<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 October 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 December 14, 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 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-14
Part II. Other Information
Item 1-6. 15-16
Signatures 17
</TABLE>
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<PAGE> 3
FRETTER, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the nine months ended October 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Three-months ended October 31, Nine-months ended October 31
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $134,173 $202,377 $458,708 $587,989
Cost of goods sold 139,963 148,300 373,611 429,417
---------- ---------- ---------- ----------
Gross profit (5,790) 54,077 85,097 158,572
---------- ---------- ---------- ----------
Operating expenses
Selling 30,624 39,831 105,548 122,256
Warehouse and delivery 5,980 7,358 18,793 20,208
Administrative 8,540 6,763 25,663 23,761
Goodwill write-off 82,317 82,317
Restructuring charge 55,123 55,123
---------- ---------- ---------- ----------
182,584 53,952 287,444 166,225
---------- ---------- ---------- ----------
Other income (expense)
Interest and other 1,427 932 4,919 5,241
Interest expense (1,939) (2,911) (7,405) (6,155)
---------- ---------- ---------- ----------
(512) (1,979) (2,486) (914)
---------- ---------- ---------- ----------
Loss before income taxes (188,886) (1,854) (204,833) (8,567)
Income taxes (benefit) (723) (1,800) (2,966)
---------- ---------- ---------- ----------
Net loss before preferred dividend (188,886) (1,131) (203,033) (5,601)
Preferred stock dividend requirements 608 600 1,808 1,800
---------- ---------- ---------- ----------
Net loss available for common
shareholders ($189,494) ($1,731) ($204,841) ($7,401)
========== ========== ========== ==========
Weighted average number of common shares 10,577,392 10,577,497 10,577,392 10,577,497
========== ========== ========== ==========
Net loss per common share ($17.92) ($0.16) ($19.37) ($0.70)
========== ========== ========== ==========
</TABLE>
<PAGE> 4
FRETTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine-months ended October 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before preferred dividends ($203,033) ($5,601)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Goodwill write-off 82,317
Store closure provision (non-cash) 49,993
Depreciation and amortization 12,698 11,623
Stock compensation expense 1,484 1,484
Other non-cash items 3,810 3,133
Change in assets and liabilities
Merchandise inventory 161,594 (33,484)
Other assets 14,318 (8,115)
Accounts payable (142) (1,844)
Accrued liabilities (33,544) (38,519)
Reserve for store closings (6,984) (25,826)
Deferred service contract revenue (19,536) 18,877
Other liabilities (8,939) (14,531)
--------- ---------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 54,036 (92,803)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,101) (10,672)
--------- ---------
NET CASH (USED FOR) INVESTING
ACTIVITIES (1,101) (10,672)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from long term
obligations (64,564) 91,063
Preferred stock dividends (1,200)
--------- ---------
NET CASH (USED FOR) PROVIDED BY
FINANCING ACTIVITIES (65,764) 91,063
--------- ---------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS (12,829) (12,412)
Cash and cash equivalents at beginning of period 13,787 16,805
--------- ---------
Cash and cash equivalents at end of period $958 $4,393
========= =========
</TABLE>
<PAGE> 5
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRETTER, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS October 31, January 31,
1995 1995
----------------- -----------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $958 $13,787
Accounts receivable 14,129 24,058
Merchandise inventory 43,490 207,066
Prepaid expenses 3,818 4,926
Deferred commissions 3,750 4,872
----------------- -----------------
Total current assets 66,145 254,709
Property and equipment, net 82,594 111,985
Goodwill, net 3,187 87,809
Other assets 6,068 6,991
Deferred commissions 4,516 7,114
----------------- -----------------
$162,510 $468,608
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current portion of long-term obligations $44,241 $4,601
Accounts payable 49,349 49,491
Current portion of deferred service contract revenue 18,991 24,933
Accrued liabilities 42,769 73,021
Reserve for store closings 40,242 7,881
Income taxes payable 423 2,143
