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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarterly period ended April 26, 1997.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number 0-21598
OLD AMERICA STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3487813
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
811 NORTH COLLINS FREEWAY
HIGHWAY 75 NORTH
PO BOX 370
HOWE, TEXAS 75459
(Address of principal executive offices)
(903)532-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes [ X ] No [ ]
At May 29, 1997, an aggregate of 3,520,437 shares of the registrant's Common
Stock, value of $.01 each (the "Common Stock"), and 1,012,842 shares of
registrant's Nonvoting Common Stock, value of $.01 each (the "Nonvoting Common
Stock"), were outstanding.
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OLD AMERICA STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
April 26, 1997 and January 31, 1997 3
Condensed Consolidated Statements of Operations -
Twelve weeks ended April 26, 1997 and April 22, 1996 4
Condensed Consolidated Statements of Cash Flows -
Twelve weeks ended April 26, 1997 and April 22, 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings (no response required)
Item 2. Changes in Securities (no response required)
Item 3. Defaults Upon Senior Securities (no response required)
Item 4. Submission of Matters to Vote of Security Holders (no response
required)
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K (none)
SIGNATURES 10
2
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OLD AMERICA STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
APRIL 26, 1997 JANUARY 31, 1997
-----------------------------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Receivables, net of allowance $ 7,153,786 $ 5,947,955
Merchandise inventories 49,014,963 56,906,255
Prepaid expenses and other 1,727,243 1,891,893
----------- -----------
Total current assets 57,895,992 64,746,103
Property and equipment, at cost, net 17,199,949 17,755,770
Intangible assets and deferred charges,
net 13,516,053 13,639,227
Other assets 487,871 482,916
----------- -----------
$89,099,865 $96,624,016
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $25,453,107 $ -
Accounts payable 16,337,066 21,813,553
Accrued salaries and wages 695,808 1,190,131
Other accrued liabilities 3,042,889 3,510,308
Current obligations under capital
leases 22,690 29,043
Deferred income taxes 65,000 65,000
----------- -----------
Total current liabilities 45,616,560 26,608,035
----------- -----------
Long-term debt - 23,570,850
Deferred income taxes 947,000 947,000
----------- -----------
Total long-term liabilities 947,000 24,517,850
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, par value $.01;
6,000,000 shares authorized,
3,520,437 and 3,514,500 shares issued
and outstanding 35,204 35,145
Nonvoting common stock, par value
$.01; 1,500,000 shares authorized;
1,012,842 shares issued and outstanding 10,128 10,128
Additional paid-in capital 42,379,611 42,350,728
Retained earnings 111,362 3,102,130
----------- -----------
Total stockholders' equity 42,536,305 45,498,131
----------- -----------
$89,099,865 $96,624,016
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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OLD AMERICA STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
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APRIL 26, 1997 APRIL 22, 1996
-------------------------------------
<S> <C> <C>
Net Sales $28,155,541 $27,138,869
Cost of sales (including occupancy
costs) 22,325,234 16,972,660
----------- -----------
Gross profit 5,830,307 10,166,209
Selling, general and administrative 9,469,202 8,915,152
expenses
Depreciation expense 765,509 587,079
Amortization of goodwill and intangibles 129,263 125,442
----------- -----------
Income (loss) before interest and
income taxes (4,533,667) 538,536
Interest expense, net 452,101 337,962
----------- -----------
Income (loss) before income taxes (4,985,768) 200,574
Income taxes (1,995,000) 82,000
----------- -----------
Net income (loss) $(2,990,768) $ 118,574
=========== ===========
Weighted average shares outstanding 4,532,860 4,520,054
=========== ===========
Earnings per share:
Net income (loss) per share $ (.66) $ 0.03
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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OLD AMERICA STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
TWELVE WEEKS ENDED
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APRIL 26, 1997 APRIL 22, 1996
-------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,990,768) $ 118,574
Adjustments to reconcile net income
(loss) to net
cash used for operating activities:
Depreciation and amortization 894,772 712,521
Changes in assets and liabilities:
Increase in receivables (1,205,832) (2,021,697)
Decrease in merchandise
inventories 7,891,294 9,306
Decrease (increase) in prepaid
expenses and other 164,650 (59,518)
Increase in other assets (11,043) (83,268)
Increase (decrease) in accounts
payable (5,476,487) 566,771
Decrease in other accrued
liabilities (961,742) (1,278,368)
----------- -----------
Net cash used for operating
activities (1,695,156) (2,035,679)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (209,690) (161,463)
----------- -----------
Net cash used for investing
activities (209,690) (161,463)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving loan, net 1,882,258 1,775,000
Proceeds from sale of equity
securities 28,942 28,218
Payments under capital leases (6,354) (5,699)
----------- -----------
Net cash provided by financing
activities 1,904,846 1,797,519
