Crown Books Continues Turnaround Efforts
Jim Milliot -- 12/18/00

Credit and capital concerns, as well as ongoing problems with its inventory management systems, hover over Crown Books as the bookstore chain tries to return to profitability after emerging from bankruptcy one year ago (News, Nov. 22, 1999).

In a registration statement filed with the Securities & Exchange Commission earlier this month, Crown said that while it has sufficient liquidity to operate for the foreseeable future, it could need additional funds in the future, and although it is negotiating with different sources, it has no firm commitments for additional capital. In addition, Crown is in default of two of its financial covenants; the company said it expects to receive waivers from the creditors affected.

One of those creditors is Ingram Book Co., from which Crown bought 94% of its book merchandise in the fiscal year ended January 31, 2000, and 65% for the six-month period ended July 29, 2000. Although the default means Ingram is no longer obligated to extend Crown the $9.6-million credit line reached under an earlier agreement, Crown said that Ingram had advised the company that it has no current plans to change the chain's credit limit. Crown is looking to lessen its dependence on Ingram and in doing so has obtained $12.7 million of credit limits from other suppliers. Crown's goal is to purchase about 50% of its merchandise directly from suppliers, a move that would improve the company's gross margins.

One of the major problems that forced Crown into bankruptcy was poor internal controls, and while Crown has improved those procedures, the company is still experiencing problems with its management information systems and is devoting a significant amount of manual effort to reconcile its accounts. The company is committed to improving its information system and plans to invest $200,000 in the next fiscal year to upgrade the system.

During the first six months of fiscal 2001, Crown had total revenues of $82.2 million, slightly below the $83.4 million reported in the comparable period last year. About 86% of its revenues came from Crown's 68 superstores with the balance generated by its 23 traditional outlets. The company's net loss was reduced to $5.5 million from $6.7 million. The loss in the last six months includes $1.1 million in preoperating costs at

In an attempt to launch an e-commerce site, Crown raised $4 million in a private offering in March and spent $1.5 million developing an Internet strategy. Crown spent another $1 million to meet its own working capital needs and plans to use the remaining $1.5 million for its own requirements through an intercompany loan with Crown estimates that it will need more than $5 million to successfully launch its Internet site, but said that given the current market conditions for Internet companies, the company d s not think it can raise the additional capital at this time. Without an infusion of funds, Crown's Internet operations face an uncertain future.

Crown filed the registration statement as part of its effort to create a public market for its new shares. Under the terms of the reorganization agreement, Crown's old stock was canceled last November and creditors exchanged debt for equity in the new company. Crown currently has 4.4 million shares outstanding, with the largest stake, 35%, held by Shenkman Capital Management. Crown chairman, president and CEO Charlie Cumello has a 6.2% stake. Crown has applied to have its stock traded on the American Stock Exchange. If AMEX rejects the application, Crown's stock will likely be listed on the OTC Bulletin Board.

The filing also notes that beginning on November 29, 1999, Crown signed a three-year agreement with Cumello that calls for an annual salary of $350,000 and annual bonuses of $140,000 to $210,000 if certain financial targets are hit.