<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 October 31, 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 December 21, 1998, the registrant had 5,288,473 shares of Common Stock, $.01
par value per share, outstanding.
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
Crown Books Corporation (hereafter referred to as "Crown Books" and the
"Company" interchangeably), 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
(in thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Thirty-nine
Weeks Ended Weeks Ended
--------------------------- ------------------------------
Oct. 31, Nov 1, Oct 31, Nov 1,
1998 1997 1998 1997
-------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Number of Stores 94 174
-------- ----------- ---------- ------------
Sales $39,094 $ 65,676 $160,168 $199,237
Interest and other income 35 10 167 194
-------- ----------- ---------- ------------
39,129 65,686 160,335 199,431
-------- ----------- ---------- ------------
Expenses:
Cost of sales 27,392 46,989 111,471 136,976
Store occupancy 7,812 12,893. 34,225 36,354
Selling and administrative 7,212 17,588 28,960 44,576
Depreciation and amortization 858 1,572 3,249 4,894
Interest expense 469 451 1,435 1,150
-------- ----------- ---------- ------------
43,743 79,493 179,340 223,950
Operating(Loss)before non operating
costs and special items (4,614) (13,807) (19,005) (24,519)
Reorganization costs 1,879 - 26,160 -
Write-off of valuation allowance and
deferred tax assets - 11,830 - 7,955
-------- ----------- ---------- ------------
Net Loss $(6,493) $ (25,637) $(45,165) $(32,474)
-------- ----------- ---------- ------------
Per share data:
Basic (loss) per share $(1.23) $ (4.85) $ (8.54) $ (6.14)
Diluted (loss) per share (1.23) (4.85) (8.54) (6.14)
Weighted average common shares and common share
equivalents outstanding:
Basic 5,288 5,288 5,288 5,288
Diluted 5,288 5,288 5,288 5,288
</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
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
ASSETS 1998 1998
------------ -------------
<S> <C> <C>
Current Assets
Cash $ 3,307 $ 4,320
Short-term instruments 299 9,558
Accounts receivable 12,301 5,955
Merchandise inventories 55,854 79,457
Prepaid income tax 670 584
Other current assets 546 3,417
------------ -------------
Total Current Assets 72,977 103,291
------------ -------------
Property and Equipment, at cost
Furniture, fixtures and equipment 28,451 37,420
Leasehold improvements 8,136 11,547
Property under capital lease 1,187 1,187
------------ -------------
37,774 50,154
Accumulated Depreciation and Amortization 24,106 26,819
------------ -------------
13,668 23,335
------------ -------------
Other Assets 328 300
------------ -------------
Total Assets $86,973 $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
(in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY 1998 1998
------------- -------------
<S> <C> <C>
Liabilities Not Subject to Compromise
Current Liabilities
Accounts payable, trade $ 9,289 $ 54,096
Short-term borrowings 21,407 -
Accrued expenses
Salaries and benefits 842 3,960
Taxes other than income 554 3,814
Other accrued expenses 2,254 15,257
Gift certificates outstanding - 6,042
Current portion, reserve for closed stores - 1,955
Due to Affiliate 520 418
------------- -------------
Total Current Liabilities 34,866 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 61,472 -
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 (deficit) (47,774) (2,609)
Treasury stock, 324,138 shares of common stock, at cost (5,456) (5,456)
------------- -------------
Total Stockholders' (Deficit) Equity (9,365) 35,800
------------- -------------
Total Liabilities and Stockholders' (Deficit) Equity $ 86,973 $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
(in thousands)
<TABLE>
<CAPTION>
Thirty-nine weeks ended
-----------------------
Cash Flows from Operating Activities October 31, 1998 November 1, 1997
------------------ -------------------
<S> <C> <C>
Net (loss) $(45,165) $ (32,474)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 3,249 4,894
Reorganization costs in connection with Chapter
11 proceedings 26,160 -
Valuation allowance for deferred tax assets - 16,997
Interest in excess of capital lease payments - 35
Loss on disposal of fixed assets - 935
Changes in assets and liabilities:
Accounts receivable (6,346) 4,256
Merchandise inventories 17,703 (12,930)
Prepaid and refundable income taxes ( 86) 3,218
Other current assets 2,871 (830)
Accounts payable, trade (44,807) 2,950
Accrued expenses (25,423) 526
Due to affiliate 102 (135)
Deferred income taxes - (7,763)
Capital lease obligation (1,725) -
Other assets (28) (289)
