FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 30, 1994. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 From the transition period from_____________ to ___________________ _________________________________________________________________ Commission file number _ _ 33-13622______________________________ _________________________________________________________________ BRENDLE'S INCORPORATED Elkin, North Carolina 56-049-7852 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1919 North Bridge Street, Elkin, North Carolina 28621 (910) 526 5600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports and (2) has been subject to such filing requirements for the past 90 days. Yes X No________ Page 1 of 16 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No________ Not Applicable________ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. At July 30, 1994, there were 12,760,644 shares of the issuer's Common Stock outstanding. Page 2 of 16 PART I. FINANCIAL INFORMATION Item 1. Financial Statements BRENDLE'S INCORPORATED Consolidated Statements of Income (Unaudited) (In thousands except per share data) Three Months Ended July 30, July 31, 1994 1993 Net sales $32,742 $36,232 Other income 31 35 Total revenue 32,773 36,267 Cost and expenses: Cost of merchandise sold 25,137 26,309 Selling, operating and administrative expenses 9,701 10,202 Depreciation and amortization 882 1,266 Interest expense: Capitalized leases 111 189 Other 355 0 Reorganization Costs 596 3,816 36,782 41,782 Net loss before income taxes and extraordinary item (4,009) (5,515) Provision for income taxes --- --- Net loss before extraordinary item (4,009) (5,515) Debt forgiveness 1,576 --- Net income (loss) $(2,433) $(5,515) Weighted average shares outstanding 12,766 8,290 Net income (loss) per share $ (0.19) $ (0.67) Page 3 of 16 BRENDLE'S INCORPORATED Consolidated Statements of Income (Unaudited) (In thousands except per share data) Six Months Ended July 30, July 31, 1994 1993 Net sales $58,690 $69,506 Other income 62 137 Total revenue 58,752 69,643 Cost and expenses: Cost of merchandise sold 43,946 50,658 Selling, operating and administrative expenses 19,229 22,268 Depreciation and amortization 1,761 2,755 Interest expense: Capitalized leases 222 415 Other 596 1 Reorganization Costs 846 3,659 66,600 79,756 Net loss before income taxes and extraordinary item (7,848) (10,113) Provision for income taxes --- --- Net loss before extraordinary item (7,848) (10,113) Debt forgiveness 30,249 --- Net income (loss) $ 22,401 $ (10,113) Weighted average shares outstanding 10,582 8,292 Net income (loss) per share $ 2.12 $ (1.22) Page 4 of 16 BRENDLE'S INCORPORATED Consolidated Balance Sheet (Unaudited) (In thousands except per share data) January July July 30 29, 31, 1994 1994 1993 Assets Current Assets: Cash and temp. cash invest. $ 2,304 $ 34,774 $ 34,061 Accounts receivable 1,216 1,480 5,369 Merchandise inventories 53,657 54,133 55,335 Prepaid inventory 1,133 299 1,805 Prepaid expenses 1,923 671 1,194 Total current assets 60,233 91,357 97,764 Property and equipment, less accumulated depreciation and amortization 10,170 15,767 31,940 Other assets 745 439 579 $71,148 $107,563 $130,283 Liabilities and Shareholders' Equity Current liabilities: Notes Payable $16,476 $ --- $ --- Accounts Payable Trade 6,574 3,002 2,473 Outstanding Checks (Note #5) 3,244 --- --- Current portion of capitalized lease obligations 1,514 --- --- Current portion of restructuring expenses 509 509 1,388 Accrued compensation 538 508 699 Other accrued liabilities 2,488 2,335 4,723 Total current liabilities 31,343 6,354 9,283 Reorganization notes 276 --- --- Capitalized lease obligations, less current portion 2,292 --- --- Other liabilities 398 --- --- Other deferred credit 220 --- --- Total long-term liabilities 3,186 0 0 Liabilities subject to compromise (Note #6) 1,510 95,749 106,338 Total Liabilities 36,039 102,103 115,621 Shareholders' equity: Common stock, $1 par value, 20,000,000 shares authorized, 12,760,644, 8,299,454 and 8,301,644 shares issued 12,761 8,299 8,302 Capital in excess of par value 20,898 18,112 18,109 Retained earnings 1,450 (20,951) (11,748) (deficit) Total shareholders' equity 35,109 5,460 14,662 $71,148 $107,563 $130,283 Page 5 of 16 BRENDLE'S INCORPORATED Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six Months Ended July 30, July 31, 1994 1993 Operations: Net income (loss) $ 22,401 $(10,113) Items not requiring (providing) cash: Depreciation and amortization 1,761 2,755 Reorganization reserve --- (1,670) Other --- 7 Debt forgiveness (30,249) --- Changes in assets and liabilities: Accounts receivable 264 967 Merchandise inventories 476 2,558 Prepaid inventory (834) 2,962 Prepaid expenses (1,252) (327) Accounts payable and accrued liabilities 6,999 1,098 Reorganization reserve 0 (3,545) Cash provided (used) by operations (434) (5,308) Investing Activities: Net (additions) retirements of property and equip 3,836 5,669 (Addition) reduction in other assets (306) 87 Cash provided by investing activities 3,530 5,756 Financing Activities: Decrease in liabilities subject to compromise (52,070) --- Increase in long-term liabilities 618 --- Increase in reorganization notes 276 --- Decrease in