PW: Ingram Suing Crown Books, Former Parent

Crown Books' filing with the Securities and Exchange Commission for the quarter ended May 2, 1998, revealed nothing but more bad news for the company. The most significant revelation was that Ingram Book Co. has filed a lawsuit against the chain, charging both Crown and Dart Group, its former owner, with breach of contract. Other allegations in the suit include fraudulent misrepresentation by Dart, negligent misrepresentation by Dart, civil conspiracy by Dart and Crown, and fraudulent conveyance against Dart. The suit, filed June 10, presses for a declaratory judgment against Dart. Further details of the suit were not available at press time.

The lawsuit puts Ingram in an awkward position since it is the principal vendor supplying product to Crown. At the moment, Ingram is shipping books to Crown only on a cash-before-delivery basis. In its filing, Crown said it has no assurances that vendors will continue to supply the company with product.

To complicate matters with Ingram, Crown continues to be cash-poor and has only $1.9 million remaining from its current credit facility. Crown is continuing to search for alternatives to improve its liquidity position, but noted that if additional sources of liquidity are not found, the company will consider reorganization protection alternatives under bankruptcy laws.

To help retain as much cash as possible, Crown has suspended its plans to open four new superstores this year. In addition, it continues to review the profitability trends and prospects of existing stores and may close or relocate underperforming stores. Although Crown did not shut any stores during the first quarter, sources said the company will soon close at least two stores.

Crown has not been helped by the performance of its stores. The company lost nearly $6 million in the first quarter, compared to a loss of $2.7 million in last year's first period. Sales were up 0.8%, to $66 million. Overall comparable-store sales were down 9.3%, and same-store results for Super Crown Books were down 8.8%. Crown blamed the decreases primarily on interruptions in the flow of inventory, and also acknowledged that the new prototype superstores have not met expectations.

The company's attempt to fix a faulty accounts-payable system have not been completed. Although Crown continues to invest resources in the project, the new system has not been tested to determine if Crown is able to produce accurate financial data in a timely fashion. As a result, Crown executives had to make estimates and assumptions concerning its financial position at the end of the quarter, and advised that actual results could differ.

In a final bit of bad news, Crown said that after a preliminary review of its year 2000 problem, it had decided to develop plans to ensure minimal disruptions to the company's operations. The company noted that it is not certain that there will be time to implement the plan by 2000. The aggregated costs associated with the progam are estimated at $600,000 for fiscal 1999.