<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 31, 1996
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 of Incorporation) (IRS Employer Identification No.)
12501 GRAND RIVER
BRIGHTON, MICHIGAN 48116
(810) 220-5000
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of April 23, 1996, the aggregate market value of the Registrant's
voting stock held by nonaffiliates of the Registrant was approximately
$433,351, computed by reference to the closing sales price on such date as
reported on NASDAQ OTC Bulletin Board.
As of April 23, 1996, there were 10,577,388 shares of the Registrant's
common stock issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS
GENERAL
The Company was historically a large volume retailer of home entertainment
products, consumer electronics and appliances. In March, 1990, with 57
retail stores in operation, the Company formed a subsidiary, Fretter Auto
Sound, Inc., d/b/a/ Dash Concepts to sell at retail and install automobile
accessories such as stereos, alarms and telephones. This subsidiary grew to 19
locations in 1995. However, because this subsidiary did not produce profits
for the term of its existence, in 1995 this subsidiary and all of its retail
locations ceased all business activities. While this subsidiary has not yet
sought protection under the United States Bankruptcy Code, such action is
likely in the near future.
In September, 1991, the Company, through a wholly owned subsidiary,
acquired the stock of Fred Schmid Appliance & T.V. Co. ("Schmid"), a 19 store
chain engaged primarily in the State of Colorado, in substantially the same
business as the Company. Schmid's stores ranged in size from 8,500 square feet
to 25,000 square feet. Due to the intense competitive pressure in the
industry, the movement of large national competitive retailers into Schmid's
markets, which retailers utilize substantially larger store formats with
greater breadth and depth of product selections, the profitability of Schmid's
operation dwindled and, as of April 15, 1996, this subsidiary and all of its
retail locations ceased all business activities. While this subsidiary has not
yet sought protection under the United States Bankruptcy Code, such action is
likely in the near future.
In December, 1993, the Company acquired the stock of Dixons U.S. Holdings,
Inc. ("DUS"), thus increasing the Company's then total stores, inclusive of
Dash Concept stores, from 102 to 237-- after giving effect to store closures of
the Company and its subsidiaries contemplated as part of the DUS acquisition.
DUS stores operated through various subsidiaries under the trade names Silo and
YES. The Silo and YES stores approximated the size of the Company's other
stores and operated in many states from the East coast to the West coast of the
United States. DUS had historically suffered substantial losses, which the
Company believed could be reversed by implementing significant cost savings
measures and improving product and advertising purchases. While the Company,
as a whole, initially did achieve its goals of cost savings and improved
purchasing to restore profitability, as with Schmid, due to intense competitive
pressure in the industry, the movement of large national competitive retailers
into DUS markets, which retailers utilize substantially larger store formats
with greater breadth and depth of product selections, the profitability of DUS
could not be sustained. Accordingly, beginning in the fall of 1995, DUS
implemented a plan to exit unprofitable markets, and an intense effort was
undertaken in concert with financial advisors and creditors rights counsel, to
determine which, if any DUS markets could become profitable. DUS determined
that no such markets could become profitable for the reasons stated and, as of
December, 1995, DUS closed all of its store locations and on Dec. 4, 1995 filed
for protection under Chapter 11 of the United States Bankruptcy Code. At the
same time DUS began implementation of its plan to exit unprofitable markets,
the Company implemented a plan to exit unprofitable markets in which Fretter
stores operated, which unprofitability is attributable to the same reasons as
set forth above with respect to Schmid
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and DUS. As of the date of this Annual Report, the Company has eliminated all
of its markets except Metropolitan Detroit, Michigan in which it currently
operates 10 retail stores. The Company is currently undertaking the process to
liquidate its inventory with respect to its remaining 10 operating locations.
The Company is concurrently attempting to control the myriad issues
associated with the significant downsizing of its operations, the bankruptcy of
its DUS subsidiary, the imminent bankruptcy of its Dash Concepts and Schmid
subsidiaries, its reduced level of inventory, its inadequate remaining store
base, resolution of creditor disputes and the resultant lack of liquidity
necessary to meet a long term strategy to reverse its losses and restore
profitability.
The Company owns approximately 50 store and warehouse locations, including
nine of the ten store locations from which it remains in operation.
Substantially all of such real estate is pledged to a bank pursuant to a loan
agreement expiring April 1, 1997 and calling for monthly payments of principal
and interest as well as quarterly principal reductions. As the Company has
exited markets, it has attempted to lease or sell its owned real estate, while
resolving lease agreements with its various landlords in such markets.
The Company is also exploring an alternative retail marketing concept
which will involve between two and four stores in each market, as opposed to
ten or more as currently exist for major markets, each of which will be quite
large in relation both to existing Company stores and those of its major
competitors. The ability of the Company to exploit this new retail concept is
dependent upon a number of factors, including:
- The Company's determination of the
feasibility of such store format
- The ability of the Company to
reverse its current lack of liquidity
- The availability of long term
financing sources for inventory, fixtures,
equipment and building improvements
- The ability of the Company to
relieve itself of ongoing real property lease
obligations
- Favorable resolution of various
litigation matters-- principally involving the
DUS bankruptcy estate and its creditors, as well as the
imminent bankruptcy of Schmid and Dash concepts.
If the Company is unable to overcome the foregoing factors and develop the
new store format, it will either restrict its business to the leasing and sale
of its remaining portfolio of owned locations or seek protection under the
United States Bankruptcy Code. In such a bankruptcy, the Company would either
liquidate its remaining assets to partially repay its creditors or restructure
its debts and thereby restrict its business for the foreseeable future to the
leasing and sale of its portfolio of properties.