capitalized lease obligations (851) (694) Proceeds from borrowings on line of credit 16,476 (2,297) Issuance (redemption) of common stock (8) 12 Decrease in paid-in-capital (7) (2) Cash used by financing activities (35,566) (2,981) Net decrease in cash and temporary cash invest. $(32,470) $ (2,533) Supplemental disclosure of non-cash financing activities: During the quarter ended April 30, 1994 the company issued 4,469,191 shares of common stock valued at $7,263,000 to creditors under the terms of its Plan of Reorganization and resulted in an increase in capital in excess of par value of $2,793,000 Page 6 of 16 BRENDLE'S INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of the interim period. Note 2. In April 1986, four shareholders of the Company agreed not to transfer or sell their Common Stock to any unrelated party (as defined) without the written consent of the other parties to the agreement. In addition, in the event of the death of one of the four shareholders, the Company can be required to purchase their Common Stock at fair value up to the life insurance proceeds, consisting of policies with a face value of $5,250,000, $5,000,000, $3,070,000 and $3,000,000, respectively. An amount equal to the cash surrender value of these policies at July 30, 1994 and July 31, 1993 of $219,000 and $521,000, respectively, has been shown as an other deferred credit on the balance sheet with a corresponding reduction in retained earnings. The Company has taken out loans against the cash surrender value of these policies in the sum of $1,840,000 to finance current capital requirements. Note 3. Tax refunds resulting from losses incurred are calculated using tax payments of three prior years. Any losses in excess of those allowed for carry-back are carried forward for use as future earnings allow. These loss carry-forwards at January 29, 1994 were approximately $49 million. Tax loss carry-backs were exhausted during the second quarter of Fiscal 1992. Note 4. Effective for the first quarter of Fiscal 1994, the Company implemented Statement of Financial Accounting Standards 109, "Accounting for Income Taxes," (SFAS 109). SFAS 109 mandates the use of the liability method to calculate deferred taxes. SFAS 109 permits restatement of earlier years or presentation of the cumulative effect of the change in the years adopted. The Company has adopted the Statement prospectively and the adoption does not impact the Company's financial condition or results of operations due to the fact that the Company has recorded a valuation allowance against the deferred tax asset which primarily results from the Company's net operating loss carry-forwards. Page 7 of 16 Note 5. Outstanding checks totalling $3,244,000 on July 30, 1994 were classified under current liabilities (as outstanding checks) and included in cash at July 30, 1994. Note 6. Liabilities subject to compromise include disputed claim obligations where claim objections have been filed with the Bankruptcy Court. Page 8 of 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview: On November 22, 1992, the Company and its wholly-owned principal operating subsidiary, Brendle's Stores, Inc. (BSI), (collectively sometimes referred to as the "Company") filed for protection under Chapter 11 of the Bankruptcy Code. Under Chapter 11, the Company and BSI, Debtors In Possession, continued to conduct business in the ordinary course under the protection of the Bankruptcy Code while a Plan of Reorganization was developed to restructure and reorganize the debt structure and allow the debtor to strengthen its financial position. At the time of the filing of the Petitions, the Company was operating 51 retail stores in North Carolina, South Carolina, Virginia, Tennessee and Georgia. The Company reviewed the operations of each of its stores, and during the Fiscal year ending January 29, 1994, closed twenty-one stores whose profitability was not considered by management to be adequate. Eight store locations were closed in January 1993, and thirteen store locations were closed in May 1993. The inventory, fixtures, and real estate (at two of the company-owned stores) that became available for sale as a result of these closings were sold to generate cash to help fund the Plan of Reorganization. The Company also sold its distribution center located in Elkin, NC and leased back approximately 244,000 of the 388,000 square feet facility. Proceeds from this sale were also used to help fund the Plan of Reorganization. On November 10, 1993, the Company filed a modified Plan of Reorganization (the "Plan") with the United States Bankruptcy Court for the Middle District of North Carolina. The Plan was approved by the Company's creditors and shareholders in December, 1993, and was confirmed by the Bankruptcy Court by order entered on December 20, 1993. On April 20, 1994, the Company received Bankruptcy Court approval for a five-year, $45 million revolving line of credit with Foothill Capital Corporation to be used to partially fund the Plan and to provide working capital funds to the Company. See "Liquidity and Capital Resources." On April 29, 1994, the Company substantially consummated its Plan of Reorganization by making payments to creditors in