<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from__________ to __________
Commission file number 0-14611
FRETTER, INC.
(Exact name of Registrant as specified in its charter)
MICHIGAN 38-1557359
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12501 Grand River
Brighton, Michigan 48116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 220-5000
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
NOT APPLICABLE
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Shares outstanding as of April 30, 1995
----- -------------------------------------------
<S> <C>
Common Stock, $.01 par value 10,577,392
</TABLE>
<PAGE> 2
FRETTER, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Form 10-Q Cover Page 1
Form 10-Q Index 2
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidated Statements of
Shareholders' Equity 5
Consolidated Statements of Cash Flow 6
Notes to Consolidated Financial
Statements 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-11
Part II. Other Information
Item 1-6. 12
Signatures 14
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRETTER, INC.
CONSOLIDATED BALANCE SHEETS
( Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Assets April 30, January 31,
1995 1995
--------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $11,449 $13,787
Accounts receivable, net 24,741 24,058
Merchandise inventory 182,783 207,066
Prepaid expenses and other 6,426 4,926
Deferred commissions 4,517 4,872
---------- ---------
Total current assets 229,916 254,709
Property and equipment, net 109,008 111,985
Goodwill, net 87,046 87,809
Other assets 6,849 6,991
Deferred commissions 6,108 7,114
---------- ---------
$438,927 $468,608
========== =========
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term obligations 773 4,601
Accounts payable 51,949 49,491
Current portion of deferred service contract revenue 22,779 24,933
Accrued liabilities 56,835 73,021
Reserve for store closings 6,642 7,881
Income taxes payable 213 2,143
---------- ---------
Total current liabilities 139,191 162,070
Long-term obligations 111,484 105,161
Other noncurrent liabilities 22,442 26,008
Deferred service contract revenue 31,210 36,169
Employee benefit obligations 63,791 64,041
---------- ---------
Total liabilities 368,118 393,449
---------- ---------
Redeemable preferred stock 40,875 40,800
---------- ---------
Commitments and contingencies
Shareholders' Equity
Preferred stock-authorized, 5,000,000 shares of $.01 par
value; issued: none
Common stock-authorized: 50,000,000 shares $.01 par
value; issued: 10,577,392 shares at April 30, 1995
and January 31, 1995 106 106
Additional contributed capital 1,641 1,641
Retained earnings 28,187 32,612
---------- ---------
29,934 34,359
---------- ---------
$438,927 $468,608
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
FRETTER, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended April 30,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Net sales $166,429 $182,004
Cost of goods sold 118,948 133,082
---------- ----------
Gross profit 47,481 48,922
---------- ----------
Operating expenses
Selling 37,029 40,309
Warehouse and delivery 6,588 6,247
Administrative 8,529 8,536
---------- ----------
52,146 55,092
---------- ----------
Other income (expense)
Interest and other 1,621 2,154
Interest expense (2,726) (1,505)
---------- ----------
(1,105) 649
---------- ----------
Loss before income taxes (5,770) (5,521)
Income taxes (benefit) (2,020) (1,988)
---------- ----------
Net loss before preferred dividend (3,750) (3,533)
Preferred stock dividend requirements 600 600
---------- ----------
Net loss available for common shareholders ($4,350) ($4,133)
========== ==========
Weighted average number of common shares 10,577,392 10,577,467
========== ==========
Net loss per common share ($0.41) ($0.39)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
Fretter, Inc.
