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,July 19, 1997.
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
and
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 [ ]
At May 29,August 1, 1997, an aggregate of 3,520,437 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
PAGEPage
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
April 26,July 19, 1997 and January 31, 1997 3
Condensed Consolidated Statements of Operations -
Twelve weeks and twenty-four weeks ended
April 26,July 19, 1997 and April 22,July 13, 1996 4
Condensed Consolidated Statements of Cash Flows -
TwelveTwenty-four weeks ended April 26,July 19, 1997 and April 22,July 13, 1996 5
Notes to Condensed Consolidated Financial Statements 6-76-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-910
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)11
SIGNATURES 1012
2
OLD AMERICA STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------Condensed Consolidated Balance Sheets
APRIL 26,- --------------------------------------------------------------------------------------------------------------------------
July 19, 1997 JANUARYJanuary 31, 1997
---------------------------------------------------------------------------------------
ASSETS (Unaudited)
CURRENT ASSETS:
Receivables, net of allowance $ 7,153,7862,210,092 $ 5,947,955
Merchandise inventories 49,014,96340,575,660 56,906,255
Prepaid expenses and other 1,727,2431,496,477 1,891,893
----------------------- -----------
Total current assets 57,895,99244,282,229 64,746,103
------------ -----------
Property and equipment, at cost, net 17,199,94915,252,392 17,755,770
Intangible assets and deferred charges, net 13,516,05335,133 13,639,227
Other assets 487,871417,148 482,916
------------ -----------
-----------
$89,099,865$ 59,986,902 $96,624,016
======================= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $25,453,107$ 22,235,492 $ -
Accounts payable 16,337,06615,619,005 21,813,553
Accrued salaries and wages 695,808679,125 1,190,131
Other accrued liabilities 3,042,8894,266,535 3,510,308
Current obligations under capital leases 22,69016,017 29,043
Deferred income taxes - 65,000
65,000
----------------------- -----------
Total current liabilities 45,616,56042,816,174 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(deficit) (25,254,215) 3,102,130
----------------------- -----------
Total stockholders' equity 42,536,30517,170,728 45,498,131
------------ -----------
-----------
$89,099,865$ 59,986,902 $96,624,016
======================= ===========
See notes to consolidated condensed financial statements.
3
OLD AMERICA STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------Condensed Consolidated Statements of Operations (Unaudited)
TWELVE WEEKS ENDED
-------------------------------------
APRIL 26,- ----------------------------------------------------------------------------------------------------------
Twelve Weeks Ended Twenty-four weeks ended
----------------------------- ----------------------------
July 19, 1997 APRIL 22,July 13, 1996 -------------------------------------July 19, 1997 July 13, 1996
----------------------------- ----------------------------
Net Sales $28,155,541 $27,138,869$ 22,364,094 $ 24,934,987 $ 50,519,635 $ 52,073,856
Cost of salesgoods sold (including
occupancy costs) 22,325,234 16,972,66018,441,363 15,723,535 40,766,597 32,485,695
------------ ----------- ------------ -----------
Gross profit 5,830,307 10,166,209Profit 3,922,731 9,211,452 9,753,038 19,588,161
Selling, general and
administrative 9,469,202 8,915,152
expenses 9,899,153 8,638,532 19,368,355 17,764,184
Depreciation expense 765,509 587,079780,001 614,808 1,545,510 1,201,887
Amortization of goodwill and intangibles 129,263 125,442expense 85,992 115,868 215,255 241,310
Restructuring charges 17,582,713 - 17,582,713 -
------------ ----------- ------------ -----------
Income (loss)Loss before interest and income taxes
(4,533,667) 538,536(24,425,128) (157,756) (28,958,795) 380,780
Interest expense, net 452,101 337,962484,701 360,301 936,802 698,263
------------ ----------- ------------ -----------
Income (loss) before income
taxes (4,985,768) 200,574(24,909,829) (518,057) (29,895,597) (317,483)
Income taxes (1,995,000) 82,000455,748 (205,000) (1,539,252) (123,000)
------------ ----------- ------------ -----------
Net income (loss) $(2,990,768)loss $(25,365,577) $ 118,574(313,057) $(28,356,345) $ (194,483)
============ =========== ============ ===========
Weighted average shares
outstanding 4,532,860 4,520,0544,539,503 4,519,521 4,539,799 4,519,775
============ =========== ============ ===========
Earnings per share:
Net incomeIncome (loss) per share $ (.66) $ 0.03$(5.59) $(0.07) $(6.25) $(0.04)
============ =========== ============ ===========
See notes to condensed consolidated financial statements.
