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 April 27, 1996.
[ ] 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 56-0497852
(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 June 11, 1996, there were 12,756,284 shares of the issuer's Common Stock
outstanding.
Page 2 of 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BRENDLE'S INCORPORATED
Consolidated Statement of Operations
(Unaudited)
(In thousands except per share data)
Three Months Ended
---------------------------------
Apr. 27, Apr. 29,
1996 1995
------------ -----------
Net sales .................................... 25,685 $ 23,920
Other income .................................. 9 233
--------
Total revenue ................................. 25,694 24,153
--------
Cost and expenses:
Cost of merchandise sold .................... 19,611 16,977
Selling, operating and
administrative expenses .................. 10,612 9,481
Depreciation and amortization ............... 620 864
Interest expense:
Capitalized leases ......................... 17 51
Other ...................................... 762 625
Provision for restructuring ................. 9,215 --
-------- ------
40,837 27,998
-------- ------
Loss before provision for income taxes......... (15,143) (3,845)
Provision for income taxes .................... -- --
-------- ------
Net loss ............................. $(15,143) $ (3,845)
======== ======
Weighted average shares outstanding ........... 12,757 12,759
-------- ------
Net income (loss) per share ................... (1.19) $ (0.30)
-------- ------
Page 3 of 13
BRENDLE'S INCORPORATED
Consolidated Balance Sheet
(Unaudited)
(In thousands except per share data)
Apr. 27, January 27, Apr. 29,
1996 1996 1995
--------------------------- --------------
Assets
Current Assets:
Cash and temporary cash investments ............................ $2,360 $ 1,380 $ 2,457
Accounts receivable ............................................ 1,293 1,295 898
Merchandise inventories ........................................ 48,867 50,147 54,045
Other current assets ........................................... 1,390 1,211 1,533
----- -------- --------
Total current assets ......................................... 53,910 54,033 58,933
Property and equipment, less accumulated
depreciation and amortization .................................. 6,800 7,387 8,224
Other assets ..................................................... 626 568 853
------- -------- --------
$ 61,336 $ 61,988 $ 68,010
======= ======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Revolving credit facility ...................................... $ 20,172 $ 22,275 $ 20,352
Accounts Payable
Trade ........................................................ 806 4,709 8,078
Outstanding Checks (Note #5) ................................. 497 3,432 2,215
Current portion of capitalized lease obligations ............... 173 168 848
Current portion of restructuring reserve ....................... 200 206 426
Other accrued liabilities (Note #6) ............................ 7,581 4,150 3,132
-------- -------- --------
Total current liabilities .................................... 29,429 34,940 35,051
Reorganization notes ............................................. 198 207 387
Capitalized lease obligations, less current portion .............. 234 282 407
Other liabilities ................................................ 1,212 1,328 1,124
Other deferred credit ............................................ 425 425 529
-------- -------- --------
Total long-term liabilities .................................... 2,069 2,242 2,447
Liabilities subject to compromise ................................ 20,175 -- --
Total Liabilities .............................................. 51,673 37,182 37,498
-------- -------- --------
Shareholders' equity:
Common stock, $1 par value, 20,000,000
shares authorized, 12,756,284, 12,756,284
and 12,758,717 shares issued ................................. 12,756 12,756 12,759
Capital in excess of par value ................................. 20,895 20,895 20,896
Retained earnings (deficit) .................................... (23,988) (8,845) (3,143)
-------- -------- --------
Total shareholders' equity ....................................... 9,663 24,806 30,512
-------- -------- --------
$61,336 $ 61,988 $ 68,010
=========== ========= ========
Page 4 of 13
BRENDLE'S INCORPORATED
Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
-------------------------------
Apr. 27, Apr. 29,
1996 1995
------------- ---------------
Operating activities:
Net income (loss) ............................................................$ (15,143) $(3,845)
Items not requiring (providing) cash:
Depreciation and amortization ............................................. 620 864
Changes in assets and liabilities:
Accounts receivable .......................................................... 2 73
Merchandise inventories ...................................................... 1,280 (5,594)
Other current assets ......................................................... (179) (172)
Accounts payable and accrued liabilities ..................................... (478) 4,239
------- -------
Cash provided by operating activities ....................................... (13,898) (4,435)
------- -------
Investing Activities:
Additions to property and equipment .......................................... (50) (312)
Retirements of property and equipment ........................................ 17 --
Addition in other assets ..................................................... (58) (65)
------- -------
Cash provided by investing activities ........................................ (91) (377)
------- -------
Financing Activities:
Increase in liabilities subject to compromise ................................ 20,175 --
Outstanding checks ........................................................... (2,935) 1,163
Increase in long-term liabilities ............................................ (125) (224)
Increase in reorganization notes ............................................. -- --
Decrease in capitalized lease obligations .................................... (43) (435)
Borrowings on revolving credit facility ...................................... (2,103) 4,984
------- -------
Cash provided by financing activities ........................................ 14,969 5,488
------- -------
Net increase in cash and
temporary cash investments ................................................... 980 676
Cash and temporary cash investments
- beginning of period ........................................................ 1,380 1,781
------- -------
Cash and temporary cash investments
- end of period .............................................................. $ 2,360 $ 2,457
======= =======
Page 5 of 13
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.
