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 October 28, 1995.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
From the transition period from_____________ to___________________
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Commission file number__ 33-13622_________________________________
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BRENDLE'S INCORPORATED
Elkin, North Carolina 56-0497852
(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________
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.
As of December 06, 1995, there were 12,758,717 shares of the issuer's Common
Stock outstanding.
Page 2 of 20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BRENDLE'S INCORPORATED
Consolidated Statement of Income
(Unaudited)
(In thousands except per share data)
Three Months Ended
------------------------------------
Oct. 28, Oct. 29,
1995 1994
--------------- ---------------
Net sales $ 29,505 $ 32,671
Other income 36 76
--------------- ---------------
Total revenue 29,541 32,747
--------------- ---------------
Cost and expenses:
Cost of merchandise sold 22,510 25,035
Selling, operating and
administrative expenses 10,772 10,817
Depreciation and amortization 784 908
Interest expense:
Capitalized leases 42 121
Other 855 619
Gain on sale of facilities (8) ---
Gain on life insurance proceeds (Note 2) (2,555)
Reorganization Costs --- 1,348
--------------- ---------------
32,400 38,848
--------------- ---------------
Loss before provision for income taxes
and extraordinary item (2,859) (6,101)
Provision for income taxes --- ---
--------------- ---------------
Loss before extraordinary item (2,859) (6,101)
Extraordinary item-gain from debt forgiveness (Note 6) --- (1,639)
--------------- ---------------
Net loss $ (2,859) $ (4,462)
=============== ===============
Weighted average shares outstanding 12,757 12,761
--------------- ---------------
Net loss per share $ (0.22) $ (0.35)
--------------- ---------------
Page 3 of 20
BRENDLE'S INCORPORATED
Consolidated Statement of Income
(Unaudited)
(In thousands except per share data)
Nine Months Ended
------------------------------------
Oct. 28, Oct. 29,
1995 1994
--------------- ---------------
Net sales $ 83,534 $ 91,361
Other income 269 138
--------------- ---------------
Total revenue 83,803 91,499
--------------- ---------------
Cost and expenses:
Cost of merchandise sold 61,440 68,981
Selling, operating and
administrative expenses 30,349 30,047
Depreciation and amortization 2,507 2,669
Interest expense:
Capitalized leases 143 343
Other 2,278 1,215
Gain on sale of facilities (963) ---
Gain on life insurance proceeds (Note 2) (2,555)
Reorganization costs (1) 2,194
--------------- ---------------
93,198 105,449
--------------- ---------------
Loss before provision for income taxes
and extraordinary item (9,395) (13,950)
Provision for income taxes --- ---
--------------- ---------------
Loss before extraordinary item (9,395) (13,950)
Extraordinary item-gain from debt forgiveness (Note 6) --- (31,889)
--------------- ---------------
Net income (loss) $ (9,395) $ 17,939
=============== ===============
Weighted average shares outstanding 12,758 11,308
--------------- ---------------
Net income (loss) per share $ (0.74) $ 1.59
--------------- ---------------
Page 4 of 20
BRENDLE'S INCORPORATED
Consolidated Balance Sheet
(Unaudited)
(In thousands except per share data)
Oct. 28, January 28, Oct. 29,
1995 1995 1994
--------------- --------------- --------------
Assets
Current Assets:
Cash and temporary cash investments $ 2,903 $ 1,781 $ 2,600
Accounts receivable 2,260 971 2,480
Merchandise inventories 72,159 48,451 74,020
Other current assets 4,067 1,361 2,373
--------------- --------------- --------------
Total current assets 81,389 52,564 81,473
Property and equipment, less accumulated
depreciation and amortization 7,544 8,776 9,325
Other assets 152 788 732
--------------- --------------- --------------
$ 89,085 $ 62,128 $ 91,530
=============== =============== ==============
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility $ 31,716 $ 15,368 $ 32,539
Accounts payable
Trade 20,444 4,192 16,729
Outstanding checks (Note #5) 4,372 1,053 2,924
Current portion of capitalized lease obligations 183 1,241 1,307
Current portion of restructuring reserve 426 445 509
Other accrued liabilities (Note 2) 5,744 2,759 4,293
--------------- --------------- --------------
Total current liabilities 62,885 25,058 58,301
Reorganization notes 350 403 281
Capitalized lease obligations, less current portion 323 449 760
Other liabilities 1,025 1,332 390
Other deferred credit 472 529 220
--------------- --------------- --------------
Total long-term liabilities 2,170 2,713 1,651