MARKETING STRATEGY
The Company's marketing strategy was historically based upon building
customer satisfaction by offering the lowest available prices in each market, a
broad variety of name brand products, and the ability of customers to extend
the term of manufacturers' product warranties by purchasing extended service
agreements from or through the Company. Inasmuch as the Company has
significantly restructured its
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retail operations and closed all except 10 of its retail stores, as discussed
above, the following delineation of product and service groups are not
indicative of the future.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL PRODUCT AND SERVICE SALES(1)
FOR TWELVE MONTHS ENDED
Jan. 31, 1996 Jan. 31, 1995(2) Jan. 31, 1994(3)
PRODUCT GROUP ------------- ---------------- ----------------
<S> <C> <C> <C>
Video(4).................... 31.9% 35.2% 37.7%
Appliances(5)............... 37.1% 30.6% 30.7%
Audio(6).................... 10.9% 10.8% 15.2%
Personal Electronics(7)..... 14.9% 17.3% 12.4%
Service Contracts(8)........ 5.2% 6.1% 4.1%
100.0% 100.0% 100.0%
</TABLE>
- - ---------------
(1) Includes net sales, less credit card discounts and net increases to
deferred service contract revenue.
(2) Reflects combined Company and DUS sales for all of fiscal year ended
January 31, 1995.
(3) Reflects Company only sales prior to December 11, 1993, and Company and
DUS (Silo) sales from December 11, 1993 through January 31, 1994.
(4) Includes, from time to time, color and black-and-white televisions
(portable, table-top and console), projection televisions, cassette
recorders, camcorders and related accessories, video enhancement devices,
tripods, blank video tapes and television stands.
(5) Includes, from time to time, automatic washers and dryers, dishwashers,
refrigerators, freezers, ranges, microwave ovens, air conditioners,
dehumidifiers and trash compactors.
(6) Includes, from time to time, compact disc players, home stereo systems,
receivers, speakers, cassette decks, turntables, amplifiers, tuners,
equalizers, prepackaged audio systems, audio furniture, compact music
systems, headphones, microphones and cartridges.
(7) Includes, from time to time, portable tape recorders with and without
radios, portable radios, car stereo equipment, cellular phones, computer
hardware and peripherals, personal radios, clock radios, conventional
telephones, cordless telephones, telephone answering devices, heaters,
fans, humidifiers, blank audio tapes, facsimile machines, water and air
purifiers, car and home alarms, ready to assemble furniture and other
miscellaneous items.
(8) Extended Service Agreements by which the Company itself or through a
third party insurer offers customers the ability to extend manufacturer
warranties on products sold by the Company.
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SUPPLIERS AND PURCHASING
The Company has historically acquired its quality, brand name, nationally
advertised merchandise directly from manufacturers and distributors. Closure
of most of the Company's retail markets has resulted in a curtailment of most
merchandise purchases. While not indicative of the future, the Company's top
ten suppliers in the past fiscal year, in alphabetical order were General
Electric, Hitachi, JVC, Maycor, Packard Bell, RCA, Sony, Toshiba, Whirlpool and
Zenith. The size of the Company's total merchandise purchases has historically
allowed it to acquire merchandise at a lower price than would be available to
smaller retailers. Given the relatively few remaining retail stores now in
operation by the Company, the historic volume buying discounts enjoyed by the
Company which allowed it to offer low prices to its customers, are likely no
longer available.
SEASONAL BUSINESS
As with other retail businesses, the Company's net sales are substantially
greater during the year end holiday season than during other periods of the
year.
EMPLOYEES
On May 10, 1996, the Company had 175 employees.
SERVICE MARKS
While the Company and its subsidiaries possess various service marks
associated with the Company's historic business, such service marks are no
longer important to either the Company's remaining business or the potential
new store format currently being considered.
COMPETITION
The brand name home entertainment product, consumer electronic and
appliance business is highly competitive, with price, broad product selection
and a large exciting shopping experience being the principal competitive
factors. This customer preference has rapidly developed leaving the Company's
stores along with most regional and local retailers of like products at a
competitive disadvantage to the largest national retailers who now offer
substantially larger stores with a much broader selection of products and
increasing product categories. In addition, retailers such as furniture stores,
mass merchants and department stores, internet and cable television shopping
services have all diminished the Company's market share. The foregoing forms
the principal reasons for the Company's inability to achieve profits in its
various markets, resulting in the various market closures discussed above.
ITEM 2. PROPERTIES
As of the date of this Annual Report, excluding DUS, the Company owns
approximately 50 properties and leases approximately 12 from others. Only one
of such leased locations is in the Company's remaining market of Metropolitan
Detroit, Michigan. As the Company has exited markets, it has endeavored to
seek suitable
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arrangements with its landlords to dispose of its lease obligations, either
through lease terminations or lease assignments. In addition, as the Company
has exited markets it has attempted to sell or lease its formerly occupied
locations. The ability of the Company to survive outside of the protection of
the United States Bankruptcy Code is largely dependent upon its ability to
successfully terminate or assign its remaining lease agreements and either
sell or lease its remaining owned properties within the confines of its limited
liquidity.
