Formation of creditors group expected as Cook United files a ch.11 petition

Discount Store News, Oct 29, 1984

CLEVELAND -- Federal bankruptcy court orders for the formation of a creditors' committee were expected at press-time as the next step in Cook United's bankruptcy proceedings, following the discounter's filing of a Chapter 11 petition earlier this month.

Cook United went into voluntary bankruptcy to buy time and obtain new bank funding to enable the scaled-down 53-store discounter to complete a soft goods-oriented remodeling and remerchandising program that executives asserted was its only chance for long-term survival.

The discounter's filing in the U.S. Bankruptcy Court for the Northern District of Ohio noted there was $88.6 million in unsecured debt, with the 20 largest supplier creditors owed $7,967,300 of the $27 million trade debt portion. Secured debt was $32.7 million, with the six largest bank creditors due $23,262,700.

In addition, $18.7 million was due holders of unsecured 5-1/2% convertible subordinate debentures.

Company chairman, president and chief executive officer Russell A. Hansen said the "painful" bankruptcy filing "is the most responsible action to take" because "the company required a moratorium on payment of its debts in order to carry out its remodeling and merchandising program."

He added: "The financing necessary to successfully implement this program could't be obtained from the company's banking group."

He asserted the filing gives the discounter time "to improve our financial position and strengthen our balance sheet. We are confident that Cook will be able, in time, to emerge from Chapter 11 as a revitalized and viable entity."

The discounter, subject to expected court approval, is "arranging interim financing" from an unnamed "major New York bank," he said.

A company spokesman said Cook United was "fairly confident" an arrangement would be reached on new financing with the unnamed bank. He indicated this would enable the discounter to obtain more of the merchandise it needed to carry out its new merchandising program.

The Chapter 11 filing would seem to enhance Cook United's position. It freezes the discounter's previous trade debt, along with insuring that monies from sales made during the bankruptcy go to vendors that supply goods during this period, so suppliers have less concern about being paid for their merchandise.

One source said vendors now have a more "favorable attitude" about shipping to Cook United as a debtor in possession of its business.

However, he indicated various financial lenders have different views on the company's filing, based on the nature of their loans to Cook United and the discounter was meeting with its banks "relating to their posture."

Another source explained that secured lenders in any bankruptcy situation always have to determine what is the best course of action for them to obtain their monies: liquidating all or part of the bankrupt company and/or going along with some form of reorganization.

The company spokesman said Cook United was a solvent company. Its assets exceeded its liabilities but it wasn't liquid enough to pay its bills, he explained. The filing was the only alternative it had to buy time and obtain funds for its revamping.

One source said the discounter's board didn't think its available financing was enough to carry out the remodeling and remerchandising program drawn up by Hansen.

The company's sales and earnings weren't meeting levels set in the bank loan agreements, while vendor reluctance to supply the company had hurt sales in the 16 stores already remodeled.

Trade sources noted that Cook United has had problems during the past two years getting all the merchandise it wanted.

The spokesman said sales in the 16 remodeled stores haven't reached targeted levels because the discounter didn't have all the goods needed for its program.

Hansen, in reporting the discounter's quarterly results late last month a few days before the Chapter 11 filing, said sales in the last "six newly remodeled stores, although less than expected, were clearly ahead of the remainder of the chain, indicating the new concepts are working."

He noted consolidation of two warehouses into one Toledo, Ohio, facility (part of the scaling back of the discounter's previous multistate operation) "didn't go as smoothly as planned, which resulted in some merchandise stocking problems and lost sales."

In the quarter ended Aug. 11, 10 stores were remerchandised under the discounter's program, but "expenses associated" with the endeavor "adversely affected" results, Hansen said. Fourteen more remodeled stores are to open by early November, and the last 23 will be reworked before spring 1985.

The discounter was "investing approximately $200,000 per store" in the remodeling and remerchandising program, he said.

Company sales in the 28 weeks ended Aug. 11 dropped 41% from $288.6 million to $170.2 million (due to a smaller number of units). The net loss, however, was cut, by more than half, to $4.4 million from $8.9 million.

Sales Down

Sales in the quarter fell 51.9% from $139.4 million to $67.1 million, while the net loss was sharply shaved from $3.8 million to just $284,000.