accordance with the Plan and distributing stock for the benefit of certain unsecured and secured creditors. Page 9 of 16 Comparison of Operations Second Quarter Fiscal 1995 Compared to Second Quarter Fiscal 1994 Net sales for the three months ended July 30, 1994 were $32,742,000 compared to $36,232,000 for the same quarter ended July 31, 1993. The sales decrease from the prior year was the result of operating thirteen fewer stores during the second quarter of Fiscal 1995. As part of the Company's reorganization it closed thirteen stores during the second quarter ended July 31, 1993. Comparable store sales increased 3.2% compared to the same period last year. The sales increase resulted from increased promotional activity including Senior Citizen Days, V.I.P. Nights, additional pages in advertising circulars, and increased circulation of advertising circulars. Other income was $31,000 for the second quarter of Fiscal 1995 compared to $35,000 for the second quarter of Fiscal 1994. Other income includes miscellaneous non-recurring items. The cost of merchandise sold in the second quarter of Fiscal 1995 was $25,137.000 compared to $26,309,000 in the second quarter of Fiscal 1994. The decrease in cost of merchandise sold was primarily the result of the decrease in sales as discussed above. Gross margin is calculated by subtracting the cost of merchandise sold from net revenues. Gross margin as a percentage of sales was 23.3% for the three months ended July 30, 1994 compared to 27.5% for the same period last year. The decrease in the gross margin as a percentage of sales was the result of the planned increase in promotional activity discussed above, aggressive markdowns of items dropped from the Company's current merchandise assortment and the continued competitive retail environment. Selling, operating and administrative expenses ("SO & A") for the second quarter of Fiscal 1995 and 1994 were $9,701,000 and $10,202,000, respectively. This decrease is primarily the result of operating thirteen fewer stores and the corresponding reduction of corporate overhead. SO & A expenses, as a percentage of revenues, increased to 29.6% in the second quarter of Fiscal 1995 compared to 28.1% for the same period last year. This increase in expense, as a percentage of revenues, resulted primarily from the decrease in sales and a reduction in corporate overhead which was disproportionate to the corresponding reduction in sales. Second quarter depreciation and amortization expense for Fiscal 1995 and 1994 was $882,000 and $1,266,000, respectively. Expense for fixed asset depreciation and amortization is less because the Company is operating fewer stores and some assets in the remaining stores have become fully depreciated since the second quarter of Fiscal 1994. Page 10 of 16 Interest on capital leases for Fiscal 1995 and Fiscal 1994 was $111,000 and $189,000, respectively. Interest expense on debt other than capital leases was $355,000 compared to zero for the same quarter last year. This increase in interest on debt is for interest and fees of the $45 million revolving credit facility from Foothill Capital Corporation. For the second quarter of Fiscal 1994, no interest was accrued on pre-petition debt obligations. Reorganization costs of $596,000 for Fiscal 1995 include professional fees associated with the Chapter 11 proceedings and expenses for stores closed in prior years. Reorganization costs for Fiscal 1994 of $3,816,000 include professional fees and store closing expenses reduced by interest income. For the second quarter of Fiscal 1994 interest on short-term investments was offset to reorganization costs as required by AICPA Statement of Position 90-7 (Financial Reporting by Entities Reorganizing Under the Bankruptcy Code). Debt forgiveness recorded for the second quarter of Fiscal 1995 was $1,576,000. This amount represents the debt forgiveness from the settlement of pre-petition debt claims resolved subsequent to April 29, 1994. Net loss for the second quarter of Fiscal 1995 was $2,433,000 compared to $5,515,000 for Fiscal 1994. Net loss before extra-ordinary item for the second quarter of Fiscal 1995 was $4,009,000 compared to $5,515,000 for the same period last year. The Company's tax loss carry-backs were exhausted in Fiscal 1992 resulting in the loss of any tax benefit for the first quarter of Fiscal 1995. The loss carry-forwards will be used as future earnings allow. First Six Months of Fiscal 1995 Compared to First Six Months of Fiscal 1994 Net sales for the six months ended July 30, 1994 were $58,690,000, a decrease from the $69,506,000 for the first six months ended July 31, 1993. The sales decrease from the prior year was the result of operating fewer stores. For the first six months of Fiscal 1995 the Company operated thirty stores compared to the first six months of Fiscal 1994 when the Company operated 43 stores for the first four months of the year and 30 stores for the remaining two months. Sales for the thirty stores open the first six months of both years increased by 4.1%. This increase in sales resulted primarily from a better in-stock position and increased promotional activity compared to the first six months of Fiscal 1994. Other income was $62,000 