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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
CROWN BOOKS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 52-1227415
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1601 MCCORMICK DRIVE
LARGO, MARYLAND 20774-5302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 955-1300
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
COMMON STOCK, PAR VALUE $0.01 PER SHARE AMERICAN STOCK EXCHANGE
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Business.................................................... 1
Item 2. Financial Information....................................... 7
Item 3. Properties.................................................. 16
Item 4. Security Ownership of Certain Beneficial Owners and
Management.................................................. 17
Item 5. Directors and Executive Officers............................ 19
Item 6. Executive Compensation...................................... 22
Item 7. Certain Relationships and Related Transactions.............. 26
Item 8. Legal Proceedings........................................... 26
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters...................... 27
Item 10. Recent Sales of Unregistered Securities..................... 28
Item 11. Description of Registrant's Securities to be Registered..... 30
Item 12. Indemnification of Directors and Officers................... 31
Item 13. Financial Statements and Supplementary Data................. 32
Item 14. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 32
Item 15. Financial Statements and Exhibits........................... 34
</TABLE>
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ITEM 1. BUSINESS.
GENERAL
Crown Books Corporation is a discount retailer of books, book-related
products, and non-book products. We offer:
- popular hardcover and paperback titles, including bestsellers, mass
market paperbacks (such as mystery, romance, science fiction and other
popular fiction), and children's books;
- other new books, former bestsellers and reprints (including the
opportunity to special order books not stocked in our inventory); and
- a wide selection of non-book products and accessories, including books on
tape, newspapers, magazines, reference materials and greeting cards.
We believe we are the fourth largest chain bookstore retailer in the United
States and have the second largest market share in Chicago. For the fiscal year
ended January 29, 2000, book sales accounted for approximately 87% of our total
sales, while sales of non-book products and accessories accounted for
approximately 13% of our total sales. As of November 25, 2000, we operated 91
stores primarily in Washington, D.C., Chicago, San Francisco, Los Angeles, and
San Diego.
Our business strategy is to sell value-priced books and non-book products
by offering discount prices and providing quality customer service. We believe
we are the only major bookstore chain to offer discount prices on all books, not
just selected titles. We sell hardcover books listed on The New York Times
bestseller list at 40% below the publishers' suggested retail prices, paperbacks
on The New York Times bestseller list at 30% below the publishers' suggested
retail prices, and other new books at 10% below the publishers' suggested retail
prices. We also sell publishers' over-stock, reprints, and former bestsellers at
significant discounts from the publishers' original suggested retail prices. In
addition, we allow our customers to special order books we do not have in stock.
We believe that our book prices are generally at least 10% less than the prices
charged by our largest traditional competitors, such as Borders Group, Inc. and
Barnes & Noble, Inc. We also believe our prices are generally competitive with
the discount prices charged by Internet booksellers.
We offer our products through our older and smaller stores called Classic
Stores and our newer and larger Super Crown Books stores called Superstores. Our
Classic Stores range in size from approximately 2,000 to 6,000 square feet and
carry approximately 15,000 to 40,000 different titles and a limited selection of
non-book products and accessories. Our Superstores range in size from
approximately 7,000 to 23,000 square feet and carry as many as 70,000 different
titles, as well as a wider selection of non-book products and accessories. As of
November 25, 2000, approximately 76% of our stores were Superstores and
approximately 86% of our sales came from our Superstores. Most of our stores are
open seven days a week.
Our executive offices are located at 1601 McCormick Drive, Largo, Maryland
20774-5302, and our telephone number is (301) 955-1300.
BACKGROUND
We opened our first store in September 1977 in Rockville, Maryland. Our
strategy was to cluster stores in a few targeted markets to achieve potential
economies of scale in advertising and field supervision. Despite aggressive
expansion by our competition, we believe we dominated the discount retail book
market in the cities in which we had stores due to our low overhead costs,
aggressive advertising and our competition's failure to offer books at discount
prices.
In 1992, we opened our first superstore, following an industry-wide trend.
Over the next two years, we converted or replaced over 100 of our Classic Stores
with Superstores and reduced the discounts we offered on book sales. In fiscal
1997, we invested in a new management information system to administer our
merchandise information and accounts payable. However, we encountered
significant problems implementing this new system. The results of our Superstore
expansion strategy and the problems we experienced with our
<PAGE> 4
new system materially and adversely affected our entire business and caused us
to experience severe financial difficulties.
In January 1998, in an effort to address the combined effects of increased
expenses, declining sales and difficulties in satisfying accounts payable due to
problems associated with our new information system, we returned $32.9 million
of book inventory to publishers for credit against outstanding payables. As a
result, we had difficulty stocking our shelves with books. At the same time, we
closed our regional warehouses and increased our reliance on Ingram Book
Company, a division of Ingram Book Group, Inc., or Ingram, for the purchase of
new book inventory. Ingram is a leading book wholesaler in the United States.
In April 1998, our inventory problems were further aggravated when Ingram
suspended all shipments of books to us and commenced a lawsuit against us
seeking, among other things, the payment of a $12.6 million receivable. Plagued
by mounting losses and a dearth of inventory, we tried to obtain additional
credit from our bankers, other book wholesalers and suppliers. However, we were
unsuccessful.
BANKRUPTCY PROCEEDINGS
On July 14, 1998, we and our subsidiaries filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code, as amended, with
the United States Bankruptcy Court for the District of Delaware. On June 30,
1999, we filed our Disclosure Statement for our Joint Chapter 11 Plan of
Reorganization, and on August 18, 1999, we filed our First Amended Disclosure
Statement for our First Amended Joint Chapter 11 Plan of Reorganization, which
we call our Plan of Reorganization.
At the time of our Chapter 11 bankruptcy filing, we had approximately $17.1
million of debt that had matured under our then existing credit facility and had
total unsecured debt of approximately $56.9 million, which included
approximately $29.2 million in unpaid trade debt. After we filed for bankruptcy,
we entered into a $40.0 million debtor-in-possession revolving credit facility
with Paragon Capital LLC and Foothill Capital Corporation called the DIP
Facility . The DIP Facility allowed us to repay the $17.1 million of debt that
had matured under our existing credit facility and increase our borrowing
capacity.
On October 7, 1999, the Bankruptcy Court confirmed our Plan of
Reorganization, and the Plan became effective on November 11, 1999. Our Plan of
Reorganization allowed us to emerge from bankruptcy with sufficient trade credit
to continue our operations in the ordinary course of business. When our Plan of
Reorganization became effective, we entered into an agreement with Ingram, our
principal supplier, for a new two-year trade credit facility called the Ingram
Facility. We also entered into a new two-year revolving credit facility with
Paragon and Foothill called the Emergence Facility, which replaced the DIP
Facility.
Our Plan of Reorganization also allowed us to emerge from bankruptcy with
an improved capital structure and trade credit. Under our Plan of
Reorganization, all outstanding shares of our common stock and rights to
purchase or receive such shares were cancelled, and unsecured creditors holding
allowed general unsecured claims became entitled to receive 100% of our new,
post-bankruptcy common stock in exchange for their claims. Our Plan of
Reorganization authorized us to issue up to 5.0 million shares of new common
stock to the holders of allowed general unsecured claims at a ratio of .0833
shares per $1.00 of claims. As of November 25, 2000, our unsecured claims
equaled approximately $52.5 million. The total amount of unsecured claims may be
adjusted in the future as some unsecured creditor claims are reconciled. The
exchange of shares of our new common stock for the claims of our unsecured
creditors under the Plan of Reorganization allowed us to emerge from bankruptcy
substantially debt-free, except for amounts outstanding under the Ingram
Facility, the Emergence Facility, approximately $2.0 million in state and local
taxes and $1.6 million in other obligations.
Our Plan of Reorganization provided for:
- the continued operations of our company;
- the merger of all of our subsidiary companies existing at the time of the
bankruptcy into Crown Books Corporation;
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- the consummation of the Emergence Facility to refinance our obligations
under the DIP Facility and to finance our future working capital needs;
- the consummation of a contract with Ingram to supply merchandise with a
credit limit of $11.6 million through December 31, 1999, and $9.6 million
thereafter;
- the cancellation of all outstanding shares of our "old" common stock,
plus warrants, options, and related rights to purchase or otherwise
receive shares of "old" common stock, and all outstanding shares of
common stock in each of our subsidiaries;
- the issuance of up to 5.0 million shares of our new common stock to the
holders of allowed general unsecured claims;
- the establishment of a tax note for state and local taxes in the amount
of $2.0 million;
- the payment of $1.6 million in lease cure payments; and
- the issuance of up to 750,000 shares of our new common stock to employees
and consultants upon the exercise of stock options granted under our
Emergence Bonus and Incentive Plan.
CORPORATE HISTORY
We were incorporated in Delaware in 1977 by the Dart Drug Company (which
became The Dart Group, Inc. in 1984). We were a majority-owned subsidiary of
Dart until April 1998, when Dart was purchased by Richfood, Inc. In September
1999, SUPERVALU, Inc. purchased Richfood, and we became a majority-owned
subsidiary of SUPERVALU, Inc. until November 11, 1999, when our Plan of
Reorganization became effective.
STORE LOCATIONS
As of November 25, 2000, we operated 91 stores primarily in Washington,
D.C., Chicago, San Francisco, Los Angeles and San Diego. The following table
sets forth by metropolitan area the number of our stores for each of the last
five fiscal years.
<TABLE>
<CAPTION>
NUMBER OF STORES
AS OF (SATURDAY NEAREST TO)
JANUARY 31,
--------------------------------
METROPOLITAN AREA 2000 1999 1998 1997 1996
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Chicago, Illinois........................................... 24 25 37 36 32
Dallas, Texas............................................... -- -- 3 -- --
Houston, Texas.............................................. -- -- 11 8 6
Los Angeles, California..................................... 27 27 43 47 51
Philadelphia, Pennsylvania.................................. -- -- 4 -- --
San Diego, California....................................... 7 7 8 5 9
San Francisco, California................................... 12 12 21 20 20
Seattle, Washington......................................... -- -- 13 12 11
Washington, D.C............................................. 21 21 39 40 43
-- -- --- --- ---
Total............................................. 91 92 179 168 172
</TABLE>
In selecting specific store sites, we consider several factors, including
local demographics, desirability of available leasing arrangements, proximity to
our other stores and those of our competitors and overall retail activity. We
try to cluster our stores in selected market areas to maximize advertising and
management resources. Within a selected market area, we generally locate our
stores in strip shopping centers and urban street locations. We believe that
strip shopping centers and urban street locations typically charge less rent and
provide greater consumer awareness and convenience than large, enclosed shopping
malls.
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The following table sets forth the number of Classic Stores and Superstores
that we have opened and closed during each of the last five fiscal years, as
well as the total number of stores opened as of the end of each fiscal year.
<TABLE>
<CAPTION>
NUMBER OF STORES
AS OF (SATURDAY NEAREST TO)
JANUARY 31,
--------------------------------
STORES 2000 1999 1998 1997 1996
------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Superstores:
Opened during the year................................. -- -- 26 27 16
Closed during the year................................. 1 62 4 2 2
Classic Stores:
Opened during the year................................. -- -- -- -- --
Closed during the year................................. -- 25 11 29 38
Total stores open at end of year:
Superstores............................................ 68 69 131 109 84
Classic Stores......................................... 23 23 48 59 88
-- -- --- --- ---
91 92 179 168 172
</TABLE>
We intend to continue our practice of reviewing the performance and
prospects of our existing stores and may close or relocate under-performing
stores.
BUSINESS STRATEGY
We intend to continue our strategy of operating as a discount retailer. We
believe we are the only major bookstore chain to offer discount prices on all
books, not just selected titles. Our business objectives include leveraging the
Crown Books brand name as a discount retailer through our advertising programs,
improving vendor relations, developing training programs to enhance store
employees' sales and service capabilities, controlling overhead costs, reducing
store labor costs as a percentage of sales and improving the flow of operational
information.
Our business strategy includes the following key elements:
- Building Brand Awareness. We will continue to invest in building our
brand name as a leading discount retailer of books and book-related
products and in communicating the benefits and convenience of shopping at
our stores through advertising and other marketing methods. We believe
that we are well-positioned to benefit from the public's desire to
purchase books and related products at discount prices.
- Increasing Market-Share. We have employed a strategy of clustering our
stores in markets in which we operate. We currently have 91 stores in six
markets. We may seek to expand our presence by opening new stores in
markets in which we already operate and ultimately in new markets. We
believe that by clustering our stores we will strengthen our market
position and increase our franchise value. Most of our stores are located
in high-traffic areas with convenient access to major commercial
thoroughfares and ample parking.
- Developing an Online Business. We believe the emergence of the Internet
as a viable marketplace provides us with significant opportunities. While
we have begun to plan and develop an online bookstore to supplement our
in-store retail operations and have explored potential online
business-to-business opportunities, we currently do not have sufficient
funds to complete the development of our Internet strategy and, given
current market conditions, we do not believe we can raise additional
funds in the foreseeable future to further develop our Internet strategy.
- Pursuing Strategic Acquisitions. We believe that the bookselling
business is highly fragmented and that there may be a number of
independent booksellers that may be attractive acquisition candidates. As
part of our strategy of increasing market share, we intend to consider
selective acquisitions to
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enhance our position in our current markets and to acquire operations in new
markets if attractive acquisition opportunities and adequate financing are
available.
Our strategy also includes expanding our core traditional book retailing
business, both in our existing markets and in new markets, by extending our
brand name and increasing our customer base and revenues.
INTERNET STRATEGY
In the United States, book sales through traditional retail stores reached
approximately $12.4 billion in 1998, and by 2002 are projected to increase to
approximately $14.5 billion. According to Jupiter Communications, online book
sales for 1999 were approximately $1.2 billion. Jupiter Communications estimates
that online book sales will increase to approximately 11.3% of all book sales in
2002. In 2003, Forrester Research, Inc. predicts that online book sales in the
United States will reach approximately $3.0 billion. The two largest existing
online booksellers are Amazon.com and Barnesandnoble.com. For their most recent
fiscal year ends, these companies had revenues of approximately $1.6 billion and
$202.6 million, respectively, and net losses of approximately $720.0 million and
$48.2 million, respectively.
We believe we can benefit from the development and implementation of a
successful Internet strategy. In December 1999, we formed a wholly-owned
subsidiary called Crownbooks.com, Inc. to develop and implement our Internet
strategy. Our objective is to develop and implement a business-to-consumer
Internet strategy that supplements our in-store retail operations as well as a
business-to-business strategy which would differentiate us from Amazon.com,
Barnesandnoble.com and other similar existing online booksellers.
We plan to first develop and implement a business-to-consumer Internet
strategy to cultivate online sales from our customer base. We believe that our
established brand name, reputation and value pricing model provides us with the
ability to attract meaningful online traffic and business. Through our
Crownbooks.com website, we believe we could increase the number of titles we can
offer our customers to over 500,000 titles, versus the 15,000 to 70,000 titles
normally available in our retail stores. We then intend to develop and implement
a business-to-business Internet strategy.
In March 2000, we and Crownbooks.com completed a private offering of 6%
subordinated promissory notes of Crownbooks.com and warrants to purchase common
stock of our company and received net proceeds of $4.0 million. We used
approximately $1.5 million to begin developing our Internet strategy and $1.0
million for the working capital needs of Crown Books (the parent company). We
are currently evaluating the capital requirements needed to continue to develop
and implement our Internet strategy as well as our overall capital requirements.
We are unable to predict at this time the amount of funds required to complete
the development and implementation of our Internet strategy. However, we believe
we will need in excess of $5.0 million in additional funds. In light of the
current market conditions for Internet companies, we do not believe we can raise
additional capital at this time for our Internet strategy. We intend to use the
$1.5 million of remaining funds of Crownbooks.com for the working capital needs
of the parent company through an intercompany loan. In the event we are unable
to obtain the additional funds required to implement our Internet strategy, it
is likely that we will modify, scale back or discontinue our Internet strategy.
PURCHASING
We buy a majority of our book inventory from Ingram and are substantially
dependent on Ingram for meeting our inventory needs. We are seeking to establish
acceptable credit terms with other publishers and suppliers, and intend to
purchase more of our inventory at reduced costs through other book distributors
and directly from publishers and suppliers to reduce our dependence on Ingram.
Available credit from vendors other than Ingram increased from $3.3 million as
of January 29, 2000 to $12.7 million as of November 25, 2000. If we are unable
to secure additional sources of credit or if Ingram does not continue to extend
us credit in accordance with our current credit terms, we would experience
difficulty in providing adequate inventory to our stores, which would materially
harm our business and financial condition. Similarly, if Ingram substantially
reduces our available credit, we may be unable to find alternative book
suppliers willing to offer us sufficient trade credit and, as a result, our
business would be materially harmed.
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Most of our book and magazine purchases are protected by return policies
offered by major vendors, including Ingram. Our return privilege generally
exists for a title as long as that title remains in print in the current catalog
of the publisher. Catalog changes are generally made only after advance notice,
which allows us to return excess inventory before a title is declared out of
print and therefore ineligible for credit. Ingram charges a return fee for
processing returns. Our other major suppliers allow returns for full invoice
amounts. We generally pay the freight cost for shipping these returns. Non-book
inventory is usually marked down rather than returned. The pricing and return
policies of the major distributors are subject to change. We expect that we will
continue to have product return privileges consistent with industry practice.
MERCHANDISING
Our current merchandising is predicated on the belief that consumers will
continue to desire discounted books and non-book products, a broad product
selection and good customer service. All major merchandising decisions
concerning pricing, advertising and promotional campaigns, as well as the
ordering of inventory for each store, are managed centrally at our corporate
headquarters in Maryland. Through the use of our computerized point-of-sale and
inventory management systems, inventories are monitored both at our stores and
at our headquarters to determine purchasing requirements. Our systems are
designed to provide inventory information on an item-by-item basis to store
management.
ADVERTISING
We use advertising, promotion, discount pricing and merchandise
presentation to attract customers and increase the size of a transaction. We
advertise on a regular and frequent basis in a variety of print media, including
newspapers and newspaper inserts. We stress value pricing in our advertisements.
In addition, we attempt to satisfy regional and local consumer preferences by
tailoring the selections and quantities of books available in individual stores.
We also arrange for special appearances and book autographing sessions with
recognized authors to attract customers and build and reinforce customer
goodwill.
In the retail book industry, cooperative advertising with publishers is
customary. In cooperative advertising, publishing companies generally provide
funds to promote new releases. We expect publishers to continue their
cooperative advertising with us.
