<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 July 31, 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 September 18, 1995
<S> <C>
Common Stock, $.01 par value 10,577,392
</TABLE>
<PAGE> 2
FRETTER, INC.
INDEX
Page No.
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 9-13
Part II. Other Information
Item 1-6. 14
Signatures 15
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRETTER, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Assets July 31, January 31,
1995 1995
----------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $7,368 $13,787
Accounts receivable 20,538 24,058
Merchandise inventory 161,941 207,066
Prepaid expenses 6,970 4,926
Deferred commissions 4,092 4,872
-------- --------
Total current assets 200,909 254,709
Property and equipment, net 106,242 111,985
Goodwill, net 87,250 87,809
Other assets 6,367 6,991
Deferred commissions 5,293 7,114
-------- --------
$406,061 $468,608
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term obligations $78,331 $4,601
Accounts payable 58,891 49,491
Current portion of deferred service contract revenue 20,817 24,933
Accrued liabilities 56,945 73,021
Reserve for store closings 5,496 7,881
Income taxes payable 480 2,143
-------- --------
Total current liabilities 220,960 162,070
Long-term obligations 15,656 105,161
Other noncurrent liabilities 18,641 26,008
Deferred service contract revenue 26,664 36,169
Employee benefit obligations 64,328 64,041
-------- --------
Total liabilities 346,249 393,449
-------- --------
Redeemable preferred stock 40,950 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
July 31, 1995 and January 31, 1995, respectively 106 106
Additional contributed capital 1,641 1,641
Retained earnings 17,115 32,612
-------- --------
18,862 34,359
-------- --------
$406,061 $468,608
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 4
FRETTER, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the six months ended July 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Three-months ended July 31 Six-months ended July 31,
--------------------------- ------------------------- 3-months ended
1995 1994 1995 1994 April 30, 1995
---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $158,106 $204,331 $324,535 $385,612 $166,429
Cost of goods sold 114,700 149,154 233,648 281,117 118,948
---------- ---------- ---------- ---------- ----------
Gross profit 43,406 55,177 90,887 104,495 47,481
Operating expenses
Selling 37,895 42,830 74,924 82,425 37,029
Warehouse and delivery 6,225 6,396 12,813 12,850 6,588
Administrative 8,594 7,497 17,123 16,998 8,529
---------- ---------- ---------- ---------- ----------
52,714 56,723 104,860 112,273 52,146
Other income (expense)
Interest and other 1,871 1,927 3,492 4,309 1,621
Interest expense (2,740) (1,740) (5,466) (3,244) (2,726)
---------- ---------- ---------- ---------- ----------
(869) 187 (1,974) 1,065 (1,105)
Loss before income taxes (10,177) (1,359) (15,947) (6,713) (5,770)
Income taxes (benefit) 220 (422) (1,800) (2,243) (2,020)
---------- ---------- ---------- ---------- ----------
Net loss before preferred dividend (10,397) (937) (14,147) (4,470) (3,750)
Preferred stock dividend requirements 600 600 1,200 1,200 600
---------- ---------- ---------- ---------- ----------
Net loss available for common shareholders ($10,997) ($1,537) ($15,347) ($5,670) ($4,350)
========== ========== ========== ========== ==========
Weighted average number of common shares 10,577,392 10,577,467 10,577,392 10,577,467 10,577,392
========== ========== ========== ========== ==========
Net loss per common share ($1.04) ($0.15) ($1.45) ($0.54) ($0.41)
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
3-months ended
July 31, 1995 Per BT QTR
<S> <C> <C> <C>
Net sales $158,106 $158,107 -1
Cost of goods sold 114,700 114,878 -178
---------- ----------
Gross profit 43,406 43,229
Operating expenses
Selling $37,895 $37,719 176
Warehouse and delivery $6,225 $6,225 0
Administrative 8,594 8,569 25
---------- ----------
52,714 52,513
Other income (expense)
Interest and other $1,871 $1,851 20
Interest expense (2,740) (2,740) 0
---------- ----------
(869) (889)
Loss before income taxes ($10,177) (10,173) -4
Income taxes (benefit) 220 2,020 -1800
---------- ----------
Net loss before preferred dividend (10,397) (12,193)
Preferred stock dividend requirements 600 600 0
---------- ----------
Net loss available for common shareholders ($10,997) ($12,793) 1796
========== ==========
Weighted average number of common shares 10,577,392 10,577,392 0
========== ==========
Net loss per common share ($1.04) ($1.21) 0.16979610853034472
========== ==========
</TABLE>
<PAGE> 5
See accompanying notes to consolidated financial statements
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<PAGE> 6
Fretter, Inc.