for the first six months of Fiscal 1995 compared to $137,000 for the comparable period last year. Other income includes miscellaneous non-recurring items. Page 11 of 16 The cost of merchandise sold in the first six months of Fiscal 1995 was $6,712,000 less than the first six months of Fiscal 1994. The decrease was primarily the result of the $10,816,000 decrease in sales which, as discussed above, was the result of operating thirteen fewer stores. Gross margin, the difference between net revenues and the cost of merchandise sold, as a percentage of sales was 25.20% compared to 27.26% for the first six months of Fiscal 1995 and 1994, respectively. The reduction in the gross margin as a percentage of sales was primarily the result of the planned increase in promotional activity including Senior Citizen Days, V.I.P. Nights and aggressive markdowns of items dropped from the Company's current merchandise assortment. Selling, operating and administrative expenses ("SO & A") for the first six months of Fiscal 1995 were $19,229,000 compared to $22,268,000 for the first six months of Fiscal 1994. The $3,039,000 decrease was the result of operating thirteen fewer stores, reduction of corporate overhead and continued aggressive cost management. SO & A expenses, as a percentage of revenues, was 32.7% for the first six months of Fiscal 1995 compared to 32.0% for the same period last year. Depreciation and amortization expense for the first six months of Fiscal 1995 and 1994 was $1,761,000 and $2,755,000 respectively. This decrease in depreciation and amortization expense was primarily the result of operating fewer stores and certain assets at the remaining stores that became fully depreciated since July 31, 1993. Interest on capital leases for the first six months of Fiscal 1995 and Fiscal 1994 was $222,000 and $415,000 respectively. Interest expense on debt other than capital leases was $596,000 compared to $1,000 for the same period last year. The increase in interest on debt is for the costs of the debtor- in-possession revolving credit facility which was terminated in April 1994, and for the interest and costs of the Exit Financing Revolver with Foothill Capital Corporation which was established in April 1994. Reorganization costs of $846,000 for the first six months of Fiscal 1995 include professional fees associated with the Chapter 11 proceedings and expenses at certain closed stores reduced by interest income earned on cash deposited in escrow accounts for distribution to creditors per the plan of reorganization. Re- organization costs for the first six months of Fiscal 1994 included professional fees associated with Chapter 11 proceedings and store closing expenses offset by interest income earned on short-term investments. Interest on short term investments was offset to reorganization costs as required by AICPA Statement of Position 90-7 (Financial Reporting by Entities Reorganizing Under the Bankruptcy Code). Page 12 of 16 Debt forgiveness recorded for the first six months of Fiscal 1995 was $30,249,000. This amount represents the pre-petition debt of $37,512,000 that has been forgiven to date under the Plan of Reorganization reduced by $7,263,000, the value of 4,469,191 shares of stock issued to the unsecured creditors per the Plan of Reorganization. Net income for the first six months of Fiscal 1995 was $22,401,000 which reflects an extraordinary item of debt forgiveness of $30,249,000 and reorganization costs totaling $846,000. Net loss before extraordinary income and reorganization costs was $7,002,000 compared to $6,454,000 for the same period last year. Liquidity and Capital Resources As a result of the Chapter 11 proceeding, the Company's liquidity position has been positively affected because the cash requirements for the payment of scheduled principal payments, accrued interest, accounts payable, and other liabilities that were incurred prior to the filing of Chapter 11 Proceeding were, in most cases, deferred and subsequently settled at a reduced amount under the Plan. The Company's cash balance at July 30, 1994 was $2.3 million compared to $34.1 million at July 31, 1993. The Company believes that the Exit Financing Facility is adequate to fund its operations. Cash balances have decreased since the second quarter of Fiscal 1994 because of payments to creditors. Merchandise inventories were $53.6 million at July 30, 1994 compared to $55.3 million at July 31, 1993. Current liabilities at July 30, 1994 were $31.3 million compared with $9.3 million at July 31, 1993. This increase in current liabilities is due to increased accounts payable, from more favorable vendor credit terms, the reclassification of the current portion of capitalized lease obligations from liabilities subject to compromise to current liabilities and the increase in notes payable due to borrowings against the Revolving Credit Facility. On April 29, 1994, the Company achieved substantial consummation of the Plan by making payments to creditors of approximately $46.0 million. These payments were funded from $30.0 million of cash on hand with the balance from borrowings from the Company's $45 million Revolving Credit Facility with Foothill Capital Corporation ("Exit Financing