COMPETITION
The retail bookselling business is highly competitive and fragmented. We
face direct competition from Borders (including its subsidiary Waldenbooks
Company, Inc., the largest operator of shopping mall bookstores in the country)
and Barnes & Noble (including the B. Dalton Bookseller division of Barnes &
Noble). Borders and Barnes & Noble are larger than we are, and have greater
financial resources. We also compete with regional chains, as well as
independent single-store operators, local multi-store operators, department
stores, variety discounters, drug stores, warehouse clubs, mail order clubs,
mass merchandisers and Internet booksellers. Many of our competitors, including
Borders and Barnes & Noble, have increased their market presence by opening new
stores, including stores in markets in which we operate. Many of our
competitors' stores are larger and offer a greater number of book titles and
non-book products than our stores.
The Internet has emerged as a significant avenue for retailing in all media
categories. In particular, the retailing of books and music over the Internet is
highly competitive. Our competitors on the Internet include Amazon.com,
Barnesandnoble.com, Borders.com and others. We believe our in-store prices are
generally competitive with the prices charged by our competitors who transact
business over the Internet.
SEASONALITY
Our business, like that of many retailers, is seasonal. Nearly one-third of
our sales occur during our fourth quarter, which includes the Christmas selling
season. As a result, our inventory and accounts payable historically have been
substantially higher at the end of the third quarter than for any other quarter
of the year.
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EMPLOYEES
As of November 25, 2000, we had approximately 584 full-time and 1,182
part-time employees. Approximately 93 of our employees are located at our
corporate headquarters. The corporate headquarters staff is responsible for
executive and general operating management, buying, merchandising, advertising,
finance, accounting, information systems and real estate management. Our
employees are not represented by unions and are not covered by any collective
bargaining agreements. We consider our relationship with our employees to be
good.
TRADENAMES AND TRADEMARKS
We own and maintain several trademarks and servicemarks that are registered
with the United States Patent and Trademark Office. These trademarks and
servicemarks include the tradenames "Crown Books," "Super Crown Books" and
"Crown Kids." The terms of these registrations are generally 10 years, and they
are renewable for additional 10 year periods indefinitely, so long as the marks
are still in use at the time of renewal. We are not aware of any claims of
infringement or other challenges to our right to register or use our marks in
the United States.
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
In July 1998, we filed for bankruptcy protection and emerged in November
1999. As a result of our emergence from Chapter 11 bankruptcy and our adoption
of fresh-start reporting, our financial information for any period prior to
October 30, 1999 is not comparable to the financial information for periods
after that date.
The following table presents selected historical audited financial data as
of and for each of the four fiscal years in the period ended January 30, 1999
(predecessor company), the nine months ended October 30, 1999 (predecessor
company) and for the three months ended January 29, 2000 (reorganized company),
as well as unaudited financial data as of and for the six months ended July 29,
2000 (reorganized company) and July 31, 1999 (predecessor company). Our fiscal
year end is the Saturday closest to January 31. The financial data for the six
months ended July 29, 2000 includes the results of operations of Crownbooks.com,
our wholly-owned subsidiary formed in December 1999. The selected historical
data should be read in conjunction with the financial statements and the related
notes and other information contained elsewhere in this Registration Statement,
including the information set forth under the heading "Management's Discussions
and Analysis of Financial Condition and Results of Operations."
Our consolidated balance sheet data as of the fiscal years ended January
29, 2000 and January 30, 1999 and the consolidated statement of operations data
for the three months ended January 29, 2000, the nine months ended October 30,
1999 and the fiscal years ended January 30, 1999 and January 31, 1998 are
derived from our audited consolidated financial statements which appear
elsewhere in this Registration Statement. Our consolidated balance sheet data as
of January 31, 1998, February 1, 1997 and February 3, 1996 and the consolidated
statement of operations data for the fiscal years ended 1997 and 1996 are
derived from audited consolidated financial statements which are not included in
this Registration Statement. Our historical financial data as of and for the six
months ended July 29, 2000 and July 31, 1999 have been derived from our
unaudited consolidated financial statements, which appear elsewhere in this
Registration Statement. The results of operations for any interim period are not
necessarily indicative of results of operations for a full year.
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<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR REORGANIZED PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------- ------------- ---------------- ----------------
SIX MONTHS SIX MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
JULY 29, 2000 JULY 31, 1999 JANUARY 29, 2000 OCTOBER 30, 1999
------------- ------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Total revenues..................... $82,216 $83,431 $58,508 $125,918
Cost of sales (including
occupancy)....................... 69,459 72,158 47,904 109,459
Selling and administrative
expenses......................... 15,333 13,921 7,971 22,016
Reorganization costs............... 2 1,390 1,991 2,736
Net income (loss).................. (5,507) (6,675) (770) (7,556)
EBITDA(1).......................... (2,593) (4,224) 249 (3,788)
PER SHARE DATA: (2)
Basic (loss) per share........... $ (1.26) (A) $ (.15) (A)
Diluted (loss) per share......... $ (1.26) (A) (.15) (A)
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS
OUTSTANDING(2)(3)
Basic............................ 4,378 (A) 5,000 (A)
Diluted.......................... 4,378 (A) 5,000 (A)
<CAPTION>
REORGANIZED AND
PREDECESSOR
COMPANIES PREDECESSOR COMPANY
COMBINED -----------------------------------------------------
---------------- FISCAL YEARS ENDED
FISCAL YEAR -----------------------------------------------------
ENDED JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
JANUARY 29, 2000 1999 1998 1997 1996
---------------- ----------- ----------- ----------- -----------
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues..................... $184,426 $216,825 $297,795 $288,744 $286,411
Cost of sales (including
occupancy)....................... 157,363 203,661 260,497 233,847 231,837
Selling and administrative
expenses......................... 29,987 41,264 68,046 54,430 50,993
Reorganization costs............... 4,727 31,889 -- -- --
Net income (loss).................. (8,326) (66,010) (48,650) (860) 3,704
EBITDA(1).......................... (3,539) (59,989) (56,360) 5,384 12,375
PER SHARE DATA: (2)
Basic (loss) per share........... (A) (A) (A) (A) (A)
Diluted (loss) per share......... (A) (A) (A) (A) (A)
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS
OUTSTANDING(2)(3)
Basic............................ (A) (A) (A) (A) (A)
Diluted.......................... (A) (A) (A) (A) (A)
</TABLE>
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR REORGANIZED
COMPANY COMPANY COMPANY PREDECESSOR COMPANY
----------- ----------- ----------- -----------------------------------------------------
JULY 29, JULY 31, JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
2000 1999 2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................... $70,765 $64,965 $76,395 $72,525 $126,926 $176,897 $180,852
Current assets.................. 58,496 54,859 63,182 61,112 103,291 141,583 150,574
Total liabilities............... 55,750 101,852 56,565 102,735 91,126 92,442 93,391
Current liabilities............. 52,360 43,021 56,565 43,193 85,542 84,515 77,606
Liabilities subject to
compromise.................... -- 58,831 -- 59,542 -- -- --
Stockholders' equity
(deficit)..................... 15,015 (36,887) 19,830 (30,210) 35,800 84,455 87,461
</TABLE>
---------------
(1) EBITDA means earnings (loss) before interest, taxes, depreciation and
amortization.
(2) Our earnings per share and weighted average common share data assumes that
a maximum of 5.0 million shares were deemed to be outstanding at January
29, 2000 and that 4,378,050 shares were deemed to be outstanding at July
29, 2000. The actual number of shares deemed to be outstanding is subject
to adjustment as we reconcile outstanding claims from our general unsecured
creditors.
(3) Does not include outstanding options and warrants because they are not
dilutive.
(A) Earnings per share data is not presented for the predecessor company because
all of the common stock of the predecessor company stock was canceled under
our Plan of Reorganization.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the section entitled
"Selected Financial Data" and our financial statements and the notes thereto
included in this Registration Statement.
Our fiscal year ends on the Saturday nearest January 31. Unless the context
otherwise indicates, "fiscal 2001" refers to the 53-week fiscal year ending
February 3, 2001, "fiscal 2000" refers to the 52-week fiscal year ended January
29, 2000, "fiscal 1999" refers to the 52-week fiscal year ended January 30,
1999, and "fiscal 1998" refers to the 52-week fiscal year ended January 31,
1998.
Our company's financial results have changed significantly over the past
three years, principally as a result of our filing for reorganization under
Chapter 11 of the Bankruptcy Code on July 14, 1998, and our subsequent emergence
from Chapter 11 reorganization on November 11, 1999.
FRESH START ACCOUNTING EFFECTIVE OCTOBER 30, 1999
We have accounted for the reorganization using the principles of fresh
start accounting as required by Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
issued by the American Institute of Certified Public Accountants. Fresh start
accounting is required when pre-reorganized stockholders receive less than 50%
of the new common stock issued upon reorganization, and the reorganization value
of the assets of the reorganized company is less than the total of all
post-petition liabilities and allowed claims. Our assets and liabilities are
restated to reflect their reorganization value which approximates fair value at
the date of reorganization.
We engaged Marshall & Stevens Inc., independent financial consultants, to
perform a valuation as to our reorganization value. Our reorganization value as
of October 30, 1999 was approximately $20.6 million. The determination of
reorganization value encompasses several factors. The methodology involved the
estimation of our enterprise value (the market value of stockholders' equity and
our debt) based on the present value of forecasted cash flows, discounted at
20%, plus anticipated expansion of trade credit and expected proceeds from
assets not required in the reconstituted business.
For accounting purposes, the effects of the Plan of Reorganization and
fresh start accounting were recorded as of the quarter ended October 30, 1999,
after the close of business. As a result of the Chapter 11 bankruptcy filing and
the closing of 87 stores in fiscal 1999 and the adoption of fresh start
accounting, our results of operations for fiscal 2000 are not comparable to our
results of operations for fiscal 1999 and prior periods.
In connection with our emergence from bankruptcy, we changed our method of
accounting for prepaid rent and gift certificate obligations as of October 30,
1999, and for the nine-month period then ended. Historically, all rent payments
had been expensed although rent often was paid in advance. The effect of this
change was to increase working capital, current and total assets and decrease
net loss by approximately $1.5 million as of October 30, 1999. In addition, we
reduced the period for which we accrue gift certificate obligations from 10
years to three years. The effect of this change was to improve working capital,
decrease our current and total liabilities and net loss by approximately $2.0
million as of October 30, 1999.
RESULTS OF OPERATIONS
Since filing for Chapter 11 bankruptcy protection, we have devoted a
significant amount of time to analyzing our cost structure. We have developed
and implemented cost-reduction initiatives to improve our overall financial and
operating results. We believe our operating results reflect the progress made
with these initiatives. In fiscal 2000, selling and administrative expenses
declined as a percentage of sales to 16.3% from 19.1% in the prior year. In
fiscal 1999, selling and administrative expenses declined as a percentage of
sales to 19.1% from 22.9% in the previous year. However, for the six months
ended July 29, 2000, selling and administrative expenses of our bricks and
mortar business increased slightly as a percentage of sales due to the
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<PAGE> 12
rebuilding of our management team. Since filing for Chapter 11 bankruptcy
protection, we closed 87 stores, of which 80 store closings occurred in August
1998, shortly after we filed for Chapter 11 bankruptcy protection.
SIX MONTHS ENDED JULY 29, 2000 COMPARED TO THE SIX MONTHS ENDED JULY 31, 1999
During the six months ended July 29, 2000, we opened one store in February
and closed one store in June. The results for the six months ended July 29, 2000
include the pre-operating costs of Crownbooks.com, our wholly-owned subsidiary
formed in December 1999.
Sales. Net sales for the six months ended July 29, 2000 decreased by $1.2
million, or 1.5%, to $82.2 million from $83.4 million in the comparable period
in the prior year. This decrease was attributable to a reduction in the number
of new releases by popular authors during the six months ended July 29, 2000,
and lower sales of such books. Management believes that these conditions
negatively impacted sales throughout the industry. The decrease in sales for the
six month period was offset in part by sales in July 2000 from the fourth book
in the series of Harry Potter books.
Cost of sales. Cost of sales, including store occupancy and warehousing
expenses, decreased by $2.7 million, or 3.7%, to $69.5 million, or 84.5% of net
sales, in the six months ended July 29, 2000, from $72.2 million or 86.5% of net
sales in the prior period. This decrease was attributable to lower product costs
derived from additional lines of credit with publishers as compared to
wholesalers, which enabled us to purchase goods at lower costs.
Selling and administrative expenses. Selling and administrative expenses
increased by $1.4 million, or 10.1%, to $15.3 million, or 18.7% of net sales,
for the six months ended July 29, 2000, from $13.9 million, or 16.7% of net
sales, in the prior period. Excluding $1.1 million of Crownbooks.com expenses
included in the results for the six months ended July 29, 2000, bricks and
mortar selling and administrative expenses increased $0.3 million, or 2.2%, to
$14.2 million, or 17.3% of net sales, for the six months ended July 29, 2000.
This increase of $0.3 million was primarily attributable to the rebuilding of
our management team and annual salary increases during the six months ended July
29, 2000, which totaled $0.8 million, conversion from a self-funded insurance
program which resulted in an expense of $0.4 million, which was offset in part
by improved store maintenance and reduction of book price sticker expense
totaling $1.0 million.
Depreciation and amortization expenses. Depreciation and amortization
expenses for the six months ended July 29, 2000 remained relatively constant
with the prior period.
Interest expense. Interest expense increased by $0.5 million, or 45%, to
$1.6 million for the six months ended July 29, 2000 as compared to from $1.1
million for the prior period. This increase was due to an increase in the level
of borrowings and in the interest rate paid on such borrowings.
Reorganization costs. Reorganization costs (which included financial and
legal consultants for our company to operate in bankruptcy until its emergence
on November 11, 1999) decreased by $1.4 million, or 100%, for the six months
ended July 29, 2000 from reorganization costs of $1.4 million in the prior
period. This decrease was attributable to the elimination of consultants for the
six months ended July 29, 2000 as a result of our emergence from bankruptcy.
Net loss. We had a net loss of $5.5 million for the six months ended July
29, 2000 as compared to a net loss of $6.7 million for the six months ended July
29, 1999.
FISCAL YEAR ENDED JANUARY 29, 2000 COMPARED TO FISCAL YEAR ENDED JANUARY 30,
1999
We began fiscal 2000 with 92 stores. During fiscal 2000, we closed one
store and did not open any new stores. Our results of operations for fiscal 2000
are not comparable to our results for fiscal 1999 because we emerged from
bankruptcy and closed only one store in fiscal 2000 as compared with 87 stores
in fiscal 1999.
Sales. Sales decreased by $32.2 million, or 14.9%, to $184.4 million for
fiscal 2000 as compared to $216.6 million for the prior year. The decrease was
primarily due to the closing of 87 stores during fiscal 1999 which had poor
operating results.
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<PAGE> 13
Cost of sales. Cost of sales, including store occupancy and warehouse
expenses, decreased by $46.3 million, or 22.7%, to $157.4 million for fiscal
2000 from $203.7 million in the prior year. This decrease was due to the closing
in fiscal 1999 of 87 stores. As a percentage of sales, cost of sales decreased
to 85.3% for fiscal 2000 as compared to 94.0% on sales for the prior year. The
decrease was primarily due to the store closings in fiscal 1999.
Selling and administrative expenses. Selling and administrative expenses
decreased by $11.3 million, or 27.3%, to $30.0 million for fiscal 2000 as
compared to $41.3 million in the prior year. The decrease was primarily due to
decreased store payroll as a result of store closings as well as a substantial
reduction in costs for corporate administrative functions achieved through the
elimination of positions.
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased by $1.7 million, or 42.1%, for fiscal 2000 to $2.3 million
from $4.0 million in the prior year. The decrease was primarily due to the
disposal of fixed assets in connection with the closing of stores.
Interest expense. Interest expense increased by $0.4 million, or 20.5%, to
$2.5 million for fiscal 2000 from $2.1 million in fiscal 1999. The increase was
due to an increase in the level of borrowings and in the interest rate paid on
such borrowings.
Reorganization costs. Reorganization costs decreased by $27.2 million, or
85.3%, to $4.7 million for fiscal 2000 from $31.9 million in the prior year. The
decrease was primarily due to the substantial completion in fiscal 1999 of our
reorganization-related efforts.
Net loss. We had a net loss of $8.3 million for fiscal 2000 as compared to
a net loss of $66.0 million for fiscal 1999.
FISCAL YEAR ENDED JANUARY 30, 1999 COMPARED TO THE FISCAL YEAR ENDED JANUARY 31,
1998
In fiscal 1999, we closed 87 stores, opened no new stores, and ended the
year with 92 stores. We began fiscal 1998 with 168 stores. We opened 26 stores
and closed 15 stores during fiscal 1998 and ended the year with 179 stores. Our
results of operations for fiscal 1999 are not comparable to our results for
fiscal 1998 because in fiscal 1999 we filed for bankruptcy and closed 87 stores
whereas in fiscal 1998 we increased our number of stores by 11.
Sales. Sales decreased by $80.9 million, or 27.2%, to $216.6 million for
fiscal 1999 from $297.5 million in the prior year. This decrease was primarily
due to the closing of 87 stores during fiscal 1999, and we believe inadequate
inventory levels in fiscal 1999 and negative publicity associated with our
bankruptcy filing.
Cost of sales. Cost of sales, including store occupancy and warehouse
expenses, decreased by $56.8 million, or 21.8%, to $203.7 million for fiscal
1999 from $260.5 million in the prior year. This decrease was due primarily to
the closing of 87 stores in fiscal 1999. Cost of sales as a percentage of sales,
increased to 94.0% for fiscal 1999 as compared to 87.6% for the prior year. Our
increase was primarily due to increased purchases in fiscal 1999 from
wholesalers at higher costs and a decline in comparable store sales and
occupancy costs. We closed all but one of our warehouses in December 1998. Our
remaining warehouse, in Maryland, only processes products that cannot be shipped
directly to stores.
Selling and administrative expenses. Selling and administrative expenses
decreased by $26.7 million, or 39.4%, to $41.3 million for fiscal 1999 as
compared to $68.0 million in the prior year. This decrease was primarily due to
decreased store payroll as a result of store closings as well as a substantial
reduction in costs for corporate administrative functions achieved through the
elimination of positions.
Depreciation and amortization expenses. Depreciation and amortization
expenses decreased by $1.8 million, or 31.9%, to $4.0 million for fiscal 1999
from $5.8 million in the prior year. The decrease was primarily due to the
disposal of fixed assets in connection with the closing of stores.
Interest expense. Interest expense increased by $0.6 million, or 40.0%, to
$2.1 million for fiscal 1999 from $1.5 million in the prior year. The increase
was due to higher borrowing levels.
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<PAGE> 14
Reorganization costs. Our reorganization costs for fiscal 1999 were $31.9
million. These expenses were incurred primarily in connection with our filing
for bankruptcy in July 1998, including store closing reserves of $12.5 million,
uncollectible vendor receivables of $7.0 million, fixed asset impairment of $6.9
million and professional services and fees of $4.2 million. There were no
reorganization expenses in fiscal 1998 as we were not in reorganization.