4
OLD AMERICA STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------Condensed Consolidated Statements of Cash Flows (Unaudited)
TWELVE- --------------------------------------------------------------------------------------------------------------------
TWENTY-FOUR WEEKS ENDED
-------------------------------------
APRIL 26,----------------------------------------
JULY 19, 1997 APRIL 22,July 13, 1996
-----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,990,768)loss $(28,356,345) $ 118,574(194,483)
Adjustments to reconcile net income
(loss)loss to net
cash used for operating activities:
Depreciation and amortization 894,772 712,5211,760,765 1,443,196
Reduction in deferred taxes payable (1,012,000) -
Gain on sale of equipment - (198,841)
Restructuring costs 17,582,713 -
Changes in assets and liabilities:
IncreaseDecrease (increase) in receivables (1,205,832) (2,021,697)3,385,807 (2,507,366)
Decrease (increase) in merchandise inventories 7,891,294 9,30615,519,646 (2,200,987)
Decrease (increase) in prepaid expenses and other 164,650 (59,518)192,216 (125,220)
Increase in other assets (11,043) (83,268)(146,178) (328,269)
Increase (decrease) in accounts payable (5,476,487) 566,771(6,494,547) 24,528
Decrease in other accrued liabilities (961,742) (1,278,368)
-----------(849,561) (985,853)
------------ -----------
Net cash used for operating activities (1,695,156) (2,035,679)
-----------1,582,516 (5,073,295)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (209,690) (161,463)
-----------(263,074) (1,416,171)
Proceeds from sale of equipment - 300,000
------------ -----------
Net cash used for investing activities (209,690) (161,463)
-----------(263,074) (1,116,171)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving loan, net 1,882,258 1,775,000(1,335,357) 5,680,697
Proceeds from sale of equity securities 28,942 28,218
Payments under capital leases (6,354) (5,699)
-----------(13,027) (11,385)
------------ -----------
Net cash provided by financing activities 1,904,846 1,797,519
-----------(1,319,442) 5,697,530
------------ -----------
Net decrease in cash - (399,623)(491,936)
Cash, beginning of period - 1,239,117
----------------------- -----------
Cash, end of period $ - $ 839,494
===========747,181
============ ===========
See notes to condensed consolidated financial statements.
5
OLD AMERICA STORES, INC.
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-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 10286 operating
retail locations in 2522 states throughout the United States as of the end of its
firstsecond quarter, April 26,July 19, 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 describedexcept as discussed in Note 5)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 April 26,July 19, 1997, and the results of their
operations for the twelve and twenty-four weeks and cash flows for the twelvetwenty-
four weeks ended April
26,July 19, 1997, and April 22,July 13, 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, 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-weekfour-
week periods. The firstsecond quarter began on February 1,April 27, 1997 and ended on April 26,July 19,
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. SUBSEQUENT EVENT - 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"). The Company is currently 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, under the Bankruptcy Code the Company may reject leases
and executory contracts. Parties affected by these rejections may file claims
with the Bankruptcy Court in accordance with the reorganization process.
Substantially all liabilities as of the Petition Date are subject to settlement
under a plan of reorganization to be voted upon by the creditors and confirmed
by the Bankruptcy Court.
6
OLD AMERICA STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
The Company's Bankruptcy filing was precipitated by a number of factors.
Deep discounting in the fourth quarter of 1996 eroded margins and reduced
liquidity. The reduction in cash flow greatly increased the 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 recorded an 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 required 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 $2,990,768$7,783,000 for the quarter ended April
26,1997July 19, 1997 and
$6,435,710$10,774,000 for the yeartwenty four weeks ended January 31,July 19, 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 theclosed sixteen stores. The Company's revolving credit agreement have been classified
in the balance sheet as current. The Company'sChapter 11 filing, liquidity issues and
the recentcontinuing 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
balances due suchpost petition purchases. Although debtor-in-
possession financing has been obtained and the Company is currently negotiating
with its key vendors untilfor basic and seasonal merchandise, assurance can not be
given that the necessary cash flows significantly improveflow will be generated in the third and fourth
quarters. The Company is in discussions and negotiations with key
vendorsquarters 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,allow the Company intends to continue to explore potential alternative financing opportunities as part of its
efforts to improve its liquidity position.normal operations.
The Company's financial statements for the quarter ended April 26,July 19, 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.business with the exception of the restructuring charges discussed in note 4.
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 income4. RESTRUCTURING CHARGES
As a result of the Company's continuing evaluation of the carrying value of
its long-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 of 1997.
7
OLD AMERICA STORES, INC.