Liabilities subject to compromise (Note #6) --- --- 931
Total Liabilities 65,055 27,771 60,883
--------------- --------------- --------------
Shareholders' equity:
Common stock, $1 par value, 20,000,000
shares authorized, 12,756,623, 12,758,717
and 12,760,644 shares issued and outstanding 12,757 12,759 12,761
Capital in excess of par value 20,896 20,896 20,898
Retained earnings (deficit) (9,623) 702 (3,012)
--------------- --------------- --------------
Total shareholders' equity 24,030 34,357 30,647
--------------- --------------- --------------
$ 89,085 $ 62,128 $ 91,530
=============== =============== ==============
Page 5 of 20
BRENDLE'S INCORPORATED
Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
------------------------------------
Oct. 28, Oct. 29,
1995 1994
--------------- ---------------
Operating activities:
Net income (loss) $ (9,395) $ 17,939
Items not requiring (providing) cash:
Depreciation and amortization 2,507 2,669
Extraordinary item-gain from debt forgiveness --- (31,889)
Changes in assets and liabilities:
Accounts receivable (1,289) (1,000)
Merchandise inventories (23,708) (19,887)
Other current assets (2,706) (1,402)
Accounts payable and accrued liabilities 22,556 18,102
--------------- ---------------
Cash used by operating activities (12,035) (15,468)
--------------- ---------------
Investing Activities:
Net (additions) retirements to property and equip. (1,275) 3,773
(Addition) reduction in other assets 636 (293)
--------------- ---------------
Cash provided (used) by investing activities (639) 3,480
--------------- ---------------
Financing Activities:
Decrease in liabilities subject to compromise --- (51,010)
Increase in long-term liabilities (364) 610
Increase (decrease)in reorganization notes (53) 281
Decrease in capitalized lease obligations (1,184) (2,591)
Borrowings on revolving credit facility 16,348 32,539
Decrease in reorganization reserve (19) ---
Redemption of common stock (2) (8)
Decrease in paid-in-capital --- (7)
Decrease in retained earnings (Note 2) (930) ---
--------------- ---------------
Cash provided (used) by financing activities 13,796 (20,186)
--------------- ---------------
Net increase (decrease) in cash and
temporary cash investments 1,122 (32,174)
Cash and temporary cash investments
- beginning of year 1,781 34,774
--------------- ---------------
Cash and temporary cash investments
- end of year $ 2,903 $ 2,600
=============== ===============
Supplemental disclosure of non-cash financing activities: During fiscal year
1995, the Company issued 4,469,201 shares of Common Stock valued at $7,263,000
to creditors under the terms of its Plan of Reorganization which resulted in an
increase in capital in excess of par value of $2,793,000.
Page 6 of 20
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
Note 1. In the opinion of Management, the accompanying unaudited
financial statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly
the results of the interim period in accordance with generally
accepted accounting principles.
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 could 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.
On September 29, 1995, Patty Brendle Redway, one of the four
shareholders, died. The Company subsequently recognized gain
of approximately $2,550,000 from life insurance proceeds,
which represents the face value of the policy ($3,000,000),
less cash surrender value previously recorded. The Estate of
Mrs. Redway has the right, exercisable within nine months of
death, to cause the Company to redeem from the Estate up to
1,912,667 shares of stock at $0.5163 per share totaling
$988,000.
On October 28, 1995, an amount equal to the potential
obligation to the Redway Estate totaling $988,000 has been
recorded in the current liability section of the balance sheet
with a corresponding reduction in stockholders' equity. An
amount equivalent to the net cash surrender value of the
policies of the remaining shareholders totaling $472,000 has
been shown as an other deferred credit on the balance sheet
with a corresponding reduction in stockholders' equity. At
October 29, 1994, the amount of other deferred credit includes
the cash surrender value of all four policies on the
shareholders who are parties to the agreement. At October 28,
1995, the Company has taken out loans against the cash
surrender value of the three remaining policies in the sum of
$1,843,000 to finance current capital requirements.
Note 3. Due to the current net operating loss, there was no
provision for income taxes. 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
Page 7 of 20
future earnings allow. These loss carry-forwards at
January 28, 1995 were approximately $66,000,000. 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.