Consolidated Statements of Shareholders' Equity
For the six months ended July 31, 1994 and 1995
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
For the six-months ---------------------- Contributed Retained
ended July 31, 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 six-months
ended July 31, 1994 (4,470) (4,470)
Preferred stock dividend
requirements (1,200) (1,200)
-------------------------------------------------- -------
BALANCE AT JULY 31, 1994 10,577,467 $106 $1,641 $23,577 $25,324
================================================== =======
For the six-months
ended July 31, 1995
---------------------------
BALANCE AT FEBRUARY 1, 1995 10,577,392 $106 $1,641 $32,612 $34,359
Net loss for the six-months
ended July 31, 1995 (14,147) (14,147)
Preferred stock dividend
requirements (1,200) (1,200)
Preferred stock accretion (150) (150)
-------------------------------------------------- -------
BALANCE AT JULY 31, 1995 10,577,392 $106 $1,641 $17,115 $18,862
================================================== =======
</TABLE>
<PAGE> 7
See accompanying notes to consolidated financial statements
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<PAGE> 8
FRETTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six-months ended July 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before preferred dividends ($14,147) ($4,470)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization 8,746 7,467
Stock compensation expense 990 1,236
Other non-cash items 1,811 2,195
Change in assets and liabilities
Merchandise inventory 45,125 (6,738)
Other assets 3,747 7,822
Accounts payable 9,400 (1,388)
Accrued liabilities (17,066) (26,572)
Reserve for store closings (5,746) (27,262)
Deferred service contract revenue (13,621) 13,574
Other liabilities (7,944) (9,499)
------- -------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 11,295 (43,635)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (739) (8,852)
------- -------
NET CASH (USED FOR) INVESTING ACTIVITIES (739) (8,852)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term obligations 4,879 46,578
Payments of long term obligations (20,654) (197)
Preferred stock dividends (1,200) (1,200)
------- -------
NET CASH (USED FOR) PROVIDED BY
FINANCING ACTIVITIES (16,975) 45,181
------- -------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (6,419) (7,306)
Cash and cash equivalents at beginning of period 13,787 16,805
Cash and cash equivalents at end of period $7,368 $9,499
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
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<PAGE> 9
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 July 31, 1995 and the results of
operations, and cash flows for the six months ended July 31, 1995 and 1994; all
of which adjustments, except as otherwise stated in these notes, 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
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expires on December 1, 1996. Borrowings under the credit agreement are secured
by accounts receivable, personal property and inventory of the Company, as
defined. At July 31, 1994 and July 31, 1995, there was $73.7 million and $66.9
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 July 31, 1995, the Company failed to meet the Interest Coverage
Ratio Covenant and the Consolidated Book Net Worth covenant of such facility.
The Company notified the agent operating the facility of the foregoing; the
agent met with the constituent lenders and granted a waiver of such
requirements through July 31, 1995. The Company has sought an extension of such
waiver, however, given the performance of the Company, such waiver may not be
granted. The Company has engaged financial and legal advisers to assist it in
analyzing various alternative strategies, each of which would lead to a
material adverse impact on the ability of the Company to continue its current
operations in the current fashion. Accordingly, the company is actively
considering all of its options including seeking relief under the United States
Bankruptcy Code for the Company and/or one or more of its subsidiaries. The
Company has reclassified the balance due under this facility of $66.9 million
and related debt of $11.3 million as current liabilities in the accompanying
balance sheet.
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 July 31, 1995.
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PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(SIX MONTHS ENDED JULY 31, 1995 AND 1994)
OVERVIEW
The Company is a large volume specialty retailer of home entertainment
products, consumer electronics and appliances. As of July 31, 1995, the Company
operated 229 retail stores, 45 in Michigan, Ohio, Massachusetts and New
Hampshire under the name Fretter; 138 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;
4 under the name YES! Your Electronics Superstore in New York, Baton Rouge and
Louisiana; 23 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. Due to the
Company's inability to profitably operate its retail stores in the states of
New York, California, Washington, Texas, Oregon and New Mexico, the Company
began closing its retail stores in these states in late August, 1995. In
addition, the Company has closed several unprofitable stores in the states of
New Jersey, Illinois, Pennsylvania and Massachusetts. The total stores closed
and currently scheduled to be closed equals 70, which will leave 159 operating
stores. See "Store Closures" on page 13.
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 issued Preferred Stock calls for a $600,000.00 quarterly
dividend payable on February 5, May 5, August 5 and November 5 of each year.
