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
Exchange Act of 1934 for the quarterly period ended November 2, 1996.8, 1997.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _______________ 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
HIGHWAYHighway 75 NORTHNorth
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 [ ][X]
At December 13, 199612, 1997, an aggregate of 3,514,5003,530,727 shares of the registrant's
Common Stock, value of $.01$ .01 each (the "Common Stock"), and 1,012,842 shares of
registrant's Nonvoting Common Stock, value of $.01$ .01 each (the "Nonvoting Common
Stock"), were outstanding.
OLD AMERICA STORES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
November 2, 1996 and January 31, 1996 3
Condensed Consolidated Statements of Operations -
Sixteen weeks and forty weeks ended November 2, 1996
and November 6, 1995 4
Condensed Consolidated Statements of Cash Flows -
Forty weeks ended November 2, 1996 and
November 6, 1995 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 a 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
(DEBTOR-IN-POSSESSION)
Table of Contents
Page
- - --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
November 8, 1997 and January 31, 1997 3
Condensed Consolidated Statements of Operations -
Sixteen weeks and year-to-date ended
November 8, 1997 and November 2, 1996 4
Condensed Consolidated Statements of Cash Flows -
Year-to-date ended November 8, 1997 and November 2, 1996 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities (no response required)
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders (no response
required)
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES 13
2
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
- - --------------------------------------------------------------------------------
NOVEMBER 2, JANUARYNovember 8, 1997 January 31, 1996 1996
------------------------------1997
----------------------------------
ASSETS (Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,629,139 $ 1,239,117
Receivables, net of allowance 1,647,721 1,067,416$ 3,110,159 $ 5,947,955
Merchandise inventories 66,656,095 53,002,04042,592,587 56,906,255
Prepaid expenses and other 1,631,499 1,444,0532,433,662 1,891,893
------------ -----------
Total current assets 71,564,454 56,752,62648,136,408 64,746,103
------------ -----------
Property and equipment, at cost, net 18,684,951 17,045,82214,482,731 17,755,770
Intangible assets and deferred charges, net 13,687,108 13,778,80052,141 13,639,227
Other assets 472,491 413,830421,148 482,916
------------ -----------
$104,409,004 $87,991,078$ 63,092,428 $96,624,016
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 26,876,872 $ -
Accounts payable $ 22,435,893 $12,242,6143,678,047 21,813,553
Accrued salaries and wages 1,110,489 1,940,484945,931 1,190,131
Other accrued liabilities 3,653,822 2,815,273
Income taxes payable - 1,425,1512,400,660 3,510,308
Current obligations under capital leases 28,226 25,9797,229 29,043
Deferred income taxes 135,677 552,000- 65,000
------------ -----------
Total current liabilities 27,364,107 19,001,50133,908,739 26,608,035
------------ -----------
Liabilities subject to compromise 20,095,175 -
------------ -----------
Long-term debt 25,542,198 16,750,000
Long-term obligations under capital
leases 7,014 28,670- 23,570,850
Deferred income taxes 369,000 369,000- 947,000
------------ -----------
Total long-term liabilities 25,918,212 17,147,670- 24,517,850
------------ -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 6,000,000
shares authorized, 3,514,5003,530,727 and 3,502,2263,514,500
shares issued and outstanding 35,307 35,145 35,022
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 42,385,939 42,350,728 42,258,917
Retained earnings 8,730,684 9,537,840(deficit) (33,342,860) 3,102,130
------------ -----------
Total stockholders' equity 51,126,685 51,841,9079,088,514 45,498,131
------------ -----------
$104,409,004 $87,991,078$ 63,092,428 $96,624,016
============ ===========
See notes to condensed consolidated financial statements.