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Net decrease in cash - (399,623)
Cash, beginning of period - 1,239,117
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Cash, end of period $ - $ 839,494
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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OLD AMERICA STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of OLD AMERICA
STORES, INC., a Delaware corporation ("Old America"), and its wholly-owned
subsidiaries, OLD AMERICA STORE, INC., a Texas corporation ("Store"), and OLD
AMERICA WHOLESALE, INC., a Delaware corporation ("Wholesale") (Old America,
Store and Wholesale collectively, the "Company"). All material intercompany
balances and transactions have been eliminated. The Company is a specialty
retailer of home decorating products and arts and crafts items with 102
operating retail locations in 25 states throughout the United States as of the
end of its first quarter, April 26, 1997.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (consisting
of normal, recurring adjustments including the inventory adjustment described in
Note 5) that the Company considers necessary for a fair presentation, in
accordance with generally accepted accounting principles, of the consolidated
financial position of the Company and its subsidiaries at April 26, 1997, and
the results of their operations and cash flows for the twelve weeks ended April
26, 1997 and April 22, 1996. These results are not necessarily indicative of
the results to be expected for the full fiscal years.
The consolidated financial information presented herein should be read in
conjunction with the audited consolidated financial statements and the notes
thereto for the fiscal years ended January 31, 1997 and 1996, included in the
Company's Annual Report on Form 10-K (File No. 0-21598) dated May 1, 1997.
The Company reports its financial results on the basis of thirteen four-week
periods. The first quarter began on February 1, 1997 and ended on April 26,
1997. The first, second and fourth quarters each year include three four-week
periods. The third quarter includes four four-week periods. The actual number
of selling days in each period may vary from year to year.
2. GOING CONCERN
The Company incurred net losses of $2,990,768 for the quarter ended April
26,1997 and $6,435,710 for the year ended January 31, 1997. The Company has
decided to close between 20 to 25 stores, which include 16 stores which
previously were to be relocated. Additionally, the Company has requested
waivers of certain of its financial covenants under its debt agreement, as the
Company was not in compliance at April 26, 1997 and, accordingly, amounts
outstanding under the Company's revolving credit agreement have been classified
in the balance sheet as current. The Company's liquidity issues and the recent
operating losses raise substantial doubt about the Company's ability to continue
as a going concern.
The Company's ability to continue as a going concern is dependent upon the
willingness of the Company's lenders to waive and/or restructure the Company's
financial covenants and the need for the Company's vendors to continue to ship
merchandise to stores and negotiate extended payment terms for
6
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balances due such vendors until cash flows significantly improve in the third
and fourth quarters. The Company is in discussions and negotiations with key
vendors to obtain important basic and seasonal merchandise on more favorable
payment terms and with its banks to obtain the necessary waivers and/or
restructuring covenants, but cannot provide any assurance that it will be
successful in such discussions and negotiations. However, the Company intends to
continue to explore potential alternative financing opportunities as part of its
efforts to improve its liquidity position.
The Company's financial statements for the quarter ended April 26, 1997 have
been prepared on a going concern basis which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The financial statements do not reflect any adjustments that might
result from the outcome of this uncertainty.
3. EARNINGS PER SHARE
Earnings per share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding. Options and warrants
issued are considered as exercised for all periods presented using the treasury
stock method.
4. LONG-TERM DEBT
The Company has a revolving credit facility, which expires May 1999, with a
two bank group (the "Agreement") which provides the Company with a $30,000,000
revolving loan. The Agreement allows the Company to borrow up to 50% of the
carrying value of its merchandise inventories. Interest under the facility is
charged at the prime rate or the London Interbank Offering Rate (LIBOR) plus
2.5%, at the Company's option. The Company is required to pay a yearly fee of
37.5 basis points (.375%) on the unused portion of the revolver. Any draws
under the facility are secured by the assets of the Company.
Under the Agreement, the Company is required to comply with certain covenants
and is also prohibited from paying dividends. As a result of losses incurred
during the first quarter, the Company was in non-compliance at quarter end
regarding certain financial covenants contained in the Agreement. Management
has made its lenders aware of these events and has requested waivers of such
violations, although it is not known whether or not such waivers will be
granted. Accordingly, the Company's revolver at quarter end has been classified
as currently due in the accompanying condensed consolidated balance sheet.