Reserve for closed stores and restructuring (5,814) (885)
Liabilities subject to compromise 51,019 -
----------- -------------
Net cash used in operating activities before
reorganization items (28,290) (21,495)
Operating cash flows from reorganization items:
Professional fees paid for services rendered
in connection with the Chapter 11 proceeding (3,061) -
----------- -------------
Net cash used in operating activities (31,351) (21,495)
----------- -------------
Capital expenditures (328) (8,008)
----------- -------------
Cash Flows from Investing Activities: (328) (8,008)
----------- -------------
Cash Flows from Financing Activities:
Borrowings under revolving credit facilities 21,407 17,167
----------- -------------
Net cash provided by financing activities 21,407 17,167
----------- -------------
Net Decrease in Cash and Equivalents (10,272) (12,336)
Cash and Equivalents at Beginning of Year 13,878 16,051
----------- -------------
Cash and Equivalents at End of Period $ 3,606 $ 3,715
=========== =============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,435 $ 1,150
Income taxes (refund) - $ (4,500)
</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
October 31, 1998 and November 1, 1997
NOTE 1 - GENERAL
The accompanying consolidated 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 October 31, 1998 and
November 1, 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 November 1, 1997, such adjustments consist only of normal recurring
adjustments and reclassifications to be consistent with the October 31, 1998
presentation. With respect to the Company's financial statements at October 31,
1998 and for the period then ending, such adjustments consist 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 the closure of 80 of its
174 stores.
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 October 31, 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 statements.
During fiscal 1998 (fiscal year ended January 31, 1998), the Company acquired
and implemented a new accounts payable and inventory system. The Company
experienced significant 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 July 14, 1998 (the date of the Company's bankruptcy
filing), the Company operated 174 stores in nine geographic markets.
Subsequently, the Company has implemented a plan that closed 79 of its stores
(See Note 4). The Company has also closed one store as the result of the
expiration of the lease. At December 18, 1998, the Company operates 94 stores
(including 71 Super Crown stores) located in five geographic markets.
7
<PAGE> 8
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
October 31, 1998 and November 1, 1997
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 such a plan at any time up to February 9, 1999. This deadline date may be
further extended by the Bankruptcy Court at the Company's request.
Once a plan of reorganization is approved by the Bankruptcy Court, the
continuation of the business after reorganization will be dependent upon the
success of future operations and the Companys' ability to consummate 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 to its creditors.
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 bankruptcy
proceedings.
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. 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 different 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.
NOTE 3 - REORGANIZATION COSTS AND RESERVES
As a part of its bankruptcy, the Company has embarked on a reorganization of its
business and accordingly established reserves of $14.5 for store closings.
During the quarter ended October 31, 1998, $1.1 million was charged against the
closed store reserve. In addition, $1.8 million was incurred for other
reorganization costs ($1.7 million for professional services and fees and $0.1
million in severance costs).
8
<PAGE> 9
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
October 31, 1998 and November 1, 1997
INVENTORY RESERVES
The Company's inventories are priced at the lower of cost or market using the
first-in, first-out method. The Company has taken a physical count of its store
inventories as of October 31, 1998. The results of such physical inventories
have been included in the financial statements as of October 31, 1998. The
Company uses a gross profit method to determine inventories for periods when
complete physical counts are not taken.
During the 39 weeks ended October 31, 1998, the Company recorded inventory
write-downs of approximately $5.9 million, due to the impact of the going out of
business sales, special clearance sales and inventory returns to the vendor at
less than book cost value.