With the knowledge of Dixons, given the Company's current financial status, the
Company did not pay the August 5, 1995 dividend.
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 and in connection with this acquisition, the Company
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 $5.7 million
against the store closure reserve during the six months ended July 31, 1995.
The Company is in the process of determining a store closure reserve relating
to the 70 store closures already and to be implemented. The Company
anticipates a range of $36 million to $48 million for this reserve. This
reserve is established as a charge to the Company's income statement and a
liability on the Company's balance sheet for the Company's upcoming third
quarter financial statements.
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PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(SIX MONTHS ENDED JULY 31, 1995 AND 1994)
CHANGES IN RESULTS OF OPERATIONS
Net Sales
Net sales decreased in the three month period ended July 31, 1995 as
compared to the three month period ended July 31, 1994 by $46.2 million
(22.6%). Comparable store sales decreased $56.7 million (28.5%) from the same
period last year.
Net sales decreased in the six month period ended July 31, 1995 as
compared to the six month period ended July 31, 1994 by $61.1 million (15.8%).
Comparable store sales decreased $66.9 million (21.6%) for the six month period
from the same period last year.
Comparable store sales relates each store's sales in a current fiscal
period to the same store's sales for the same period in the prior fiscal year.
The comparable store sales calculation for the three month and six month
periods ended July 31, 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 total sales and comparable store sales for the three
month and six month periods ended July 31, 1995 is primarily due to the intense
competition within the Company's key markets and unfavorable economic
conditions affecting the retail industry.
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<PAGE> 13
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(SIX MONTHS ENDED JULY 31, 1995 AND 1994)
Cost of Goods Sold and Gross Profit
Cost of goods sold decreased by $34.4 million (23.1%) and gross profit
decreased $11.9 million (21.7%) in the three month period ended July 31, 1995
as compared to the three month period ended July 31, 1994. Gross profit as a
percentage of net sales increased to 27.4% in the three month period ended July
31, 1995 from 27.0% in the three month period ended July 31, 1994.
Cost of goods sold decreased by $47.5 million (16.9%) and gross
profit decreased $13.6 million (13.0%) in the six month period ended July 31,
1995 as compared to the six month period ended July 31, 1994. Gross profit as
a percentage of net sales increased to 28.0% in the six month period ended July
31, 1995 from 27.1% in the six month period ended July 31, 1994
The increase in gross profit as a percentage of sales for the three
month and six month periods ended July 31, 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 $4.0 million (7.1%)
in the three month period ended July 31, 1995 compared to the three month
period ended July 31, 1994. As a percentage of net sales, operating expenses
increased to 33.3% in the three month period ended July 31, 1995 from 27.8% in
the three month period ended July 31, 1994.
Operating expenses decreased by $7.4 million (6.6%) in the six month
period ended July 31, 1995 compared to the six month period ended July 31,
1994. As a percentage of net sales, operating expenses increased to 32.3% in
the six month period ended July 31, 1995 from 29.1% in the six month period
ended July 31, 1994.
The increase in operating expense as a percentage of net sales for the
three month and six month periods ended July 31, 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 $56,000 (2.9%) in the three month
period ended July 31, 1995 compared to the three month period ended July 31,
1994. Interest and other income as a percentage of net sales for the three
month periods ended July 31, 1995 and 1994 was 1.2% and 0.9%, respectively.
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<PAGE> 14
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(SIX MONTHS ENDED JULY 31, 1995 AND 1994)
Interest and other income decreased $817,000 (19.0%) in the six month
period ended July 31, 1995 compared to the six month period ended July 31,
1994. Interest and other income as a percentage of net sales for the six month
periods ended July 31, 1995 and 1994 was 1.1% and 1.1%, respectively.
The decrease for the three month and six month periods ended July 31,
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 $1.0 million (57.5%) in the three month
period ended July 31, 1995 compared to the three month period ended July 31,
1994. Interest expense as a percentage of net sales for the three month
periods ended July 31, 1995 and 1994 was 1.7% and .8%, respectively.
Interest expense increased $2.2 million (68.5%) in the six month
period ended July 31, 1995 compared to the six month period ended July 31,
1994. Interest expense as a percentage of net sales for the six month periods
ended July 31, 1995 and 1994 was 1.7% and .8%, respectively.
The increase in interest expense for the three month and six month
periods ended July 31, 1995 as compared to the prior year is primarily due to
the increased interest rates and borrowings on the Company's line of credit.
Income Taxes
A tax benefit was recorded in the three month period ended April 30,
1995 in the amount of approximately $2.0 million. This benefit was reduced to
$1.8 million in the three month period ended July 31, 1995 because prior year
losses will utilize greater than anticipated pre-acquisition loss
carryforwards.