ITEM 3. LEGAL PROCEEDINGS
Largely as a result of the DUS bankruptcy filed Dec. 4, 1995 (In Re:
Dixons U.S. Holdings, Inc., et. al., United States Bankruptcy Court, District
of Delaware, Case No. 95-1577 (PJW), Jointly Administered), the Company is
party to a substantial number of legal proceedings. Many creditors of DUS are
seeking through such litigation to hold the Company liable for the debts of DUS
under various legal theories by which such creditors believe that DUS and the
Company should be treated as a single legal entity. The Company has
aggressively defended such actions and has obtained a preliminary injunction in
the DUS Bankruptcy Court against the prosecution of such claims by such
creditors. Such preliminary injunction, however, does not preclude the
prosecution of cases by such DUS creditors against the Company where such
creditors' cases are characterized as direct claims against the Company as
opposed to theories by which such creditors seek a determination that the
Company and DUS should be treated as a single legal entity. Further, such
preliminary injunction was issued based in part upon a representation by DUS to
the DUS Bankruptcy Court that DUS itself is likely to bring an action against
the Company seeking to hold the Company liable for the debts of DUS on various
theories of consolidation.
In the event the preliminary injunction issued in the DUS Bankruptcy Court
is dissolved, it is unlikely that the Company will have adequate financial
resources to fund the defense of all such lawsuits or adverse judgments,
if any, rendered in such cases, which would likely result in the need for the
Company to seek protection under the United States Bankruptcy Code. In
addition, many creditors of DUS have characterized their claims against the
Company as direct claims as opposed to single legal entity claims. Given the
Company's lack of liquidity, the expenses of protracted litigation in such cases
and adverse results in any several of such lawsuits would likely result in the
need for the Company to seek protection under the United States Bankruptcy Code.
Further, in the event DUS brings its own action against the Company as DUS has
indicated to the DUS Bankruptcy Court is likely, while the Company would
aggressively defend such action, an adverse ruling therein or the Company's
determination that there would be a significant risk of an adverse ruling, each
would likely result in a determination by the Company to itself seek the
proection of the United States Bankruptcy Code.
On April 26, 1996, Hilco Trading Company, Inc. and Garcel, Inc. filed a
lawsuit against the Company and certain of its officers and employees (United
States District Court, Northern District of Illinois, Eastern Division Case No.
96-2520) by which the Plaintiffs seek damages against the Company and other
Defendants arising out of the Plaintiffs' purchase and liquidation of the
Company's retail inventory in several markets in which the Company and DUS
closed stores. The Plaintiffs' claim that the Company and other Defendants
misled the Plaintiffs as to the quantity, quality and cost of such inventory.
In their Complaint, Plaintiffs seek damages of forty-one million dollars, which
includes treble damages under 18 U.S.C. Section 1964(c), although the
Plaintiffs' calculus of their damages is vague, at best. The
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Company denies liability to Plaintiffs and intends to aggressively defend the
action. Given the vague recitation of the Plaintiffs' damages claim, it is not
possible to determine the effect upon the Company in the unlikely event of a
judgment adverse to the Company. However, given the Company's lack of
liquidity, a significant adverse judgment will result in the need for the
Company to seek protection under the United States Bankruptcy Code.
The Travelers Insurance Company has provided the Company and its
subsidiaries a modified paid loss liability insurance program collateralized by
a letter of credit. The Company believes that each constituent subsidiary or
parent entity forming the Company is responsible only for their own allocated
premiums and losses. The Travelers believes that the liability is joint and
several between the constituent entities. The Company has also objected to
both the reserve and claims handling practices of the Travelers, which
practices the Travelers believes suggests a liability of over two million
dollars in excess of the collateral letter of credit posted by the Company.
The Company believes that more responsible claims handling and reserve
practices would suggest a liability somewhat less than the collateral letter of
credit. Neither the Travelers nor the Company has initiated litigation to
resolve what liability, if any, the Company may have with respect to this
liability insurance program. However, in the event litigation is commenced,
given the Company's lack of liquidity, an adverse judgment that the Company's
liability significantly exceeds the collateral letter of credit will result in
the need for the Company to seek protection under the United States Bankruptcy
Code.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low bid prices for the
Company's Common Stock as quoted on the Nasdaq National Market System for the
period from February 1, 1994 through August 18, 1995 and quoted on the Nasdaq
SmallCap Market for the period from August 18, 1995 through January 31, 1996.
Subsequent to August 18, 1995, the Company was moved to the Nasdaq SmallCap
Market due to the Company not meeting the Nasdaq National Market's tangible
asset requirement. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
First Quarter (2/1/94-4/30/94) 5 1/4 3 1/2
Second Quarter (5/1/94-7/31/94) 5 1/4 3 3/4
Third Quarter (8/1/94-10/31/94) 4 7/8 3 1/8
Fourth Quarter (11/1/94-1/31/95) 3 1/2 2 1/4
______________
First Quarter (2/1/95-4/30/95) 3 1/2 2 3/4
Second Quarter (5/1/95-7/31/95) 3 1/4 1 15/16
Third Quarter (8/1/95-10/31/95) 1 13/16 3/8
Fourth Quarter (11/1/95-1/31/96) 7/8 1/8
</TABLE>
On April 23, 1996 the last reported sales price of the Company's Common
Stock on the Nasdaq OTC Bulletin Board was $.25 per share. As of April 23,
1996 there were approximately 737 record holders of the Company's Common Stock.