CLOSED STORE COSTS
In connection with its reorganization, the Company incurred an impairment of the
installed fixed assets for the 79 stores that were closed and accordingly
reflected a write-off of approximately $6.9 million (See Note 4).
Further, the Company rejected leases on substantially all of these closed
stores. The Company is actively working to resolve and otherwise satisfy any
pre-petition and post-petition claims related to these leases. Ultimately any
settlement regarding claims from the lease liabilities could add significantly
to pre-petition obligations.
NOTE 4 - STORE CLOSING PLAN AND SETTLEMENT WITH MAJOR SUPPLIER
As previously noted, at the time of the Company's bankruptcy filing on July 14,
1998 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 beneficial to close 79 of its stores (such 79 stores are
referred to herein as the "Closed Stores").
On August 14, 1998, the Company was granted an order from the Bankruptcy Court
which, among other things, (a) approved the closing of the Closed Stores, (b)
authorized the return of inventory at 41 Closed Stores to the Company's major
supplier, and c) authorized the Company to enter into an agreement with a
liquidator providing for the liquidation of the inventory at 38 of the Closed
Stores by conducting going-out-of-business sales, with the residual inventory
returned to the Company's major supplier for book purchasing credit. Further,
the Company conducted special clearance sales of obsolete excess inventory
through it's on-going 94 stores.
MAJOR SUPPLIER SETTLEMENT
The Company closed 79 stores and in connection therewith, entered into an
agreement with its major inventory supplier (the "Return Agreement") pursuant to
which the inventory at 41 of the Closed Stores was returned to the supplier in
exchange for a revolving line of credit in like amount. Under the Return
Agreement, the Company received book purchase credits of $11.6 million (after
rejected inventory and handling costs) in exchange for the returned inventory.
Approximately $472,000 in inventory was rejected by the supplier and will be
separately sold or otherwise liquidated by the Company.
9
<PAGE> 10
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
October 31, 1998 and November 1, 1997
INVENTORY LIQUIDATION SALES
In August and September 1998, the Company sold the inventory related to the 38
Closed Stores to a liquidator. The liquidator conducted going out of business
sales which ultimately resulted in the Company receiving $7.5 in cash.
Concurrently, the Company entered into a second and separate agreement with its
major supplier to accept unsold inventory from the liquidator for book purchase
credits of $4.7 million (after rejections). The Company plans to sell or
otherwise liquidate any remaining rejected inventory (valued at approximately
$412,000) on its own.
During September and October, the Company conducted special clearance sales in
its 94 on-going stores to liquidate obsolete inventory with a cost value of
approximately $2.0 million. The inventory was primarily from certain of its
Closed Stores and the central warehouse. The Company realized approximately
$900,000 in cash from these sales.
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE ("PRE-PETITION INDEBTEDNESS")
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 October 31,
1998 as Liabilities Subject to Compromise, consisting of the following (in
thousands):
<TABLE>
<S> <C>
Accounts payable $ 25,841
Accrued salary and benefits 1,135
Accrued taxes other than income 2,007
Capital lease obligation 1,761
Due to affiliate 1,237
Gift certificates outstanding 4,735
Closed store reserves 13,393
Other accrued expenses 11,363
------
$ 61,472
=========
</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. Recently the Company has filed with the
Bankruptcy Court a motion to establish January 28, 1999 as a date ("bar date")
for the unsecured creditors to file with the court notice of the amount and
nature of their claims. 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.
10
<PAGE> 11
CROWN BOOKS CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, UNAUDITED
October 31, 1998 and November 1, 1997
Under the Bankruptcy Code, the Company may, subject to certain conditions,
assume or reject executory contracts, including store leases, existing at the
commencement of the bankruptcy cases. The rejection of an executory contract or
lease is treated as a breach thereof occurring 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 ultimately be
included in Liabilities Subject to Compromise. At October 31, 1998, the Company
had a reserve for closed stores of approximately $13.4 million as a result of
its estimate for the cost associated with the closing of stores and lease
rejection claims, which amount is included in the accompanying Balance Sheet as
Liabilities Subject to Compromise.