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 3,419,000
Other restructuring charges 1,004,000
-----------
Total restructuring charges $17,583,000
===========
As a result of recent significant losses recorded by the weighted
average numberCompany and the
attendant uncertainty regarding the Company's reorganization proceedings,
management of sharesthe Company and the Board of common stock outstanding. OptionsDirectors concluded that goodwill
previously recorded had been permanently impaired and, warrants
issued are consideredtherefore, 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. Management has also identified four
additional stores slated for closure within the next sixty days. For these
twenty stores, the Company has recorded a charge to earnings as exercisedpart 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 unexpired 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 $3,419,000.
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 for which an additional charge of $390,000
was recorded in the second quarter. Management intends taking selected store
inventories in future periods presented usingin order to monitor shrink results going forward.
Additionally, management plans to take physical counts on approximately forty
stores at the treasury
stock method.
4.end of December, 1997.
6. 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. Income tax expense of approximately $456,000 has
been recorded to reflect a valuation allowance against tax benefits recorded in
the first quarter which, because of the Company's continued deterioration in the
second quarter, may not be realized.
7. LONG-TERM DEBT
The Company hashad a revolving credit facility which expires May 1999, with a two bank group (the
"Agreement""Lenders") which providesprovided the Company with a $30,000,000 revolving loan.loan (the
"Agreement"). The Agreement allowsallowed
8
OLD AMERICA STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
the Company to borrow up to 50% of the carrying value of its merchandise
inventories. Interest under the facility iswas charged at the prime rate or the
London Interbank Offering Rate (LIBOR) plus 2.5%, at the Company's option. The
Company iswas required to pay a yearly fee of 37.5 basis points (.375%) on the
unused portion of the revolver. Any draws under the facility were secured by
the assets of the Company.
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 consists of a $30 million revolving credit facility (the
"Revolver") and $5 million in term loans (the "Term Loans"). The Revolver
provides 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 are 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 become due and payable at the earlier of 1) August 11,
1999, 2) emergence from Chapter 11 Bankruptcy or 3) any default under the
financing agreement.
In order to obtain the DIP financing, the Company agreed to pay a $700,000
commitment fee of which $500,000 was paid upon closing of the facility and the
balance is payable in one year ($100,000 is refundable in the event the DIP
financing is repaid during the second year of its term). In addition, the
Company is required to pay a facility fee of $200,000 (payable in monthly
installments of $8,333.33 each) and a yearly fee of 25 basis points (.25%) on
the unused portion of the Revolver. All amounts borrowed under the Revolver and
Term Loans 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
7
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.
89
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FirstResults of Operations
Second Quarter 1997 Compared to FirstSecond Quarter 1996
- ----------------------------------------------------------------------------------------------------
Net Sales. Net sales for the firstsecond quarter ended April 26,July 19, 1997, increaseddecreased by
$1,017,000$2,571,000 or 3.7%10.3% to $28,156,000 for 102 stores open$22,364,000 from $24,935,000 for the quarter ended April 26, 1997, from $27,139,000 for 94 stores open for the quarter ended April
22,July
13, 1996. Comparable store sales for the quarter were down 3.8%14.9% over the
firstsecond quarter in the prior year. Comparable store sales results were negatively
impacted byhave continued to
deteriorate as a significant reduction inresult of higher out-of-stock positions and reduced advertising
and a lackas compared to the prior year. Net sales have also declined due to the closure
of basic
merchandise in itssixteen 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.quarter.
Gross Profit. Gross profit for the firstsecond quarter decreased 42.7%57.4% or $4,336,000$5,288,000
to $5,830,000$3,923,000 or 20.7%17.5% of net sales, from $10,166,000$9,211,000 or 37.5%36.9% of net sales in
1996. The 16.8%19.4% decrease in gross profit as a percent of net sales is primarily
relatedattributable 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(i) 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
unanticipatedfor 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 countedwhich
reflects actual results achieved during the first quarter . In
addition, other items affecting gross profit included additionalhalf of the year, (ii) an
increase in warehouse and procurement costs (1.5%), increased freight due to smaller average shipmentsa 16.1% decline in inventory
levels from the prior year, (iii) lower merchandise margins attributable to
stores by common carrier (1.3%)increased discounting incurred during the quarter in an attempt to stimulate
sales, and (iv) an increase in cost of goods sold (1.8%) duemarkdowns related to reduced volume and coop rebate allowances earned during the quarter.clearance merchandise.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the firstsecond quarter of 1997 increased $554,000$1,260,000 or
6.2%14.6% to $9,469,000$9,899,000 or 33.6%44.3% of net sales from $8,915,000$8,639,000 or 32.9%34.6% 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. TheThis 9.7% of net sales increase is primarily attributable to an
increase in other operating expense primarily relatessalaries and wages (6.6%) due to operating
lease payments for point-of-sale (POS) computer hardwarelost leverage from lower sales.