On February 27, 1996, the Company's Common Stock was moved to the Nasdaq OTC
Bulletin Board. This move was due to the Company not meeting the Nasdaq
SmallCap Market's capital and surplus requirements. The Company does not
anticipate paying cash dividends in the foreseeable future.
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ITEM 6.SELECTED FINANCIAL DATA
Sale statistics for the three fiscal years ending January 31, 1996 are
set forth in Item 7.
<TABLE>
<CAPTION>
(Dollar amounts in thousands except per share data) TWELVE MONTHS ENDED
Jan. 31, Jan 31, Jan 31. Jan 31. Jan 31.
1996(1) 1995 1994(4) 1993(3) 1992(2)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 502,317 $858,849 $545,508 $361,603 $292,698
Net (loss) earnings available for
common shareholders....................... $(222,367) $ 3,665 $ (1,096) $ 5,719 $ 4,003
(Loss) earnings per common share*......... $ (21.02) $ .35 $ (.14) $ .77 $ .55
Total assets.............................. $ 101,514 $468,608 $456,802 $177,131 $164,431
Short-term obligations.................... $ 48,459 $ 4,601 $ 590 $ 534 $ 1,577
Long-term obligations, less current
portion(5) ............................... $ 42,045 $145,961 $ 88,584 $ 40,939 $ 41,302
Shareholders' equity (deficit)............ $(188,308) $ 34,359 $ 30,994 $ 64,019 $ 57,307
_______________
</TABLE>
* Per share information has been restated to reflect the December 3, 1993
acquisition of the stock of DUS as if the transaction occurred as of the
beginning of the respective periods.
(1) On December 4, 1995, DUS and its subsidiaries filed voluntary petitions
for relief under Chapter 11 of the United States Bankruptcy Code.
Accordingly, the Company no longer accounts for DUS as a consolidated
subsidiary effective December 4, 1995.
(2) Included in net loss and loss per common share at January 31, 1992 is a
cumulative effect on prior years of a change in accounting principle for
recognition of service contract revenue of $8.8 million and $1.20,
respectively.
(3) Included in all selected financial data is the effect of the acquisition
of Schmid which occurred September 30, 1991. Additionally, included in
net earnings and earnings per common share is an extraordinary credit of
$.8 million and $.10, respectively, related to the utilization of net
operating loss carryforwards.
(4) Included in all selected financial data is the effect of the December 3,
1993 acquisition of DUS. For financial statement purposes, post-December
11, 1993 operations for DUS are included in January 31, 1994 data.
Additionally, included in net loss and net loss per common share at
January 31, 1994 is a gain related to the cumulative effect on the prior
years of a change in accounting principle for accounting for income taxes
of $2.8 million and $.35, respectively, a store closure provision of $4.0
million and $.50, respectively, and the write-off of deferred taxes of
$8.1 million and $1.01, respectively.
(5) Long-term obligations, less current portion, includes redeemable preferred
stock at January 31, 1996, 1995 and 1994.
The data reflected herein is not indicative of the Company's future financial
condition or results of operations due, among other things, to the bankruptcy
of DUS, the imminent bankruptcy of the Dash concepts and Schmid subsidiaries
and the potential pursuit of an alternative retail marketing concept discussed
elsewhere herein.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW. The discussion of results of operations and financial condition
that follows is based upon the Company's consolidated financial statements.
However, the results of operations and financial condition for the current year
are not comparable to prior years due, in part, to the following reasons:
1. Dixons U.S. Holdings, Inc. ("DUS") and all of its subsidiaries filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code. As
a result, DUS was deconsolidated as of the December 4, 1995 bankruptcy filing
date.
2. Due to substantial operating losses the Company closed 203 stores
during the current fiscal year and operated 39 stores as of January 31, 1996
compared to 237 and 242 stores as of January 31, 1995 and 1994, respectively.
As of May 10, 1996, the Company operates 10 retail stores.
3. As a result of these store closings, the Company incurred negative
margins in all closed markets reflecting sales of inventory to third party
liquidators.
4. As a result of these store closings, the Company recorded a store
closure charge ($67.5 million) to provide for lease disposition costs, fixed
asset write-offs, employee termination and other costs, and the Company
wrote off the unamortized portion of goodwill ($85.5 million).
The following table sets forth the percentage relationship to net sales of
certain items, shown in the Company's Consolidated Statement of Operations.
<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Netsales............................................. 100.0% 100.0% 100.0%
Cost of goods sold................................... 81.4 73.4 74.6
----- ----- -----
Gross profit....................................... 18.6 26.6 25.4
Operating expenses................................... 63.3 25.0 23.7
----- ----- -----
Operating (Loss) profit............................ (44.7) 1.6 1.7
Interest and other income............................ .4 .5 .4
Interest expense..................................... (1.8) (1.1) (.6)
----- ----- -----
(Loss) Earnings before income taxes, extraordinary
gain and cumulative effect of a change in
accounting principle............................... (46.1) 1.0 1.5
Income taxes (benefit)............................... ( .7) .3 2.1
----- ----- ----
</TABLE>
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<TABLE>
<CAPTION>
Year Ended January 31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(Loss) Earnings before extraordinary gains and
cumulative effect of a change in accounting
principle.......................................... (45.4) .7 (.6)
Cumulative effect of change in accounting for income
taxes................................................ - - .5
Extraordinary gain on forgiveness of debt............ 1.6 - -
----- ----- -----
Net (Loss) earnings before preferred stock
dividend........................................... (43.8) .7 (.1)
Preferred stock dividend requirements.............. (.5) (.3) (.1)
----- ----- -----
Net (Loss) Earnings Available for Common
Shareholders....................................... (44.3) .4 (.2)
===== ===== =====
</TABLE>
NET SALES. Net sales decreased $356.5 million in fiscal year 1996 to
$502.3 million from $858.8 million in fiscal year 1995. The decrease is due
primarily to store closings and the intense competition in key markets and
unfavorable economic conditions affecting the retail industry.