Note 5. Outstanding checks totaling $4,372,000 on October 28, 1995
were classified under current liabilities (as outstanding
checks) and included in cash at October 28, 1995.
Note 6. Settlement of pre-petition liabilities resulted in debt
forgiveness that is shown as an extraordinary item on the
income statement. On October 29,1994 liabilities subject to
compromise included disputed claim obligations where claim
objections were filed with the Bankruptcy Court, which have
subsequently been resolved.
Page 8 of 20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Brendle's operates 31 retail stores, which are merchandised as a group
of specialty stores, under one roof, offering an in-depth selection of jewelry,
gifts, electronics, housewares and juvenile products. Given the current
competitive retail environment, Management has attempted to be proactive in an
effort to strengthen the Company's niche in the marketplace. The Company has
undertaken several strategies to achieve this goal, including, but not limited
to, the following:
During the third quarter of this Fiscal year the Company expanded its
"store-within-a-store" concept by adding Brendle's "Party Universe" departments
to its merchandise offering. The Party Universe departments offer a full array
of party and paper products including, but not limited to, color coordinated
drink-ware, plates, serving trays, gift wrap, theme party decorations, banquet
supplies and seasonal departments (Valentines, Graduation, Halloween, Christmas,
etc.). Party Universe is a franchised department, and as of October 28, 1995, is
operating in twelve of the Company's stores. The Company plans to have a Party
Universe department in all stores within the next year. Management elected to
implement a franchised department of these product lines to take advantage of
the franchiser's already existing marketing and merchandising resources. This
assortment of consumable party goods and discount paper products is expected to
increase traffic in the stores and complement the current selection of gifts for
any occasion.
Also during the third quarter, the Company completed the conversion to
a fully integrated management information system. These systems link new
point-of-sale ("POS") equipment in the stores and new merchandising, warehouse,
inventory and financial control systems at the home office. Utilization of this
modern technology will provide many benefits, including better customer service
from improved POS equipment, enhanced sales analysis for merchandise selection
and evaluation, merchandise-demand forecasting/ marketing information, effective
linkage with suppliers for purchasing decisions and automatic replenishment and
reorder systems to improve inventory performance.
Also during the quarter, the Company completed the relocation of its
Chapel Hill, North Carolina store to Cary, North Carolina , which is located in
the Raleigh-Durham / Research Triangle Park area and opened its thirty-first
store in Rock Hill, South Carolina.
Page 9 of 20
Comparison of Operations
Third Quarter Fiscal 1996 Compared to Third Quarter Fiscal 1995
Net sales for the third quarter of FYE January 1996, ("Fiscal
1996")were $29,505,000, a decrease of $3,166,000, or 9.7%, compared to the same
period last year. This decrease reflects the relocation of the Chapel Hill,
North Carolina store, which closed August 5, 1995 and did not reopen until
October 12, 1995. Net sales also include sales from one new store opened for
three days during the third quarter. Comparable store sales for the third
quarter of Fiscal 1996 decreased 8.7%. The decrease in sales was due primarily
to the weak retail climate and to a 6% reduction in the circulation of
promotional flyers, which was necessary to offset paper and postage cost
increases. Circulation will return to normal levels during the fourth quarter.
Other income, which consists of miscellaneous non-recurring items,
was $36,000 for the third quarter of Fiscal 1996 compared to $76,000 for the
same period last year.
The cost of merchandise sold in the third quarter of Fiscal 1996 was
$22,510,000, compared to $25,035,000 for the same period last year. The decrease
in cost of goods sold was primarily the result of the decrease in sales, as
discussed above.
Gross margin as a percentage of revenues was 23.8% for the third
quarter of Fiscal 1996, compared to 23.6% for the same period last year. The
improved gross margin percentage is a result of an increased jewelry mix.
Selling, operating, and administrative expenses ("SO & A") for
the third quarter of Fiscal 1996 and 1995 were $10,772,000 and $10,817,000
respectively. This decrease in SO & A expense is the result of operating one
less store for eleven weeks of the quarter. SO & A expenses, as a percentage of
revenues, increased to 36.5%, compared to 33.0% for the same period last year,
primarily due to the decrease in total sales, as discussed above.