Income taxes. In fiscal 1998, we wrote off $7.9 million of net previously
recognized tax assets.
Net loss. We had a net loss of $66.0 million for fiscal 1999 as compared
to a net loss of $48.7 million for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
General. We have suffered losses in the previous four fiscal years. The
following table depicts cash provided from or (used) for operations for the
reporting periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
--------------------------- ----------------------------------------
JULY 29, JULY 31, JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 2000 1999 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)..................... $(5,507) $(6,675) $(8,326) $(66,010) $(48,650)
Depreciation and amortization......... 1,331 1,366 2,291 3,957 5,809
Valuation allowance................... -- -- -- -- 22,971
Loss on disposal of fixed assets...... -- 22 519 8,813 3,887
Net changes in current assets and
liabilities......................... 5,696 6,042 (2,564) (34,249) 23,138
Liabilities subject to compromise..... -- (710) (755) 59,542 --
Net cash provided by (used in)
operations after reorganization
costs............................... 1,520 45 (8,835) (27,947) 7,155
</TABLE>
During fiscal 1999 and fiscal 2000, we funded our operating losses and
reorganization costs from our operations and our credit facilities. During
fiscal 1998, our $32.9 million inventory returns initiative reduced our payment
obligation to vendors, and cash generated from operations funded our operating
losses. As a result, we had the following working capital at the periods ended:
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
January 29, 2000.......................................... $ 6,617
January 30, 1999.......................................... $17,919
January 31, 1998.......................................... $17,749
</TABLE>
Working capital decreased from fiscal 1999 to fiscal 2000. The decrease was
primarily due to increased borrowings under our credit facility which was used
to fund operating losses and restructuring costs. Our working capital from
fiscal 1998 to fiscal 1999 remained relatively constant.
Credit Facilities. In November 1999, we entered into the two-year
Emergence Facility with Paragon and Foothill. Under the Emergence Facility, from
September through March of each year, we may borrow the lesser of $35.0 million
(or $30.0 million from April through August of each year), 55% of our eligible
inventory or 90% of the net retail liquidation value of such inventory, less
reserves, subject to adjustment. Borrowings include a $5.0 million limit for the
issuance of letters of credit. We used the proceeds from the Emergence Facility
to re-pay in full borrowings under the DIP Facility, and are using the remaining
proceeds to pay certain claims pursuant to our Plan of Reorganization,
professional fees, to fund working capital and for other general corporate
purposes. Obligations under the Emergence Facility are secured by a first
priority lien on substantially all our assets.
Amounts outstanding under the Emergence Facility bear interest at the base
rate announced from time to time by Wells Fargo Bank, N.A., plus 1.0% (but in no
event less than 8.0%). The Emergence Facility also provides for a monthly fee of
the greater of $2,000 or 1.5% of the amount by which the outstanding loans and
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<PAGE> 15
letters of credit exceed 110% of what we have projected in our business plan. In
addition, the Emergence Facility provides for an annual fee of 0.25% on the
daily average unused portion of the facility. In February 2000, we increased our
borrowing availability from 55% to 56% of eligible inventory to cover short-
term working capital requirements needed during that month.
As of November 25, 2000, approximately $1.2 million was available for
additional borrowings under the Emergence Facility. At November 25, 2000, the
effective interest rate was 10.75% on $32.7 million and 13.75% on $1.9 million.
In November 1999, we also entered into the two-year Ingram Facility. Under
this facility, Ingram supplies us with merchandise up to a credit limit of $9.6
million. We currently fully utilize the Ingram Facility. Amounts in excess of
$1.5 million which are outstanding under the Ingram Facility are secured by a
lien on substantially all of our assets. The lien held by Ingram is subordinate
to the lien held by Paragon and Foothill.
The Emergence Facility contains several significant covenants that, among
other things, restrict our ability to dispose of assets, incur additional
indebtedness, pay cash dividends, create liens on assets, make investments,
materially deviate from the current business plan and engage in mergers or
consolidations. In addition, under the Emergence Facility and the Ingram
Facility, we are required to comply with covenants that include specified
financial ratios and tests principally relating to sales, earnings, inventory
levels and accounts payable balances. In April 2000, we were in default under
one covenant contained in the Ingram Facility and as a result we were in default
under the Emergence Facility. Although we have not obtained any waivers with
respect to these defaults, our secured lenders and Ingram have advised us that
they are not taking any action at this time in respect of these defaults. Ingram
also advised us that no change in our credit limit is currently anticipated.
However, Ingram has advised us that it is no longer obligated to extend us $9.6
million of credit under the Ingram Facility. In addition, we believe that as of
October 28, 2000 we may be in default under one of the financial covenants
included in the Emergence Facility. We have notified our secured lenders of the
default. Although there can be no assurance, we anticipate that we will receive
waivers from our secured lenders under the Emergence Facility with respect to
both defaults.
Ingram can require us to pay our outstanding obligations under the Ingram
Facility at any time. The acceleration of our obligations under this facility or
any breach (past or future) of any of our covenants under the Emergence Facility
which results in the acceleration of our obligations under either facility,
would likely result in the foreclosure of our assets, in which event it is
unlikely that we could continue to operate our business.
We have obtained limited trade credit from our other suppliers. Available
credit from vendors other than Ingram increased from $3.3 million as of January
29, 2000 to $12.7 million as of November 25, 2000. We are negotiating with all
of our vendors to increase our credit limits and payment terms. We believe that
it is critical to increase our trade credit from suppliers other than Ingram to
reduce our dependence on Ingram and improve our operating results.
Private Placement. In March 2000, Crownbooks.com raised $4.0 million
through the private placement of units consisting of (i) a three-year 6.0%
subordinated promissory note of Crownbooks.com in the principal amount of
$500,000, and (ii) a three-year warrant to purchase 183,824 shares of our common
stock at an exercise price of $2.72 per share. Interest on the promissory notes
is payable semi-annually on June 30 and December 31 either in cash or, at the
option of Crownbooks.com, by the issuance of additional promissory notes. The
obligations under the promissory notes are subordinate to all other senior debt
of Crownbooks.com. The warrants to purchase shares of our common stock may be
exercised in cash, or at the holder's election, by the surrender of the
principal amount of such holder's promissory note. If the holders of the
promissory notes elect not to exercise all or any portion of their warrants by
surrendering the principal amount of their promissory notes, then all amounts
outstanding will become due and payable by Crownbooks.com on March 22, 2003.
Of the $4.0 million in net proceeds we received from the private placement,
we used approximately $1.5 million to begin evaluating and developing our
Internet strategy, and $1.0 million for the working capital needs of Crown Books
(the parent company). We are currently evaluating the capital requirements
needed to
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<PAGE> 16
continue to develop and implement our Internet strategy as well as our overall
capital requirements. We are unable to predict at this time the amount of funds
required to complete the development and implementation of our Internet
strategy. However, we believe we will need in excess of $5.0 million in
additional funds. In light of the current market conditions for Internet
companies, we do not believe we can raise additional capital at this time for
our Internet strategy. We intend to use the $1.5 million of remaining funds of
Crownbooks.com for the working capital needs of Crown Books (the parent company)
through an intercompany loan. In the event we are unable to obtain the
additional funds required to implement our Internet strategy, it is likely that
we will modify, scale back or discontinue our Internet strategy.
Future Capital Needs. We anticipate that our borrowing availability under
our Emergence Facility will likely be reduced by our secured lenders in the near
future. We are in the process of seeking additional capital and are negotiating
with financing sources. We believe our current borrowing and trade credit from
our secured lenders and suppliers, including Ingram, together with an expected
intercompany loan of $1.5 million from Crownbooks.com and funds we expect to
receive from an additional financing, will give us sufficient liquidity to
operate our business for the foreseeable future. However, we may need further
funds in the future. We do not have any firm commitments for financing at this
time. In addition, we cannot guarantee that we will be able to obtain financing
when it is needed, or at all, or that we will continue to obtain borrowings or
receive trade credit at levels currently being provided to us. If we are unable
to obtain borrowings or trade credit when it is required, our business and
future prospects would be materially harmed.
CAPITAL EXPENDITURES
During fiscal 2000, we incurred capital expenditures of approximately $0.1
million for management information systems. We expect to incur approximately
$0.8 million in capital expenditures in fiscal 2001, including $0.2 million for
management information systems, $0.2 million in store facility expenditures and
fixtures and $0.4 million for fixtures and improvements for our corporate
headquarters.
TRADE CREDIT
During fiscal 2000, we purchased approximately 94% of our book merchandise
from Ingram and the remaining 6% from publishers and other vendors. During the
six months ended July 29, 2000, we began ordering more book merchandise directly
from publishers and vendors to reduce our dependence on Ingram. During this
period, we purchased approximately 65% of our book merchandise from Ingram and
35% directly from publishers and other vendors. We intend to reduce our reliance
on Ingram in the future and purchase approximately 50% directly from publishers
and other vendors. We believe that a 50%/50% mix would improve our overall gross
profit margin. Our ability to reduce our dependence on Ingram will depend on
whether we can obtain additional trade credit. We are negotiating with all of
our vendors to increase our credit limits and payment terms. As of November 25,
2000, we had obtained $12.7 million of credit limits from our non-Ingram
suppliers. No assurances can be made that we will be able to maintain or expand
our trade credit with suppliers.
MANAGEMENT INFORMATION SYSTEMS
During fiscal 1998, our prior management team implemented a new computer
system to manage our accounts payable and inventory operations. We believe this
new computer system was not adequately tested, and was not compatible with our
computerized point-of-sale system at the store level. Due to difficulties
associated with the adoption of this computer system, our internal control
system was compromised in certain areas. For example, during fiscal 1998 and
1999, we were unable to accurately and timely reconcile our purchases from and
amounts payable to each of our vendors, and had difficulty maintaining inventory
levels at our stores. In addition, reconciliations of certain key ledger
accounts, including cash, accounts payable and inventory were not performed on a
timely basis during fiscal 1998 and the adjustment required to reconcile the
general ledger to the physical inventory at year-end was unusually high. A
significant amount of manual effort was required to reconcile these accounts in
connection with the fiscal 1998 year-end financial statement closing process to
determine the nature of any reconciling items and record adjustments to correct
errors or omissions to these accounts. Arthur Andersen LLP, our former
independent public accountants, advised us in
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<PAGE> 17
both April 1998 and April 1999 that material weaknesses and significant
deficiencies existed in our internal controls that could adversely affect our
ability to record, process, summarize and report financial data consistent with
the assertions of management in its financial statements.
We have taken steps which we believe have improved our internal controls
and procedures. However, we continue to experience problems with our management
information systems and therefore are having difficulty in timely reconciling
our inventory and accounts payable. Accordingly, a significant amount of manual
effort is still required to reconcile these accounts. We believe our automated
internal controls and procedures would benefit from further improvements. We are
continuing the process of improving our internal controls and procedures, and
are committed to investing in our information systems in order to meet the needs
of our business.
EFFECT OF INFLATION
We believe that inflation in the past several years has had no significant
impact on our business. Our purchase cost and selling price for merchandise are
a percentage of the publishers' suggested retail prices. We believe the impact
of inflation is generally reflected in the publishers' suggested retail prices.
Therefore, we believe that we will be able to recover most cost increases.
FORWARD-LOOKING STATEMENTS
This Registration Statement contains forward-looking statements that
involve risks and uncertainties. These statements relate to future events or our
future financial performance and include statements about our plans, objectives
and business as well as our expectations and intentions. In some cases, you can
identify these forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms of other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by any forward-looking statements. These risks
and uncertainties include, but are not limited to, the following:
- general economic and business conditions, both nationally and in those
areas in which we operate;
- prospects for the retail book industry;
- competition;
- changes in our business strategy or plans;
- the loss of any of our management or key personnel;
- the availability of capital and trade credit to fund our business;
- changes in consumer preferences;
- merchandising decisions;
- adverse weather conditions, particularly during peak selling seasons; and
- changes in our relationships with Ingram and other suppliers.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this Registration Statement to
conform these statements to actual results.
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<PAGE> 18
TAX CREDITS AND LOSS CARRY FORWARDS
We have available net operating loss carry forwards. Our future taxable
income may be offset by these loss carry forwards, which are estimated to be
utilizable at approximately $1.75 million per year through 2014.
DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our Emergence Facility, which had a total outstanding balance at November 25,
2000 of $34.6 million. The interest rate on this revolving line of credit is
variable and is based on a bank reference or prime rate. If the interest paid on
average outstanding balances were to increase by 10%, and the average annual
balance remained at the November 25, 2000 level, the estimated impact on our
annual consolidated financial statements would be to reduce the income (increase
the loss) before taxes by approximately $0.4 million.
ITEM 3. PROPERTIES.
As of November 25, 2000, we operated 91 stores in five states and the
District of Columbia. We lease all of our store locations. Each store lease
typically has an initial term of five years, and many leases have multiple
five-year renewal options. Generally, rent under these leases approximates
current market rents. As of November 25, 2000, the average unexpired term under
our existing store leases was approximately three years and four months, without
taking into account the exercise of any available renewal options. The total
minimum lease payment obligations for our retail stores were approximately $14.6
million for fiscal 2001, $12.8 million for fiscal 2002, $11.2 million for fiscal
2003, $9.4 million for fiscal 2004, and $5.8 million in fiscal 2005.
We lease approximately 41,244 square feet of office and warehouse space for
our principal executive offices located in Largo, Maryland. The term of the
lease is 10 years, and ends on July 1, 2010. The current annual rent is $0.2
million. Our rent will increase each year by approximately 4%, except during the
sixth year of the lease, when our rent will increase by approximately 16%. Under
the terms of the lease, we also are responsible for other costs associated with
renting space, including but not limited to the payment of maintenance and
utilities. We have provided our landlord with an unconditional and irrevocable
letter of credit in the amount of $0.4 million as security for our performance
under the lease. We expect this letter of credit to be decreased by $80,000 on
each anniversary of the lease starting on July 1, 2001 until the amount of the
letter of credit is equal to one months' rent.
We anticipate that our existing store leases will be renegotiated as they
expire or that alternative properties can be leased on acceptable terms. We
believe all of our facilities are suitable and adequate for our current and
anticipated operations. However, we may close stores and open additional stores
from time to time as business may require.
16
<PAGE> 19
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of November 25, 2000, there were 4,378,050 shares of common stock deemed
to be outstanding. The number of shares deemed to be outstanding is subject to
adjustment as we reconcile outstanding claims from of our general unsecured
creditors. As a result, the total number of shares to be issued pursuant to our
Plan of Reorganization could be materially less or more than the number of
shares currently deemed to be outstanding, but will not be in excess of 5.0
million shares. Therefore, the percentage of outstanding shares owned by each
shareholder may change. We expect to issue our shares prior to the time this
Registration Statement becomes effective.
The following table contains information regarding the beneficial ownership
of our common stock as of November 25, 2000 as if such shares were issued by:
- each person or entity who is known by us to own beneficially more than 5%
of our common stock;
- our executive officers;
- each member of our Board of Directors; and
- all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY
NAME(1) OWNED(2) OWNED
------- ---------------- ------------
<S> <C> <C>
Royalty Books Associates, LLC
Shenkman Capital Management, L.L.C.
Mark R. Shenkman(3)....................................... 1,558,914 35.0%
Charles R. Cumello(4)....................................... 291,666 6.2%
Dennis J. Buckley(5)........................................ -- --
John P. Bohman(6)........................................... -- --
Susan H. Harwood(7)......................................... -- --
Kevin J. Ball(8)............................................ -- --
Matthew F. Ellis(9)......................................... -- --
Ann Carlano(10)............................................. -- --
Theodore M. Barnhill, Jr.(11)............................... 12,500 *
Bradford R. Klatt(12)....................................... 251,471 5.4%
Gordon T. Macomber(13)...................................... 12,500 *
Steven G. Panagos(14)....................................... 199,265 4.4%
Richard H. Weinstein(15).................................... 12,500 *
Gwenn S. Winkhaus(16)....................................... 12,500 *
All directors and executive officers as a group (14
persons).................................................. 2,351,316 44.8%
</TABLE>
---------------
* Less than 1%
(1) Unless otherwise indicated, the business address of each person named in
the table above is c/o Crown Books Corporation, 1601 McCormick Drive,
Largo, Maryland 20774-5302.
(2) As used in this table, a beneficial owner of a security includes any person
who, directly or indirectly, through contract, arrangement, understanding,
relationship or otherwise has or shares (i) the power to vote, or direct
the voting of, such security or (ii) investing power which includes the
power to dispose, or to direct the disposition of, such security. In
addition, a person is deemed to be the beneficial owner of a security if
that person has the right to acquire beneficial ownership of such security
within 60 days of November 25, 2000.
(3) Includes 1,486,671 shares owned by Royalty Books Associates, LLC, 59,743
shares underlying warrants held by Shenkman Capital Management, L.L.C., and
12,500 shares underlying options held by Mark R. Shenkman. Does not include
options held by Mr. Shenkman to purchase 37,500 shares which are not
vested. These options vest in equal one-third increments on each of March
13, 2001, 2002 and 2003. Mr. Shenkman is a director of our company and the
Managing Member of Shenkman Capital Management, L.L.C., which is the
Managing Member of Royalty Books Associates, LLC. Mr. Shenkman may
therefore be deemed to beneficially own the shares of common stock
beneficially
17
<PAGE> 20
owned by Shenkman Capital Management, L.L.C. and Royalty Books Associates,
LLC. The business address of Royalty Books Associates, LLC, Shenkman
Capital Management, L.L.C. and Mark R. Shenkman is c/o Shenkman Capital
Management, L.L.C., 461 Fifth Avenue, New York, NY 10017. If the total
amount of allowed general unsecured claims decreases from the amount set
forth as of November 25, 2000, the percentage of the outstanding shares of
common stock beneficially owned by Royalty Books and all other
shareholders, in the table above will increase.
(4) Represents fully vested stock options. Does not include options to purchase
133,334 shares which vest on November 28, 2001. Also does not include
options to purchase 75,000 shares which will vest in equal one-third
increments on each of March 13, 2001, 2002 and 2003.
(5) Does not include options to purchase 50,000 shares which are not vested.
These options will vest in equal one-third increments on each of July 10,
2001, 2002 and 2003.
(6) Does not include options to purchase 50,000 shares which are not vested.
These options will vest in equal one-third increments on each of January 5,
2001, 2002 and 2003.
(7) Does not include options to purchase 15,000 shares which are not vested.
These options will vest in equal one-third increments on each of September
14, 2001, 2002 and 2003.
(8) Does not include options to purchase 10,000 shares which are not vested.
These options will vest in equal one-third increments on each of September
11, 2001, 2002 and 2003.
