claim under Section 364(c)(1) of the Bankruptcy Code.
Interest is payable on Standard Borrowings at a floating rate equal to the
lenders' base rate plus 1.25%, and on Additional Borrowings at a floating rate
equal to the lenders' base rate plus 8.5%. Interest is payable monthly, in
arrears.
In connection with its borrowings under the Loan Agreement, the Company has
agreed to pay the lenders a $600,000 commitment fee and maintenance fees at a
rate of $120,000 per year. If the Company elects to pre-pay the unpaid balance
of its loans after July 15, 1998, it will also become obligated to pay, subject
to certain exceptions, a pre-payment premium of $750,000.
Under the Loan Agreement, the Company is required to satisfy certain financial
reporting and inventory content and balance covenants.
In connection with its acquisition of Dart Group Corporation ("Dart") which
owns 52.3% of the Company's outstanding common stock in May 1998, Richfood
Holdings, Inc. ("Richfood") has expressed its intent to cause Dart to divest
its ownership of the Company as soon as practicable. The declines in the
Company's financial performance, its liquidity concerns and the Chapter 11
filing have impeded the ability to effect any transaction. Accordingly, there
can be no assurance that any transaction will be effected.
Financial Condition
The Company relies primarily on cash and cash equivalents and borrowings under
its credit facilities to satisfy its liquidity needs. The Company's cash and
cash equivalents declined from approximately $13.9 million at January 31, 1998
to approximately $4.0 million at August 1, 1998, while its available credit
facilities decreased from $25.0 million at January 31, 1998 to $8.3 million at
September 17, 1998. The decline in the Company's liquidity resulted primarily
from the Company's continuing operating losses and seasonal factors. The
decline in the Company's liquidity is partly offset by a reduction in the
Company's liquidity needs resulting from the implementation of the Company's
store closing plan and from a further, temporary reduction resulting from the
stay imposed upon the Company's creditor's attempts to collect Pre-petition
Indebtedness under the Bankruptcy Code. Generally, such stay will continue in
effect as to unsecured creditors during the Company's pending bankruptcy case.
Management believes that the Company's liquidity is adequate to support
continuing operations during the next twelve months, based on current forecasts
and provided that the stay remains in effect, while management continues to
develop a long-term strategic business plan.
Operating activities used $30,133,000 of the Company's funds during the 26
weeks ended August 1, 1998, compared to using $24,623,000 during the 26 weeks
ended August 2, 1997. The primary use of funds during the 26 weeks ended
August 1, 1998 was for funding operating losses and payments for year-end
accounts payable balances and other year-end liabilities.
The Company used $328,000 for investing activities during the 26 weeks ended
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
August 1, 1998, for capital expenditures compared to $4,005,000 for the same
period last year.
Financing activities provided $20,686,000 to the Company during the 26 weeks
ended August 1, 1998. At September 17, 1998, the Company's borrowings under
the Loan Agreement aggregated $11.5 million and there was approximately $8.3
million available for borrowing under the Loan Agreement.
Results of Operations
Sales of $121,074,000 for the 26 weeks ended August 1, 1998 decreased by
$12,487,000 or 9.3% compared to the 26 weeks ended August 2, 1997 and sales of
$55,074,000 for the 13 weeks ended August 1, 1998 decreased by $11,944,000 or
17.8% compared to the 13 weeks ended August 2, 1997. Comparable sales (sales
for stores open for 13 months) decreased 9.4% and 17.8% during the 26 and 13
weeks ended August 1, 1998, respectively, as compared to the same periods last
year. The decreases were primarily due to interruptions in the flow of
merchandise inventory primarily as a result of the Company's liquidity
problems.
Interest and other income decreased by $52,000 and $40,000 during the 26 and 13
weeks ended August 1, 1998, respectively, when compared to the 26 and 13 weeks
ended August 2, 1997. The decreases were primarily due to reduced interest
income as a result of decreased funds available for short-term investments.
Cost of sales, store occupancy and warehousing expenses as a percentage of
sales were 88.9% and 92.3% for the 26 and 13 weeks ended August 1, 1998,
respectively, compared to 83.5% and 84.6% for the 26 and 13 weeks ended August
2, 1997. The increases were primarily due to the effect of the decline in
comparable store sales on occupancy costs, as a percentage of sales, in
existing stores.
Selling and administrative expenses as a percentage of sales were 20.4% and
19.9% for the 26 and 13 weeks ended August 1, 1998 compared to 21.6% and 22.0%
for the 26 and 13 weeks ended August 2, 1997. The decreases were primarily due
to cost-cutting measures implemented by new management, partly offset by the
effect of declining sales.
Depreciation and amortization expense decreased $930,000 for the 26 weeks ended
August 1, 1998 compared to the 26 weeks ended August 2, 1997. The decrease was
primarily due to write-off of store assets and computer equipment prior to
January 31, 1998.