3
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- - --------------------------------------------------------------------------------
SIXTEEN WEEKSQUARTER ENDED FORTY WEEKSYEAR-TO-DATE ENDED
------------------------------------------------------------------------------------------ ---------------------------
NOVEMBER 8, NOVEMBER 2, NOVEMBER 6,8, NOVEMBER 2,
NOVEMBER 6,1997 1996 19951997 1996
1995
------------------------------------------------------------------------------------------ ---------------------------
Net sales $25,128,577 $37,900,615 $39,595,059$ 75,648,212 $89,984,471
$93,146,366----------- ----------- ------------ -----------
Cost of goods sold (including
occupancy costs) 18,716,637 24,136,350 24,634,82959,483,234 56,632,045 59,061,283
----------- ----------- ----------------------- -----------
Gross profit 6,411,940 13,764,265 14,960,23016,164,978 33,352,426
34,085,083----------- ----------- ------------ -----------
Selling, general and
administrative expenses 10,932,575 13,272,305 13,622,92930,300,930 31,036,490 29,756,591
Depreciation expense 916,839 805,726 704,7002,462,349 2,007,613 1,610,825
Amortization expense 938,685 159,031 163,4831,153,940 400,340
380,677Restructuring charges 1,015,580 - 18,598,293 -
----------- ----------- ------------ -----------
-----------
Earnings (loss)Loss before interest and taxes (7,391,739) (472,797) 469,118(36,350,534) (92,017) 2,336,990
Interest expense, net 696,905 569,876 459,0341,633,707 1,268,139 991,548
----------- ----------- ------------ -----------
Loss before income taxes (8,088,644) (1,042,673) (37,984,241) (1,360,156)
Income taxes - (430,000) (1,539,252) (553,000)
----------- ----------- Income (loss) before
provision for income taxes (1,042,673) 10,084 (1,360,156) 1,345,442
Provision (benefit) for income taxes (430,000) 2,000 (553,000) 568,000
----------- ----------- ----------------------- -----------
Net income (loss)loss $(8,088,644) $ (612,673) 8,084$(36,444,989) $ (807,156) 777,442
=========== =========== ======================= ===========
Weighted average shares
outstanding 4,542,558 4,526,815 4,500,1254,542,892 4,521,558 4,519,962
=========== =========== ======================= ===========
Earnings per share:
Net income (loss)loss per share $(0.14) $0.00 $(0.18) $0.17$ (1.78) $ (0.14) $ (8.02) $ (0.18)
=========== =========== ======================= ===========
See notes to condensed consolidated financial statements.
4
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- - --------------------------------------------------------------------------------
FORTY WEEKS FORTY WEEKSYEAR-TO-DATE ENDED
ENDED------------------------------------
NOVEMBER 8, 1997 NOVEMBER 2, NOVEMBER 6,
1996
1995
-----------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)loss $(36,444,989) $ (807,156) $ 777,442
Adjustments to reconcile net incomeloss to net
cash used for operating activities:
Depreciation and amortization 2,749,622 2,407,953
1,991,502Provision for deferred taxes (1,012,000) (416,323)
Gain on sale of equipment - (198,841)
Restructuring charges 17,304,562 -
Change in deferred income taxes (416,323)Cash used for restructuring items:
Professional fees 736,759 -
Payroll expenses 385,005 -
Other 171,967 -
Changes in assets and liabilities:
Decrease (increase) in receivables (580,305) (389,574)
Increase2,485,740 (2,005,456)
Decrease (increase) in merchandise inventories 13,502,153 (13,654,055)
(17,931,678)
Decrease (increase)Increase in prepaid expenses and other (744,969) (187,446) 986,046
Increase in other assets (239,204) (367,309)
(105,277)
Increase (decrease) in accounts payable (1,046,225) 10,193,279
11,839,702
IncreaseDecrease (increase) in other accrued liabilities (757,751) 8,554 27,349
Decrease in income taxes payable (1,425,151) (492,472)
------------ ------------
Net cash used for operating activities (2,909,330) (5,026,800) (3,296,960)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (410,251) (3,747,902) (6,162,201)
Proceeds from sale of equipment - 300,000 -
------------ ------------
Net cash used for investing activities (410,251) (3,447,902) (6,162,201)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowingsBorrowings under revolving loan, net 3,306,022 8,792,199 8,960,000
Proceeds from sale of equity securities 35,373 91,934 195,726
Payments under capital leases (21,814) (19,409) (33,249)
------------ ------------
Net cash provided by financing activities 3,319,581 8,864,724 9,122,477
------------ ------------
Net increase(decrease)increase (decrease) in cash - 390,022 (336,684)
Cash, beginning of period - 1,239,117 1,119,407
------------ ------------
Cash, end of period - $ 1,629,139 $ 782,724
============ ============
See notes to condensed consolidated financial statements.