COST OF GOODS SOLD. Cost of goods sold decreased by $221.5 million in
fiscal year 1996 from fiscal year 1995 and gross profit decreased by $135.0
million due to the significant sales decrease. Gross profit as a percentage of
sales decreased from 26.6% to 18.6%. These decreases are the result of
discounting associated with inventory clearance sales and the sale of inventory
in closed stores to third party liquidators. Losses from these sales
approximated $3.0 million and $20 million respectively.
Cost of goods sold and gross profit increased by $223.3 million and $90
million respectively in fiscal year 1995 over fiscal year 1994. These changes
were due primarily to the acquisition of DUS.
OPERATING EXPENSES. Operating expenses generally consist of selling,
warehouse and delivery and administrative expenses. These operating expenses
decreased by $49.4 million in fiscal year 1996 as compared to fiscal year 1995
due primarily to store closings.
Also categorized as operating expenses are costs associated with store
closings. Specifically, the Company recorded a store closure charge of $67.5
million to reflect lease disposition costs ($22.0 million), estimated
losses from the disposal of fixed assets ($39.5 million), employee termination
and other costs ($6.0 million). As a result of these charges, total operating
expenses increased by $102.7 million in fiscal year 1996 compared to fiscal
year 1995. Due to substantial operating losses and negative cash flows during
the year and future projections, the Company determined that the carrying value
of goodwill was impaired. Accordingly, during fiscal 1996, the Company
recorded a charge of $85.5 million to write off the remaining unamortized
goodwill balance.
Operating expenses increased by $89.7 million in fiscal year 1995 as
compared to fiscal year 1994. The increase is primarily attributable to an
increase in store occupancy costs resulting from the acquisition of DUS
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and expenses associated with the closure of the DUS Philadelphia headquarters,
consolidation from three to two regions, consolidation of warehouse operations
and temporary duplicated labor expenses.
INTEREST AND OTHER INCOME. Interest and other income decreased $3.0
million from fiscal year 1995 due to the effect of market interest rate charges
compared to rates payable by customers. This amount increased $2.6 million in
fiscal 1995 over fiscal 1994 due to an increase in private label credit card
sales.
INTEREST EXPENSE. Interest expense decreased $.7 million from fiscal 1995
as a result of lower debt levels due to store closings. For fiscal year 1995,
interest expense increased $6.2 million due primarily to higher debt levels
resulting from the acquisition of DUS.
INCOME TAXES. For the fiscal years 1996 and 1995, the Company recorded
estimated tax refunds of income taxes previously paid by Fretter of $3.4
million and $1.4 million respectively. The refunds are attributable to the
carryback of net operating losses incurred by Fretter against prior year
taxable income. There was no tax refund attributable to Silo losses.
The effective tax rate for fiscal year 1995 is 29.2% and is primarily a
result of recording the aforementioned carryback benefit of $1.4 million for
Fretter's current year net operating loss, offset by the book deferred charge
of approximately $3.9 million relating to the utilization of acquired tax
attributes. The $3.9 million deferred charge offsets the Company's goodwill
and does not represent an actual cash payment obligation nor does it affect the
tax refund provision.
In connection with the acquisition of DUS, the Company reviewed the
carrying value of deferred tax assets. As a result of this review a valuation
allowance was provided during fiscal year 1994.
The Company will continue to file a consolidated federal income tax return
including DUS. The consolidated group has approximately $438.3 million of net
operating loss carryforwards (of which $431.4 million is allocable to DUS and
$6.9 million is attributable to Fretter) which expire through the year 2010.
No benefit for acquired net deferred tax assets or net operating loss
carryforwards has been recognized in the statement of operations. As the
acquired net deferred tax assets or net operating loss carryforwards are
utilized, such amounts were to first reduce goodwill. Since goodwill is
reduced to zero, future benefits, if any, will be included in income as a
reduction of income tax expense.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING. The Company adopted Statement
of Financial Accounting Standard No. 109 ("SFAS 109") "Accounting for Income
Taxes," effective February 1, 1993. The adoption of SFAS 109 changes the
method of accounting for income taxes from the deferred method (APB 11) to an
asset and liability method. The asset and liability method recognizes the
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amount and the tax basis of the
assets and liabilities.
Pursuant to SFAS 109, assets and liabilities acquired in purchase
accounting were assigned their fair values assuming equal tax and financial
reporting bases and deferred taxes are provided for basis differences.
Under APB 11, values were assigned net of tax. In adopting SFAS 109, the
Company adjusted the carrying values of assets so acquired. The cumulative
effect of the change in accounting principle effective February 1, 1993 was
$2.8 million or $.35 per share.
12
<PAGE> 13
PREFERRED STOCK DIVIDEND REQUIREMENTS. At the time of and in connection
with the acquisition of DUS, the Company issued to Dixons America Holdings,
Inc. 3,000,000 shares of newly-created Convertible Preferred Stock, Series A,
and 1,500,000 shares of newly-created Preferred Stock, Series B, each having a
stated value of $10 per share, representing all authorized shares. Dividends
on the Series A and Series B Preferred shares at an annual rate of 5% and 6%,
respectively, are cumulative from the issue date and are payable quarterly.