NOTE 6 - DEBTOR-IN-POSSESSION FINANCING
On September 2, 1998 Crown Books and its subsidiaries finalized a
Debtor-in-Possession 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 in an aggregate amount equal
to the lesser of (a) $40,000,000, or (b) the sum of (i) Standard Borrowings and
(ii) Special Inventory Advances (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 net
retail liquidation value of such inventory. "Special Inventory Advances" means
borrowings in excess of the Standard Borrowings in an amount equal to the lesser
of (i) 7.5% of the cost value of the Company's acceptable inventory, or (ii) 15%
of the net retail liquidation value of such inventory and further such Special
Inventory Advance must be backed by an inventory repurchase agreement acceptable
to the Lender. As of this date, the Company does not have such an acceptable
inventory repurchase agreement.
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 364c(1) of the
Bankruptcy Code.
Interest is payable on Standard Borrowings at a floating rate equal to the
lenders' prime rate plus 1.25%, and at prime plus 8.5% on Special Inventory
Advances. Interest is payable monthly, in arrears.
In connection with its borrowings under the Loan Agreement, the Company has paid
the lenders a $600,000 commitment fee and has agreed to pay maintenance fees at
a rate of $120,000 per year. If the Company elects to pre-pay the unpaid balance
of its loans, 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; sales; accounts payable; advance rate; and inventory content and
balance covenants. The Company and its Lenders have entered into a letter of
agreement to the Loan Agreement that will change certain convenant requirements
for December 1998 and January 1999 related to sales and effective advance rates.
At December 18, 1998, the Company's borrowings under the Loan Agreement
aggregated $27.8 million, and there was approximately $6.8 million available for
borrowing under the Loan Agreement.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING INFORMATION
Certain matters discussed herein are forward-looking statements and as such may
involve known and unknown risks, uncertainties, and other factors which may
cause the actual results, performance or achievements of the Company to differ
from those expressed or implied by such forward-looking statements. 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; and the effect of national and regional economic
conditions. Although the Company believes that the expectations reflected in
such forward-looking statements are based upon reasonable assumptions, it can
give no assurance that its expectations will be attained. The Company undertakes
no obligation to release publicly any revisions to these forward-looking
statements or to reflect any future change in 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 at 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 a reserve for Closed
Stores of approximately $13.4 million during the 39 weeks ended October 31,
1998.
At July 31, 1998, the Company operated 174 stores in nine geographic markets, of
which 130 were Super Crown Books stores. However, the Company has, with
Bankruptcy Court approval, implemented a plan that has resulted in the closure
of 79 of its stores and subsequently closed one additional store due to the
expiration of the lease. At December 11, 1998, the Company continues to operate
94 stores (including 71 Super Crown Books stores) located in five geographic
markets.
In connection with its acquisition in May 1998 of Dart Group Corporation
("Dart"), which owns 52.3% of the Company's outstanding common stock, 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.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
FINANCIAL CONDITION
The Company relies primarily on cash and borrowings under its revolving credit
facilities to satisfy it's liquidity needs. The Company's cash position declined
from approximately $13.9 million at January 31, 1998 to approximately $3.6
million at October 31, 1998, while its available credit facilities decreased
from $25.0 million at January 31, 1998 to $6.8 million at December 11, 1998. The
decline in the Company's liquidity resulted primarily from the Company's
restocking of depleted store inventories; continuing operating losses; funding
of reorganization costs; and the build up of inventory for the Christmas season.
The Company's liquidity needs have been partly offset by the implementation of
the Company's store closing plan; special inventory liquidation programs; and
the temporary stay imposed under the Bankruptcy Code on the Company's creditor's
attempts to collect Pre-petition Indebtedness. 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.
Operating activities used $31,351,000 of the Company's funds during the 39 weeks
ended October 31, 1998, compared to using $21,495,000 during the 39 weeks ended
November 1, 1997. The primary use of funds during the 39 weeks ended October 31,
1998 was for funding seasonal build in inventory; funding operating losses;
funding store closings; payments for payable balances; and professional fees
related to the Company's Bankruptcy.