Consolidated Statements of Shareholders' Equity
For the three months ended April 30, 1994 and 1995
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
For the three-months --------------------------- Contributed Retained
ended April 30, 1994 Shares $0.01 par Capital earnings Total
- ----------------------------- ---------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1994 10,577,467 $106 $1,641 $29,247 $30,994
Net loss for the three-months
ended April 30, 1994 (3,533) (3,533)
Preferred stock dividend
requirements (600) (600)
---------- ---- ------ ------- -------
BALANCE AT APRIL 30, 1994 10,577,467 $106 $1,641 $25,114 $26,861
========== ==== ====== ======= =======
<CAPTION>
For the three-months
ended April 30, 1995
- ------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1995 10,577,392 $106 $1,641 $32,612 $34,359
Net loss for the three-months
ended April 30, 1995 (3,750) (3,750)
Preferred stock dividend
requirements (600) (600)
Preferred stock accretion (75) (75)
---------- ---- ------ ------- -------
BALANCE AT APRIL 30, 1995 10,577,392 $106 $1,641 $28,187 $29,934
========== ==== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
5
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FRETTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three-months ended April 30,
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before preferred dividends ($3,750) ($3,533)
Adjustments to reconcile net loss to net
cash (used for) operating activities:
Depreciation and amortization 4,324 3,922
Stock compensation expense 501 620
Other non-cash items 1,281 1,371
Change in assets and liabilities
Merchandise inventory 24,283 (6,820)
Other assets (1,145) (14,555)
Accounts payable 2,458 (10,156)
Deferred service contract revenue (7,113) 5,213
Other liabilities (24,755) (25,637)
--------- ---------
NET CASH (USED FOR) OPERATING ACTIVITIES (3,916) (49,575)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (317) (6,199)
--------- ---------
NET CASH (USED FOR) INVESTING ACTIVITIES (317) (6,199)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term obligations 6,475 52,746
Payments of long term obligations (3,980) (80)
Preferred stock dividends (600)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,895 52,666
--------- ---------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,338) (3,108)
Cash and cash equivalents at beginning of period 13,787 16,805
--------- ---------
Cash and cash equivalents at end of period $11,449 $13,697
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
6
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FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements, which
include Fretter, Inc. and its wholly owned subsidiaries ("Company") have been
prepared in accordance with generally accepted accounting principles and
reflect, in the opinion of management, all adjustments necessary for a fair
statement of financial position as of April 30, 1995 and the results of
operations, and cash flows for the three months ended April 30, 1995 and 1994;
all of which adjustments are of a normal and recurring nature. Certain amounts
in prior years' consolidated financial statements have been reclassified to
conform with the current year presentation. The consolidated financial
statements should be read in conjunction with the financial statements and
notes contained in the Company's 1995 Annual Report on Form 10-K and Annual
Report filed with the Securities and Exchange Commission on May 1, 1995.
2. SERVICE CONTRACTS
The Company recognizes revenue from the sale of service contracts on a
straight-line basis over the life of the contract. Incremental direct costs
resulting from the sale of such contracts (primarily commissions) are also
deferred and recognized on a straight-line basis over the same period.
Effective November 1, 1994 the Company discontinued selling its own
service contracts and instituted a program to offer for sale to its customers
third party service contracts by which an independent entity issues the
Company's customers the extended service contracts sold by the Company's
salespersons. The Company records the sale of these contracts as a component
of net sales, records the amount payable to the third party as a component of
cost of goods sold and records salesperson commissions as a component of
selling expense at the time of sale to its customers.
Effective with the acquisition of Dixons U.S. Holdings, Inc. ("DUS")
on December 3, 1993, the Company recorded a liability for the estimated costs
of servicing contracts of DUS which existed at the acquisition date. No
revenue or costs associated with these acquired contracts will be recognized.
The current and noncurrent portions of the liability are included in accrued
liabilities and other noncurrent liabilities, respectively.
3. SEASONALITY
Due to the seasonality of the Company's business, interim results of
operations are not necessarily indicative of the results for any other interim
period or the results of operations for the full year.
4. LONG-TERM OBLIGATIONS
The Company maintains a revolving credit agreement with a commercial
credit company which committed a maximum of $140.0 million to the Company for
cash borrowings and letters of credit. Interest on amounts outstanding under
this facility is calculated at 1.25% above the bank's prime rate. This
facility expires on December 1, 1996. Borrowings under the credit agreement
are secured by accounts receivable,
7
<PAGE> 8
personal property and inventory of the Company, as defined. At April 30, 1994
and April 30, 1995, there was $69.5 million and $84 million outstanding under
the credit facility.
Covenants of the above agreements require the Company to maintain
minimum amounts of consolidated net worth, net income and interest coverage
ratio, and limits the amounts for capital expenditures, debt service payments
and additional indebtedness the Company may incur.
As of April 30, 1995, the Company has failed to meet the Interest
Coverage Ratio Covenant of such facility. In addition, although not presently
calculated, it is likely that the Company is or shortly will fail to meet its
Consolidated Book Net Worth Covenant of such facility. The Company has
notified the agent operating the facility of the foregoing and the agent has
indicated that it will shortly meet with the constituent lenders to discuss the
Company's request for a waiver of such requirements.
5. EARNINGS PER SHARE
Earnings per share are computed by dividing earnings after income
taxes by the weighted average number of common shares outstanding, including
common stock equivalents. Common stock equivalents include stock options
outstanding which may be converted to common stock. There were no common stock
equivalents used in the calculation at April 30, 1995.