Dividend requirements were $2.425 million and $2.4 million for fiscal 1996 and
1995 respectively. The fiscal 1996 amount included additional dividends
accrued because the Company did not pay the dividends due in August and
November 1995.
NET EARNINGS. Due to the factors discussed above, net earnings decreased
to a loss of $222.4 million in fiscal year 1996 compared to net earnings of
$3.7 million in fiscal year 1995. Net earnings increased $4.8 million in
fiscal 1995 to net earnings of $3.7 million from a net loss of $1.1 million in
fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES. As previously discussed, the Company
closed 203 stores since February 1, 1995 due to substantial operating losses
caused by intense market competition and unfavorable conditions affecting the
retail industry. As a result, the Company was unable to meet certain loan
covenants resulting in defaults. In response, the Company negotiated major
changes in its financing agreements.
In January 1996, the Company terminated its inventory financing agreement
with an independent credit organization which resulted in a draw against a
letter of credit issued by a commercial bank to repay the inventory financing
agreement. As a result of the letter of credit draw, the Company amended its
agreement with the commercial bank in March 1996 to provide for a modified
payment plan requiring a systematic reduction of the outstanding balance until
the new maturity date of April 1, 1997.
The Company failed to meet the Interest Coverage covenant of its revolving
credit facility with a commercial credit company. The Company amended this
agreement in November 1995 to eliminate or modify certain covenants and reduce
the line of credit from $140 million to $50 million. Such line of credit was
subsequently reduced, by agreement, to $25 million. Availability under this
line is determined by formulas based on inventories and receivables. As a
result of store closings and inventory liquidations, availability is decreasing
under this line and is sometimes limited. The Company has not met the Interest
Coverage covenant as of January 31, 1996 causing a default in this agreement
and the aforementioned commercial bank line of credit.
Short term cash requirements are also met from the proceeds generated from
the sale or rental of owned real estate. Property no longer needed for retail
operations will be held for sale or rent depending on the best anticipated
economic result. The accompanying Consolidated Balance Sheet includes
liabilities for medical insurance, workman's compensation insurance and other
expenses related to terminated employees of DUS. However, there is a
possibility that some or all of the payment obligations for these liabilities
may be borne solely by the Company. In fact, the Company has been obligated to
fund medical payments subsequent to the Bankruptcy Petition. Additionally,
there may be attempts by Silo creditors for payment by Fretter of obligations
related to post-retirement benefits of a DUS subsidiary, costs associated with
service contracts sold by DUS and some store operating and selling costs.
While these liabilities are also included in the Consolidated Balance Sheet,
the Company believes the actual payment liability remains with DUS. In
addition, the Company is involved in and anticipates a large number of lawsuits
resulting from the store closing and the DUS Bankruptcy Petition (see Item 3,
Legal Proceedings). The Company is not able to evaluate the effect of these
developing matters. It is possible that the Company's cash flow or its
financial condition could be materially affected by the unfavorable outcome of
these liability and litigation issues.
13
<PAGE> 14
The Company continues to actively review alternatives as it relates to
future operations including seeking relief under the U.S. Bankruptcy Code for
the Company and/or one or more of its remaining subsidiaries. These
alternatives include re-entering the appliance and consumer electronics market
through a new retail format, eliminating all operations except for managing the
real estate portfolio on an ongoing basis, some combination of both or
liquidation of the Company. The Company cannot reasonably predict nor give
assurance regarding the outcome or success of these alternatives.
Additionally, the Company is reviewing sources and methods to acquire the
necessary financing for both operations and capital expenditures.
Alternatively, the Company has conducted an extensive analysis of its real
estate and, in fact, has sold some buildings no longer used. However, no
assurances can be given that the Company will be successful in implementing new
retail concepts nor raising the requisite capital. Further, assuming that new
retail methods are developed and capital is raised, there is no assurance that
the Company will regain positive cash flows and profitable operations.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules of the Company filed herein are
listed on the following index.
Index to Consolidated Financial Statements
and Supplementary Data
Report of Independent Accountants.............................. F-1
Consolidated Balance Sheets.................................... F-2
Consolidated Statements of Operations.......................... F-3
Consolidated Statements of Shareholders' Equity................ F-4
Consolidated Statements of Cash Flows.......................... F-5
Notes to Consolidated Financial Statements..................... F-6
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
14
<PAGE> 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
NAME AGE POSITIONS
Ernest L. Grove, Jr. 71 Chairman of the Board of Directors and Director
John B. Hurley 56 President, Chief Executive Officer and
Director of the Company
Dale R. Campbell 39 Executive Vice President, Treasurer and
Director of the Company
Peter A. Dow 62 Director of the Company
Brian K. Friedman 39 Director of the Company, resigned May 10, 1996
Robert N. Shrager 47 Director of the Company, resigned May 10, 1996
Daniel Hourigan 48 Senior Vice President-Store Operations,
resigned April 15, 1996
Julian L. Potts 48 Senior Vice President-Advertising,
Merchandising and Marketing of the Company
Stuart G. Garson 40 Vice President, Secretary and General Counsel
of the Company
Ernest L. Grove, Jr. has been the Chairman of the Board of the Company
since December 1993. Mr. Grove has been a director of the Company since 1987.