(9) Does not include options to purchase 25,000 shares which are not vested.
These options will vest in equal one-third increments on each of June 26,
2001, 2002 and 2003.
(10) Does not include options to purchase 25,000 shares which are not vested.
These options will vest in equal one-third increments on each of June 14,
2001, 2002 and 2003.
(11) Includes options to purchase 12,500 shares. Does not include options to
purchase 37,500 shares which are not vested. These options vest in equal
one-third increments on each of March 13, 2001, 2002 and 2003. The business
address of Mr. Barnhill is c/o The Department of Finance, The George
Washington University, Washington, D.C. 20052.
(12) Includes options to purchase 12,500 shares and shares underlying a warrant
to purchase 238,971 shares held by RoseLink Investors LLC. Mr. Klatt, by
virtue of being the Managing Member of RoseLink Investors LLC, may be
deemed to beneficially own the shares beneficially owned by RoseLink
Investors LLC. Does not include options to purchase 37,500 shares which are
not vested. These options vest in equal one-third increments on each of
March 13, 2001, 2002 and 2003. The business address of Mr. Klatt is c/o
Roseland Property Company, 233 Canoe Brook Road, Short Hills, NJ 07078.
(13) Includes options to purchase 12,500 shares. Does not include options to
purchase 37,500 shares which are not vested. These options vest in equal
one-third increments on each of March 13, 2001, 2002 and 2003. The business
address of Mr. Macomber is c/o NYU Online, 594 Broadway, Suite 40, New
York, NY 10012.
(14) Includes options to purchase 12,500 shares. Does not include options to
purchase 37,500 shares which are not vested. These options vest in equal
one-third increments on each of March 13, 2001, 2002 and 2003. Also
includes 186,765 shares underlying a warrant to purchase such shares issued
to Zolfo Cooper, LLC. Mr. Panagos is a principal of Zolfo Cooper, LLC, and
therefore may be deemed to beneficially own the shares of common stock
beneficially owned by Zolfo Cooper, LLC. The business address of Mr.
Panagos is c/o Zolfo Cooper, LLC, 292 Madison Avenue, New York, NY 10017.
(15) Includes options to purchase 12,500 shares. Does not include options to
purchase 37,500 shares which are not vested. These options vest in equal
one-third increments on each of March 13, 2001, 2002 and 2003. The business
address of Mr. Weinstein is c/o Shenkman Capital Management, Inc., 461
Fifth Avenue, New York, NY 10017. Mr. Weinstein is a member of Shenkman
Capital Management, L.L.C.
(16) Includes options to purchase 12,500 shares. Does not include options to
purchase 37,500 shares which are not vested. These options vest in equal
one-third increments on each of March 13, 2001, 2002 and 2003. The business
address of Ms. Winkhaus is c/o Reich & Tang, 600 Fifth Avenue, New York, NY
10020.
18
<PAGE> 21
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information, as of November 25,
2000, concerning our directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Charles R. Cumello(3).................. 56 Chairman of the Board of Directors, President and
Chief Executive Officer
Dennis J. Buckley...................... 52 Vice President, Chief Financial Officer and Secretary
John P. Bohman......................... 38 Vice President and General Merchandising Manager
Susan H. Harwood....................... 39 Vice President, Chief Information Officer
Kevin J. Ball.......................... 43 Vice President, Marketing
Matthew F. Ellis....................... 50 Vice President, Human Resources
Ann Carlano............................ 47 Vice President, Store Operations
Theodore M. Barnhill, Jr. (1)(4)....... 53 Director
Bradford R. Klatt...................... 46 Director
Gordon T. Macomber(1).................. 42 Director
Steven G. Panagos...................... 38 Director
Mark R. Shenkman(1)(2)(3)(4)........... 57 Director
Richard H. Weinstein................... 35 Director
Gwenn S. Winkhaus(2)(4)................ 43 Director
</TABLE>
---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Executive Committee.
(4) Appointed by Royalty Books Associates, LLC.
The business experience of each of the persons listed above for at least
the last five years is as follows:
Charles R. Cumello became President and Chief Executive Officer of our
company in November 1999 and became Chairman of the Board of Directors in
October 2000. Mr. Cumello was President and Chief Executive Officer of Factory
Card Outlet from 1995 until 1998. In April 1999, Factory Card Outlet filed for
bankruptcy protection. Mr. Cumello was President and Chief Executive Officer of
Waldenbooks, Inc. from 1991 to 1994.
Dennis J. Buckley joined our company as Vice President and Chief Financial
Officer in July 2000. Since October 2000, Mr. Buckley has been the Secretary of
our company. Before joining our company, Mr. Buckley served as Vice President
and Chief Financial Officer at LearningSmith, Inc. from 1994 until 2000. In
December 1999, LearningSmith, Inc. filed for bankruptcy protection. Mr. Buckley
has held a variety of other positions, including Vice President, Finance for
OfficeMax, Inc. from 1993 until 1994. From 1990 until 1993, Mr. Buckley was Vice
President and Controller for Chess King, a division of Melville Corp.
John P. Bohman joined our company in February 2000 as Vice President and
General Merchandising Manager. Previously, Mr. Bohman served in various
positions at Ingram Book Company, including Vice President, Sales from June 1999
until February 2000, Vice President, National Accounts from 1997 until 1999, and
Director, National Accounts from 1994 until 1997.
Susan H. Harwood has been Vice President, Chief Information Officer of our
company since November 1998. Ms. Harwood joined our company in 1996 as
Information Systems Project Manager. Ms. Harwood was promoted to manager of
Strategic Systems Planning in 1997 and to Director, Corporate Systems in 1997.
Prior to joining our company, Ms. Harwood was self-employed as an information
systems consultant from 1994 until 1996.
19
<PAGE> 22
Kevin J. Ball became Vice President, Marketing in September 2000. From
August 1995 until September 2000, Mr. Ball was Director of Advertising at
Transworld Entertainment Corp. From June 1991 until August 1995, Mr. Ball was
Director of Marketing and Advertising for F&M Super Drug Stores. From August
1983 until January 1991, Mr. Ball was Advertising Director for Dancer's Fashions
Inc., and from June 1979 until August 1983 he was Advertising Manager for MNS
Distributors.
Matthew F. Ellis has been Vice President, Human Resources of our company
since June 2000. Mr. Ellis served as Vice President, Human Resources of Home
Depot, Eastern Great Lakes Division, from 1999 until 2000. From 1996 until 1999,
Mr. Ellis was Senior Vice President, Human Resources of Factory Card Outlet, and
from 1989 until 1995 he was Vice President, Human Resources of Today's Man. In
April 1999, Factory Card Outlet filed for bankruptcy protection.
Ann Carlano became Vice President, Store Operations of our company in June
2000. Prior to joining our company, Ms. Carlano was Vice President, Store
Operations of Fitigues Inc. from 1996 until 1999 and Vice President, Store
Operations of Mondi International from 1994 until 1996.
Theodore M. Barnhill, Jr. has been a director of our company since November
1999. Since 1978, Mr. Barnhill has been Professor of Finance at The George
Washington University. Since 1995, Mr. Barnhill has been a principal at Finsoft,
Inc.
Bradford R. Klatt has been a director of our company since February 2000.
Since 1993, Mr. Klatt has been the principal of Roseland Property Company, a New
Jersey based, full-service real estate organization founded by Mr. Klatt, which
is actively involved in the acquisition, development and construction of
primarily residential properties throughout the northeastern United States. Mr.
Klatt is also the Managing Member of RoseLink Investors, L.L.C.
Gordon T. Macomber has been a director of our company since November 1999.
Since 1999, Mr. Macomber has served as President and Chief Executive Officer of
NYU Online. From 1998 until 1999, Mr. Macomber was President of the Macmillan
Division of Pearson PLC. From 1995 until 1998, Mr. Macomber was President of the
Macmillan Consumer Division of Viacom Inc. From 1992 until 1995, Mr. Macomber
was Vice President of the Macmillan Computer Publishing Division of Paramount
Communications, Inc.
Steven G. Panagos was appointed Acting Chief Executive Officer of our
company in October 1999 and served in that capacity until Mr. Cumello's
appointment in November 1999. Mr. Panagos has been a director of our company
since November 1999. Since 1997, Mr. Panagos has been a principal at Zolfo
Cooper, LLC, a financial consulting firm, and from 1988 until 1997 he worked at
Zolfo Cooper in various other capacities. Zolfo Cooper provided financial
consulting services to our company.
Mark R. Shenkman has been a director of our company since November 1999.
Mr. Shenkman is the founder and, since 1985, has been the majority shareholder,
President and Chief Investment Officer of Shenkman Capital Management, Inc., an
investment advisory firm. Mr. Shenkman is also the Managing Member of Shenkman
Capital Management, L.L.C. We anticipate that Mr. Shenkman will resign from the
audit committee of the Board of Directors and be replaced by an independent
member of the Board.
Richard H. Weinstein has been a director of our company since February
2000. Mr. Weinstein has been General Counsel and Senior Vice President of
Shenkman Capital Management, Inc. since June 1997. Mr. Weinstein was a corporate
lawyer with the New York law firm of Seward & Kissel from 1996 until 1997, and
Caxton Corporation from 1994 until 1996.
Gwenn S. Winkhaus has been a director of our company since November 1999.
Since 1992, Ms. Winkhaus has been Tax Adviser to Oscar L. Tang at Reich & Tang
Asset Management, L.P., and since 1994, has been Treasurer at KOA Holdings, Inc.
From 1994 until 1995, Ms. Winkhaus was Treasurer of Phoenix Leasing Corporation,
a private company which formerly operated passenger and air freight services. In
January 1996, Phoenix Leasing Corporation sought relief under Chapter 11 of the
U.S. Bankruptcy Code. In April 1996, the Chapter 11 proceeding was converted to
a Chapter 7 case. From 1985 until 1992, Ms. Winkhaus was Senior Tax Manager at
KPMG Peat Marwick LLP.
20
<PAGE> 23
There are no family relationships between any director and executive
officer of our company.
BOARD COMPOSITION
Currently, our Board of Directors consists of eight directors. Our bylaws
provide that the Board may change the number of directors from time to time.
Under our bylaws, vacancies on the Board of Directors may be filled by the
affirmative vote of a majority of the remaining directors, even if the remaining
directors constitute less than a quorum.
Pursuant to our Amended and Restated Certificate of Incorporation, we will
establish a "classified" Board of Directors before our next annual meeting of
shareholders pursuant to which our Board will be divided into three classes of
directors, with each director serving staggered three-year terms. Thus, only
one-third of our directors will be eligible for election at each annual meeting.
To implement the classified structure, two of our directors will be elected to a
one-year term, three will be elected to a two-year term and three will be
elected to a three-year term. Thereafter, directors will be elected for
three-year terms. If the number of directors is changed, any increase or
decrease will be apportioned among the classes so as to maintain or attain a
number of directors in each class as nearly equal as reasonably possible, but no
decrease in the number of directors may shorten the term of any incumbent
director.
A classified board of directors may have the effect of deterring or
delaying any attempt to obtain control of our company by a proxy contest since
any person seeking control would need two separate annual meetings of
shareholders in order to elect a majority of the members of our Board of
Directors, and three meetings to change all directors. In addition, having a
classified Board of Directors may, in some circumstances, deter or delay
mergers, tender offers or other similar transactions which may be favored by
some or a majority of our shareholders.
21
<PAGE> 24
ITEM 6. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation we paid to our Chief
Executive Officer and each of our executive officers whose total salary and
bonus exceeded $100,000 in fiscal year 2000.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-----------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
--------------------------- ----------- --------- -------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Charles R. Cumello
President and Chief Executive
Officer (1)...................... 2000 $ 58,504 -- 400,000 $ 4,558
Steven G. Panagos
Former Acting Chief Executive
Officer (2)...................... 2000 -- -- -- --
Anna L. Currence 2000 $198,000 -- -- $80,850(4)
Former President and Chief 1999 $260,000 $ 3,001 -- $11,418
Executive Officer (3)............ 1998 $ 10,488 -- -- $ 488
Steven A. Pate
Former Secretary, Vice President
of Operations, and Acting Chief 2000 $175,000 $ -- -- $ 7,800
Financial Officer (5)............ 1999 $168,942 $ 9,858 -- $17,931
John R. Sutton 2000 $159,997 -- -- $ 5,850
Former Vice President of 1999 $118,739 -- -- $ 7,800
Merchandising (6)................ 1998 $115,413 -- -- $10,075
Susan H. Harwood 2000 $148,269 $ 5,048 -- $ 7,800
Vice President, Chief Information 1999 $106,655 $10,000 -- $ 1,950
Officer.......................... 1998 $ 74,808 -- -- --
Patrick Grizzell
Director of Store Operations
Former Vice President of Human
Resources (7).................... 2000 $133,462 -- -- $11,855
</TABLE>
---------------
(1) Charles R. Cumello became President and Chief Executive Officer of our
company on November 29, 1999, and he became Chairman of the Board of
Directors in October 2000. Mr. Cumello is entitled to receive an annual
salary of $350,000 pursuant to the terms of his employment agreement. See
"-- Employment Agreements."
(2) Steven G. Panagos became Acting Chief Executive Officer of our company in
October 1999 pursuant to a Management Agreement dated October 7, 1999
between Zolfo Cooper Management, LLC, and our company. Mr. Panagos resigned
as Acting Chief Executive Officer on November 29, 1999 when Mr. Cumello was
appointed as Chief Executive Officer. We did not pay any compensation to Mr.
Panagos for his service to us as Acting Chief Executive Officer, but we did
pay management fees to Zolfo Cooper Management, LLC pursuant to the
Management Agreement. If you would like more information about the
Management Agreement and our relationship with Zolfo Cooper Management, LLC,
see "Item 7 -- Certain Relationships and Related Transactions."
(3) Anna L. Currence joined our company in January 1998 and became Chief
Executive Officer in December 1998. She resigned from our company and from
the Board of Directors on October 6, 1999.
(4) Primarily represents compensation earned by Ms. Currence in her capacity as
a consultant to our company after she resigned as our President and Chief
Executive Officer on October 6, 1999.
22
<PAGE> 25
(5) Steven A. Pate joined our company in February 1998 as Vice President of
Operations. He became Secretary of our company in July 1998 and Acting Chief
Financial Officer in December of 1998. Mr. Pate resigned from our company
effective March 3, 2000.
(6) John R. Sutton became our Vice President of Merchandising in September 1996.
Mr. Sutton's employment with our company was terminated on October 19, 1999.
(7) Patrick Grizzell joined our company in December 1998 as Director of Stores,
and was promoted to Vice President of Human Resources and Training. In June
2000, he became our Director of Store Operations.
OPTION GRANTS DURING FISCAL 2000
During fiscal 2000, we granted options to the executive officers named in
the above summary compensation table as follows:
<TABLE>
<CAPTION>
MARKET VALUE
% OF TOTAL OF SHARES
SHARES OPTIONS GRANTED EXERCISE UNDERLYING
UNDER OPTIONS TO EMPLOYEES IN PRICE OPTIONS ON DATE
NAME GRANTED(#) FISCAL 2000(%) ($/SHARE) OF GRANT($) EXPIRATION DATE
---- ------------- --------------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Charles R. Cumello....... 400,000 95.0% $2.72 $ 1,088,000(1) Nov. 29, 2004
Steven G. Panagos........ -- -- -- -- --
Anna L. Currence......... -- -- -- -- --
Steven A. Pate........... -- -- -- -- --
John R. Sutton........... -- -- -- -- --
Susan H. Harwood......... -- -- -- -- --
Patrick Grizzell......... -- -- -- -- --
</TABLE>
---------------
(1) There was no public market for our common stock as of November 19, 1999, the
date of grant. The amount set forth in this column represents the fair
market value of such shares on the grant date, $2.72 per share, as
determined by our company.
OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding share option
ownership and exercises by the executive officers named in the above summary
compensation table, as well as the number and assumed value of exercisable and
unexercisable options held by those persons as of January 29, 2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN
NUMBER OF UNDERLYING UNEXERCISED THE MONEY OPTIONS
SHARES OPTIONS AT 1/29/00 AT 1/29/00($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Cumello........ -- -- 158,333 341,667 -- --
Steven G. Panagos......... -- -- -- -- -- --
Anna L. Currence.......... -- -- -- -- -- --
Steven A. Pate............ -- -- -- -- -- --
John R. Sutton............ -- -- -- -- -- --
Susan H. Harwood.......... -- -- -- -- -- --
Patrick Grizzell.......... -- -- -- -- -- --
</TABLE>
---------------
(1) The value of an "in-the-money" options represents the difference between the
aggregate estimated fair market value of the shares issuable upon exercise
of the option and the aggregate exercise price of the option. There was no
public market for our common stock as of January 29, 2000. Since the fair
market value of such shares as of January 29, 2000 as determined by our
company was the same as the exercise price of $2.72 per share, such options
are not considered in the money.
23
<PAGE> 26
EMPLOYMENT AGREEMENTS
On November 29, 1999, we entered into a three year employment agreement
with Charles R. Cumello, which provides that Mr. Cumello will serve as our
President and Chief Executive Officer. The employment agreement provides for an
annual salary of $350,000. Commencing with our fiscal year ended January 2000,
Mr. Cumello is also entitled to an annual bonus ranging from $140,000 to
$210,000, if we meet certain EBITDA targets. Pursuant to the employment
agreement, we granted Mr. Cumello options to purchase 400,000 shares of common
stock under our Emergence Bonus and Incentive Plan at an exercise price of $2.72
per share. One-third of the options granted were immediately exercisable,
one-third vested on November 28, 2000 and the remaining one-third will vest
November 28, 2001, provided Mr. Cumello is still employed by our company. If we
terminate Mr. Cumello's employment without cause, we are required to pay Mr.
Cumello his salary for the remainder of the term or for a period of 12 months,
whichever is greater, and the bonus which would have been otherwise payable to
Mr. Cumello for the contract year during which the termination occurs.
STOCK OPTION PLANS
Emergence Bonus and Incentive Plan
Pursuant to our Plan of Reorganization, we established an employee stock
option plan, which we call our Emergence Bonus and Incentive Plan, under which
we may grant options to purchase shares of our common stock to employees,
officers, directors or consultants. Options granted under the plan may be
incentive stock options, within the meaning of Section 422 of the U.S. Internal
Revenue Code of 1986, or non-qualified stock options. Incentive stock options
may be granted only to our officers or employees. The Board of Directors, or a
committee appointed by the Board, will determine the exercise price of the
options. The exercise price of incentive stock options must be equal to or
exceed the fair market value of our common stock on the date of grant. For any
officer or employee who owns more than 10% of the voting power of all classes of
our capital stock, the exercise price of any incentive stock option must equal
or exceed 110% of the fair market value of our common stock on the date of
grant. The maximum number of shares of common stock that may be issued under the
plan is 750,000, and no officer or employee may be granted options to purchase
more than 500,000 shares of common stock during any calendar year. Options
generally must be exercised no later than 10 years after the date of the grant.