On September 29, 1995, Patty Brendle Redway, one of the four
shareholders, died. The Company subsequently recognized a gain
of approximately $2,555,000 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 exercised the right to cause the Company to
redeem from the Estate 1,812,667 shares of stock. The Company
has recorded a liability of $988,000 for the protential
purchase of this Common Stock with a corrseponding cumulative
reduction in retained earnings. This liabiliity is included in
liabilities subject to compromise. The Company will not be
able to comply with the terms of this Agreement without the
approval of the Bankruptcy Court.
An amount equal to the cash surrender value of these remaining
policies at April 27, 1996 and April 29, 1995 of $425,000 and
$529,000, respectively, has been shown as an other deferred
credit on the balance sheet with a corresponding reduction in
retained earnings. As of April 27, 1996 the Company has taken
out loans against the cash surrender value of these policies
in the sum of $1,852,000 to finance current capital require-
ments.
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. 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
Page 6 of 13
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 $497,000 on April 27, 1996 were
classified under current liabilities (as outstanding checks)
and included in cash at April 27, 1996.
Note 6. The Company received a tax refund of $3,385,000 related to net
operating loss carrybacks of previous years. This refund is
currently under review by the Internal Revenue Service (IRS).
The Company did not record a benefit for the item, but
recorded it in accrued liabilities until clearance is
received from the IRS.
Page 7 of 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
On April 16, 1996 the Company filed for protection under Chapter 11 of
the Bankruptcy Code in order to implement a significant restructuring of its
merchandise strategy.
Management is in the process of evaluating markets and has
indicated its intention to close 18 of its 30 stores, reduce corporate office
staffing and implement other cost control measures. Management has announced its
intention, subject to Board of Directors and Bankruptcy Court approval, to
reformat the Company's stores in an attempt to market the Company as a
destination shopping point. The Company will focus on jewelry, housewares, small
appliances, ready-to-assemble furniture, gifts, crafts, party goods and health
and fitness items. Management believes these changes in the Company's focus and
merchandise mix will facilitate the Company's return to profitability.
Comparison of Operations
First Quarter Fiscal 1997 Compared to First Quarter Fiscal 1996
Net sales for the first quarter of FYE January 1997, ("Fiscal 1997")
increased $1,765,000, or 7.4%, compared to the same period last year. The
Company operated 30 stores during a substantial portion of the first quarter of
both years and the comparable store sales increase was 5.6%. The increase in
sales was primarily the result of the store closing sale in a Greensboro, North
Carolina store which occurred in February, 1996 coupled with one additional
promotional flyer in March, 1996 compared to the first quarter of Fiscal 1996.
Other income, which consists of miscellaneous non-recurring items was
$9,000 for the first quarter of Fiscal 1997 compared to $233,000 for the same
period last year.
The cost of merchandise sold in the first quarter of Fiscal 1997 was
$19,611,000 compared to $16,977,000 for the same period last year. The increase
in cost of goods sold was primarily the result of the increase in sales
resulting from the store closing sale in the Greensboro store and the addition
of one flyer in March, as discussed above.