Facility"). On April 20, 1994, the Company received Bankruptcy Court Approval for a five-year, $45 million Exit Financing Facility. The Page 13 of 16 Exit Financing Facility will be used to fund the aforementioned negotiated Plan payments to creditors, with the balance of the facility to be used to fund working capital requirements, inventory purchases, capital expenditures, and other general corporate purposes as the need arises. The Exit Financing Facility includes restrictions on capital expenditures as well as standard covenants found in similar agreements. These include two financial ratio covenants: (1) current ratio, and (2) total liabilities to tangible net worth ratio. The Company was in compliance with all covenants as of July 30, 1994. Under the Exit Financing Facility, the lender agrees to make revolving loans and issue or guarantee letters of credit for the Company in an amount not exceeding the lesser of the Borrowing Base (as defined in the Loan Agreement) or $45.0 million. The Exit Financing Facility includes a sublimit of $10 million for documentary and stand-by letters of credit. The Company had borrowed $16,476,000 against the $45,000,000 Revolving Credit Facility at July 30, 1994. The Exit Financing Facility provides that each loan shall bear interest at a rate of prime plus one and forty-four one hundredths (1.44) percentage points. Interest on these loans shall be payable monthly in arrears on the first day of each month. Also under the Exit Financing Facility, the Company pays an unused line fee for an amount equal to one-half of one percent (.50%) per annum on the unused portion of the Exit Financing Facility and a letter of credit fee equal to 2.5% per annum on the average daily balance of the aggregate undrawn letters of credit and letter of credit guarantees outstanding during the immediately preceding month and certain other fees. The Exit Financing Facility also requires an annual facility fee equal to one-half of one percent(.50%) of the maximum amount of the facility payable on each anniversary of the Facility closing date and a monthly servicing fee of $3,500 per month. The Company also paid an initial, one-time fee of $450,000 in order to establish the Exit Financing Facility. The Company's ability to continue as a going concern is dependent, in part, on the Company's ability to obtain merchandise on a timely basis from vendors on acceptable credit terms. Since the filing of the Chapter 11 Proceeding, the Company's ability to obtain credit through arrangements such as the Exit Financing Facility terms and credit lines have improved and are approaching historical levels experienced by the Company. Management of the Company believes that its ability to obtain credit should continue to improve based on the acceptable performance of the Company. Management further believes the Exit Financing Facility, together with the cash from operations and vendor credit, should be adequate to cover working capital requirements and permitted capital expenditures. Page 14 of 16 In addition to cash used for operations, approximately $231,000 was also used for capital expenditures during the first six months of Fiscal 1995. The Company anticipates capital expenditures for Fiscal 1995 primarily for normal facility maintenance and various projects to improve management information systems. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On November 22, 1992, the Company and its wholly-owned principal operating subsidiary, Brendle's Stores, Inc. (BSI), (collectively sometimes referred to as the "Company") filed for protection under Chapter 11 of the Bankruptcy Code. Under Chapter 11, the Company and BSI, Debtors In Possession, continued to conduct business in the ordinary course under the protection of the Bankruptcy Code while a Plan of Reorganization was developed to restructure and reorganize the debt structure and allow the debtor to strengthen its financial position. On November 10, 1993, the Company filed a modified Plan of Reorganization (the "Plan") with the United States Bankruptcy Court for the Middle District of North Carolina. The Plan was approved by the Company's creditors and shareholders in December, 1993, and was confirmed by the Bankruptcy Court by order entered on December 20, 1993. On April 29, 1994, the Company substantially consummated its Plan of Reorganization by making payments to creditors in accordance with the Plan and distributing stock for the benefit of certain unsecured and secured creditors. ITEM 2. CHANGES IN SECURITIES On April 29, 1994, the date the Plan of Reorganization was substantially consummated, the Company issued 4,469,191 shares of Common Stock, or 35% of the outstanding stock, to Arnold Zahn of Zahn and Associates, Inc., as escrow agent for the Unsecured Creditors, pending the resolution of certain disputed claims. These shares were valued at $7,263,000 and brought the total shares outstanding to 12,769,145 at April 30, 1994. ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. None B. None Page 15 of 16 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. BRENDLE'S INCORPORATED (Registrant) David R. Renegar Vice President and Chief Financial Officer Date: September 12, 1994 Page 16 of 16