OTASCO Inc.'s abrupt closing of its 170 stores Monday may have harmed prospects for raising capital, but management said it had little choice.
Jerry Goodman, chairman and chief executive of the Tulsa-based retailer, said trade creditors have been supportive of OTASCO, which initiated bankruptcy reorganization proceedings simultaneously with the store closings. But he said the company "did not receive additional capital support we needed from our lenders, which forced us into this situation."
Inventory financing for retailers is among the least risky of business loans because of the liquidity and quick turnover of the collateral the inventory securing it. But OTASCO spokesman Steve Wiley said a group of six banks that had provided inventory financing declined to continue to do so.
He said AmeriTrust Co. in Cleveland, Ohio, OTASCO's largest creditor at $86 million, was the lead lender in the group. Wiley said management tried to sell the company but, "Everybody wanted something for nothing."
Goodman said a much-smaller OTASCO hopes to reopen for business in the spring. Wiley said management was concerned about closing the stores during the interim.
"It's not really fair to go into Christmas without merchandise," he said. "We're better off reintroducing OTASCO, if you will.
"One of the last things you want to do is disappoint the consumer."
Wiley also said the lack of buyers willing to pay a price acceptable to management suggested that the OTASCO franchise value would not fall substantially more by closing the stores.
Goodman said OTASCO's falling sales and profits were due largely to poorly performing stores in depressed oil and energy regions, which Wiley estimated account for 85 percent of all stores. The company said collection problems with customers who purchased goods on credit also contributed to OTASCO's financial difficulties.
Goodman has been an OTASCO employee since 1970 and president and chief executive since 1983.
Wiley said the repositioning of OTASCO stores that has been completed for some locations has succeeded and needs to be used for other stores that would remain. When OTASCO began closing 94 stores two years ago, Goodman said discount general merchandisers such as Wal-Mart had taken much of OTASCO's traditional market.
The firm said then that it would specialize on automotive products, home appliances and electronics.
Wiley said some of the repositioned stores that performed the best were situated in strip shopping centers with a Wal-Mart store.
But restructuring OTASCO's store operations will require additional capital. Wiley said he doubts that the firm can be reorganized without new capital. He added that management will continue to seek to sell the firm.
In 1987, OTASCO sold to CoastAmerica in Denver its wholesale distribution system to its 264 franchised OTASCO stores. CoastAmerica supplies franchised Coast-to-Coast stores, which are similar in format to OTASCO.
Wiley said some of those OTASCO stores have converted to Coast-to-Coast. Those stores are unaffected by the bankruptcy filing.
Goodman said management also has reduced bank debt, divested its muffler installation subsidiary, liquidated a discount store subsidiary, reduced operating expense, consolidated three distribution centers into one, consolidated credit and collections operations and installed a retail inventory control system.
Other efforts to stablize OTASCO included involvement of Miller-Zell Inc. in Atlanta, Ga., in June to help redesign the chain. Wiley said Miller-Zell was to earn OTASCO stock for its work in revamping the store operations.
Although some work was done, he said the arrangement apparently did not proceed as all parties had hoped.
OTASCO announced in August that it would open four prototype stores in four states, including one in Chickaska, in September. Other new concept stores were opened this year before the deal with Miller-Zell was announced.
OTASCO Inc. is owned by OTASCO Corp. OTASCO Corp. is owned by management and the OTASCO Employees' Retirement Trust.
Those two groups, through the holding firm, bought the operating company in 1984 from McCrory Corp. of York, Pa., a retailing subsidiary of privately-held Rapid-American Corp. in New York.
Because of the bankruptcy filing, Wiley said, the OTASCO Inc. stock will be revalued. He said the value of the stock, which is not publicly traded, had been reduced before the filing.
"I know the stock isn't worth nothing yet," Wiley said.
Stockholders have the lowest priority of creditors in bankruptcy proceedings. Unless they invest additional capital in the bankrupt company, stockholders lose their equity interest in the firm if the reorganization plan does not propose to pay 100 percent of the claims of higher-ranking creditors. BIOG: NAME:Archive ID: 366289