5
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - --------------------------------------------------------------------------------
(UNAUDITED)
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-ownedwholly-
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 9883 operating
retail locations in 2522 states throughout the United States as of the end of its
third quarter, November 2, 1996.8, 1997.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements include all adjustments (consisting
of normal, recurring adjustments)adjustments except as discussed in note 4) 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 November 2, 1996,8, 1997, and the results of their
operations for the sixteenquarter and forty
weeksyear-to-date and cash flows for the forty weeksyear-to-date
ended November 2, 1996,8, 1997, and November 6,
1995.2, 1996. These results are not necessarily
indicative of the results to be expected for the fullcurrent fiscal years.year.
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, 19961997 and 1995,1996, included in the
Company's Annual Report on Form 10-K (File No. 0-21598) dated April 11, 1996.May 1, 1997.
The Company reports its financial results on the basis of thirteen
four-
week periods. The third quarter began on July 14, 199620, 1997 and ended on November 2,
1996.8, 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. BANKRUPTCY FILING
On August 11, 1997, the Company filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware, (the "Bankruptcy Court"). Prior to the sale transaction discussed in
Note 8 below, the Company had been operating its business as a debtor-in-
possession under the supervision of the Bankruptcy Court.
As of the Petition Date, actions to collect pre-petition indebtedness
are stayed and other contractual obligations may not be enforced against the
Company. In addition, in
conjunctionunder the Bankruptcy Code, the Company may reject leases
and executory contracts. Parties affected by these rejections may file claims
with the headquarters conversion to a new computer system,Bankruptcy Court in accordance with the week
and period end cutoff was changed from Monday to Saturday. This change reduced
the number of selling days by two in the second quarter.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which was effective for the Company beginning February 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.reorganization process.
6
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(Continued)
- - --------------------------------------------------------------------------------
2. EARNINGS PER SHARE
Earnings per share is calculatedThe Company's Bankruptcy filing was precipitated by dividing net income by the weighted
averagea number of
sharesfactors. Deep discounting in the fourth quarter of common stock outstanding. Options issued, when
dilutive, are considered as common stock equivalents for all periods presented
using1996 eroded margins and
reduced liquidity. The reduction in cash flow greatly increased the treasury stock method.
3. LONG-TERM DEBT
On May 31,level of
vendor payables at 1996 year-end and resulted in higher than normal past due
invoices. Vendors responded to the past due situation by reducing shipments in
the first and second quarters of 1997, which slowed sales and further decreased
liquidity. In addition, the Company executedrecorded an agreement with its lenders (the
"Agreement")inventory shrink estimate of
$2.9 million at the end of the first quarter based on physical inventory results
at twenty-one of the Company's retail locations. This accrual reduced the
Company's borrowing base and further limited the Company's ability to pay
vendors. In late June, management unsuccessfully attempted to convince trade
creditors to ship goods under a proposal which providesrequired vendors to defer payment
on past due balances until September through December, 1997. Finally, the
Company was in default with respect to its bank line throughout a significant
portion of the second quarter and operated under a forbearance agreement until
it filed for Chapter 11 bankruptcy on August 11, 1997.