----------------- -----------------
Total current liabilities 196,015 162,070
Long-term obligations 957 105,161
Other noncurrent liabilities 8,975 26,008
Deferred service contract revenue 22,576 36,169
Employee benefit obligations 63,669 64,041
----------------- -----------------
Total liabilities 292,192 393,449
----------------- -----------------
Redeemable preferred stock 41,025 40,800
----------------- -----------------
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
October 31, 1995 and January 31, 1995, respectively 106 106
Additional contributed capital 1,641 1,641
Retained earnings (172,454) 32,612
----------------- -----------------
(170,707) 34,359
----------------- -----------------
$162,510 $468,608
================= =================
</TABLE>
<PAGE> 6
FRETTER, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended October 31, 1994 and 1995
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
For the nine-months ------------------------ Contributed Retained
ended October 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 nine months
ended October 31, 1994 (5,601) (5,601)
Preferred Stock Dividend
requirements (1,800) (1,800)
BALANCE AT OCTOBER 31, 1994 10,577,467 $106 $1,641 $21,846 $23,593
========== ========== =========== ========== ==========
For the nine months
ended October 31, 1995
BALANCE AT FEBRUARY 1, 1995 10,577,392 $106 $1,641 $32,612 $34,359
Net loss for the nine months
ended October 31, 1995 (203,033) (203,033)
Preferred stock dividend
requirements (1,808) (1,808)
Preferred stock accretion (225) (225)
---------- ---------- ----------- ---------- ----------
Balance at October 31, 1995 10,577,392 $106 $1,641 ($172,454) ($170,707)
========== ========== =========== ========== ==========
</TABLE>
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<PAGE> 7
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 October 31, 1995 and the results of
operations, and cash flows for the nine months ended October 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.
On December 4, 1995, Dixons U.S. Holdings, Inc. ("DUS"), a wholly
owned subsidiary of Fretter, Inc. and each of the subsidiaries of DUS filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code. At
the time of the filing of the petitions, the companies included in the
bankruptcy petitions had substantially ceased all business operations.
Fretter, Inc. and its other subsidiaries have not sought bankruptcy protection.
2. STORE CLOSURE PROVISION
The Company instituted a program to close unprofitable stores in
several geographic markets. As of October 31, 1995, the Company has closed 179
stores including 150 stores operated by DUS and subsidiaries of DUS. During
November, 1995, the Company closed another 13 stores. A charge of $55.1
million has been recorded in the accompanying financial statements to reflect
lease disposition costs, estimated losses from the disposal of fixed assets and
employee termination and other costs.
3. GOODWILL
The acquisition of DUS was accounted for using the purchase method
which included recording the excess of the purchase price over the fair value
of net assets acquired as goodwill. Due to the store closures of DUS, the
entire unamortized portion of goodwill was written off as of October 31, 1995.
4. 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.
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<PAGE> 8
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 non-current portions of the liability are included in accrued
liabilities and other non-current liabilities, respectively.
5. 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.
6. LONG-TERM OBLIGATIONS
The Company maintains a revolving credit agreement with a commercial
credit company. As of October 31, 1995, the Company failed to meet the
Interest Coverage Ratio Covenant and the Consolidated Book Net Worth covenant
of such facility. On November 1, 1995 this agreement was amended and restated
principally to decrease the maximum credit to $50.0 million, revise the
borrowing availability formulas and eliminate the covenants except for the
Interest Coverage Ratio. In addition, the lender waived the Interest Coverage
Ratio Covenant default that existed at October 31, 1995. 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, personal property and inventory
of the Company, as defined. At October 31, 1995 and January 31, 1995, there
was $16.6 million and $82.9 million outstanding under the credit facility.
