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'Substantial Doubt' About Crown Books' Future
Jim Milliot -- 5/11/98
Chain nearly out of credit, may face bankruptcy soon; poor internal controls cited
Crown Books' 10-k filing last week with the Securities and Exchange Commission revealed just how dire the bookstore chain's financial situation is. Crown's auditors, Arthur Andersen, reported that, due to recurring losses and severe liquidity problems, there is "substantial doubt about its [Crown's] ability to continue as an ongoing concern."
The filing notes that as of April 28, Crown has used all but $2.8 million of its $25-million credit line, and that it was negotiating with its lenders to enter into a new credit facility with greater borrowing power. If Crown is unable to find a new funding source, the chain will consider reorganization protection alternatives under bankruptcy laws. The company has no current plans to liquidate. When Crown's problems became known, its stock-which was the best performer in the PWSI in April (see p.14)-plummeted, closing at $3.50 on May 6.
While Crown executives are in discussions with its banks, they are also talking to Ingram about the possibility of extending the payment schedule of accounts payable due the wholesaler, which is supplying the bulk of its books. Officials are also in negotiations with other suppliers to reconcile credit for book returns, disputed items and chargebacks that occurred following Crown's return of $40 million worth of books to those vendors.
For the fiscal year ended Jan. 31, 1998, Crown had a net loss of $48.6 million on sales of $297.5 million. A major contributor to the loss was write-offs of $42.3 million due to store closings and companywide restructuring.
A major problem for Crown has been what Arthur Andersen described as "a material weakness in Crown Books' internal control structure." According to Crown, the company's prior management implemented a new accounts payable/inventory system without fully testing it. As a result, Crown has been unable to determine in an accurate or timely fashion the purchases and amounts payable for each vendor throughout the year. In addition, reconciliation of certain general ledger accounts, including cash, accounts payable and inventory, were not done on a timely basis during the year. Although Crown's new management has invested substantial resources in improving controls, the improvements have not resolved the problems.
Anna Currence, Crown president, told PW that Crown is in "a challenging situation," although she said she is moving ahead with her attempt to lead a management buyout of the company. Crown will need new ownership once the sale of its parent company, Dart Group, to Richfood Holdings is completed. That deal is expected to close some time this month, at which point Richfood has said it intends to divest Crown.
During the year, Crown closed 11 traditional outlets and four Super Crown Books, and anticipates closing about three traditional stores and one non-prototype Super Crown in the year. It has also signed leases to open four new stores. Currently, Crown has 179 stores, including 131 Super Crown outlets.
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