He is the retired Vice Chairman of the Board, Chief Financial Officer and
director of The Detroit Edison Company, is a director of Standard Federal Bank
and is a trustee of Cranbrook Funds, an investment company.
John B. Hurley has been President of the Company since 1985. Prior to
that, he was Executive Vice President. Mr. Hurley has been employed by the
Company since 1975 and has been a director since 1978.
Dale R. Campbell has been employed by the Company since 1988. He has been
a director since December 1993, and an Executive Vice President of the Company
since June 1989. Prior to that he was General Counsel of the Company from
October 1988. From 1984 to 1988, he was engaged in the private practice of law
in the areas of general business and tax law with Seyburn, Kahn, Ginn, et al.
15
<PAGE> 16
Peter A. Dow has been a director of the Company since 1986. He is a
retired Vice Chairman, President and Chief Operating Officer of Lintas:Campbell
Ewald, an advertising agency.
Brian K. Friedman was a director of the Company between 1994 and May 10,
1996. He was General Counsel of Silo, Inc. from 1989 to 1993.
Robert N. Shrager was a director of the Company between 1994 and May 10,
1996. He has been Corporate Finance Director of Dixons Group plc since 1988.
Daniel Hourigan resigned from the Company in April 1996. From February
1994 to April 1996 he held the position of Senior Vice President of Store
Operations. Previous to that, since 1991, he held the same position at Silo,
Inc., a subsidiary of Dixons US Holdings, Inc., which was acquired by the
Company in December, 1993. Prior to joining Silo, Mr. Hourigan served as a
director at Dixons Stores Group in England, and held senior positions in
Operations, Property and Sales.
Julian L. Potts, employed by the Company since 1979, has been Senior Vice
President-Advertising, Merchandising and Marketing since December 1993. From
September 1991 to December 1993, he was Senior Vice President-Sales,
Operations, Marketing and Market Development. Previous to that he was Senior
Vice President-Eastern Region since September 1990.
Stuart G. Garson, employed by the Company since 1989, has been Vice
President, Secretary and General Counsel since December 1993. From November
1989 to December 1993, he was General Counsel. Previously he was a shareholder
and employee of Seyburn, Kahn, Ginn, et al, a Southfield, Michigan law firm,
practicing in the areas of general business and real estate law.
The Audit Committee consists of Ernest L. Grove, Jr., Chairman, John B.
Hurley, Peter A. Dow and Robert N. Shrager. Mr. Shrager resigned May 10, 1996.
The Audit Committee met four times during the fiscal year. The Committee
annually recommends for appointment by the Board of Directors the independent
public accountants for the Company, receives and reviews audit reports
submitted by the Company's independent public accountants and internal audit
staff, reviews internal audit procedures and performs related functions.
The Compensation Committee consists of Peter A. Dow, Chairman, Robert N.
Shrager and Ernest L. Grove, Jr. Mr. Shrager resigned May 10, 1996. The
Compensation Committee met two times during the fiscal year. The Committee
reviews and recommends to the Board of Directors matters regarding compensation
plans and arrangements with officers and directors of the Company. The
Committee also functions as the option committee under the Company's 1986
Employee Stock Option Plan and the bonus committee under the Company's Bonus
Plan described under the Compensation Committee Report on Executive
Compensation below. In addition, a subcommittee of the Compensation Committee,
Ernest L. Grove, Jr. and Peter A. Dow, functions as the Administrator of the
Company's 1993 Long Term Incentive Plan.
The Executive Committee consists of John B. Hurley, Ernest L. Grove, Jr.
and Dale R. Campbell. The Executive Committee met two times during the fiscal
year. The Executive Committee has the same
16
<PAGE> 17
power and authority as the Board in the management of the business and affairs
of the Company, subject to certain limitations, but it meets only in the event
that the entire Board is not available to act.
The Company has no standing nominating committee. The Board of Directors
held sixteen meetings and took action by written consent zero times during the
fiscal year. Each director attended at least 75 percent of all of the meetings
of the Board and of the committees upon which he served.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Certain parties are required to file under Section 16 of the Securities
Exchange Act of 1934 reports of ownership and changes of ownership with the
Securities and Exchange Commission, and to provide copies of such reports to
the Company. Based solely on information provided to the Company by
individual directors and executive officers, the Company believes that during
the preceding year all such filing requirements have been complied with.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to earned by or paid
to the Company's Chief Executive Officer and the other four executive officers
who were serving as such at the end of fiscal year 1996, for services rendered
to the Company and its subsidiaries by such officers during fiscal year 1996.
Also included is salary, bonus and option information for these people for
fiscal years 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
NAME AND -------------------------------- ------------ ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- - ------------------ ---- --------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
John B. Hurley 1996 $325,000 $ -- -- $ --
President and Chief 1995 325,000 675,000 -- 500
Executive Officer 1994 325,000 1,125,000 1,785,000
Dale R. Campbell 1996 200,000 100,000 -- --
Executive Vice 1995 198,125 75,000 127,500 500
President 1994 155,000 -- -- 500
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
NAME AND -------------------------------- ------------ ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- - ------------------ ---- --------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Daniel C. Hourigan 1996 240,000 30,000 -- 23,840(1)
Senior Vice President- 1995 254,952 -- 127,500 --
Store Operations 1994 23,996 50,000 -- --
Julian L. Potts
Senior Vice President
- - - Advertising, 1996 200,000 -- -- --
Merchandising and 1995 198,125 50,000 127,500 500
Marketing 1994 155,000 -- -- 500
Stuart G. Garson
Vice President, 1996 145,000 65,000 -- --
Secretary and General 1995 143,750 65,000 75,000 500
Counsel 1994 115,000 -- -- 500
</TABLE>
- - ---------------
(1) This amount consists of moving expenses paid to Mr. Hourigan during the
last fiscal year.