As of November 25, 2000, we had granted options to purchase 675,000 shares of
common stock.
Director Option Plan
We have also adopted a stock option plan, which we call our Director Option
Plan, under which we may grant non-qualified stock options to our non-employee
directors. The Board of Directors, or a committee appointed by the Board, will
determine the exercise price of the options. The exercise price of the stock
options must be equal to or exceed the fair market value of our common stock on
the date of grant. The maximum number of shares of common stock that may be
issued under the plan is 600,000. Options generally must be exercised no later
than 10 years after the date of the grant. As of November 25, 2000, we had
granted options to purchase an aggregate of 350,000 shares under the Director
Option Plan.
DIRECTOR COMPENSATION
As compensation for their service to our company as directors, each
non-employee director received options to purchase shares of our common stock
under our Director Option Plan. On March 13, 2000, Mark R. Shenkman, Steven G.
Panagos, Theodore M. Barnhill, Jr., Gwenn S. Winkhaus, Gordon T. Macomber,
Bradford R. Klatt and Richard H. Weinstein each received options to purchase
50,000 shares of our common stock at an exercise price of $2.72 per share, of
which options to purchase 12,500 shares were immediately exercisable. Options to
purchase the remaining 37,500 shares vest in equal one-third increments on each
of March 13, 2001, 2002 and 2003. Directors are reimbursed for reasonable
expenses actually incurred in connection with attending each formal meeting of
the Board of Directors or any committee thereof. No other compensation is paid
to directors.
24
<PAGE> 27
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of our Board of Directors
are Mark R. Shenkman and Gwenn S. Winkhaus. During fiscal 2000, we had no
Compensation Committee. For certain information about Mr. Shenkman, see "Item
7 -- Certain Relationships and Related Transactions."
During fiscal 2000, no executive officer of our company:
- served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such
committee, the board of directors) of another entity, one of whose
executive officers served on our Compensation Committee;
- served as a director of another entity, one of whose executive officers
served on our Compensation Committee; or
- served as a member of the compensation committee (or other board
committee performing similar functions or, in the absence of any such
committee, the board of directors) of another entity, one of whose
executive officers served as a director of our company.
25
<PAGE> 28
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Subsequent to our bankruptcy filing on July 14, 1998, Royalty Books
Associates, LLC, or Royalty Books, purchased an aggregate of $17.8 million of
general unsecured claims from various creditors of our company. Pursuant to our
Plan of Reorganization, Royalty Books is entitled to receive 1,486,671 shares of
our common stock, representing approximately 35.0% of our outstanding shares of
common stock, assuming that the total number of shares deemed to be outstanding
as of November 25, 2000 was 4,378,050. It is likely that the percentage of
outstanding shares owned by each shareholder will change as a result of the
number of shares ultimately issued. Such percentage change could be significant.
See "Item 4. -- Security Ownership of Certain Beneficial Owners and Management."
We have granted certain demand and incidental registration rights to Royalty
Books with respect to the shares of common stock issued pursuant to the Plan of
Reorganization. The Managing Member of Royalty Books is Shenkman Capital
Management, L.L.C., whose Managing Member is Mark R. Shenkman, a director of our
company. Richard H. Weinstein, a director of our company, is the General Counsel
and Vice President of Shenkman Capital Management Inc., an affiliate of Shenkman
Capital Management, L.L.C.
In March 2000, Shenkman Capital Management, L.L.C. purchased in our private
placement a subordinated promissory note of Crownbooks.com in the principal
amount of $162,500 and warrants to purchase 59,743 shares of our common stock at
an exercise price of $2.72 per share. Mark R. Shenkman, a director of our
company, is the Managing Member of Shenkman Capital Management L.L.C. Shenkman
Capital Management L.L.C. is the Managing Member of Royalty Books.
In July 1998, we engaged Zolfo Cooper, LLC as special financial advisors
and bankruptcy consultants to assist us in restructuring our business and
developing, negotiating and confirming our Plan of Reorganization. On October 7,
1999, we entered into a Management Agreement with Zolfo Cooper Management, LLC,
an affiliate of Zolfo Cooper, LLC, under which Zolfo Cooper Management, LLC
agreed to perform management services for our company. Pursuant to the
Management Agreement, Steven G. Panagos, a director of our company and a
principal of Zolfo Cooper, LLC, became our Acting Chief Executive Officer. Mr.
Panagos resigned as our Acting Chief Executive Officer on November 29, 1999, but
continues to serve as a director of our company. During fiscal 1999 and fiscal
2000, we made total payments of $0.8 million and $0.9 million, respectively, to
Zolfo Cooper, LLC and Zolfo Cooper Management, LLC. In connection with the
Management Agreement, we also issued to Zolfo Cooper, LLC warrants to purchase
150,000 shares of common stock at an exercise price of $2.72 per share. These
warrants expire on October 1, 2006.
In March 2000, Zolfo Cooper, LLC purchased in our private placement a
subordinated promissory note of Crownbooks.com in the principal amount of
$100,000 and warrants to purchase 36,765 shares of our common stock at an
exercise price of $2.72 per share. Steven G. Panagos, a director of our company,
is a principal of Zolfo Cooper, LLC.
In March 2000, RoseLink Investors LLC purchased in our private placement a
subordinated promissory note of Crownbooks.com in the principal amount of
$650,000 and warrants to purchase 238,971 shares of our common stock at an
exercise price of $2.72 per share. Bradford R. Klatt, a director of our company,
is the Managing Member of RoseLink Investors LLC.
ITEM 8. LEGAL PROCEEDINGS.
On July 14, 1998, we and our subsidiaries filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware. On October 7, 1999, the Bankruptcy Court
confirmed our First Amended Joint Chapter 11 Plan of Reorganization dated June
30, 1999, as modified. Pursuant to the Plan of Reorganization, we were required
to file with the Bankruptcy Court objections to the proof of claims filed by our
former creditors by March 10, 2000. We filed objections to certain proofs of
claim on or before March 10, 2000, and received extensions from the Bankruptcy
Court to file objections to other claims. We have filed with the Bankruptcy
Court a request for an extension until January 10, 2001 to file objections to
the remaining proofs of claim. As of November 25, 2000, we had filed most of our
objections. If the disputed amounts are allowed by the Bankruptcy Court, we will
issue additional shares of common stock to the creditors in satisfaction of
their claims. See "Item 1 -- Business -- Bankruptcy Proceedings."
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<PAGE> 29
Other than our bankruptcy case and ordinary and routine litigation
incidental to our business operations, we are not involved in any pending legal
proceedings.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Old Common Stock. As of November 11, 1999, the effective date of our Plan
of Reorganization, all of the shares of common stock outstanding prior to the
effective date were cancelled pursuant to our Plan of Reorganization.
New Common Stock. On November 11, 1999, pursuant to our Plan of
Reorganization, we were authorized to issue an aggregate of 5.0 million shares
of common stock to the creditors of our company. As of November 25, 2000, there
were 4,378,050 shares of our common stock deemed to be outstanding. The
4,378,050 shares deemed to be outstanding are subject to adjustment as we
reconcile outstanding claims from our bankruptcy case. As a result, the total
number of shares issued could be materially less or more than the number of
shares currently deemed to be outstanding. We expect to issue these shares prior
to the time this Registration Statement becomes effective.
There is no current public trading market for our new common stock. We are
applying to have our common stock listed on the American Stock Exchange. There
can be no assurance that our application to list our common stock on the
American Stock Exchange will be accepted. If it is not, we expect our common
stock to be quoted on the OTC Bulletin Board. Whether our common stock is listed
on the American Stock Exchange or quoted on the OTC Bulletin Board, there can be
no assurance that an active and liquid trading market will develop.
SHARES ELIGIBLE FOR FUTURE SALE
All of our shares of common stock will be issued in reliance upon Section
1145(a) of the Bankruptcy Code. Such shares will be considered to have been sold
in a public offering pursuant to Section 1145(c). Accordingly, when such shares
are issued, none will constitute "restricted securities" as defined in Rule 144
under the Securities Act of 1933, as amended, and such shares will be freely
saleable under the Securities Act, unless the holders thereof are considered to
be "underwriters."
All of the shares of common stock issuable upon the exercise of warrants
sold in connection with our private placement or otherwise are "restricted
securities" within the meaning of Rule 144 since such shares were issued and
sold by us in a private transaction in reliance upon an exemption from
registration under the Securities Act. The shares of common stock issued upon
exercise of such warrants may be sold only if they are registered under the
Securities Act or unless an exemption from registration, such as the exemption
provided by Rule 144 under the Securities Act, is available.
In general, under Rule 144 a person who owns and fully pays for shares that
were acquired from the issuer or an affiliate of the issuer at least one year
prior to the proposed sale is entitled to sell, within any three-month period, a
number of shares that does not exceed the greater of 1% of the then outstanding
shares of common stock (approximately 43,780 shares assuming that 4,378,050
shares are deemed to be outstanding as of November 25, 2000) or the average
weekly trading volume in the common stock during the four calendar weeks
preceding the date on which notice of that sale is filed, subject to certain
additional public information and notification requirements. In addition, if the
shares were acquired from the issuer or an affiliate of the issuer at least two
years prior to the proposed sale, a person who has not been an affiliate of the
issuer during the preceding three months is entitled to sell those shares under
Rule 144(k) without regard to the requirements described above.
As of November 25, 2000, options to purchase a total of 1,146,140 shares of
common stock were outstanding under the Emergence Bonus and Incentive Plan, the
Director Option Plan and under non-plan stock options, of which options to
purchase 425,306 shares are currently exercisable.
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<PAGE> 30
As of November 25, 2000, 1,620,590 shares of common stock were issuable
upon the exercise of outstanding warrants.
Some holders of our common stock have rights to have their shares
registered for resale under the Securities Act. See "Description of Registrant's
Securities to be Registered -- Registration Rights."
Approximately 180 days after the effectiveness of this registration
statement, we intend to file a registration statement on Form S-8 under the
Securities Act to register all of the shares of common stock reserved for future
issuance under the Emergence Bonus and Incentive Plan and the Director Option
Plan. Based on the number of shares reserved for issuance as of November 25,
2000, this registration statement would cover approximately 1,350,000 shares.
That registration statement will automatically become effective upon filing.
Accordingly, shares issued upon the exercise of stock options granted under our
stock option plans will be eligible for resale in the public market from time to
time, subject to vesting restrictions.
HOLDERS
As of November 25, 2000, assuming the approval by the Bankruptcy Court of
all outstanding and unresolved general unsecured claims, there would be
approximately 400 record holders of our new common stock.
DIVIDENDS
We have not declared or paid any cash dividends on our common stock, and we
do not anticipate declaring or paying any cash dividends on our common stock for
the foreseeable future. We intend to retain any future earnings to repay
indebtedness or finance the growth and development of our business. Any
determination as to the payment of dividends will be at the discretion of our
Board of Directors and will depend on, among other things, our operating
results, financial condition, capital requirements, contractual provisions which
restrict or prohibit the declaration of dividends and such other factors as our
Board of Directors may deem relevant.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Emergence from Bankruptcy
Pursuant to our Plan of Reorganization, we are authorized to issue up to
5.0 million shares of our new common stock in satisfaction of allowed claims
against us by our general unsecured creditors. As of November 25, 2000, there
were 4,378,050 shares of our new common stock deemed to be outstanding. The
number of shares deemed to be outstanding is subject to adjustment as we
reconcile outstanding claims from our general unsecured creditors. As a result,
the total number of shares issued could be materially less or more than the
number of shares currently deemed to be outstanding, but will not be in excess
of 5.0 million shares. Assuming the approval by the Bankruptcy Court of all
outstanding and unresolved general unsecured claims as of November 25, 2000,
there would be approximately 400 holders of record as of such date. We expect to
issue these shares prior to the time this Registration Statement becomes
effective. Based upon the exemption provided by Section 1145 of the Bankruptcy
Code, we believe that none of these securities are required to be registered
under the Securities Act of 1933, as amended, or under any state or local law
requiring registration for offer or sale of a security or registration of
licensing of an issuer of, underwriter of, or broker or dealer in, such
securities, in connection with their issuance and distribution pursuant to the
Plan of Reorganization. If you would like more information about the 4,378,050
shares of common stock deemed to be outstanding, see "Item 9 -- Market Price of
and Dividends on the Registrant's Common Equity and Related Stockholder
Matters -- Market Information -- New Common Stock."
Private Placement
In March 2000, we and Crownbooks.com raised $4.0 million through the
private placement of units consisting of (i) a three-year 6% subordinated
promissory note of Crownbooks.com in the principal amount of $500,000, and (ii)
a three-year warrant to purchase 183,824 shares of common stock of our company
at an
28
<PAGE> 31
exercise price of $2.72 per share. If you want more information about our
private placement, please see our discussion in "Item 2 -- Financial
Information -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Private Placement."
The sale of the securities sold in the private placement was made pursuant
to an exemption from the registration provisions of the Securities Act of 1933,
as amended, set forth in Section 4(2) thereof as a transaction by an issuer not
involving a public offering.
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<PAGE> 32
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
GENERAL
Our authorized capital stock consists of 10.0 million shares of common
stock, par value $0.01 per share, and 1.0 million shares of preferred stock, par
value $0.01 per share. As of November 25, 2000, there were 4,378,050 shares of
common stock deemed to be outstanding and no shares of preferred stock
outstanding. If all of our outstanding options and warrants are exercised, we
will have an additional 2,766,730 shares of common stock outstanding. Our
Amended and Restated Certificate of Incorporation prohibits us from issuing
non-voting equity securities and does not contain any redemption or sinking fund
provisions. If you would like more information about the 4,378,050 shares of
common stock deemed to be outstanding, see "Item 9 -- Market Price of and
Dividends on the Registrant's Common Equity and Related Stockholder Matters --
Market Information -- New Common Stock."
COMMON STOCK
When issued, all of our outstanding shares of common stock will be validly
issued, fully paid and non-assessable. The holders of common stock are entitled
to such dividends (whether payable in cash, property or capital stock) as may be
declared from time to time by our Board of Directors from funds, property or
stock legally available therefor, and are entitled after payment of all prior
claims, to receive all of our assets upon the liquidation, dissolution or
winding up of our company. Generally, holders of common stock have no
redemption, conversion or preemptive rights to purchase or subscribe for our
securities.
Except as required by law, the holders of common stock are entitled to vote
on all matters as a single class, and each holder of common stock is entitled to
one vote for each share of common stock owned. Holders of common stock do not
have cumulative voting rights. Our common stock is not currently traded on any
securities exchange. We are applying to have our common stock listed on the
American Stock Exchange. However, there is no guarantee that we will be
successful in this effort, or, even if we are, that an active and liquid trading
market will develop.
PREFERRED STOCK
Under our Amended and Restated Certificate of Incorporation, our Board of
Directors is authorized, subject to certain limitations prescribed by law, to
issue shares of preferred stock in one or more classes or series and to fix the
designations, powers, preferences and relative participation, option or other
special rights and qualifications, limitations or restrictions thereof,
including the dividend rate, conversion or exchange rights, redemption price and
liquidation preference, of any such class or series. In addition, our Board of
Directors may fix the number of shares constituting any such class or series,
and increase or decrease the number of shares of any such class or series, but
not below the number of outstanding shares of any such class or series. The
rights of holders of our common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock. We have no current plans to
issue preferred stock.
REGISTRATION RIGHTS
Royalty Books
We have granted demand and incidental registration rights to Royalty Books
covering the shares of common stock issued to it pursuant to the Plan of
Reorganization. The demand registration rights we granted to Royalty Books are
exercisable at any time and expire on November 11, 2004. The incidental
registration rights we granted to Royalty Books are exercisable at any time in
connection with certain registration statements we file.
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<PAGE> 33
Private Placement
We also have granted demand and incidental registration rights covering a
total of 1,470,590 shares of our common stock to the holders of the warrants we
issued in our private placement. The demand registration rights are exercisable
at any time commencing one year after our common stock is listed on a national
securities exchange or quoted on the Nasdaq National Market or the Nasdaq
SmallCap Market. The incidental registration rights we granted to the holders of
our warrants are exercisable at any time in connection with certain registration
statements that we file. The demand and incidental registration rights expire on
March 22, 2003.
Zolfo Cooper, LLC
We also have granted incidental registration rights to Zolfo Cooper, LLC
covering the 150,000 shares of common stock underlying the warrants we issued to
Zolfo Cooper, LLC in connection with the Management Agreement. These
registration rights are exercisable at any time in connection with certain
registration statements that we file.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, through its certificate of incorporation, to eliminate the
personal liability of its directors and officers to the corporation or its
stockholders, so long as the director or officer acted in good faith and in a
manner he or she reasonably believed to be in the best interests of the
corporation, and, with respect to criminal action, had no reasonable cause to
believe his or her conduct was unlawful. Our amended and restated certificate of
incorporation exonerates our directors from monetary liability to the fullest
extent permitted by this statutory provision but does not restrict the
availability of non-monetary and other equitable relief.
Our amended and restated certificate of incorporation requires us to
indemnify each director and officer against all expense, liability and loss
actually and reasonably incurred or suffered in connection with any action, suit
or proceeding (as defined therein, which includes any threatened proceeding,
whether civil, criminal, administrative, or investigative) to the maximum extent
permitted, and in the manner prescribed by, the General Corporation Law of the
State of Delaware and any other applicable law. Our amended and restated
certificate of incorporation also requires us to advance expenses to such
persons, provided however, that such person shall deliver an undertaking to us
to return such advances in the event of an adverse ruling. We maintain a $10.0
million directors' and officers' liability insurance policy.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted for directors, officers and controlling
persons of our company pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our audited consolidated financial statements for fiscal 2000, 1999, and
1998 and our unaudited financial statements for the six months ended July 29,
2000, are set forth at the end of this Registration Statement and begin on page
F-1.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Our former independent auditors, Arthur Andersen LLP, resigned on June 15,
1999. During fiscal 1998 and fiscal 1999, and all subsequent interim periods
through June 15, 1999 (the date of resignation), we had no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
During fiscal 1998, our prior management team implemented a new computer
system to manage our accounts payable and inventory operations. This new
computer system was not adequately tested, and was not compatible with our
computerized point-of-sale system at the store level. Due to difficulties
associated with the adoption of this new computer system, our internal control
system was compromised in certain areas. For example, during fiscal 1998 and
1999, we were unable to accurately and timely reconcile our purchases from and
amounts payable to each of our vendors, and had difficulty maintaining inventory
levels at our stores. In addition, reconciliations of certain key ledger
accounts, including cash, accounts payable and inventory were not performed on a
timely basis during fiscal 1998 and the adjustment required to reconcile the
general ledger to the physical inventory at year-end was unusually high. A
significant manual effort was required in connection with the fiscal 1998
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. Arthur Andersen LLP advised us in both
April 1998 and April 1999 that material weaknesses and significant deficiencies
existed in our internal controls that could adversely affect our ability to
record, process, summarize and report financial data consistent with the
assertions of management in its financial statements. As a result, during fiscal
1999 Arthur Andersen LLP determined that they could not complete a review of our
quarterly financial statements in accordance with the American Institute of
Certified Public Accountant guidelines. Accordingly, they did not issue a report
on any of our interim financial information.