Interest on capital leases for the third quarters of Fiscal 1996 and
Fiscal 1995 was $42,000 and $121,000, respectively. Third quarter FYE 1996 lease
interest is less because the Company's capital leases are nearing the end of
term. For the third quarter of Fiscal 1996, fees associated with the Revolving
Credit Facility of $127,000 are included in other interest. For Fiscal 1995,
these fees were included in Reorganization Costs. Interest expense on other debt
was $728,000, compared to $619,000 for the same quarter last year. This increase
in interest expense is due to higher
Page 10 of 20
interest rates and increased borrowings under the Company's $45,000,000
Revolving Credit Facility.
Gain from proceeds on insurance was $2,555,000 for Fiscal 1996, which
resulted from life insurance proceeds on Patty B. Redway, a director of the
Company, who died on September 29, 1995.
Reorganization costs of $1,348,000 for the third quarter of Fiscal 1995
consists of costs associated with the Chapter 11 proceeding, Revolving Credit
Facility fees of $119,000 and store closing expenses for stores closed in prior
years. Because the Company has achieved consummation of its Plan of
Reorganization, there were no reorganization costs for the third quarter of
Fiscal 1996.
Debt forgiveness recorded for the third quarter of Fiscal 1995 was
$1,639,000. This amount represents the pre-petition debt forgiven under the Plan
of Reorganization subsequent to April 29, 1994. The Company did not realize any
debt forgiveness for the third quarter of Fiscal 1996.
Net loss for the third quarter of Fiscal 1996 was $2,859,000, compared
to a net loss of $4,462,000 for the third quarter of Fiscal 1995. Comparing the
results of the third quarters of both years is somewhat complicated due to the
unusual financial events of the bankruptcy proceedings and gain from life
insurance proceeds as discussed above. Therefore, Management believes earnings
(loss) before interest, taxes, depreciation, amortization and reorganization
items ("EBITDA") is a useful tool for measuring performance. EBITDA (loss) for
the third quarter of Fiscal 1996 was ($3,741,000) compared with ($3,105,000) for
the same period last year and is the result of the sales decline partially
offset by the increase in gross margin percent and the reuctionin SO & A
expenses.
The Company's tax loss carry-backs were exhausted in Fiscal 1992,
resulting in the loss of any tax benefit for the third quarter of Fiscal 1996.
The loss carry-forwards will be used as future earnings allow.
Page 11 of 20
First Nine Months Fiscal 1996 Compared to First Nine Months Fiscal 1995
Net sales for the first nine months of FYE January 1996 were
$83,534,000, compared with $91,361,000, an 8.6% decrease from the same period
last year. The comparable store sales decrease was 8.9%, which was a result of
the weak retail climate and the elimination of three promotional flyers in the
first six months of this year.
Other income, which consists of miscellaneous non-recurring items,
was $269,000 for the first nine months of Fiscal 1996, compared to $138,000
for the same period last year.
The cost of merchandise sold in the first nine months of Fiscal 1996
was $61,440,000, compared to $68,981,000 for the same period last year. The
decrease in cost of merchandise sold was primarily the result of the decrease in
sales as discussed above.
Gross margin as a percentage of revenues was 26.7% for the first nine
months of Fiscal 1996, compared to 24.6% for the same period last year. This
increase in the gross margin percentage is the result of an increase in the
jewelry sales mix, coupled with the Company's planned reduction in promotional
and clearance sales.
Selling, operating, and administrative expenses ("SO & A") for the
first nine months of Fiscal 1996 and 1995 were $30,349,000 and $30,047,000,
respectively. This increase is primarily the result of increased advertising
costs resulting from increased paper and postage expenses and costs associated
with the implementation of the Company's new management information system. SO &
A expenses, as a percentage of revenues, increased to 36.2%, compared to 32.8%
for the same period last year, primarily due to the decrease in total sales as
discussed above.
Interest on capital leases for the first nine months of Fiscal 1996 and
Fiscal 1995 was $143,000 and $343,000, respectively. This interest expense is
less because the Company's capital leases are nearing the end of term. For the
first nine months of Fiscal 1996, bank fees of $416,000 are included in other
interest. For Fiscal 1995, these fees were included in Reorganization Costs.
Interest expense on other debt was $1,862,000, compared to $1,215,000 for the
same period last year. This increase in interest expense is due to higher
interest rates and increased borrowings under the Company's $45,000,000
Revolving Credit Facility.
Gain on sale of facilities of $963,000 for Fiscal 1996 resulted
from the sale of the Company's lease at its Chapel Hill, North Carolina
store, which was relocated to Cary, North Carolina.