Should the Company be unable to successfully negotiate such waivers or obtain
financing from other sources, the Company's ability to continue as a going
concern could be in question.
5. INVENTORY SHRINK
It has been the Company's practice to estimate shrink for its stores each
period based on the results from previous physical inventory counts. When
subsequent physical counts are taken such estimates are reversed and actual
shrink is recorded. As a result of physical inventory counts taken for 26
stores during the first quarter, management revised its estimate of inventory
shrinkage for all the effect of recording the results of the actual inventory
counts taken during the quarter, as well as the revision in estimate of shrink
for all stores not inventoried during the quarter, was to record a charge to
cost of sales during the quarter of $2.9 million. As a result of the increased
shrinkage experienced during the first
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quarter, the Company plans to take physical inventory counts at all stores not
counted in the first quarter during the second and third quarters. Due to the
nature of this estimate, actual shrinkage results could differ from the estimate
and modifications to the adjustment would be made in the period that the
physical inventory was taken.
6. SUBSEQUENT EVENTS
In June 1997, the Company's Chief Executive Officer, Richard Tredinnick,
resigned and the Board of Directors named Jerry Payton, Chief Operating Officer,
as the interim Chief Executive Officer. Severance costs related to Mr.
Tredinnick's resignation will be recorded in the second quarter.
As a result of the significant losses and reduced cashflows experienced by
the Company during the first quarter, the Company has abandoned its plans to
relocate sixteen stores in fiscal 1997 and instead has decided to close between
20 and 25 stores during the year. The Company's present intent is to transfer
the goods related to such stores to continuing stores. Costs related to such
store closures which have not been accrued to date, if any, will be expensed in
the second quarter.
As discussed in the Company's 1996 Annual Report on Form 10-K, the Company and
a former officer and director are named defendants in a lawsuit which alleges
breach of contract and fraud. The Company previously filed a motion for summary
judgment to dismiss all complaints named in the suit. Early in the second
quarter, the Company was denied its motion for summary judgment, however, the
Company continues to believe the claims are without merit and intends to
vigorously defend itself regarding such claims.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
First Quarter 1997 Compared to First Quarter 1996
- -------------------------------------------------
Net Sales. Net sales for the first quarter ended April 26, 1997 increased by
$1,017,000 or 3.7% to $28,156,000 for 102 stores open for the quarter ended
April 26, 1997, from $27,139,000 for 94 stores open for the quarter ended April
22, 1996. Comparable store sales for the quarter were down 3.8% over the first
quarter in the prior year. Comparable store sales results were negatively
impacted by a significant reduction in advertising and a lack of basic
merchandise in its stores during the first quarter of 1997. In order to reduce
advertising expenses, the Company eliminated two full color inserts that were
released in the prior year.
Gross Profit. Gross profit for the first quarter decreased 42.7% or $4,336,000
to $5,830,000 or 20.7% of net sales, from $10,166,000 or 37.5% of net sales in
1996. The 16.8% decrease in gross profit as a percent of net sales is primarily
related to inventory charges totaling $2,932,000 (10.4%) related to results of
physical inventory counts taken during the quarter and the adjustment of
inventory shrinkage accruals at the remaining stores. The physical inventory
results indicated an increase in shrinkage that significantly differed from the
Company's historical experience. The shrinkage accrual adjustment was recorded
to reflect the current trend evidenced by the physical inventory counts that
were done in the first quarter. As a result of the increased shrinkage results
experienced by the Company, management undertook a review of the Company's
accounting systems and procedures with the assistance of Deloitte & Touche, the
Company's independent auditors. Based on this review, management believes that
the Company's accounting systems are operating properly but that the
unanticipated inventory shrinkage was attributable largely to deficiencies in
operational compliance. The Company is in the process of developing and will
implement a comprehensive training program for store management within the next
sixty days. The Company is also taking physical inventory counts in the second
and third quarters for all stores not counted during the first quarter . In
addition, other items affecting gross profit included additional warehouse and
procurement costs (1.5%), increased freight due to smaller average shipments to
stores by common carrier (1.3%) and an increase in cost of goods sold (1.8%) due
to reduced volume and coop rebate allowances earned during the quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first quarter of 1997 increased $554,000 or 6.2%
to $9,469,000 or 33.6% of net sales from $8,915,000 or 32.9% of net sales in
1996. Although advertising expense decreased 2.1% from the prior year,
increases in general salary (2.3%) and other operating expense (.9%) offset the
decline. The increase in other operating expense primarily relates to operating
lease payments for point-of-sale (POS) computer hardware and software installed
the summer and fall of 1996.