8
<PAGE> 9
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(THREE MONTHS ENDED APRIL 30, 1995 AND 1994)
OVERVIEW
The Company is a large volume specialty retailer of home entertainment
products, consumer electronics and appliances. Currently the Company operates
236 retail stores, 45 of which are in Michigan, Ohio, Massachusetts and New
Hampshire under the name Fretter; 136 retail stores under the name Silo in
Arizona, California, Delaware, Illinois, Indiana, Nevada, New Jersey, New
Mexico, New York, Oregon, Pennsylvania, Texas, Utah and Washington, operated
through DUS; 14 retail stores under the name YES! Your Electronics Superstore
in New York, Baton Rouge, Louisiana and Marshall Fields locations, operated
through DUS; 22 retail stores in Colorado, Montana and Wyoming operated through
Fred Schmid Appliance & TV Co. ("Schmid"), a wholly-owned subsidiary of the
Company; and 19 automotive electronic retail stores in Michigan, Ohio and
Indiana operated through Dash Concepts, a wholly-owned subsidiary of the
Company. Additionally, there are five stores still required to operate under
continuous operation clauses, all of which will be closed as soon as
satisfactory arrangements are reached with the respective landlords. The
Company is also in the process of closing the ten YES stores it operates in
Marshall Fields department stores in Illinois.
On December 3, 1993, the Company issued 3,164,804 shares of common
stock, 3,000,000 shares of Convertible Series A Preferred Stock and 1,500,000
shares of Series B Preferred Stock to Dixons America Holdings, Inc. ("DAH") in
exchange for the outstanding shares of equity securities of Dixons U.S.
Holdings, Inc. ("DUS"). As a result of this transaction, the Company owns and
controls the business assets and operations of DUS. DAH subsequently
transferred all of its shares in the Company to Dixons Overseas Investments
Limited ("DOI").
The ultimate parent company of DOI is Dixons Group plc ("Dixons")
which (through certain subsidiaries), is the largest consumer electronics
retailer in the United Kingdom and is a public limited company listed on London
Stock Exchange. DUS is the holding company of Silo Holdings, Inc., which
together with its subsidiaries (including Silo, Inc.) comprise the business
referred to as "Silo."
As a result of this acquisition, the Company has closed a number of
locations where there were overlapping and competing stores, low performing
stores and duplicate facilities. As of fiscal year ended January 31, 1995, the
Company had charged $31.9 million to a store closure reserve related to closing
these facilities. The Company charged $2.9 million against the store closure
reserve during the three months ended April 30, 1995.
9
<PAGE> 10
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(THREE MONTHS ENDED APRIL 30, 1995 AND 1994)
The more significant factors affecting the Company's operations in the
three month period ended April 30, 1995 include:
- The Company effectively and significantly reduced the combined
store management expenses compared to the expenses previously
experienced by the separate Fretter and DUS companies.
- Intense competition in the Company's key markets resulted in
decreased sales, decreased gross margins and decreases in
comparable store sales.
- The Company closed 12 stores and opened 6 new stores during
the last fiscal year and closed 2 stores during the first
three months of this fiscal year resulting in lower total
sales for the first quarter of fiscal 1996 as compared to the
first quarter of fiscal 1995.
CHANGES IN RESULTS OF OPERATIONS
Net Sales
Net sales decreased in the three month period ended April 30, 1995 as
compared to the three month period ended April 30, 1994 by $15.6 million
(8.6%). Comparable store sales decreased $10.3 million (9.4%) from the same
period last year. The decrease of $15.6 million in total sales is primarily
due to the intense competition within the Company's key markets and lesser
number of stores operated by the Company.
Comparable store sales relates each store's sales in a current fiscal
period to the same store's sales in the same period in the prior fiscal year.
The comparable store sales calculation for the three month period ended April
30, 1995 reflects Fretter, Silo and Schmid stores; however, the Silo stores
were phased into the Company's reporting systems in series over the first
quarter of fiscal 1994 and its stores' sales for comparable stores sales
purposes are counted only as of the month in which each store was placed on the
Company's reporting systems.
The decrease in comparable store sales for the three month period
ended April 30, 1995 is primarily due to the intense competition within the
Company's key markets.
Cost of Goods Sold and Gross Profit
Cost of goods sold decreased by $14.1 million (10.6%) and gross profit
decreased $1.4 million (2.9%) in the three month period ended April 30, 1995 as
compared to the three month period ended April 30, 1994. Gross profit as a
percentage of net sales increased to 28.6% in the three month period ended
April 30, 1995 from 26.9% in the three month period ended April 30, 1994.
10
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PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(THREE MONTHS ENDED APRIL 30, 1995 AND 1994)
The increase in gross profit as a percentage of sales for the three
month period ended April 30, 1995 is primarily attributable to improved
merchandise mix and purchasing cost efficiencies due to the consolidation of
DUS into the Company.
Operating Expenses
Operating expenses comprise warehouse and delivery, selling and
administrative expenses. Operating expenses decreased by $2.9 million (5.3%)
in the three month period ended April 30, 1995 compared to the three month
period ended April 30, 1994. As a percentage of net sales, operating expenses
increased to 31.3% in the three month period ended April 30, 1995 from 30.3% in
the three month period ended April 30, 1994.