Arthur Andersen LLP's report on our financial statements for fiscal 1999
included the following going concern qualification:
"The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses in the last three fiscal years, and has a
net capital deficiency of $30.2 million at January 30, 1999. In addition,
as described in Note 1 to the accompanying financial statements, in July
1998 the Company filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code. These matters among others, raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters, including its
intent to file a plan of reorganization that will be acceptable to the
Court and the Company's creditors, are also described in Note 1. In the
event a plan of reorganization is accepted, continuation of the business
thereafter is dependent on the Company's ability to achieve successful
future operations. The accompanying consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded assets amounts or the amounts and
classifications of liabilities that might be necessary should the Company
be unable to continue as a going concern."
On June 29, 1999, our Board of Directors approved Grant Thornton LLP as our
new independent auditors. During the most recent two fiscal years and subsequent
interim period preceding the appointment of Grant Thornton LLP as our auditors,
we had not consulted Grant Thornton LLP regarding:
- the application of accounting principles to a specified transaction,
either completed or proposed;
- the type of opinion that might be rendered on our financial statements;
or
- any matter that was either the subject of a disagreement or a reportable
event.
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<PAGE> 35
We have taken steps which we believe have improved our internal controls
and procedures. However, we continue to experience problems with our management
information systems and therefore are having difficulty in timely reconciling
our inventory and accounts payable. Accordingly, a significant amount of manual
effort is still required to reconcile these accounts. We believe our automated
internal controls and procedures would benefit from further improvements. We are
continuing the process of improving our internal controls and procedures, and
are committed to investing in our information systems in order to meet the needs
of our business.
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<PAGE> 36
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Index of Financial Statements
The following financial statements of our company are included at the
indicated page in this Registration Statement:
Audited Consolidated Financial Statements:
<TABLE>
<S> <C>
Report of Grant Thornton LLP, Independent Certified Public
Accountants............................................... F-1
Report of Arthur Andersen, LLP, Independent Public
Accountants............................................... F-2
Consolidated Balance Sheets as of January 29, 2000 and
January 30, 1999.......................................... F-3
Consolidated Statements of Operations for the years ended
January 29, 2000, January 30, 1999 and January 31, 1998... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended January 29, 2000, January 30, 1999 and
January 31, 1998.......................................... F-5
Consolidated Statements of Cash Flows for the years ended
January 29, 2000, January 30, 1999 and January 31, 1998... F-6
Notes to Consolidated Financial Statements.................. F-8
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets for the six months ended July
29, 2000 and the fiscal year ended January 29, 2000....... F-20
Consolidated Statements of Operations for the six months
ended July 29, 2000 and July 31, 1999..................... F-21
Consolidated Statements of Cash Flows for the six months
ended July 29, 2000 and July 31, 1999..................... F-22
Notes to Consolidated Financial Statements.................. F-23
</TABLE>
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<PAGE> 37
(b) Schedules have been omitted because the information is not required or
has been provided elsewhere in this financial statement. The following exhibits
are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
2.1 First Amended Disclosure Statement for Debtors' First
Amended Joint Chapter 11 Plan of Reorganization dated August
18, 1999.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
4.1 Form of certificate of common stock.
10.1 Revolving Credit Facility Agreement dated July 15, 1998,
among Crown Books Corporation, Foothill Capital Corporation
and Paragon Capital, LLC.
10.2 First Amendment to Loan and Security Agreement dated August
17, 1998, among Crown Books Corporation, Foothill Capital
Corporation and Paragon Capital LLC.
10.3 Second Amendment to Loan and Security Agreement dated
September 9, 1998, among Crown Books Corporation, Foothill
Capital Corporation and Paragon Capital LLC.
10.4 Post-Confirmation Credit Agreement and Ratification and
Third Amendment Agreement dated November 11, 1999, among
Crown Books Corporation, Foothill Capital Corporation and
Paragon Capital LLC.
10.5 Registration Rights Agreement dated November 11, 1999,
between Crown Books Corporation and Royalty Books
Associates, LLC.
10.6 Memorandum of Understanding dated November 11, 1999, by and
between Crown Books Corporation and Ingram Book Company.(1)
10.7 Security Agreement dated November 9, 1999, between Ingram
Book Company and Crown Books Corporation.
10.8 Subordination and Intercreditor Agreement dated November 11,
1999, by and between Ingram Book Company and Paragon Capital
L.L.C.
10.9 Emergence Bonus and Incentive Plan.
10.10 Director Option Plan.
10.11 Employment Agreement between Crown Books Corporation and
Charles R. Cumello dated November 29, 1999.
10.12 Lease for Principal Executive Offices: Maryland Multi-Tenant
Industrial Lease; Inglewood Tech Center II dated April 25,
2000.
10.13 Form of Warrant to purchase common stock of Crown Books
Corporation.
10.14 Form of Promissory Note of Crownbooks.com, Inc.
10.15 Form of Registration Rights Agreement by and between Crown
Books Corporation and the investors in the private
placement.
10.16 Form of Management Agreement dated October 7, 1999, between
Crown Books Corporation and Zolfo Cooper Management, LLC.
16.1 Letter re change in certifying accountant.
27.1 Financial Data Schedule.
</TABLE>
---------------
(1) (This agreement is filed in redacted form as it is subject to a request for
confidentiality submitted to the Securities and Exchange Commission.)
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<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
CROWN BOOKS CORPORATION
By: /s/ CHARLES R. CUMELLO
------------------------------------
Charles R. Cumello
Chairman of the Board, President
and Chief Executive Officer
Date: December 8, 2000
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<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT TITLE NUMBER
------- ------------- ------
<C> <S> <C>
2.1 First Amended Disclosure Statement for Debtors' First
Amended Joint Chapter 11 Plan of Reorganization dated August
18, 1999.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Bylaws.
4.1 Form of certificate of common stock.
10.1 Revolving Credit Facility Agreement dated July 15, 1998,
among Crown Books Corporation, Foothill Capital Corporation
and Paragon Capital, LLC.
10.2 First Amendment to Loan and Security Agreement dated August
17, 1998, among Crown Books Corporation, Foothill Capital
Corporation and Paragon Capital, LLC.
10.3 Second Amendment to Loan and Security Agreement dated
September 9, 1998, among Crown Books Corporation, Foothill
Capital Corporation and Paragon Capital, LLC.
10.4 Post-Confirmation Credit Agreement and Ratification and
Third Amendment Agreement dated November 11, 1999, among
Crown Books Corporation, Foothill Capital Corporation and
Paragon Capital, LLC.
10.5 Registration Rights Agreement dated November 11, 1999,
between Crown Books Corporation and Royalty Books
Associates, LLC.
10.6 Memorandum of Understanding dated November 11, 1999, by and
between Crown Books Corporation and Ingram Book Company.(1)
10.7 Security Agreement dated November 9, 1999, between Ingram
Book Company and Crown Books Corporation.
10.8 Subordination and Intercreditor Agreement dated November 11,
1999, by and between Ingram Book Company and Paragon Capital
L.L.C.
10.9 Emergence Bonus and Incentive Plan.
10.10 Director Option Plan.
10.11 Employment Agreement between Crown Books Corporation and
Charles R. Cumello dated November 29, 1999.
10.12 Lease for Principal Executive Offices: Maryland Multi-Tenant
Industrial Lease; Inglewood Tech Center II dated April 25,
2000.
10.13 Form of Warrant to purchase common stock of Crown Books
Corporation.
10.14 Form of Promissory Note of Crownbooks.com, Inc.
10.15 Form of Registration Rights Agreement by and between Crown
Books Corporation and the investors in the private
placement.
10.16 Form of Management Agreement dated October 7, 1999, between
Crown Books Corporation and Zolfo Cooper Management, LLC.
16.1 Letter re change in certifying accountant.
27.1 Financial Data Schedule.
</TABLE>
---------------
(1) (This agreement is filed in redacted form as it is subject to a request for
confidentiality submitted to the Securities and Exchange Commission.)
37
<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Crown Books Corporation
We have audited the consolidated balance sheet of Crown Books Corporation
(a Delaware corporation) and Subsidiaries ("the Company") as of January 29, 2000
(Reorganized Company), and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the three month period ended
January 29, 2000 (Reorganized Company) and the nine month period ended October
30, 1999 (Predecessor Company). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Crown Books Corporation and Subsidiaries as of January 30, 1999
(Predecessor Company) and for the years ended January 30, 1999 and January 31,
1998 (Predecessor Company), were audited by other auditors whose report dated
April 28, 1999, on those statements included an explanatory paragraph describing
conditions that raised substantial doubt about the Company's ability to continue
as a going concern.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
On November 11, 1999, the Company emerged from bankruptcy. As discussed in
Notes A, B and C to the consolidated financial statements, effective October 30,
1999, the Company emerged from bankruptcy and in accounting for the
reorganization adopted "fresh start reporting" as required by Statement of
Position (SOP 90-7), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, issued by the American Institute of Certified Public
Accountants. As a result of the reorganization and adoption of fresh start
reporting, the January 29, 2000 consolidated balance sheet is not comparable to
the Company's January 30, 1999 consolidated balance sheet since it presents the
consolidated financial position of the reorganized entity.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Crown Books
Corporation and Subsidiaries at January 29, 2000, (Reorganized Company) and the
consolidated results of their operations and their consolidated cash flows for
the three month period ended January 29, 2000 (Reorganized Company) and the nine
month period ended October 30, 1999 (Predecessor Company), in conformity with
accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Baltimore, Maryland
May 31, 2000
F-1
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Crown Books Corporation:
We have audited the accompanying consolidated balance sheet of Crown Books
Corporation (a Delaware corporation, and subsidiaries as of January 30, 1999
(Predecessor Company), and the related statements of operations, stockholders'
(deficit) equity, and cash flows for each of the two fiscal years in the period
ended January 30, 1999 (Predecessor Company). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Crown Books Corporation and
subsidiaries as of January 30, 1999 (Predecessor Company) and the results of
their operations and their cash flows for each of the two fiscal years in the
period ended January 30, 1999 (Predecessor Company) in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses in the last three fiscal years, and has a net
capital deficiency of $30.2 million at January 30, 1999 (Predecessor Company).
In addition, as described in Note A to the accompanying financial statements, in
July 1998 the Company filed a voluntary petition for relief under Chapter 11 of
the U.S. Bankruptcy Code. These matters among others, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters, including its intent to file a plan of
reorganization that will be acceptable to the Court and the Company's creditors,
are also described in Note A. In the event a plan of reorganization is accepted,
continuation of the business thereafter is dependent on the Company's ability to
achieve successful future operations. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
As discussed in Note B to the consolidated financial statements, in fiscal
1998 the Company changed its method of accounting for purchased computer
software costs.
Washington, D.C.
April 28, 1999
/s/Arthur Andersen LLP
F-2
<PAGE> 42
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 29, 2000 AND JANUARY 30, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
---------------- ----------------
JANUARY 29, 2000 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. 2,616 $ 3,298
Accounts receivable.................................... 2,462 85
Merchandise inventories................................ 55,799 57,023
Other current assets................................... 2,305 706
------- -------
Total current assets.............................. 63,182 61,112
PROPERTY AND EQUIPMENT -- AT COST
Furniture and fixtures................................. 11,828 26,761
Leasehold improvements................................. 1,178 8,105
------- -------
13,006 34,866
Less accumulated amortization and depreciation......... 242 23,787
------- -------
12,764 11,079
OTHER ASSETS................................................ 449 334
------- -------
$76,395 $72,525
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable -- trade.............................. $14,097 $13,258
Line-of-credit/debtor-in-possession financing.......... 26,095 17,881
Accrued expenses
Salaries and benefits................................ 1,266 2,553
Taxes, other than income............................. 2,450 1,774
Other................................................ 9,042 2,451
Gift certificates liabilities.......................... 3,615 5,218
Due to affiliate....................................... -- 58
------- -------
Total current liabilities......................... 56,565 43,193
LIABILITIES SUBJECT TO COMPROMISE........................... -- 59,542
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, par value $.01 per share; 20,000,000
shares authorized, 5,000,000 and 5,612,611 shares
issued and outstanding in 2000 and 1999,
respectively......................................... 50 56
Additional paid-in capital............................. 20,550 43,809
Accumulated deficit.................................... (770) (68,619)
Treasury stock, 324,138 shares of common stock at
cost................................................. -- (5,456)
------- -------
19,830 (30,210)
------- -------
$76,395 $72,525
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 43
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS INDICATED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
---------------- ------------------------------------------------------
THREE NINE YEAR ENDED
MONTHS ENDED MONTHS ENDED -----------------------------------
JANUARY 29, 2000 OCTOBER 30, 1999 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES
Sales......................... $58,524 $125,901 $216,613 $297,505
Interest and other income..... (16) 17 212 290
------- -------- -------- --------
58,508 125,918 216,825 297,795
EXPENSES
Cost of sales................. 41,047 90,420 162,459 212,141
Store occupancy and
warehousing................. 6,857 19,039 41,202 48,356
Selling and administrative.... 7,971 22,016 41,264 68,046
Depreciation and
amortization................ 242 2,049 3,957 5,809
Interest expense.............. 777 1,719 2,064 1,497
Write-off of impaired
assets...................... -- -- -- 4,275
Closed store charge
(reversal).................. -- -- -- (1,634)
------- -------- -------- --------
56,894 135,243 250,946 338,490
------- -------- -------- --------
Income (loss) before
reorganization costs, non
operating cost, net effect
of the change in accounting
method and income tax....... 1,614 (9,325) (34,121) (40,695)
REORGANIZATION COSTS............... 1,991 2,736 31,889 --
NON OPERATING EXPENSES (INCOME).... 393 (973) -- --
CHANGES IN ACCOUNTING UNDER FRESH
START REPORTING.................. -- (3,532) -- --
------- -------- -------- --------
Loss before income tax........ (770) (7,556) (66,010) (40,695)
INCOME TAX BENEFIT................. -- -- -- 15,016
VALUATION ALLOWANCE FOR DEFERRED
TAX ASSET........................ -- -- -- (22,971)
------- -------- -------- --------
NET LOSS........................... $ (770) $ (7,556) $(66,010) $(48,650)
======= ======== ======== ========
PER SHARE DATA:
Basic loss per share.......... $ (.15) (A) (A) (A)
Diluted loss per share........ (.15) (A) (A) (A)
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS
OUTSTANDING:
Basic......................... 5,000 (A) (A) (A)
Diluted....................... 5,000 (A) (A) (A)
</TABLE>
---------------
(A) Earnings per share is not presented for the Predecessor Company because such
presentation would not be meaningful. The Predecessor Company stock was
canceled under the plan of reorganization and the new stock was issued
following consummation of the plan.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 44
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIODS INDICATED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
---------------- -------------------------------------------------------
THREE NINE YEAR ENDED
MONTHS ENDED MONTHS ENDED -----------------------------------
JANUARY 29, 2000 OCTOBER 30, 1999 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
COMMON STOCK:
Balance, beginning of period.... $ 50 $ 56 $ 56 $ 56
Fresh start revaluation......... -- (6) -- --
------- -------- -------- -------
Balance, end of period.......... $ 50 $ 50 $ 56 $ 56
======= ======== ======== =======
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period.... $20,550 $ 43,809 $ 43,809 $43,809
Fresh start revaluation......... -- (23,259) -- --
------- -------- -------- -------
Balance, end of period.......... $20,550 $ 20,550 $ 43,809 $43,809
======= ======== ======== =======
(ACCUMULATED DEFICIT) RETAINED
EARNINGS:
Balance, beginning of period.... $ -- $(68,619) $ (2,609) $46,041
Cancellation of liabilities
subject to compromise........ -- 53,932 -- --
Fresh start revaluation......... -- 22,243 -- --
Net loss........................ (770) (7,556) (66,010) (48,650)
------- -------- -------- -------
Balance, end of period.......... $ (770) $ -- $(68,619) $(2,609)
======= ======== ======== =======
TREASURY STOCK:
Balance, beginning of period.... $ -- $ (5,456) $ (5,456) $(5,451)
Fresh start revaluation......... -- 5,456 -- --
Acquisition of treasury stock... -- -- -- (5)
------- -------- -------- -------
Balance, end of period............ $ -- $ -- $ (5,456) $(5,456)
======= ======== ======== =======
SHARES OF COMMON STOCK
OUTSTANDING:
Balance, beginning and end of
period....................... 5,000 5,289 5,289 5,289
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 45
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS INDICATED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
---------------- ------------------------------------------------------
THREE NINE YEAR ENDED
MONTHS ENDED MONTHS ENDED -----------------------------------
JANUARY 29, 2000 OCTOBER 30, 1999 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................. $ (770) $ (7,556) $(66,010) $(48,650)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities Depreciation
and amortization................... 242 2,049 3,957 5,809
Reversal of closed stores and
restructuring charge............. -- -- -- (1,634)
Valuation allowance for deferred
tax asset........................ -- -- -- 22,971
Provision for impaired assets...... -- -- -- 4,275
Interest in excess of capital loan
payments......................... -- -- -- 41
Loss on disposal of fixed assets... 519 -- 8,813 1,205
Changes in assets and liabilities
Accounts receivable.............. (783) (1,594) 5,870 2,825
Merchandise inventories.......... 8,695 (7,471) 22,434 30,579
Prepaid and refundable income
taxes......................... -- -- 584 3,218
Other current assets............. (635) (964) 2,711 (515)
Other assets..................... 283 (398) (34) (25)
Accounts payable -- trade........ (6,028) 6,867 (40,838) (691)
Accrued expenses................. 2,942 (3,420) (18,802) 2,856
Due to affiliate................. -- (58) (360) 205
Deferred income taxes............ -- -- -- (13,737)
------- --------- -------- --------
Net cash provided by (used in)
operating activities before
reorganization items........ 4,465 (12,545) (81,675) 8,732
Reorganization items:
Reserve for closed stores and
restructuring............... -- -- (5,814) (1,577)
Accounts payable.............. -- -- 30,555 --
Closed store reserves......... -- -- 17,957 --
Court approved claims paid-in
bankruptcy.................. -- (755) -- --
Other......................... -- -- 11,030 --
------- --------- -------- --------
Net cash provided by (used in)
operating activities after
reorganization items........ 4,465 (13,300) (27,947) 7,155
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................. (35) (26) (514) (9,323)
------- --------- -------- --------
Net cash used in investing
activities.................. (35) (26) (514) (9,323)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit
facilities......................... (4,846) 13,060 17,881 --
Purchase of treasury stock........... -- -- -- (5)
------- --------- -------- --------
Net cash provided by (used in)
financing activities........ (4,846) 13,060 17,881 (5)
------- --------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 46
CROWN BOOKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
---------------- ------------------------------------------------------
THREE NINE YEAR ENDED
MONTHS ENDED MONTHS ENDED -----------------------------------
JANUARY 29, 2000 OCTOBER 30, 1999 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET DECREASE IN CASH AND CASH
EQUIVALENTS................. (416) (266) (10,580) (2,173)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD............................ 3,032 3,298 13,878 16,051
------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................... $ 2,616 $ 3,032 $ 3,298 $ 13,878
======= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid (refunded) during the
period for:
Interest........................... $ 777 $ 1,719 $ 2,064 $ 1,497
Income taxes (refund).............. -- -- -- (4,445)
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Write-off book value of fixed assets
to restructuring and closed store
reserves........................... $ -- $ -- $ -- $ 4,956
Cancellation of liabilities subject
to compromise upon emergence from
bankruptcy......................... -- 53,932 -- --
Cancellation of Predecessor and
issuance of Reorganized Company
stock in conjunction with emergence
from bankruptcy.................... -- 23,265 -- --
Revaluation of assets in conjunction
with fresh start reporting......... -- 4,435 -- --
Revaluation of retained earnings to
reflect fresh start reporting...... -- 22,243 -- --
Cancellation of treasury stock in
conjunction with emergence from
bankruptcy......................... -- 5,456 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 47
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE A -- GENERAL
The Company is engaged in the business of operating discount retail
bookstores in the United States. Its stores offer books, newspapers, magazines
and related items. At January 29, 2000, the Company operated 91 stores in five
geographic markets (Washington, DC, Chicago, San Francisco, Los Angeles and San
Diego).