On October 31, 1995 the maximum availability under this agreement was
$140 million and covenants required 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 indicated above, the maximum
availability was reduced to $50 million as of November 1, 1995. The Company
also maintains a loan agreement with an independent credit organization to
finance certain of its merchandise purchases and another with a bank to finance
capital expenditures. Borrowings outstanding under these agreements totaled
$27.6 million and $21.6 million as of October 31, 1995 and January 31, 1995,
respectively. As of October 31, 1995, the Company failed to meet the minimum
net worth requirement and payment terms of these 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 remaining subsidiaries.
The Company has reclassified the balance due under all of these
financing agreements, totaling $44.2 million as current liabilities in the
accompanying balance sheet due to the aforementioned defaults.
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<PAGE> 9
7. LOSS PER SHARE
Earnings or loss per share is 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 October 31, 1995.
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<PAGE> 10
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(NINE MONTHS ENDED OCTOBER 31, 1995 AND 1994)
OVERVIEW
The Company is a large volume specialty retailer of home entertainment
products, consumer electronics and appliances. As of October 31, 1995, the
Company operated 63 retail stores, 42 in Michigan, Ohio, Massachusetts and
Indiana under the name Fretter and 21 in Colorado, Montana and Wyoming operated
through Fred Schmid Appliance & TV Co. ("Schmid"), a wholly-owned subsidiary of
the Company. Due to the Company's inability to profitably operate its retail
stores in the state of Massachusetts, the Company closed all thirteen of its
retail stores in November, 1995. The Company has closed a total of 192
stores, including 150 stores operated by DUS and subsidiaries of DUS, and 19
stores operated by Fretter Auto Sound, Inc., d/b/a Dash Concepts; thus leaving
50 operating stores. See "Store Closures" on page 14.
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. 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 dividends due on August
5, 1995 and November 5, 1995.
On December 4, 1995, DUS and all of its subsidiaries filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code. Prior
thereto DUS and its subsidiaries had ceased substantially all business
operations.
CHANGES IN RESULTS OF OPERATIONS
Net Sales
Net sales decreased in the three month period ended October 31, 1995
as compared to the three month period ended October 31, 1994 by $68.2 million
(33.7%). Comparable store sales decreased $29.3 million (45.1%) from the same
period last year.
Net sales decreased in the nine month period ended October 31, 1995 as
compared to the nine month period ended October 31, 1994 by $129.3 million
(22.0%). Comparable store sales decreased $51.1 million (27.1%) for the nine
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
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<PAGE> 11
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(NINE MONTHS ENDED OCTOBER 31, 1995 AND 1994)
nine month periods ended October 31, 1995 reflects Fretter and Schmid stores.
The Silo stores were phased out of the Company's reporting systems as these
stores were closed.
The decrease in total sales and comparable store sales for the three
month and nine month periods ended October 31, 1995 is primarily due to
store closing and the intense competition within the Company's key markets and
unfavorable economic conditions affecting the retail industry.
Cost of Goods Sold and Gross Profit
Cost of goods sold decreased by $8.3 million (5.6%) and gross profit
decreased $59.9 million (110.7%) in the three month period ended October 31,
1995 as compared to the three month period ended October 31, 1994. Gross
profit as a percentage of net sales decreased to a negative 4.3% in the three
month period ended October 31, 1995 from 26.7% in the three month period ended
October 31, 1994. However, gross profit as a percentage of sales was 22.6% for
the 50 operating stores for the three month period ended October 31, 1995.
Cost of goods sold decreased by $55.8 million (13.0%) and gross
profit decreased $73.5 million (46.3%) in the nine month period ended October
31, 1995 as compared to the nine month period ended October 31, 1994. Gross
profit as a percentage of net sales decreased to 18.6% in the nine month period
ended October 31, 1995 from 27.0% in the nine month period ended October 31,
1994.
The decrease in gross profit as a percentage of sales for the three
month and nine month periods ended October 31, 1995 is primarily due to
discounting associated with inventory liquidation sales and sales to liquidators
attributable to store closures.