Interest expense increased by $267,000 during the 26 weeks ended August 1, 1998
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
primarily due to increased borrowing under the Company's credit facilities.
During the 13 weeks ended August 1, 1998, the Company recorded reorganization
costs of approximately $24.3 million in connection with Chapter 11 filing and
store closings.
The Company had net losses of $38.7 million and $32.7 million in the 26 and 13
weeks ended August 1, 1998 compared to net losses of $6.8 million and $4.2 in
the 26 and 13 weeks ended August 2, 1997 as a result primarily of the
reorganization costs and to the declines in comparable store sales and gross
margins.
Internal Controls
During the year ended January 31, 1998, under its prior management team, Crown
Books implemented a new accounts payable and inventory system without the system
being completely tested and interfaced with the store systems. As a result of
implementation problems with the system, Crown Books has been unable to
determine in an accurate and timely manner the purchases and amounts payable
for each vendor throughout fiscal 1998. Additionally, reconciliations of
certain key general ledger accounts, including cash, accounts payable and
inventory, were not performed on a timely basis during fiscal 1998 and the
adjustment to reconcile the general ledger to the physical inventory at year
ended January 31, 1998 was unusually high. Significant effort was required in
connection with the year-end financial statement closing process to reconcile
these accounts, determine the nature of any reconciling items and record
adjustments to correct errors or omissions to these accounts.
Since February 1998, Crown Books, under its new management, has invested
substantial effort and made improvements in the controls and procedures
relating to the above mentioned items. To date, these improvements have not
been tested to determine if Crown Books is able to produce accurate financial
data in a timely and efficient manner. Consequently, the Company's independent
auditors did not perform a review of the quarterly financial information
included in this report. Management intends to continue its efforts to improve
systems controls.
Year 2000
The Company is currently conducting a review of the impact of Year 2000 on its
information systems, as well as reviewing its impact on relationships with
customers and key vendors. Based on a preliminary review, the store systems
will need to upgrade to the latest version of the point-of-sale program, and
some stores will need new computer equipment to handle this upgrade. The
Company believes the general ledger system to be ready to handle Year 2000, but
ancillary and related programs could need modification. Based on this review,
a plan to ensure minimal disruption to the Company's operations is being
developed, and the Company has contracted with outside consultants for
remediation of affected proprietary programs and this work has begun. There
can be no certainty that there will be sufficient time to implement the plan by
the Year 2000. Currently the aggregate costs associated with this program are
estimated at $600,000 for fiscal 1999, no payments were made during the 26
weeks ended August 1, 1998.
15
<PAGE> 16
PART II
Item 1. Legal Proceedings
Material legal proceedings pending against Crown Books are described in its
Annual Report on Form 10-K for the year ended January 31, 1998 (the "Annual
Report"). The Company's principal vendor, Ingram Books, Inc., ("Ingram") filed
a lawsuit against Crown Books on June 10, 1998. In the lawsuit, Ingram
alleges, among other things, breach of contract by Crown Books and Dart Group
Corporation ("Dart"), fraudulent misrepresentation by Dart, negligent
misrepresentation by Dart, civil conspiracy by Dart and Crown Books, fraudulent
conveyance against Dart, breach of contract by Dart and press for a declaratory
judgment against Dart.
The Company believes it will satisfy Ingram's pre-petition debt with inventory
exchanges (see Note 4 to the Consolidated Financial Statements).
Dart has advised the Company that it believes that Ingram's claims against Dart
are without merit and that it intends to vigorously defend the matter.
Item 5. Other Information
On September 17, 1998, the Company was notified that, effective September 18,
1998, its common stock would be delisted from trading on the NASDAQ stock
market.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule
(B) Reports on Form 8-K
During the quarter ended August 1, 1998, Crown Books Corporation filed
two Current Reports on Form 8-K.
On May 28, 1998, Crown Books Corporation (the "Company") filed a
Current Report on Form 8-K reporting under Item 1.-Changes in Control
of Registrant that Richfood Holdings, Inc. ("Richfood") had acquired
control of the Company. In addition, the size of the Board of
Directors was increased from three to five members and Messrs. John E.
Stokely and John C. Belknap, each of whom is an executive officer of
Richfood were elected to the Board.
On July 28, 1998, Crown Books Corporation filed a Current Report on
Form 8-K reporting under Item 3. Bankruptcy or Receivership that the
Company filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements 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.
CROWN BOOKS CORPORATION
Date: September 21, 1998 By: ANNA L. CURRENCE
---------------------- -----------------------------
ANNA L. CURRENCE
President
Date: September 21, 1998 By: STEVEN PATE
----------------------- -----------------------------
STEVEN PATE
Acting Chief Financial Officer
17
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