Depreciation Expense. Depreciation expense increased from $587,000 in the first
quarter of 1996, to $766,000 in 1997. The increase in depreciation expense is
primarily due to capital expenditures for the nine new stores opened in the fall
of 1996 and capitalized costs of the POS conversion.
Interest Expense. Interest expense increased from $338,000 in the first quarter
of 1996, to $452,000 in the first quarter of 1997. The increase is due to
additional borrowings under the Company's revolving loan facility to finance 9
new stores in 1996.
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Income. Net income for the first quarter decreased from $119,000 in the
first quarter of 1996 to a loss of ($2,991,000) for 1997. This net loss equates
to $(.66) earnings per share based on 4,532,860 weighted average shares
outstanding for the first quarter of 1997, as compared to $0.03 earnings per
share for the first quarter of 1996 based on 4,520,054 weighted average shares
outstanding.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for property and equipment amounted to $210,000 for the
twelve weeks ended April 26, 1997.
The Company's inventory has decreased $7,891,000 from $56,906,000 at January
31, 1997 to $49,015,000 on April 26, 1997. This decrease includes a $2.9
million inventory reduction related to increased shrink recorded in the first
quarter of 1997 (See "Gross Profit" above).
The Company also decreased purchasing levels during the quarter and used the
cash to reduce outstanding accounts payable. As a result of the increased
vendor payments, accounts payable was reduced 25% or $5,476,000 during the
quarter. Despite significant paydowns to vendors during the quarter, the
Company is still not within terms on a significant amount of its outstanding
trade payable and continues to experience disruptions in the flow of merchandise
to its stores. The Company believes these disruptions may also be attributable,
in part, to the poor overall performance of the industry experienced within the
past eighteen months.
At April 26, 1997, bank debt was $25,453,000, an increase of $1,882,000 from
January 31, 1997, representing amounts owed under the Company's existing
revolving credit facility. Borrowings in the first quarter of 1997 were used to
reduce vendor payable balances and purchase limited seasonal and basic
merchandise. Under the facility, the Company is required to comply with certain
covenants. As a result of first quarter charges discussed above, the Company
was in non-compliance at quarter end regarding certain financial covenants
contained in its credit facility and, accordingly, the debt was classified as
current.
The Company's ability to continue as a going concern is dependent upon the
Company's lenders willingness to waive and/or restructure the Company's
financial covenants and the need for the Company's vendors to continue to ship
merchandise to stores and negotiate extended payment terms for balances due such
vendors until cashflows significantly improve in quarters three and four. The
Company is in discussions and negotiations with key vendors to obtain important
basic and seasonal merchandise on more favorable payment terms and with its
banks to obtain the necessary waivers and/or restructuring of its covenants, but
cannot provide any assurance that it will be successful in such discussions and
negotiations. However, the Company intends to continue to explore potential
alternative financing opportunities as part of its efforts to improve its
liquidity position.
The Company has also abandoned its plan to relocate up to sixteen stores
during the fiscal year and, instead, plans to close 20 - 25 stores and transfer
merchandise to continuing stores.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
OLD AMERICA STORES, INC.
Date: June 23, 1997 By: /s/ Jim D. Schultz
----------------------------
Jim D. Schultz
Sr. Vice President, Secretary,
Treasurer and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-26-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 7,153,786
<ALLOWANCES> 0
<INVENTORY> 49,014,963
<CURRENT-ASSETS> 57,895,992
<PP&E> 25,662,696
<DEPRECIATION> 8,462,747
<TOTAL-ASSETS> 89,099,865
<CURRENT-LIABILITIES> 45,616,560
<BONDS> 0
0
0
<COMMON> 45,332
<OTHER-SE> 43,437,793
<TOTAL-LIABILITY-AND-EQUITY> 89,099,865
<SALES> 28,155,541
<TOTAL-REVENUES> 28,155,541
<CGS> 22,325,234
<TOTAL-COSTS> 10,363,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 452,101
<INCOME-PRETAX> (4,985,768)
<INCOME-TAX> (1,995,000)
<INCOME-CONTINUING> (2,990,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,990,768)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> 0
</TABLE>