On July 14, 1998, each of Crown Books and its wholly-owned subsidiaries,
collectively 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. At the time of bankruptcy filings, it operated a chain
of 176 retail bookstores. On August 14, 1998, the Company was granted an order
from the Bankruptcy Court, which among other things approved the closing of 80
stores. Four additional stores were closed in the normal course of business by
the end of fiscal year 1999.
The Bankruptcy court confirmed the Company's First Amended Plan of
Reorganization (Plan) on October 7, 1999 and the Company emerged from bankruptcy
on November 11, 1999, the effective date of the Plan. For the purposes of
accounting, the Company has elected to consider October 30, the end of its
fiscal quarter as the date of emergence. The results of operations for the
period October 30, 1999 to November 11, 1999 were not material. During the
period from July 14, 1998 through October 30, 1999, the Company operated as a
debtor-in-possession (DIP). The Plan provides for the continued operations of
the Company, including the consummation of a senior, secured credit facility for
up to $35 million to refinance the Company's obligations under the DIP Facility
and to finance future working capital needs, the termination of all 5,289,000
shares of old common stock, plus warrants, options, and related rights for old
common stock, the termination of all common stock in each of the Company's
subsidiaries, the merger of all the subsidiaries into Crown Books Corporation,
the issuance of 5,000,000 shares of all new common stock under an Amended and
Restated Certificate of Incorporation to the holders of allowed general
unsecured claims, and the issuance of up to 750,000 shares of the new common
stock to employees and others as part of a stock option plan.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements follows.
1. BASIS OF PRESENTATION
The Company adopted "fresh start reporting" in which the Company's assets
and liabilities were adjusted to reflect their estimated fair values and the
remaining accumulated deficit was eliminated, resulting in a new reporting
entity as of October 30, 1999. Accordingly, the Company's consolidated financial
statements prior to October 30, 1999 (the "Predecessor Company") are not
comparable to consolidated financial statements presented subsequent to that
date (the "Reorganized Company"). A vertical line has been placed on the
consolidated financial statements to distinguish between pre-organization and
post-reorganization activity. Certain prior year amounts have been reclassified
to conform with the current year presentation.
2. FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to January 31. The
fiscal years presented include 52 weeks each.
3. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Crown Books
Corporation (a Delaware Corporation) and its subsidiaries (collectively, the
Company) until the merger of all subsidiaries into the parent upon emergence
from bankruptcy. In December of 1999, the Company formed a wholly-owned
F-8
<PAGE> 48
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
subsidiary, "Crownbooks.com" to facilitate the Company's internet strategy.
Amounts related to this entity are consolidated. All significant intercompany
accounts and transactions have been eliminated in consolidation.
4. REVENUE RECOGNITION
The Company's principal source of revenue is derived from sale of books.
Revenue is recognized at the time of sale. Compensation and other internal costs
incurred in connection with operations are charged directly to expense.
The Company recognizes revenue and expenses on the accrual basis for both
financial statement and income tax purposes.
5. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
Accounts payable include amounts due to vendors for purchase of books net
of credits for returned merchandise. In the reporting periods, the Company has
approximately 80% of the accounts payable due to one major vendor.
6. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives of three to ten years. Leasehold improvements
are amortized over the lesser of 10 years or the remaining term of the related
lease. Buildings are depreciated over 20 years. Accelerated methods are used for
income tax purposes.
Effective February 2, 1997, the Company changed its accounting policy from
expensing purchased computer software costs in the year of acquisition to
capitalizing and depreciating these costs over the estimated useful life not to
exceed five years. During the 52 weeks ended January 31, 1998, the Company
recorded amortization of purchased computer software costs of approximately
$530,000. The effect of capitalizing purchased computer software was to reduce
the Company's reported net loss in fiscal 1998 by approximately $1.2 million.
7. DEFERRED COSTS
As a result of the Company's bankruptcy filing, the Company wrote off all
unamortized deferred costs, in the amount of $579,000. These costs are included
in reorganization costs in the accompanying consolidated statements of
operations as of January 30, 1999. Fees related to the Post Confirmation Credit
Agreement have been expensed as incurred (see Note H).
8. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) 109, "Accounting for Income Taxes." Liabilities and
assets are recognized for the deferred tax consequences of temporary differences
that will result in net taxable or deductible amounts in future periods.
F-9
<PAGE> 49
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
9. CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
10. ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities, and
reported revenue and expenses. Actual results could differ from these estimates.
The principal estimates and assumptions used in the preparation of the
accompanying consolidated financial statements include those considered in the
revaluation of the balance sheet using the principles of fresh start reporting
(see Note C).
11. PRE-OPENING EXPENSES
All costs of opening a new store, exclusive of capital assets, are charged
to expense as incurred.
12. ADVERTISING EXPENSE
The Company records the costs of advertising as an expense as incurred and
coop-advertising rebates are offset against advertising expense.
13. STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) permits companies to record
compensation cost for stock-based employee compensation plans at fair value or
intrinsic value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
(APB No. 25) and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock (see Note I).
14. EARNINGS PER SHARE
Net earnings per share was not presented for the Predecessor Company
because the stock was canceled under the Plan and the new stock was not issued
until after consummation of the Plan, therefore the presentation would not be
meaningful. Net loss per share for the Reorganized Company was computed using
the weighted average number of common shares outstanding, plus the common stock
equivalents related to stock options if not anti-dilutive, in accordance with
the provisions of SFAS No. 128, "Earnings Per Share."
15. LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value should be assessed. Impairment is
measured by comparing the carrying value to the estimated undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. The Company has determined that, as of January 31, 1998, there was
an impairment in the carrying value of certain long-lived assets and recorded
approximately a $4.3 million reserve for those assets. In connection with the
bankruptcy filing on July 14, 1998, the Company recorded a $6.9 million
write-off for fixed assets at 80 closed stores. Additionally, impairment charges
were recorded in the fiscal year ended
F-10
<PAGE> 50
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
January 30, 1999 for purchased computer software costs and capital leased assets
no longer in use by the Company.
NOTE C -- FRESH START REPORTING
The Company has accounted for the reorganization using the principles of
fresh start accounting, as required by Statement of Position (SOP 90-7),
Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,
issued by the American Institute of Certified Public Accountants. Fresh start
accounting is required under SOP 90-7 because pre-organization stockholders
received less than 50% of the new common stock and the reorganization value of
the assets of the reorganized Company is less than the total of all post-
petition liabilities and allowed claims.
Fresh Start Reporting resulted in material changes to the consolidated
balance sheet, including valuation of assets at fair value in accordance with
principles of the purchase method of accounting, valuation of liabilities
pursuant to provisions of the Plan and valuation of equity based on the
appraised reorganization value of the ongoing business.
Under the principles of fresh start accounting, the Company's total assets
were recorded at their assumed reorganization value, with the reorganization
value allocated to identifiable assets on the basis of their estimated fair
value. Accordingly, the Company's property and equipment increased by
approximately $4.4 million. In addition, the predecessor company's equity
(deficit) was eliminated.
The total reorganization value was determined in consideration of several
factors. The methodology used by the independent appraisers involved estimation
of the Company's enterprise value using discounted forecasted cash flow plus
expected value of assets required in the reconstructed business, (principally
future tax benefits of net operating loss carry forwards), adjusted for the
Company's present and forecasted debt. This resulted in an estimated
reorganization value of approximately $20.6 million.
Effective with emergence from bankruptcy as of October 30, 1999, the
Company changed its method of accounting for prepaid rent and gift certificate
obligations. Prior to this, all rent payments had been expensed although rent
was in fact paid in advance. The effect of this change was to increase the
assets and decrease net loss by approximately $1,495,000. Also effective on
emergence, the Company reduced the period for which it would accrue gift
certificate obligations from 10 years to 3 years. The effect of this change was
to decrease the liability and net loss by approximately $2,037,000.
F-11
<PAGE> 51
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- FRESH START REPORTING -- CONTINUED
The effect of the Plan and the implementation of fresh start reporting on
the Company's consolidated balance sheet as of October 30, 1999 was as follows:
<TABLE>
<CAPTION>
PRE-FRESH START CONFIRMATION FRESH START REORGANIZED
BALANCE SHEET OF PLAN DEBT FAIR VALUE BALANCE SHEET
OCTOBER 30, 1999 DISCHARGE ADJUSTMENTS OCTOBER 30, 1999
---------------- ------------ ----------- ----------------
(ALL DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash.............................. $ 3,032 $ 3,032
Accounts receivable, net.......... 1,679 1,679
Inventory and other assets........ 64,494 64,494
Other current assets.............. 1,670 1,670
-------- -------
Total current assets......... 70,875 70,875
Equipment and improvements, net...... 9,056 4,435(B) 13,491
Other assets......................... 732 732
-------- -------
Total assets................. $ 80,663 $85,098
======== =======
Liabilities and stockholders' (deficit)
equity
Current liabilities:
Accounts payable -- trade....... $ 20,127 $20,127
Accrued expenses................ 9,861 9,861
Priority claims................. 3,569(A) 3,569
Line-of-credit/debtor-in-
possession financing......... 30,941 30,941
-------- -------
Total current liabilities.... 60,929 64,498
Liabilities subject to compromise...... (53,932)(A)
57,501 (3,569)(A) --
-------
Total liabilities............ 118,430 64,498
Stockholders' (deficit) equity
Common stock......................... 56 (56)(A) 50(B) 50
Additional paid-in capital........... 43,809 (27,644)(A) 4,385(B) 20,550
(Accumulated deficit) retained
earnings.......................... (76,176) 76,176(A) -- --
Treasury stock....................... (5,456) 5,456(A) --
-------
(37,767) 20,600
-------- -------
Total liabilities and
stockholders' equity....... $ 80,663 $85,098
======== =======
</TABLE>
---------------
(A) To record the settlement of liabilities, priority claims which continue
after emergence, the cancellation of old and the issuance of new stock
pursuant to the Plan.
(B) To record the adjustments for revaluation of fixed assets and liabilities at
their estimated fair value, including the allocation of reorganization value
to identifiable assets.
NOTE D -- INVENTORY
The Company's inventories are priced at the lower of first-in, first-out
cost or market. The Company has established an allowance for loss on
non-returnable inventory and rejected merchandise returns of approxi-
F-12
<PAGE> 52
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- INVENTORY -- CONTINUED
mately $2.5 and $2.1 million in 2000 and 1999, respectively. During the last two
years, the Company purchased approximately 95% of its inventory from one
supplier.
NOTE E -- EMPLOYEE BENEFIT PLANS
The Company has a salary reduction plan available to all full-time
employees under Section 401(k) of the Internal Revenue Code. Employees May elect
to defer a percentage of their annual compensation, as well as make voluntary
contributions within certain limitations. The Company matched 25% of employee's
deferrals up to 6%. For the years ended January 29, 2000, January 30, 1999 and
January 31, 1998, the Company contributed $58,000, $33,000 and $140,000,
respectively, to the Plan.
In December 1998, at the request of the Company, the Bankruptcy Court
dissolved the Employees Deferred Compensation Benefit Plan and granted
permission for the Company to pay out its proceeds to the six employees and
former employees who had participated in the plan.
NOTE F -- INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109. This
standard requires, among other things, recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary differences
between financial statement and income tax basis of assets and liabilities and
for tax net operating loss carryforwards, to the extent that realization of such
benefits is more likely than not.
As a result of the losses incurred to date and its Chapter 11 Bankruptcy
filing on July 14, 1998, the Company recorded a valuation allowance against its
entire net deferred tax asset and is continuing to record valuation reserves to
offset any future income tax benefit until it is more likely than not that the
Company will be able to realize such benefits.
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------
FISCAL YEAR
---------------------------------
2000 1999 1998
-------- ----------- --------
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ -- $ --
State............................................... -- -- --
-------- -------- --------
-- -- --
Deferred:
Federal............................................. $ 12,868 $(22,493) $(11,737)
State............................................... 3,018 (4,979) (3,279)
Valuation allowance................................. (15,886) 27,472 22,971
-------- -------- --------
$ -- $ -- $ 7,955
======== ======== ========
</TABLE>
F-13
<PAGE> 53
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- INCOME TAXES -- CONTINUED
The effective income tax rate is reconciled to the Federal statutory rate
as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------
FISCAL YEAR
---------------------------------
2000 1999 1998
-------- ----------- --------
<S> <C> <C> <C>
Federal statutory rate................................ 34.0% 34.0% 34.0%
Income taxes at Federal statutory rate................ $ (2,930) $(22,443) $(13,836)
(Decrease) increase in taxes resulting from:
State income taxes, net of Federal income tax
benefit............................................. (534) (5,029) (1,272)
Cancellation of indebtedness income................... 19,350 -- --
Valuation allowance................................... (15,886) 27,472 22,971
Other................................................. -- -- 92
-------- -------- --------
Income tax provision.................................. $ -- $ -- $ 7,955
======== ======== ========
Effective tax rate.................................... N/A N/A N/A
</TABLE>
The tax effect of each type of temporary difference and carryforward that
generates a significant portion of deferred tax asset is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Gross deferred tax assets:
Capitalized leases treated as operating leases for
tax purposes.................................... $ -- $ 244 $ 228
Uniform capitalization of overhead to inventory.... 482 481 579
Reserves for closed stores and restructuring....... 6,786 6,908 1,811
Straight line rent adjustments..................... 1,351 570 1,276
Accrued professional fees.......................... -- 146 --
Depreciation....................................... 958 1,218 1,877
Self-insurance accrual............................. 273 412 575
Capital loss carryforward.......................... 201 203 195
Construction reimbursements........................ -- -- 575
Reserve for inventory.............................. 240 1,012 1,775
Bad debt reserve................................... -- -- 457
Sick and vacation accrual.......................... 88 228 351
Other.............................................. 248 221 360
Net operating loss carryforward.................... 26,130 41,000 15,112
Alternative minimum tax credit carryforward........ 300 300 300
Valuation allowance................................ (37,057) (52,943) (25,471)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
The Company has a cumulative net operating loss carryforward of
approximately $65 million which will expire in 2014. In addition, the Company
has generated an alternative minimum tax credit of approximately $0.3 million,
which can be used to offset future regular tax liabilities. The Company has
approximately $0.5 million capital loss carryforwards that will expire in 2011.
As a result of the Company's emergence from Chapter 11, a portion of the
net operating loss carryforwards were reduced by the cancellation of
indebtedness income recognized. Also, a change in
F-14
<PAGE> 54
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- INCOME TAXES -- CONTINUED
ownership occurred which will result in a limitation on the remaining amounts of
net operating loss and tax credit carryforwards that can be utilized each year.
This annual limitation will be based primarily on the enterprise value
under Section 382 of the Internal Revenue Code.
NOTE G -- RELATED PARTY TRANSACTIONS
Until September 1998, Dart Group Corporation ("Dart"), a company affiliated
by common ownership, provided certain services relating to management, general
and administrative functions and charged the Company using the methods described
herein. As of October 1998, the Company has assumed the responsibility for the
functions formerly provided by Dart.
The Company was charged an amount which, in management's opinion, was equal
to costs incurred by Dart to provide these functions. Dart charged the Company,
on a monthly basis, for actual expenses which relate directly to the Company's
operations. Substantially all such charges were supported by invoices from
unrelated parties designating the Company as recipient of the related goods or
services or were for matters related to all of Dart's affiliated companies and
were allocated on a judgmental basis by management of Dart. Amounts receivable
from or payable to affiliates relate to transactions made on behalf of the
Company by Dart or on behalf of Dart by the Company.
Dart also charged the Company, on a monthly basis, for actual residual
expenses such as telephone trunk lines when it was not practical to separate the
billing. Substantially all such charges were supported by invoices from
unrelated parties designating the Company as recipient of the related goods.
The following table summarizes the intercompany transactions:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------------
FISCAL YEARS
---------------------------------------------
JULY 15, 1998 FEBRUARY 1, 1998
THROUGH THROUGH
JANUARY 30, 1999 JULY 14, 1998 1998
---------------- ---------------- -------
<S> <C> <C> <C>
Due to affiliate, beginning of the period...... $ -- $ 418 $ 213
Director expense charges
Rentals...................................... 210 187 381
Salaries..................................... 152 746 2,126
Legal, rentals and other..................... 455 1,685 5,453
----- ------- -------
817 2,618 7,960
Payments....................................... (759) (1,294) (7,755)
----- ------- -------
Due to affiliate, end of the period............ $ 58 $ 1,742 $ 418
===== ======= =======
</TABLE>
All transactions with Dart included above were made free of interest and
under payment terms that, in management's opinion, were comparable to those with
unrelated parties. The average balance of amounts due to affiliate were $916,000
and $236,000 for fiscal 1999 and 1998, respectively.