The Company used $328,000 for capital expenditures during the 39 weeks ended
October 31, 1998, compared to $8,008,000 for the same period last fiscal year.
Financing activities provided $21,407,000 to the Company during the 39 weeks
ended October 31, 1998. At December 18, 1998, the Company's borrowings under its
revolving loan agreement aggregated $27,818,972 and there was approximately
$6,825,410 million available for borrowing under such agreement.
RESULTS OF OPERATIONS
The Company currently operates 94 book stores. For the comparable period last
year (August 1, 1997 to November 1, 1997) the Company operated 174 stores.
Accordingly any assessment of comparable overall results need to be weighted for
this difference in number of open stores.
Sales
Sales of $160,168,000 for the 39 weeks ended October 31, 1998 decreased by
$39,069,000, or 19.6%, compared to the 39 weeks ended November 1, 1997. Sales of
$39,094,000 for the 13 weeks ended October 31, 1998 decreased by $26,582,000 or
40.5%, compared to the 13 weeks ended November 1, 1997. Of the $26,582,000
decrease approximately $22,457,000 (84.5%) related to stores that have been
closed; accordingly on a comparable store basis for the same calendar periods,
store sales decreased $4,125,000 (9.5%) primarily due to (1) the interruptions
in the flow of merchandise inventory primarily as a result of the Company's
liquidity problems, (2) a lack of comparable marketing programs, (3) additional
competition by several major bookstore chains and,(4) the effect of adverse
bankruptcy publicity.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Cost of Sales
Cost of sales (before shrinkage and other reserves) as a percentage of sales
were 67.4% and 67.8% for the 39 and 13 weeks ended October 31, 1998,
respectively, compared to 65.6% and 66.2% for the 39 and 13 weeks ended
November 1, 1997, respectively. The increased cost of sales were primarily due
to the effects of higher book purchase costs resulting from the current major
supplier purchase and distribution arrangements. The Company has accrued
inventory shrinkage of $3.6 million and $6.7 million for the 39 weeks periods
ended October 31, 1998 and November 1, 1997, respectively.
Store Occupancy
Occupancy costs of $7.8 million for the 13 weeks ended October 31, 1998
decreased by approximately $5.1 million compared to the quarter ended November
1, 1997; however, occupancy cost as a percent of sales increased slightly in the
3rd quarter fiscal 1999 compared to the similar quarter of fiscal year 1998.
This increase in occupancy costs relative to sales is primarily due to lower
sales at the comparable stores coupled with relatively fixed occupancy costs.
All occupancy costs related to the 79 Closed Stores have been charged to the
closed store reserve.
Selling and Administrative Expenses
Selling and administrative expenses as a percentage of sales were 18.1% and
18.5%, respectively, for the 39 and 13 weeks ended October 31, 1998, compared to
22.4% and 26.8% for the 39 and 13 weeks ended November 1, 1997. The savings were
primarily due to cost-cutting measures implemented by current management
including payroll and associated fringe benefits; lower levels of advertising;
and lower levels of travel, pre-opening, bad debt and supply expenses.
Depreciation and Amortization
Depreciation and amortization expense decreased $1,645,000 and $714,000 for the
39 weeks and the 13 weeks ended October 31, 1998 respectively, compared to the
39 weeks and the 13 weeks ended November 1, 1997. The decreases were primarily
due to store closings and the associated write-off of store assets and computer
equipment.
Interest Expense
Interest expense increased by $285,000 and $18,000 during the 39 weeks and the
13 weeks ended October 31, 1998 compared to year earlier periods. The level of
interest costs increased primarily due to increased borrowings under the
Company's credit facility and were used to fund operating losses (including
vendor payments). In the 3rd quarter the level of interest costs were lower due
to both lower average borrowings and the lower effective interest rate.
Reorganization Costs
During the 39 weeks ended October 31, 1998, the Company recorded reorganization
costs of approximately $26.2 million in connection with Chapter 11 filing and
store closings.