3. GOING CONCERN
The Company incurred net losses without regard to the restructuring
charges (discussed in note 4) of $7,073,000 for the quarter ended November 8,
1997 and $17,752,000 for the year-to-date ended November 8, 1997. The Company
closed sixteen stores and sold the inventory at three year $30,000,000 revolving
credit facility.stores to an outside group
conducting going-out-of-business sales. The facility allowsCompany's Chapter 11 filing,
liquidity issues, continuing operating losses and the Company present non-
compliance with bank covenants which have remained uncured raise substantial
doubt about the Company's ability to borrow upcontinue as a going concern. In addition,
effective October 10, 1997 the Company was notified by NASDAQ that it no longer
qualifies for inclusion in the national market system .
In November 1997, the Company engaged an investment banking firm to
50%assist the Company in identifying a buyer for the Company. As discussed in Note
8, the assets of the company were sold on January 21, 1998.
The Company's financial statements for the quarter ended November 8,
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 with the exception of the restructuring charges
discussed in note 4 and financing cost as discussed in note 7. The financial
statements do not reflect any adjustments that might result from the outcome of
this uncertainty.
4. RESTRUCTURING CHARGES
As a result of the Company's continuing evaluation of the carrying
value of its merchandiselong-lived tangible and intangible assets, additional losses from
operations in the second quarter and other factors discussed in note 3, the
Company recorded restructuring charges of $17,583,000 in the second quarter and
$1,016,000 in the third quarter of 1997.
7
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - --------------------------------------------------------------------------------
These charges are summarized as follows:
Write-off of goodwill $13,160,000
Write-off of net book value of assets for closed stores 3,855,000
Other restructuring charges 1,583,000
-----------
Total restructuring charges $18,598,000
===========
As a result of recent significant losses recorded by the Company and
the attendant uncertainty regarding the Company's reorganization proceedings,
management of the Company and the Board of Directors concluded that goodwill
previously recorded had been permanently impaired and, therefore, should be
written off. The net book value of goodwill charged to operations was
$13,160,000.
As part of the Company's restructuring program, management closed
sixteen unprofitable stores in June and July 1997 and an additional three stores
in October 1997. The inventory at these stores was sold to the NASSI Group, LLC
at 31% of retail value. For the closed and GOB stores, the Company has recorded
a charge to earnings as part of its restructuring costs equal to the sum of 1)
the net book value of fixtures and equipment, 2) all remaining unpaid lease
payments through the remaining term of the lease, and 3) the write off of all
other assets which have no future value subsequent to the store closure date.
Such amounts aggregated $3,855,000.
5. INVENTORIES
As a result of inventory shrink experienced at the end of the first
quarter in twenty-one retail locations, management accrued inventory shrink
equal to 2% of sales for all stores not inventoried at quarter one. Management
also made the decision to take physical inventories at all remaining stores in
quarter two. The results of those physical counts disclosed an average shrink
of 2.4% of sales since each store's last count. In December 1997, the Company
took physical inventories at 33 stores which resulted in an aggregate gain of
1.5% of sales since the last inventories.
Interest6. INCOME TAXES
While the Company has recorded significant operating losses year-to-
date, the Company is unable to recognize the tax benefits from such losses in
the accompanying financial statements since there is no assurance of future
realization of such benefits. Therefore, income tax expense has not been
recorded in the third quarter.
8
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - --------------------------------------------------------------------------------
7. LONG-TERM DEBT
On August 12, 1997, the Company obtained Debtor-in-Possession (DIP)
financing from GBFC/BankBoston. The proceeds from this financing were used to
pay off the Company's existing lenders and provide working capital to the
Company. The financing consisted of a $30 million revolving credit facility (the
"Revolver") and $5 million in term loans (the "Term Loans"). The Revolver
provided for advances equal to 65% of eligible inventory, as defined. The Term
Loans require no principal payment until January 1, 1998 at which time monthly
installments of $211,111 were due and payable. Both the Revolver and Term Loans
bear interest equal to GBFC/BankBoston Base Rate (8.59% on August 11, 1997) plus
.625%. These facilities were scheduled to become due and payable at the earlier
of 1) August 11, 1999, 2) emergence from Chapter 11 Bankruptcy or 3) any default
under the facility is
charged atfinancing agreement.