Gross margin as a percentage of revenues was 23.7% for the first
quarter of Fiscal 1997 compared to 29.7% for the same period last year. This
decrease in the gross margin percentage is
Page 8 of 13
primarily the result of the store
closing sale in Greeensboro, North Carolina.
Selling, operating, and administrative expenses ("SO & A") for the
first quarter of Fiscal 1997 and 1996 were $10,612,000 and $9,481,000,
respectively. This increase is primarily the result of increased occupancy costs
due to the Company operating one more store during February of the first quarter
versus last year. The Company also renewed leases at nine locations since the
first quarter of last year. These lease renewals included CPI increases and are
now accounted for as operating leases in the current year whereas they were
recorded as capital leases for the same period last year. The increase in SO
& A expense also reflects the cost of one aditional promotional event compared
to the same period last year. SO & A expenses, as a percentage of revenues,
increased to 41.3%, compared to 39.3% for the same period last year.
Depreciation and amortization expense for the first quarter of fiscal
1997 and fiscal 1996 was $620,000 and $864,000, respectively. Expense for fixed
asset depreciation and amortization is less because certain assets have become
fully depreciated and certain leases which were previously accounted for as
capital leases have been renewed since the first quarter of last year and have
been included as operating leases in SO&A expense.
Interest on capital leases for Fiscal 1997 and Fiscal 1996 was $17,000
and $51,000, respectively. This interest expense is less due to the renewal of
nine lease since the first quarter of last year which are being accounted for as
operating leases and the cost is reflected in the SO,&A expense. Interest
expense on other debt and bank fees was $762,000 compared to $625,000 for the
same quarter last year. This increase in interest expense is due to an increase
in interest rates and additional borrowings under the Company's $45 million
Revolving Credit Facility.
Reorganization costs of $9,215,000 for the first quarter of Fiscal 1997
reflect the reserve for the liquidation of inventory and other costs associated
with the closing of the 18 stores, corporate downsizing, and other costs of the
Chapter 11 Proceeding. There were no reorganization costs for the first quarter
of Fiscal 1996.
Net loss for the first quarter of Fiscal 1997 was $15,143,000 compared
to $3,845,000 for the first quarter of Fiscal 1996. Fiscal 1997 net loss
includes $9,215,000 of reorganization costs as discussed above. Management
believes earnings (loss) before interest, taxes, depreciation, amortization and
reorganization items ("EBITDA") is a useful tool for measuring performance
because net income (loss) is not comparable with the previous period due to the
Chapter 11 Proceeding.
EBITDA(loss) for the first quarter of Fiscal 1997 was ($4,529,000)
compared with ($2,305,000) 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
Page 9 of 13
of Fiscal 1996. The loss carry-forwards will be used as future earnings allow.
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.
As a product of the Chapter 11 Proceeding, Brendle's liquidity position
has been positively affected because the cash requirements for the payment of
accounts payable and certain other liabilities that were incurred prior to the
filing of the Chapter 11 Proceeding have, in most cases, been deferred until a
Plan of Reorganization is confirmed by the Bankruptcy Court. For financial
statement purposes, pre-petition liabilities which are dependent on the Chapter
11 Proceeding have been segregated and classified as "liabilities subject to
compromise" on the balance sheet. At April 27, 1996 liabilities subject to
compromise were $20,175,000.
The Company's cash balance at April 27, 1996 was $2,360,000 compared
to $2,457,000 million at April 29, 1995.
Merchandise inventories were $48,867,000 at April 27, 1996, compared to
$54,045,000 at April 29, 1995. The decline in inventories was primarily the
result of reduced inventory receipts in the first quarter for the 18 stores
planned to be closed pursuant to the 1996 strategic plan.
Current liabilities at April 27, 1996 were $29,429,000 compared with
$35,051,000 at April 29, 1995. This decrease resulted from debt reclassified as
liabilities subject to compromise which will be resolved under the Chapter 11
Proceeding as discussed above.