As noted above, as of October 1998, the Company assumed the
responsibilities formerly performed by Dart. For January 29, 2000 and January
30, 1999, the Company paid Dart $278,405 and $364,456 for rent, respectively. As
part of the reorganization and emergence from bankruptcy $1,762,000 due to Dart
was written off and Dart paid $1,300,000 to the Company as part of the plan of
reorganization.
F-15
<PAGE> 55
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- LINE-OF-CREDIT/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. The Loan Agreement, as amended, provided that the
lenders would establish for the Company a revolving credit facility permitting
borrowings in an aggregate amount equal to the lesser of $40,000,000, or the sum
of (i) Standard Borrowings, and (ii) Special Inventory Advances. "Standard
Borrowings" means borrowing in an amount equal to the lesser of (i) 55% of the
value of the Company's acceptable inventory, at cost, less a reserve for
shrinkage, non-book inventory, and professional fees, or (ii) 85% of the net
retail liquidation value of such inventory.
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 a maintenance
fee at a rate of $120,000 per year. Borrowings under the Loan Agreement bore
interest at 9.5%.
On November 11, 1999, the Company finalized a Post Confirmation Credit
Agreement and Ratification and Third Amendment Agreement (the "Credit
Agreement") with certain commercial lenders to convert the Debtor-in-Possession
Financing to a revolving line of credit. The Credit Agreement, as amended,
provides borrowings in an aggregate amount equal to the lesser of $35,000,000,
or the sum of (i) Standard Borrowings, and (ii) Special Inventory Advances.
"Standard Borrowings" means borrowing in an amount equal to the lesser of (i)
55% of the value of the Company's acceptable inventory, at cost, less a reserve
for shrinkage, non-book inventory, and professional fees, or (ii) 90% of the net
retail liquidation value of such inventory.
In connection with its borrowings under the Credit Agreement, the Company
has paid the lenders a $120,000 commitment fee and has agreed to pay a
maintenance fee at a rate of $84,000 per year. The Company also paid a DIP
Conversion Fee of $175,000 upon the execution of this Credit Agreement. 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
$700,000.
This revolving line-of-credit bears interest at 9% at January 29, 2000 and
matures on November 12, 2001. The Company's obligation under the agreement is
collateralized by a security interest in substantially all of its assets. The
agreement requires the Company to meet certain financial ratios each month and
restricts the transfer of assets and incurrence of liabilities outside the
normal course of business.
One of the major suppliers of the Company has extended a credit facility of
$9,600,000. This credit facility is collateralized by a second lien on the
merchandise inventory. As of January 29, 2000, the Company had issued as
additional collateral a letter of credit for $2,000,000 to this vendor.
NOTE I -- STOCK OPTION PLAN
The Company had a stock option plan and accounted for the plan under APB
No. 25, under which no compensation cost is recognized when employee options are
granted at fair market value. Had compensation
F-16
<PAGE> 56
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- STOCK OPTION PLAN -- CONTINUED
cost for the plan been determined consistent with SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the following pro
forma amounts:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
---------------------------------------------------------
THREE MONTHS NINE MONTHS FISCAL YEAR
ENDED ENDED -------------------
JANUARY 29, 2000 OCTOBER 30, 1999 1999 1998
---------------- ---------------- -------- --------
<S> <C> <C> <C> <C>
Net loss:
As reported....................... $(770) $(7,556) $(66,010) $(48,650)
Pro forma......................... (796) (8,012) (66,717) (49,344)
Net loss per share (diluted)
As reported....................... $(.15) (A) (A) (A)
Pro forma......................... (.16) (A) (A) (A)
</TABLE>
---------------
(A) See Note A -- Page F-4.
The weighted average fair value of options granted during fiscal 2000 and
1998 was $0.76 and $4.09, respectively. The fair value of each option grant was
estimated on the date of the grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in fiscal 2000
and 1998: risk free rates of approximately 6.5% and 5.42%; no expected
dividends; expected lives of 5.0 to 6.0 years; and expected volatility of 0% and
40%. The option exercise price equals the market price on the date of grant.
Options vest fully after three years and expire after five to six years. Under
the Plan of Reorganization, upon emergence from bankruptcy, the old options were
terminated and the Company may grant new options of up to 750,000 shares.
Options are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PER SHARE
OF OPTIONS PRICE PER SHARE EXERCISE PRICE
---------- --------------- --------------
<S> <C> <C> <C>
PREDECESSOR COMPANY:
Outstanding at February 1, 1997................ 349,570 $10.500-23.000 $13.560
Granted................................... 165,550 9.375 9.375
Forfeited................................. (109,295) 9.375-23.000 12.320
-------- -------------- -------
Outstanding at January 31, 1998................ 405,825 9.375-23.000 12.190
Forfeited................................. (163,175) 9.375-23.000 13.870
-------- -------------- -------
Outstanding at January 30, 1999................ 242,650 9.375-23.000 11.060
Terminated................................ (242,650) 9.375-23.000 11.060
-------- -------------- -------
Outstanding at October 30, 1999................ -- -- --
-------- -------------- -------
REORGANIZED COMPANY:
Outstanding at October 30, 1999................ -- -- --
Granted................................... 622,059 2.720 2.720
-------- -------------- -------
Outstanding at January 29, 2000................ 622,059 $ 2.720 $ 2.720
======== ============== =======
</TABLE>
New options have been granted to directors and certain executives as part
of their employment agreements. Options have also been granted to an adviser.
Management believes that the current fair market value of its shares to be less
than the exercise price of the options. The value, if any, of the options
granted to the adviser is not material to these financial statements.
F-17
<PAGE> 57
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- COMMITMENTS AND CONTINGENCIES
The Company leases facilities, equipment and automobiles under various
agreements, the longest of which expires in 2008. Net minimum rental commitments
under all non-cancelable operating leases are as follows:
<TABLE>
<S> <C>
2001........................................................ $14,581
2002........................................................ 12,799
2003........................................................ 11,224
2004........................................................ 9,421
2005........................................................ 5,768
Thereafter.................................................. 7,886
-------
$61,679
=======
</TABLE>
Total rent expense for the years ended January 29, 2000, January 30, 1999
and January 31, 1998 was $14,319,693, $24,306,992 and $29,169,730, respectively.
The Company maintains its cash balances in various financial institutions,
which at times may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
The Company was partially self-insured for health and dental costs and for
workers' compensation, automobile and general liability prior to February 1999.
Subsequent to that period, the coverage was changed to a pre-funded insured
program with both specific and aggregate excess coverage limits established. The
Company based its self-insurance liability upon a review by an independent
insurance broker of claims filed and claims incurred but not reported.
During fiscal 1998, Dart and the Company settled all litigation and
disputes between Dart and the Company on the one hand and members of the Haft
family (former shareholders of Dart and the Company) on the other hand and all
related claims and litigation.
As a result of these settlements, members of the Haft family no longer own
common stock or options for common stock of Dart or the Company. In fiscal 1998,
the Company paid approximately $0.8 million for its portion of these
settlements.
In the normal course of business, the Company is involved in various claims
and litigation, which in the opinion of management, will not have a materially
adverse effect upon the consolidated financial condition and results of
operations of the Company.
NOTE K -- LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise, including claims that become known after
the petition date, are reported at their expected allowed claim amount in
accordance with Statement of Financial Accounting Standard (SFAS) No. 5,
Accounting for Contingencies. To the extent that the amounts of claims changed
as a result of actions in the bankruptcy case or other factors, the recorded
amount of liabilities subject to compromise were adjusted.
As a result of the Company's bankruptcy (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
F-18
<PAGE> 58
CROWN BOOKS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- LIABILITIES SUBJECT TO COMPROMISE -- CONTINUED
stayed. Pre-petition Indebtedness has been reflected on the Company's
consolidated balance sheet as Liabilities Subject to Compromise, consisting of
the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 30, 1999(1) JANUARY 30, 1999
------------------- ----------------
<S> <C> <C>
Accounts payable..................................... $30,153 $30,555
Accrued taxes other than income...................... 852 1,638
Capital lease obligation............................. 1,772 1,772
Due to affiliate..................................... 1,648 1,742
Closed store reserves................................ 17,644 17,957
Accrued property taxes and other expenses............ 5,432 5,878
------- -------
$57,501 $59,542
======= =======
</TABLE>
---------------
(1) Prior to emergence.
The Company filed a motion with the Bankruptcy Court to establish June 8,
1999 as the date (bar date) for the unsecured creditors to finalize their claims
with the court. Under the Bankruptcy Code, liabilities and obligations incurred
after the commencement of the bankruptcy in connection with the operation of the
Company's business generally enjoy priority in the 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 bankruptcy. The rejection of an executory contract or lease
is treated as a breach thereof occurring immediately before the filing of the
debtors' bankruptcy petitions. Upon emergence from bankruptcy, the Liabilities
Subject to Compromise have been written off in accordance with the plan.
NOTE L -- REORGANIZATION COSTS
Reorganization costs included those expenses related to the Company's
restructuring and bankruptcy filings. In 1999, they included $12.5 million of
closed store reserves for the closing and disposal of 80 stores, and $6.9
million for the write off of fixed assets related to those stores. In addition,
accounts receivable for vendor credits of $7.0 million were written off as
uncollectable. Professional services and fees of $4.2 million were incurred as
part of the restructuring and bankruptcy process. In 2000, the majority of the
reorganization costs of $4.7 million consisted of professional fees, mainly for
financial consultants assisting the Company with its emergence from bankruptcy.
The aforementioned items and other bankruptcy reorganization costs included in
the accompanying statements of operations as reorganization costs include the
following (dollars in thousands):
<TABLE>
<CAPTION>
REORGANIZED
COMPANY PREDECESSOR COMPANY
------------------ ------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED YEAR ENDED
JANUARY 29, 2000 OCTOBER 30, 1999 JANUARY 30, 1999
------------------ ----------------- ----------------
<S> <C> <C> <C>
Professional services and fees....... $1,728 $2,292 $ 4,226
Severance costs...................... -- 310 564
Financing costs and fees............. 263 134 699
Closed store reserves................ -- -- 12,500
Fixed asset impairment............... -- -- 6,934
Vendor receivable.................... -- -- 6,966
------ ------ -------
$1,991 $2,736 $31,889
====== ====== =======
</TABLE>
F-19
<PAGE> 59
CROWN BOOKS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JULY 29, 2000 AND JANUARY 29, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS FISCAL YEAR
ENDED ENDED
JULY 29, 2000 JANUARY 29, 2000
------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.............................. $ 5,120 $ 2,616
Accounts receivable, net............................... 56 2,462
Merchandise inventories................................ 51,135 55,799
Other current assets................................... 2,185 2,305
------- -------
Total current assets.............................. 58,496 63,182
Property and equipment, at cost (less accumulated
amortization and depreciation of $26,338 in 2000, and
$25,103 in 1999, respectively)............................ 11,682 12,764
Other assets................................................ 587 449
------- -------
$70,765 $76,395
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable-trade................................. $16,327 $14,097
Accrued expenses....................................... 12,787 16,373
Line of credit......................................... 23,246 26,095
------- -------
Total current liabilities......................... 52,360 56,565
Long-term obligations, net of original issue discount of
$610...................................................... 3,390 --
------- -------
55,750 56,565
STOCKHOLDERS' EQUITY
Common stock........................................... 50 50
Additional paid-in capital............................. 21,241 20,550
Accumulated deficit.................................... (6,276) (770)
------- -------
15,015 19,830
------- -------
$70,765 $76,395
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 60
CROWN BOOKS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDING JULY 29, 2000 AND JULY 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------- -------------
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 29, 2000 JULY 31, 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUES
Sales.................................................. $82,144 $83,402
Other Income........................................... 72 29
------- -------
82,216 83,431
EXPENSES
Cost of sales, store occupancy and warehousing......... 69,459 72,158
Selling and administrative............................. 15,333 13,921
Interest expense....................................... 1,583 1,085
Depreciation and amortization.......................... 1,331 1,366
------- -------
87,706 88,530
------- -------
Loss before reorganization costs, non operating
expenses and income taxes............................. (5,490) (5,099)
Reorganization costs........................................ 2 1,390
Non operating expenses...................................... 15 186
------- -------
Loss before income taxes............................... (5,507) (6,675)
Provision for income taxes.................................. -- --
------- -------
NET LOSS.................................................... $(5,507) $(6,675)
======= =======
Per share data
Basic (loss) per share................................. $ (1.26) NA
Diluted (loss) per share............................... $ (1.26) NA
Weighted average common shares and common share equivalents
outstanding:
Basic.................................................. 4,378 NA
Diluted................................................ 4,378 NA
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 61
CROWN BOOKS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 29, 2000 AND JULY 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REORGANIZED PREDECESSOR
COMPANY COMPANY
------------- -------------
SIX MONTHS SIX MONTHS
ENDED ENDED
JULY 29, 2000 JULY 31, 1999
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net loss.................................................. $(5,507) $(6,675)
Adjustments to reconcile net cash provided by (used in)
operating activities:
Depreciation and amortization.......................... 1,331 1,366
Loss on disposal of fixed assets....................... -- 22
Changes in assets and liabilities:
Accounts receivable.................................. 2,406 (490)
Merchandise inventories.............................. 4,664 6,682
Other current assets................................. 120 222
Other assets......................................... (138) (81)
Accounts payable -- trade............................ 2,230 2,009
Accrued expenses..................................... (3,586) (2,242)
Due to affiliate..................................... -- (58)
------- -------
Net cash provided by operations before
reorganization items............................ 1,520 755
Reorganization items:
Court approved claims paid in bankruptcy.......... -- (710)
------- -------
Net cash provided by operations after
reorganization items............................ 1,520 45
------- -------
Cash flows from investing activities:
Capital expenditures...................................... (167) --
------- -------
Net cash used in investing activities............. (167) --
Cash flows from financing activities:
Borrowings under private placement........................ 4,000 --
Net borrowings (repayments) under revolving credit
facilities............................................. (2,849) 116
------- -------
Net cash provided by financing activities......... 1,151 116
------- -------
Net increase in cash and cash equivalents................... 2,504 161
Cash and cash equivalents at beginning of period............ 2,616 3,298
------- -------
Cash and cash equivalents at end of period.................. $ 5,120 $ 3,459
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 62
CROWN BOOKS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JULY 29, 2000 AND JULY 31, 1999
(UNAUDITED)
NOTE A -- GENERAL
The accompanying consolidated financial statements reflect the accounts of
Crown Books Corporation and its wholly-owned subsidiary (Crownbooks.com)
(collectively referred to 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 July 29, 2000 and
July 31, 1999 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 at July
29, 2000 and for the period then ending, additional adjustments reflect adoption
of American Institute of Certified Public Accountants SOP 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code.
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. The interim operating results reported for each of the six month
periods ended July are not necessarily indicative of 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 for the year ended January 29,
2000 should be read in conjunction with the accompanying interim financial
statements.
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 29, 2000, the Company operated 91
stores in 6 geographic markets.
NOTE B -- INVENTORY
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 July 29, 2000 and July 31, 1999.
NOTE C -- LEASES
On April 25, 2000, the Company entered into an agreement for 41,244 square
feet of office and warehouse space for our principal executive offices located
in Largo, Maryland. The term of the lease is 10 years, commencing on July 1,
2000. The annual rent is $227,000, and will increase each year by approximately
4%, except during the sixth year of the lease, when our rent will increase by
approximately 16%. Under the terms of the lease, the Company also is responsible
for other costs including the payment of maintenance and utilities. The Company
has provided its landlord with an unconditional and irrevocable letter of credit
in the amount of $400,000 as security for performance under the lease. This
letter of credit may be decreased by $80,000 on each anniversary of the lease
starting on July 1, 2000 until the letter of credit equals one month's rent.
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<PAGE> 63
CROWN BOOKS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE D -- PRIVATE PLACEMENT
In March 2000, Crown Books and its wholly-owned subsidiary, Crownbooks.com,
Inc. ("Crownbooks.com"), raised $4.0 million through the private placement of
eight units consisting of (i) a three-year 6.0% subordinated promissory note of
Crownbooks.com in the principal amount $500,000, and (ii) a three-year warrant
to purchase 183,824 shares of common stock of Crown Books at an exercise price
of $2.72 per share. Of the $4.0 million in net proceeds from the private
placement, approximately $1.5 million is being used to develop the Company's
Internet strategy, and $1.0 million was distributed to Crown Books (the parent
company) for working capital and general corporate purposes. An additional $1.5
million is anticipated to be loaned to Crown Books for operations. Interest on
the promissory notes is payable semi-annually on June 30 and December 31 either
in cash or, at the option of Crownbooks.com, by the issuance of additional
promissory notes. The obligations under the promissory notes are subordinate to
all other senior debt of Crownbooks.com. The subordinated debt of $4.0 million
is included in long term obligations, net of original issue discount of
$610,000. The original issue discount is the estimated value of the warrants,
amortized over three years, net of accumulated amortization. The warrants to
purchase shares of Crown Books may be exercised in cash, or at the holder's
election, by the surrender of the principal amount of such holder's promissory
note. If the holders of the promissory notes elect not to exercise all or any
portion of their warrants, then all amounts outstanding will become due and
payable by Crownbooks.com on March 22, 2003.
NOTE E -- EARNINGS PER SHARE
Earnings per share (EPS) is not presented for the Predecessor Company
because all of the common stock of the Predecessor Company was cancelled under
the Plan of Reorganization. The EPS and weighted average common share data
assumes that a maximum of 5.0 million shares were deemed outstanding at January
29, 2000 and that 4,378,050 shares were deemed to be outstanding at July 29,
2000. The actual number of shares deemed to be outstanding is subject to
adjustment as the Company reconciles outstanding claims from general unsecured
creditors.
NOTE F -- DEBT COVENANTS
Under the line of credit and certain trade credit agreements, the Company
is required to comply with covenants that include specified financial ratios and
tests principally relating to sales, earnings, inventory levels and accounts
payable balances. In April 2000, the Company was in default under one covenant
contained in its trade credit agreement and as a result was in default under the
line of credit due to a cross default clause. The secured lenders have advised
the Company that they are not taking any action at this time in respect of their
default under the line of credit. The Company has not obtained a waiver from the
trade creditor for its breach under the trade credit agreement. However, the
trade creditor has advised the Company that it is not taking any action at this
time but that it is no longer obligated to extend $9.6 million of credit under
the trade credit agreement. The trade creditor has also advised them that no
change in the credit limit is currently anticipated.
In addition, the Company believes that as of October 28, 2000 it may be in
default under one of the financial covenants included in the line of credit. The
Company has notified its secured lenders of the default. Although there can be
no assurance, it anticipates that it will receive a waiver from its lenders with
respect to both defaults.
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