Net Losses
The Company had net losses of $45.2 million and $6.5 million in the 39 and 13
weeks ended October 31, 1998 compared to net losses of $32.5 million and $25.6
million in the 39 and 13 weeks ended November 1, 1997. The losses in the 39 and
13 weeks ended October 31, 1998 are the result of the reorganization costs;
store closings and the declines in comparable store sales. The fiscal year 1998
losses for the 39 week and the 13 weeks ended November 1, 1997 were primarily
due to reversals of income tax benefits previously recognized and the addition
to shrinkage reserves.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
INTERNAL CONTROLS
During the fiscal year ended January 31, 1998 (fiscal 1998), under its prior
management team, Crown 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, the Company was
unable to determine in an accurate and timely manner the purchases and amounts
payable for each vendor throughout fiscal 1998. Additionally, reconciliation 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, under its new management, has invested substantial
effort and made improvements in the financial controls and procedures.
Significant effort still is needed to completely reconcile both the cash
accounts and the pre-petition obligations.
YEAR 2000
The Company is continuing its review and implementation related to impact of
Year 2000 on its information systems, as well the impact on relationships with
customers and key vendors. Based on its review, the Company's point of sale and
store level inventory control systems in the 94 on going stores 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 may be capable of handling Year 2000 and is in the process
of testing this system. Other ancillary and related systems 9including the
primary inventory control systems) will need some modification. The Company
contracted with a Year 2000 software solution provider for remediation of
affected proprietary programs. Remediation is complete, and all modified code
has been returned to the Company. The Company has begun testing the code
changes, and will purchase a suite of testing tools to facilitate this testing
effort. The Company's plan is to continue to substantially involve outside
experts in both remediation of affected proprietary programs, and development of
contingency plans to ensure minimal disruption of the Company's operations
should remediation efforts fail. There can be no certainty that there will be
sufficient time to complete full implementation of the plan by the Year 2000.
Currently the aggregate costs associated with this program are estimated at
$600,000 for fiscal 1999, with no payments made during the 39 weeks ended
October 31,1998.
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 seeks declaratory judgement against Dart.
The Company believes it has satisfied the Ingram pre-petition debt with
inventory exchanges pursuant to Bankruptcy Code Section 546(g) (see Note 4 to
the Consolidated Financial Statements). The Ingram action is currently stayed as
it relates to the Company.
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.
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
- -------
<TABLE>
<S> <C>
(A) Exhibits
--------
Exhibit 27.1 - Financial Data Schedule
(B) Reports on Form 8-K
</TABLE>
During the quarter ended October 31, 1998, Crown Books Corporation filed one
Current Report on Form 8-K. Such report was filed on August 25, 1998 reporting
under Item 5 that Crown Books was implementing a store closing plan with the
approval of the Bankruptcy Court.
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: December 21, 1998 By: /s/ Anna L. Currence
ANNA L. CURRENCE
President and Chief Executive Officer
Date: December 21, 1998 By: /s/ Richard K. Nason
RICHARD K. NASON
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATIONA EXTRACTED FROM CROWN BOOKS
CORPORATION CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10Q FOR THE NINE MONTHS ENDED OCTOBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 3,307
<SECURITIES> 299
<RECEIVABLES> 12,301
<ALLOWANCES> 0
<INVENTORY> 55,854
<CURRENT-ASSETS> 72,977
<PP&E> 37,774
<DEPRECIATION> 24,106
<TOTAL-ASSETS> 86,973
<CURRENT-LIABILITIES> 34,866
<BONDS> 0
0
0
<COMMON> 56
<OTHER-SE> (9,309)
<TOTAL-LIABILITY-AND-EQUITY> 86,973
<SALES> 39,094
<TOTAL-REVENUES> 39,129
<CGS> 37,392
<TOTAL-COSTS> 43,274
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 469
<INCOME-PRETAX> (4,614)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,614)
<DISCONTINUED> (1,879)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,493)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