In order to obtain the prime rate orDIP financing, the London Interbank Offering Rate (LIBOR) plus 2%,
at the Company's option. Under terms of the Agreement, the Company paid the
lenders an origination fee of 50 basis points (.5%) at closing. The Company has
also agreed to pay a
$700,000 commitment fee of which $500,000 was paid upon closing of the facility
with the balance payable in one year. In addition, a facility fee of $200,000
(payable in monthly installments of $8,333.33 each) and a yearly fee of 37.525 basis
points (.375%(.25%) on the unused portion of the revolver. Any drawsRevolver were incurred. All amounts
borrowed under the facilityRevolver and Term Loans are secured by the assets of the
Company. At the end of the third quarter the Company was not in compliance with
certain loan covenants. Accordingly, the revolving and term loans are classified
as current liabilities on the Balance Sheet as of November 8,1997. In addition,
the loan commitment fee ($700,000) and facility fee ($200,000) were recorded as
financing costs in the Company's Statement of Operations in the third quarter.
Although, GBFC/BankBoston has continued to fund the Company's cash flow needs
for operating expenses, the Company was forced to suspend payments to its
vendors commencing in early December 1997. Consequently, the Company received
almost no inventory since that time. GBFC/BankBoston substantially reduced the
Company's loan availability by: (I) reducing the borrowing base for an
additional shrink reserve of $500,000, (ii) requiring a 1998 Ad Valorem tax
reserve of $437,000 during the month of December 1997 as a reduction in the
borrowing base, and (iii) phase in a reduction in the advance rate to 50% in
December 1997.
Effective December 1, 1997, GBFC/BankBoston had also increased its
interest rate on the revolver and term facilities to 12.125%, the default rate
provided in its agreement.
8. SUBSEQUENT EVENTS
On January 16, 1998, the bankruptcy court approved the sale of all assets of the
Company and its subsidiaries to Old America Stores, LP and KOB, LP in exchange
for cash, used primarily to pay off all secured indebtedness, and the assumption
of substantially all post petition liabilities of the Company and its
subsidiaries. The purchase price was determined through arms-length negotiations
between the parties. The purchase price did not provide for any payment to pre-
petition creditors or stockholders. Accordingly, there will be no value for the
stockholders of the Company. As a result of
9
OLD AMERICA STORES, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - --------------------------------------------------------------------------------
the sale, the Company and its subsidiaries have terminated operations and is in
the process of liquidating and winding up their affairs. The transaction closed
on January 21, 1998.
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 repaidis a party to a
settlement agreement between the Company, the plaintiff and the Company's
insurance carrier whereby the Company has agreed to pay $50,000 in exchange for
full release of all claims against the Company and its former lender on June 5, 1996.
4. OPERATING LEASEofficer. The
Companysettlement has entered into an operating lease covering certain equipmentbeen approved by the Company's bankruptcy court and software needed to complete its point-of-sale, merchandising, warehouse and
financial systems installation. This lease, which commenced in March 1996, is for a five-year period with paymentspending
approval of $66,123 each month. The future minimum
lease payments under this operating lease are as follows:
Year Ending:
1996 $ 571,700
1997 793,400
1998 793,400
1999 793,400
2000 793,400
Thereafter 227,700
----------
$3,973,000
==========
7the plaintiff's bankruptcy court.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Third Quarter 19961997 Compared to Third Quarter 19951996
- - -------------------------------------------------
Net Sales. Net sales for the third quarter ended November 2, 1996,8, 1997, decreased by
$1,748,000$12,772,000 or 4.4%33.7% to $37,901,000$25,129,000 from $39,595,000$37,901,000 for the quarter ended
November 6, 1995.2, 1996. Comparable store sales for the quarter were down 5.6%28.8% over
the third quarter in the prior year. Sales results were negatively impacted from
significant product liquidation by the Company's largest competitor during the
third quarter. In addition, the Company completed the conversionComparable store sales have continued to
deteriorate as a result of all storeshigher out-of-stock positions and reduced advertising
as compared to a new point-of-sale system and instituted new item display configurations
(plan-o-grams). These internal activities diverted attention from store
operations and contributed to the decline in sales from the prior year.