Page 12 of 20
Gain from proceeds on insurance was $2,555,000 for Fiscal 1996, which
resulted from life insurance proceeds on Patty B. Redway, a director of the
Company, who died on September 29, 1995.
Reorganization costs of $2,194,000 for the first nine months of Fiscal
1995 consist of costs associated with the Chapter 11 proceeding, revolving
credit facility fees of $263,000 and store closing expenses for stores closed in
prior years. Because the Company has achieved consummation of its Plan of
Reorganization, there were no reorganization costs for Fiscal 1996.
Debt forgiveness recorded for the first nine months of Fiscal 1995 was
$31,889,000. This amount represents the pre-petition debt forgiven under the
Plan of Reorganization subsequent to April 29, 1994. The Company did not realize
any debt forgiveness for Fiscal 1996.
Net loss for the first nine months of Fiscal 1996 was $9,395,000,
compared to a net income of $17,939,000 for the same period last year. Comparing
the results of both years is somewhat complicated due to the unusual financial
occurrences of the bankruptcy proceeding. For instance, the net income for the
first nine months of Fiscal 1995 included reorganization costs of $2,194,000 and
debt forgiveness of $31,889,000. The first nine months of Fiscal 1996 includes a
gain on sale of facilities of $963,000 and a gain on life insurance proceeds of
$2,555,000. Therefore, Management believes earnings (loss) before interest,
taxes, depreciation, amortization, and reorganization items, and other gains
("EBITDA") is a useful tool for measuring performance.
EBITDA (loss) for the first nine months of Fiscal 1996 was ($7,986,000)
compared with ($7,529,000) 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 third quarter of Fiscal 1996.
The loss carry-forwards will be used as future earnings allow.
Page 13 of 20
Liquidity and Capital Resources
The Company's business is highly seasonal with operating cash and
working capital needs fluctuating during the year in relation to seasonal
inventory levels. These requirements are financed by internally generated funds,
borrowings under the Company's Revolving Credit Facility and vendor credit
terms. Cash flow from operations is primarily generated in the fourth quarter of
the Fiscal year.
The Company's cash balance at October 28, 1995 was $2,903,000
compared to $2,600,000 at October 29, 1994 and is consistent with
Management's expectations.
Merchandise inventories were $72,159,000 at October 28, 1995, compared
to $74,020,000 at October 29, 1994. The decline in inventories was primarily the
result of a planned reduction in the number of units kept in stock.
Current liabilities at October 28, 1995 were $62,885,000, compared with
$58,301,000 at October 29, 1994. This increase is primarily due to an increase
in vendor trade payables, reflecting increased credit terms from the Company's
vendors and the recording of the potential liability for the redemption of
Company stock from the Estate of Patty Brendle Redway as discussed below.
The Company's liquidity was positively affected during the third
quarter of Fiscal 1996 by the receipt of life insurance proceeds of $2,628,000
from the death of one of the majority shareholders. In April of 1986, prior to
the initial public offering of the Company's Common Stock, all of the then
shareholders of the Company (including Douglas D. Brendle, S. Floyd Brendle,
Patty Brendle Redway, and William F. Cosby) entered into a Shareholders'
Agreement with the Company. Therein, the shareholders agreed, among other
things, to restrict the transfer of their Common Stock to any unrelated party
(as defined) without the written consent of all remaining shareholders who are
parties to the Agreement unless the transferring shareholder gives a right of
first refusal to related parties (as defined) of the transferring shareholder
and to the remaining shareholders who are parties to the Agreement, and such
right of first refusal is not exercised. In addition, the Shareholders'
Agreement gives the right, exercisable within nine months of death, to the
personal representative of certain deceased shareholders who were parties to the
Agreement, to cause the Company to redeem from the deceased shareholder's estate
up to that number of shares of Common Stock of the Company owned by the deceased
shareholder at his death valued at the average of the closing prices for the 20
trading days prior to the date of death not to exceed the life insurance
proceeds received by the Company as a result of such death. The Company
Page 14 of 20
purchased life insurance on the lives of Douglas D. Brendle, S. Floyd Brendle,
William F. Cosby and Patty B. Redway in the face amounts set forth as follows to
fund the potential redemption of these shares: $5,000,000, $5,250,000,
$3,070,000 and $3,000,000.