Operating Expenses
Operating expenses generally comprise warehouse and delivery, selling
and administrative expenses. These operating expenses decreased by $8.8
million (16.3%) in the three month period ended October 31, 1995 compared to
the three month period ended October 31, 1994. As a percentage of net sales,
operating expenses increased to 33.6% in the three month period ended October
31, 1995 from 26.7% in the three month period ended October 31, 1994.
Operating expenses decreased by $16.2 million (9.8%) in the nine month
period ended October 31, 1995 compared to the nine month period ended October
31, 1994. As a percentage of net sales, operating expenses increased to 32.7%
in the nine month period ended October 31, 1995 from 28.3% in the nine month
period ended October 31, 1994.
The increase in operating expense as a percentage of net sales for the
three month and nine month periods ended October 31, 1995 is primarily
attributable to an increase in store occupancy costs,
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<PAGE> 12
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(NINE MONTHS ENDED OCTOBER 31, 1995 AND 1994)
amortization of goodwill resulting from the acquisition of DUS and expenses
related to inventory liquidation.
In addition, as a result of the store closures, the Company recorded a
$55.1 million store closure charge as of October 31, 1995. Also, the Company
wrote-off the remaining $82.3 million of goodwill initially recorded as part of
the DUS acquisition.
Interest And Other Income
Interest and other income increased $495,000 (53.1%) in the three
month period ended October 31, 1995 compared to the three month period ended
October 31, 1994. Interest and other income as a percentage of net sales for
the three month periods ended October 31, 1995 and 1994 was 1.1% and 0.5%,
respectively.
Interest and other income decreased $322,000 (6.1%) in the nine month
period ended October 31, 1995 compared to the nine month period ended October
31, 1994. Interest and other income as a percentage of net sales for the nine
month periods ended October 31, 1995 and 1994 was 1.1% and 0.9%, respectively.
The changes for the three month and nine month periods ended October
31, 1995 are primarily due to the impact of changing 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 decreased $1.0 million (33.4%) in the three month
period ended October 31, 1995 compared to the three month period ended October
31, 1994. Interest expense as a percentage of net sales for the three month
periods ended October 31, 1995 and 1994 was 1.4%.
Interest expense increased $1.2 million (20.3%) in the nine month
period ended October 31, 1995 compared to the nine month period ended October
31, 1994. Interest expense as a percentage of net sales for the nine month
periods ended October 31, 1995 and 1994 was 1.6% and 1.0%, respectively.
The decrease in interest expense for the three month period ended
October 31, 1995 as compared to the prior year is primarily due to the decrease
in borrowings attributable to inventory reductions. The increase in interest
expense for the nine month period ended October 31, 1995 as compared to the
prior year is primarily due to increased interest rates and borrowings in the
first nine months offset by current lower borrowing levels.
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<PAGE> 13
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(NINE MONTHS ENDED OCTOBER 31, 1995 AND 1994)
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 $187.8 million from a net loss of $1.1 million in the three
month period ended October 31, 1994 to a net loss of $188.9 million in the
three month period ended October 31, 1995.
Due to the factors discussed above, net loss before preferred stock
dividend increased $197.4 million from a net loss of $5.6 million in the nine
month period ended October 31, 1994 to a net loss of $203.0 million in the nine
month period ended October 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
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 development and to remodel or relocate existing stores.
On November 1, 1995 the Company executed an amendment to its revolving
credit agreement with a commercial credit company to waive then existing
defaults, increase the borrowing base formula during the Christmas Holiday
selling season, while decreasing the maximum amount available for cash
borrowings and letters of credit. The Company believes that its liquidity
position has been improved by this financing amendment in that it provides
opportunity to provide desired inventory mix for the holiday season.
The Company continually reviews the profitability of all markets and
stores as well as alternative financial and marketing strategies. However,
given the Company's financial performance, there can be no assurances that
these financial strategies will be available for implementation.