Gross Profit. Gross profit for the third quarter decreased 8.0%53.4% or $1,196,000$7,352,000
to $6,412,000 or 25.5% of net sales, from $13,764,000 or 36.3% of net sales from $14,960,000 or 37.8% of net sales in
1995.1996. The 1.5%11.2% decrease in gross profit as a percent of net sales is primarily
relatedattributable to margin compression(i) an increase in the accrual for inventory shrinkage which
reflects actual results achieved during the first half of the year, (ii) a
significant decline in the amount of expenses that can be capitalized into
inventory due to a reduction in purchasing from the promotional environmentprior year, (iii) an
increase in rent expense as a percent to sales (although the crafts
industry.dollar amount
declined, the percentage increase is due to reduction in leverage from lower
sales) and (iv) a loss on sale of inventory to an outside liquidation company in
three stores to be closed ($435,000).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the third quarter of 19961997 decreased $351,000$2,339,000 or
2.6%17.6% to $10,933,000 or 43.5% of net sales from $13,272,000 or 35.0% of net
sales from $13,623,000 or 34.4% of net sales in 1995. The 0.6%1996. This 8.5% of net sales increase is primarily attributable to an
increase in advertising relatedsalaries and wages (5.7%) due to the cost of publishing free-standing color inserts and
moving certain newspaper advertisinglost leverage from mid-week to Sunday circulation.lower sales.
Depreciation Expense. Depreciation expense increased from $705,000$806,000 in the third
quarter of 1995,1996, to $806,000$917,000 in 1996.1997. This increase is primarily associated
with capitalized costs of new stores incurred relatedsince the third quarter of 1996.
Restructuring Charges. Restructuring charges resulting from the bankruptcy
filing during the quarter were recorded. The restructuring charges amounted to
$1,016,000 which represented professional fees ($630,000) and a reserve for
bonuses to certain key employees for remaining through the installation of the point-of-sale
system at the stores and new computer hardware and software at the Company's
headquarters.bankruptcy process
($385,000).
Interest Expense. Interest expense increased from $459,000 in the third quarter
of 1995, to $570,000 in the third quarter
of 1996.1996, to $697,000 in the third quarter of 1997. The growth in interest
expense is due to increased borrowings under the revolving loan facility to
finance the Company's remodeling program and increasesnine new stores in inventory partially
offset by a reduced cost of borrowings in the current quarter as compared with
fiscal 1995.1996.
Net Income. Net income for the third quarter decreased from $8,000a net loss of
$613,000 in the third quarter of 19951996 to a loss of $613,000$8,089,000 for 1996.1997. This
net loss equates to a $.14$1.78 loss per share based on 4,526,8154,542,558 weighted average
shares outstanding for the third quarter of 1996,1997, as compared to $0.00 earnings$0.14 loss per
share for the third quarter of 19951996 based on 4,500,1254,526,815 weighted average shares
outstanding.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for property and equipment amounted to $3,748,000$410,000
for the forty weeks ended November 2, 1996.8, 1997. Such expenditures are related primarily
to
point-of-sale (POS) implementation and leasehold improvements and fixtures
for new stores. The Company has entered into an operating lease covering certain
computer hardware and software necessary to implement POS scanner technology
that is linked to perpetual inventory records maintained at the stock-keeping-
unit level. This system includes the transmissionnormal replacement of sales and inventory data to
headquarters on a daily basis. During the third quarter, all stores were
converted to the new POS system.store equipment. The Company's inventory has increased $13,654,000decreased
$14,313,000 from $53,002,000$56,906,000 at January 31, 19961997 to
$66,656,00011
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
$42,593,000 on November 2, 1996.8, 1997. This increasedecrease reflects additional inventory needed for newthe reduction in the
total number of stores, and increased inventory for
promotional and seasonal activities. On November 6, 1995, total inventories
were $63,568,000, representing $676,000102 stores at January 31, 1997, down to 83 stores at the
end of the third quarter. In addition, per store (94 stores open) compared to
$680,000inventory has declined from an
average of $558,000 per store (98 stores open) onat January 31, 1997, to an average of $513,000 per
store at November 2, 1996.8, 1997. This per store decrease reflects a significant
reduction in vendor shipments resulting from higher-than-normal past due
balances for the Company's vendors payable.