Upon the death of Patty Brendle Redway, the Company received
approximately $2,628,000 of life insurance proceeds, which represents the face
value of the policy ($3,000,000), less outstanding loans against the policy and
minor interest adjustments. The Estate of Mrs. Redway has the right, exercisable
within nine months of death, to cause the Company to redeem from the Estate up
to 1,912,667 shares of stock at $0.5163 per share totaling $988,000. This
potential obligation to the Redway Estate totaling $988,000 has been recorded in
the current liability section of the balance sheet with a corresponding
reduction in stockholders' equity.
On April 20, 1994, the Company received Bankruptcy Court approval for a
five-year, $45,000,000 Revolving Credit Facility which was used to fund payments
to creditors and to fund working capital, inventory purchases, capital
expenditures, and other general corporate purposes. The $45,000,000 Revolving
Credit 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. A discussion of the Company's compliance with these financial
ratios is discussed below.
Under the terms of the Revolving Credit Facility, the Company is
required to maintain a current ratio of at least one and forty-five one
hundredths to one (1.45:1.0), measured on a Fiscal quarter-end basis. The
Company is also required to maintain a total liabilities to tangible net worth
ratio of not more than two and one-tenth to one (2.1:1.0), measured on a Fiscal
quarter - end basis.
For the Fiscal quarter ended October 28, 1995, the Company's current
ratio was one and twenty-nine hundredths to one (1.29:1.0), and the total
liabilities to tangible net worth ratio was three and two hundredths to one
(3.02:1.0), resulting in a technical event of default under the Revolving Credit
Facility.
The Company requested and has received a waiver from Foothill Capital
Corporation for both the current ratio and total liabilities to tangible net
worth covenant violations for the Fiscal quarter ended October 28, 1995. The
Company's Management believes that sales in the fourth quarter and the
subsequent pay down of vendor payables and the Revolving Credit Facility in the
normal course of business will result in the compliance with terms in both
financial covenants at the end of the fourth quarter
Page 15 of 20
ending January 27, 1996. Compliance with these covenant requirements in the
future will be dependent primarily on the Company's operating performance.
Under the Revolving Credit 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 $45,000,000. The Revolving Credit Facility includes a sub-limit
of $10,000,000 for documentary and stand-by letters of credit.
The Revolving Credit 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 Revolving Credit Facility, the
Company pays an unused line fee for an amount equal to one-half percent (.50%)
per annum on the unused portion of the Revolving Credit Facility and a letter of
credit fee equal to two and one-half percent (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 Revolving Credit 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 Revolving Credit Facility.
At October 28, 1995, the Company had borrowed $31,716,000 from the
Revolving Credit Facility and had outstanding $1,635,000 in open letters of
credit, for a total of $33,351,000. At October 28, 1995, the total available
under the Revolving Credit Facility based on the borrowing base formula (65% of
eligible inventory) was $40,681,000.
The Company's capacity to continue as a going concern is dependent, in
part, on the Company's ability to obtain merchandise on a timely basis from its
vendors under favorable credit terms. Since the filing of the Chapter 11
Proceeding, the Company's ability to obtain credit through arrangements such as
the Revolving Credit Facility, and vendor credit lines have continued to improve
and are at the highest level experienced since the Chapter 11 filing.
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In addition to cash used for operations, approximately $1,279,000 was
also used for capital expenditures during the first nine months of Fiscal 1996.
The Company anticipates Fiscal 1996 capital expenditures will be primarily for
normal facility maintenance, store relocation, and various projects to improve
information systems.
Management believes the Revolving Credit Facility, together with the
cash from operations and vendor credit, should be adequate to cover working
capital requirements and capital expenditures.
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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 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 On October 20, 1995, the Company attended a hearing
before the NASDAQ Hearing Panel regarding its continued inclusion in the
National Market System. The Company was granted an exception to continue to
trade in the NASD National Market pursuant to the decision of the Hearing Panel
on October 23, 1995. The Company has elected, however, to have the Company's
stock trade on the NASDAQ Small Cap Market. The Company believes that the Small
Cap Market will provide its shareholders with an adequate trading forum while,
at the same time, avoiding future
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problems with compliance with the continuing inclusion requirements of the
National Market System.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. None
B. On October 4, 1995, the Company filed a Form 8-K reporting
that the Company's Common Stock would be traded on the NASD
Bulletin Board System, commencing on or about October 5, 1995.
Page 19 of 20
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: December 12, 1995
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