Net Earnings Before Preferred Stock Dividend
Due to the factors discussed above, net loss before preferred stock
dividend increased $9.5 million from a net loss of $.9 million in the three
month period ended July 31, 1994 to a net loss of $10.4 million in the three
month period ended July 31, 1995.
Due to the factors discussed above, net loss before preferred stock
dividend increased $9.7 million from a net loss of $4.5 million in the six
month period ended July 31, 1994 to a net loss of $14.1 million in the six
month period ended July 31, 1995.
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<PAGE> 15
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(SIX MONTHS ENDED JULY 31, 1995 AND 1994)
LIQUIDITY AND CAPITAL RESOURCES
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 $6.4
million, primarily attributable to net cash used for operating activities.
Net cash provided by operating activities of $11.3 million resulted
primarily from a decrease in inventory of $45.1 million offset by a decrease in
liabilities.
Store Closure
Beginning in early August, 1995, the Company instituted a program to
close not less than 70 stores of which 58 were closed as of September 18, 1995.
These closings include 51 stores which were acquired as part of the acquisition
of DUS and represent the closing of some geographic market segments as well as
individual stores within certain markets. As a result of these closings, the
Company will establish a store closure reserve to cover estimated lease
disposition and occupancy costs, fixed asset write-offs, employee severance and
related costs, inventory write-downs, freight and other direct costs. The
Company estimates that a one time restructuring charge to be recorded in the
third quarter for these costs will range between $36 million and $48 million.
This estimate may be revised as additional facts and information are
determined.
General
The Company is actively reviewing the profitability of all markets and
stores. In addition, alternative approaches and Plans are being considered
because of the Company's deteriorating liquidity. The Company has engaged
financial and legal advisers to assist it in analyzing various alternative
strategies, each of which would lead to a material adverse impact on the
ability of the Company to continue its current operations in the current
fashion. Accordingly, the Company is actively considering all of its options
including seeking relief under the United States Bankruptcy Code for the
Company and/or one or more of its subsidiaries.
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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 JULY 31, 1995 AND 1994)
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 July 31, 1995, the Company failed to meet the Interest Coverage
Ratio Covenant and the Consolidated Book Net Worth covenant of its Senior
Indebtedness to BT Commercial Corporation, agent for constituent lenders under
the Company's $140 million Revolving Credit Agreement. The Company notified
the agent operating the facility of the foregoing; the agent met with the
constituent lenders and granted a waiver of such requirements through July 31,
1995. The Company has sought an additional extension of such waiver, however,
given the performance of the Company, such waiver may not be granted. Default
under such Senior Indebtedness could result in defaults being declared in the
Company's other credit facilities. The Company has engaged financial and legal
advisers to assist it in analyzing various alternative strategies, each of
which would lead to a material adverse impact on the ability of the Company to
continue its current operations in the current fashion. Accordingly, the
Company is actively considering all of its options including seeking relief
under the United States Bankruptcy Code for the Company and/or one or more of
its subsidiaries.
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
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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 JULY 31, 1995 AND 1994)
27. Selected Financial Data Schedule per Item
601(c)(1)(ii) of Regulation S-K.
b. Reports on Form 8-K
None
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: September 19, 1995
By: /s/ John Hurley
--------------------------
John Hurley
Chief Executive Officer
Date: September 19, 1995
By: /s/ J. Michael McLean
--------------------------
J. Michael McLean
Chief Accounting Officer
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<PAGE> 18
Exhibit Index
Exhibit No. Description Page No.
----------- ----------- --------
Ex-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000790815
<NAME> FRETTER, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> JUL-31-1995
<CASH> 7,368
<SECURITIES> 0
<RECEIVABLES> 20,538
<ALLOWANCES> 0
<INVENTORY> 161,941
<CURRENT-ASSETS> 200,909
<PP&E> 106,242
<DEPRECIATION> 0
<TOTAL-ASSETS> 406,061
<CURRENT-LIABILITIES> 220,960
<BONDS> 15,656
<COMMON> 106
40,950
0
<OTHER-SE> 18,756
<TOTAL-LIABILITY-AND-EQUITY> 406,061
<SALES> 158,106
<TOTAL-REVENUES> 158,106
<CGS> 114,700
<TOTAL-COSTS> 114,700
<OTHER-EXPENSES> 52,714
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,740
<INCOME-PRETAX> (10,177)
<INCOME-TAX> 220
<INCOME-CONTINUING> (10,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,997)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