On April 30, 1996, the Company received Bankruptcy Court Approval for a
one-year $25 million Debtor-In-Possession Revolving Credit Facility ("DIP
Facility") to be used to retire Foothill's pre-petition secured loan and, to the
extent necessary, fund working capital requirements. The $25 million DIP
Facility includes restrictions on capital expenditures as well as standard
covenants found in similar agreements. These
Page 10 of 13
include two financial ratio covenants: (1) current ratio, and (2) total
liabilities to tangible net worth ratio. As of April 27, 1996, the Company was
not in compliance with these covenants. The obligation to Foothill Capital
Corporation has been shown as a current liabilitiy on the balance sheet since
its inception. Therefore, noncompliance with the financial covenants has no
effect on the financial statements of the Company. The Revolving Credit
Facility was converted to a Debtor-In-Possession Facility upon filing of the
Chapter 11 proceeding pending final Bankruptcy Court approval.
Under the DIP 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 $25
million. The maximum borrowing capacity will be reduced to $15 million by June
2, 1996. The Revolving Credit Facility includes a sublimit of $2 million for
documentary and stand-by letters of credit.
The DIP Facility provides that each loan shall bear interest at a rate
of prime plus two (2.00) percentage points. Interest on these loans shall be
payable monthly in arrears on the first day of each month. Also, under the DIP
Credit 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 DIP
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 DIP Facility also requires a monthly servicing
fee of $3,500 per month. The Company also paid a one-time fee of $150,000 in
order to establish the DIP Facility.
At April 27, 1996, the Company had borrowed $20,172,000 from the DIP
Facility and had outstanding $1,359,000 in open letters of credit, for a total
of $21,531,000. At April 27, 1996, the total available under the DIP Facility
based on the borrowing base formula was $24,225,000. As the inventory at the
eighteen closing stores is liquidated, the proceeds will be applied to the
balance of the DIP Facility and the Company expects borrowings under the DIP
Facility to be at zero by July 1, 1996.
The Company's ability to continue as a going concern is dependent, in
part, on its ability to obtain merchandise on a timely basis from vendors on
acceptable terms. Many vendors have agreed to resume shipments and negotiations
with vendors are returning payment terms and credit lines to more acceptable
levels. Management of the Company believes the DIP facility will have a
significant positive impact on terms it is able to receive from its vendors.
In addition to cash used for operations, approximately $50,000 was also
used for capital expenditures during the first quarter of Fiscal 1997. The
Company anticipates total capital expenditures for Fiscal 1997 of approximately
$1,300,000 primarily for normal facility maintenance and the refurbishing of the
twelve (12) go-forward stores in accordance with the 1996 strategic plan.
Page 11 of 13
Management believes the DIP Facility, together with the cash from
operations and vendor credit, should be adequate to cover working capital
requirements and capital expenditures.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On April 16, 1996, the Company filed a Voluntary Petition with the
United States Bankruptcy Court for the Middle District of North Carolina
instituting a Chapter 11 reorganization proceeding. The case has been assigned
number B-96-50495C-11W. Subsequent to the filing, pursuant to motions filed by
Brendle's, the United States Bankruptcy Court authorized the closing of 18
stores and the liquidation of the inventory located in those stores through
going out of business sales. Also, pursuant to Motion filed by Brendle's, an
Order has been entered approving interim post-petition financing from Foothill
Capital Corporation in the amount of $25,000,000. It is anticipated that a Final
Order will approve post-petition financing in an approximate amount of $12-15
million which the Company feels will be adequate for the needs of the Company
while it is a debtor-in-possession. In addition to the official unsecured
creditors committee which is routinely appointed in Chapter 11 reorganization
cases, the United States Bankruptcy court, pursuant to a motion filed by
Brendle's, has also approved the formation of an official Equity Security
Holders Committee, which is now actively functioning in the Chapter 11
proceeding. During the course of court proceeding, Brendle's has announced on
the record that it intends to file its plan of reorganization prior to August
14, 1996, which is the last day of the original exclusivity period.
ITEM 2. CHANGES IN SECURITIES None
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) The Company filed a Form 8-K on April 29, 1996,
reporting under Item 3 the filing of the April 1996 Chapter 11 Proceeding.
Page 12 of 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRENDLE'S INCORPORATED
(Registrant)
-----------------------
David R. Renegar
Vice President and
Chief Financial Officer
Date: June 11, 1996
PAGE 13 of 13