The increase in operating expense as a percentage of net sales for the
three month period ended April 30, 1995 is primarily attributable to an
increase in store occupancy costs and amortization of goodwill resulting from
the acquisition of DUS.
Interest And Other Income
Interest and other income decreased $533,000 (24.7%) in the three
month period ended April 30, 1995 compared to the three month period ended
April 30, 1994. Interest and other income as a percentage of net sales for the
three month periods ended April 30, 1995 and 1994 was 1.0% and 1.2%,
respectively.
The decrease for the three month period ended April 30, 1995 is
primarily due to the impact of increasing interest rates charged by the
Company's account financier in relation to the interest rates payable by
consumers; as well as the cost of the Company's customer financing promotions.
Interest Expense
Interest expense increased $1.2 million (81.1%) in the three month
period ended April 30, 1995 compared to the three month period ended April 30,
1994. Interest expense as a percentage of net sales for the three month
periods ended April 30, 1995 and 1994 was 1.6% and .8%, respectively.
The increase in interest expense for the three month period ended
April 30, 1995 as compared to the prior year is primarily due to the increased
interest rates and borrowings on the Company's line of credit.
11
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PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(THREE MONTHS ENDED APRIL 30, 1995 AND 1994)
Income Taxes
The effective income tax rates for the three month periods ended April
30, 1995 and 1994 were 35.0% and 36.0%, respectively (prior to the
establishment of the valuation allowance for net deferred tax assets).
A tax benefit was recorded in the three month period ended April 30,
1995 in the amount of approximately $2.0 million.
Net Earnings Before Preferred Stock Dividend
Due to the factors discussed above, net loss before preferred stock
dividend increased $.2 million from a net loss of $3.5 million in the three
month period ended April 30, 1995 to a net loss of $3.7 million in the three
month period ended April 30, 1995.
Changes in Cash Flows
The Company's primary needs for capital are to support its inventory,
particularly during the Christmas Holiday season and in the summer months with
the purchase of air conditioners. In addition, capital is required to fund new
store openings and to remodel or relocate existing stores.
Since February 1, 1995, cash and cash equivalents decreased $2.3
million, primarily attributable to net cash used for operating activities.
Net cash used in operating activities of $3.9 million was used to
decrease liabilities by $29.4 million, offset by a decrease in inventory and
other assets of approximately $25.5 million.
The Company expects to fund modernization of its stores and future
expansion of its retail store base with a combination of funds generated from
operations, mortgage and loan financing, and through existing lines of credit,
to the extent available. The Company's future liquidity is dependent on
continued funding under the revolving credit facility.
12
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the Company is party to various legal proceedings
relating to the conduct of its business. Many of these claims are covered by
insurance. Management is of the opinion that the outcome of any of these
currently pending legal proceedings will not have a material adverse effect on
the Company's business or financial condition.
Item 2. Changes in Securities
None
Item 3. Default upon Senior Securities
As of April 30, 1995, the Company has failed to meet the Interest
Coverage Ratio Covenant of its Senior Indebtedness to BT Commercial
Corporation, agent for constituent lenders under the Company's $140 million
Revolving Credit Agreement. In addition, although not presently calculated,
it is likely that the Company is or shortly will fail to meet its Consolidated
Book Net Worth Covenant required under such Senior Indebtedness. The Company
has notified the agent of the foregoing and the agent has indicated that it
will shortly meet with the constituent lenders to discuss the Company's request
for a waiver of such requirements.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27. Selected Financial Data Schedule per Item
601(c)(1)(ii) of Regulation S-K.
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRETTER, INC.
Registrant
Date: June 14, 1995 By: s/ John Hurley
-------------------------
John Hurley
Chief Executive Officer
Date: June 14, 1995 By: s/ Dale R. Campbell
-------------------------
Dale R. Campbell
Executive Vice President
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
27 Selected Financial Data Schedule per Item
601(c)(1)(ii) of Regulation S-K.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1995
<PERIOD-END> APR-30-1995
<CASH> 11,449
<SECURITIES> 0
<RECEIVABLES> 24,741
<ALLOWANCES> 0
<INVENTORY> 182,783
<CURRENT-ASSETS> 229,916
<PP&E> 109,008
<DEPRECIATION> 0
<TOTAL-ASSETS> 438,937
<CURRENT-LIABILITIES> 139,191
<BONDS> 111,484
<COMMON> 106
40,875
0
<OTHER-SE> 29,828
<TOTAL-LIABILITY-AND-EQUITY> 438,927
<SALES> 166,429
<TOTAL-REVENUES> 166,429
<CGS> 118,948
<TOTAL-COSTS> 118,948
<OTHER-EXPENSES> 50,525
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,726
<INCOME-PRETAX> (5,770)
<INCOME-TAX> (2,020)
<INCOME-CONTINUING> (3,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,350)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