At November 2, 1996,8, 1997, long-term and short-term bank debt was $25,542,000,$26,877,000, an
increase of $8,792,000$3,306,000 from January 31, 1996, representing amounts owed1997. On August 11, 1997, the Company
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware, (the "Bankruptcy Court"). The Company is
currently operating its business as a debtor-in-possession under the Company'ssupervision
of the Bankruptcy Court. In conjunction with the Chapter 11 filing the Company
obtained debtor-in-possession (DIP) financing from GBFC/BankBoston which
allowed the Company to repay its existing indebtedness and have cash
availability to purchase regular and seasonal merchandise. At the end of the
third quarter the Company was not in compliance on certain loan covenants.
Accordingly, the revolving credit facility. Borrowings madeand term loans are classified as current liabilities
on the Balance Sheet as of November 8,1997. GBFC/BankBoston has agreed to
continue to fund the DIP financing on a discretionary basis (see note 7 to the
financial statements).
On January 16, 1998, the bankruptcy court approved the sale of all
assets of the Company and its subsidiaries to Old America Stores, LP and KOB, LP
in exchange for cash, used primarily to pay off all secured indebtedness, and
the assumption of substantially all post petition liabilities of the Company and
its subsidiaries. The purchase price was determined through arms-length
negotiations between the parties. The purchase price did not provide for any
payment to pre-petition creditors or stockholders. Accordingly, there will be no
value for the stockholders of the Company. As a result of the sale, the Company
and its subsidiaries have terminated operations and are in the first three quartersprocess of
1996
were used to pay management bonuses, federalliquidating and state income taxes due, new
store constructionwinding up their affairs. The transaction closed on January 21,
1998.
12
PART II. OTHER INFORMATION
- - ---------------------------
ITEMS 1 AND 3. LEGAL PROCEEDINGS AND DEFAULTS UPON SENIOR SECURITIES
See Part I. Item 2. Management's Discussion and to fund increases in inventories. The Company hasAnalysis for a new
revolving credit facility which replaceddiscussion
of these matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(2.1) Asset Purchase Agreement between Old America Stores, Inc., and its
secured credit facility that
matured on May 31, 1996. The new facility provides the Company with a $30
million, three year revolver bearing interest at prime or LIBOR plus 2%, at the
Company's option. The Company completed its new facilitysubsidiaries and repaid its former
lender under the facility on June 5, 1996.
The Company will open five new stores during the remainder of the year. The
Company believes that cash from operations, together with borrowings under the
new revolving credit facility, will be sufficient to fund working capital needsOld America Stores, LP and the addition of new stores scheduled for the balance of 1996.
9KOB, LP
(99) Press Release dated January 26, 1998
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLD AMERICA STORES, INC.
Date: December 13, 1996January 29, 1998 By: /s/ Jim D. Schultz
----------------- --- ------------------
Jim D. Schultz
Senior Vice President, Secretary,
Treasurer and Chief Financial
Officer (Principal Financial
and Accounting Officer)
1014