Since February 1, 1995, cash and cash equivalents decreased $12.8
million. Net cash provided by operating activities of $54.0 million resulted
primarily from a reduction in inventory of $163.6 million offset by operating
losses and decreases in liabilities. Net cash used for financing activities
reflected debt reduction of $64.6 million and the payment of preferred stock
dividends of $1.2 million. Net cash used for investing activities totaled $1.1
million for the purchase of property and equipment.
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<PAGE> 14
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(NINE MONTHS ENDED OCTOBER 31, 1995 AND 1994)
Store Closure
As a result of the acquisition of DUS, the Company closed a number of
locations where there were overlapping stores. 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 $3.8 million and $9.5
million against the store closure reserve during the three and nine month
periods ended October 31, 1995, respectively.
Beginning in early August, 1995, the Company instituted a program to
close low performing stores. Including the stores closed in November, 1995,
192 stores have been closed this fiscal year and represent the closing of some
geographic market segments as well as individual stores within certain markets.
Of the 192 store closures, 150 such stores were operated by DUS and its
subsidiaries; and 19 of such stores were operated by the Company's subsidiary
Fretter Auto Sound Inc., d/b/a Dash Concepts. As a result of these closings,
the Company has established a store closure reserve to cover estimated lease
disposition and occupancy costs, fixed asset dispositions, employee severance
and related costs and other direct costs. A $55.1 million restructuring charge
has been recorded as of October 31, 1995 for these costs. This charge may be
revised as additional facts and information are determined. Actual costs
incurred as of October 31, 1995 totaled $18.2 million.
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 remaining subsidiaries.
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<PAGE> 15
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 October 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
October 31, 1995, and amended such credit agreement as of November 1, 1995 to,
among other things, reduce the credit facility to $50 million. Default under
such Senior Indebtedness resulted in defaults being declared in the Company's
bank facility maintained for capital expenditures. The Company is also in
default of its $25 million inventory finance agreement, thus allowing a draw
event and concurrent default in its aforesaid bank facility. 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 remaining 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
27. Selected Financial Data Schedule per Item
601(c)(1)(ii) of Regulation S-K.
15 of 17
<PAGE> 16
b. Reports on Form 8-K
Form 8-K dated November 2, 1995 relating to Company's sale of
$34.7 million in inventory and substantial cessation of
business of the Company's subsidiary Dixons U.S. Holdings,
Inc. and its subsidiaries.
Form 8-K dated December 12, 1995 relating to Chapter 11
Bankruptcy filing by the Company's subsidiary Dixons U.S.
Holdings, Inc. and its subsidiaries.
16 of 17
<PAGE> 17
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: December 20, 1995 By: /s/ John Hurley
------------------------------------
John Hurley
Chief Executive Officer
Date: December 20, 1995 By: /s/ J. Michael McLean
------------------------------------
J. Michael McLean
Chief Accounting Officer
17 of 17
<PAGE> 18
Exhibit Index
-------------
Exhibit Number Description
- - -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 958
<SECURITIES> 0
<RECEIVABLES> 14,129
<ALLOWANCES> 0
<INVENTORY> 43,490
<CURRENT-ASSETS> 66,145
<PP&E> 82,594
<DEPRECIATION> 45,315
<TOTAL-ASSETS> 162,510
<CURRENT-LIABILITIES> 196,015
<BONDS> 0
41,025
0
<COMMON> 106
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 162,510
<SALES> 134,173
<TOTAL-REVENUES> 134,173
<CGS> 139,963
<TOTAL-COSTS> 139,963
<OTHER-EXPENSES> 182,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,939
<INCOME-PRETAX> (188,886)
<INCOME-TAX> 0
<INCOME-CONTINUING> (188,886)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (189,494)
<EPS-PRIMARY> (17.92)
<EPS-DILUTED> (17.92)
</TABLE>