Although sixteen stores were closed during the quarter, additional labor costs
were incurred to move merchandise to remaining stores after the closures.
As a result of lowering the Company's store count from 102 stores to 86
stores and software installed
the summer and fall of 1996.implementing an austerity program, management has reduced its
corporate payroll by approximately $900,000 on an annualized basis going
forward. Management intends to continue reviewing its corporate cost structure
to hold such costs in line with its remaining store base.
Depreciation Expense. Depreciation expense increased from $587,000$615,000 in the
firstsecond quarter of 1996, to $766,000$780,000 in 1997. TheThis increase in depreciation expense is primarily
due to capital expenditures for the nine new stores opened in the fall
of 1996 andassociated with capitalized costs of new stores incurred since the POS conversion.second
quarter of 1996.
Restructuring Charges. Restructuring charges were recorded due to the Company's
determination that certain long-lived tangible and intangible assets had been
permanently impaired and the decision to close sixteen stores during the
quarter. The restructuring charges amounted to $17,583,000 and were primarily a
write-off of goodwill ($13,160,000) and costs related to completed and planned
store closures ($3,419,000).
Interest Expense. Interest expense increased from $338,000$360,000 in the firstsecond
quarter of 1996, to $452,000$485,000 in the firstsecond quarter of 1997. The increasegrowth in
interest expense is due to additionalincreased borrowings under the Company's revolving loan
facility to finance 9the nine new stores in 1996.
910
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Income. Net income for the firstsecond quarter decreased from $119,000a net loss of
$313,000 in the firstsecond quarter of 1996 to a loss of ($2,991,000)$25,366,000 for 1997. This
net loss equates to $(.66) earnings$5.59 loss per share based on 4,532,8604,539,503 weighted average
shares outstanding for the firstsecond quarter of 1997, as compared to $0.03 earnings$0.07 loss per
share for the firstsecond quarter of 1996 based on 4,520,0544,519,521 weighted average shares
outstanding.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for property and equipment amounted to $210,000$263,000 for
the twelvetwenty-four weeks ended April 26,July 19, 1997. Such expenditures are related to
normal replacement of store equipment. The Company's inventory has decreased
$7,891,000$16,330,000 from $56,906,000 at January 31, 1997 to $49,015,000$40,576,000 on April 26,July 19,
1997. This decrease includes a $2.9
million inventoryreflects the reduction related to increased shrink recorded in the first
quartertotal number of stores, 102
stores at January 31, 1997, (See "Gross Profit" above).
The Company also decreased purchasing levels duringdown to 86 stores at the quarter and used the
cash to reduce outstanding accounts payable. As a resultend of the increased
vendor payments, accounts payable was reduced 25% or $5,476,000 during thesecond quarter.
Despite significant paydownsIn addition, per store inventory has declined from an average of $558,000 per
store at January 31, 1997, to vendors during the quarter, the
Company is still not within terms onan average of $472,000 per store at July 19, 1997.
This per store decrease reflects a significant amount of its outstanding
trade payable and continues to experience disruptionsreduction in vendor shipments
resulting from higher-than-normal past due balances for 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.Company's vendors
payable.
At April 26,July 19, 1997, bank debt was $25,453,000, an increase$22,235,000, a decrease of $1,882,000$1,336,000 from
January 31, 1997, representing amounts owed under1997. At the Company's existing
revolving credit facility. Borrowings inend of the firstsecond 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 inan
overline position with respect to its credit facility and, accordingly,agreement, however, the debt was classified as
current.
The Company's abilitylenders
agreed to continue as anormal operations until the Chapter 11 Bankruptcy filing on
August 11, 1997. 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 inventory 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.forward.
The Company is currently in discussions and negotiations with key vendors to obtain important
basic and seasonal merchandisethe process of preparing the reorganization
plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on more favorable payment terms and with its
banks to obtain the necessary waivers and/or restructuring of its covenants, but
cannot provide any assuranceForm 8-K on August 19, 1997 reporting that it will be successful in such discussions and
negotiations. However,
the Company intends to continue to explore potential
alternative financing opportunities as parthad filed for bankruptcy protection under Chapter 11 of its efforts to improve its
liquidity position.
The Company has also abandoned its plan to relocate up to sixteen stores
duringTitle 11 of
the fiscal year and, instead, plans to close 20 - 25 stores and transfer
merchandise to continuing stores.
10United States Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware.
11
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 ofby the
undersigned thereunto duly authorized.
OLD AMERICA STORES, INC.
Date: June 23,September 2, 1997 By: /s/ Jim D. Schultz
--------------------------------------------- ------------------------------
Jim D. Schultz
Sr.
Vice President, Secretary,
Treasurer and Chief Financial
Officer (Principal Financial
and Accounting Officer)
1112