On October 1, 1991, John B. Hurley and the Company entered into an
employment agreement providing for, among other things, an annual salary of
$325,000, subject to annual upward adjustments in the discretion of the Board,
and various fringe benefits. In connection with the Silo acquisition in
December 1993, this employment agreement was amended.
Under this employment agreement, the Company granted Mr. Hurley options to
acquire 800,000 shares of Common Stock. Of these 800,000 options, 200,000 were
exercised during fiscal year 1993 at an exercise price of $.50 per share. The
remaining 600,000 options were amended in connection with the Silo acquisition
to become 306,000 options which are exercisable through October 1, 2001 for
$.97 per share. Subject to certain other provisions of the employment
agreement discussed below, all of the 306,000 options are exercisable as of the
date of this Annual Report on Form 10-K.
If an "Acceleration Event" occurs during the term of Mr. Hurley's
employment agreement and the Company (or its successor) thereafter terminates
Mr. Hurley's employment other than for "Cause" (as defined in the agreement),
all then outstanding options granted him under the agreement would become
immediately exercisable. The term "Acceleration Event" is defined in the
agreement to include, among
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<PAGE> 19
other things, (a) a merger in which the Company is not the survivor, (b) the
sale of a majority of the Common Stock the result of which is to consolidate
ownership of such stock in a single person or a group of persons acting in
concert, (c) the sale of all of the Common Stock held by Unaffiliated
Shareholders (as therein defined) the result of which is to consolidate the
ownership of such stock in a single person or group, and (d) the conveyance of
all or substantially all of the assets of the Company to another entity the
ownership of which is not substantially similar to that of the Company prior to
such conveyance.
Under the terms of Mr. Hurley's employment agreement, Mr. Hurley was
granted a bonus of $1,800,000. Mr. Hurley and the Company agreed to defer
payment of portions of such bonus and are shown above as bonuses in years
1994-1995.
In addition, Mr. Hurley's employment agreement may be terminated by the
Company at any time, with or without Cause. If termination is for Cause, or if
Mr. Hurley voluntarily terminates (other than under certain specified
circumstances following an Acceleration Event), all then outstanding options
granted to Mr. Hurley under the agreement would become void and no other
obligations would be owed to him under the agreement. If termination is due to
death or disability (as defined in the agreement), the Company would not be
required to continue any salary or other benefits pursuant to the agreement,
but all options then outstanding and exercisable would continue to be
exercisable through January 31 of the next calendar year. Termination by the
Company other than for Cause or voluntarily by Mr. Hurley under specified
circumstances following an Acceleration Event would have no effect on the
status of his then outstanding options. In addition, in either such case,
salary payments would be required to continue until the earlier of (a) October
1, 2001 or (b) five years after the termination date.
Further, Mr. Hurley may terminate his employment agreement if prior to
December 3, 1996 either (a) Dixons American Holdings, Inc. ("DAH") (or its
transferee) designates a majority of the members of the Company's Board of
Directors or (b) an aggregate of 5% of the Common Stock or Series A Preferred
Stock issued in the Silo Acquisition are transferred by DAH or an affiliate, to
a party not an affiliate of DAH. If Mr. Hurley terminates the agreement in
such event, he will be paid the lesser of (x) $1.625 million, or (y) the
aggregate of all amounts which would be paid to him through the end of the term
of the agreement. In addition, the stock options granted under his employment
agreement, under the Company's 1993 Long Term Incentive Plan, and from Oliver
L. Fretter and Howard O. Fretter (see below), will accelerate and fully vest.
Pursuant to option agreements amended in connection with the Silo
acquisition, Mr. Hurley also holds options to purchase 408,000 shares of Common
Stock from Oliver L. Fretter and options to purchase 204,000 shares of Common
Stock from Howard O. Fretter, in each case at an exercise price of $.97 per
share. Of these 612,000 options, 448,800 are presently vested and the balance
will become vested on December 3, 1996, subject to acceleration as described
above. The options expire on December 3, 1999.
OPTIONS GRANTED
There were no options granted with respect to the individuals named in the
Summary Compensation Table concerning option grants during the last fiscal
year. No stock appreciation rights ("SARs") were granted during the last
fiscal year.
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<PAGE> 20
OPTION EXERCISE AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to the individuals
named in the Summary Compensation Table concerning the number and value of
options outstanding at the end of the last fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-The-Money Options/SARs at
Fiscal Year End (#)(1) Fiscal Year End ($)(2)
------------------------ ----------------------------
Shares Acquired Value Not Not
Name on Exercise Received Exercisable Exercisable Exercisable Exercisable
(#) ($)
- - ----------------- --------------- -------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John B. Hurley -- -- 1,893,800 809,200 -- --
Dale R. Campbell -- -- 2,550 127,500 -- --
Daniel Hourigan -- -- -- 127,500 -- --
Julian L. Potts -- -- 4,080 127,500 -- --
Stuart G. Garson -- -- -- 75,000 -- --
</TABLE>
- - ---------------
NOTES
(1) No SARs are outstanding.
(2) No option were in-the-money at the end of the last fiscal year.
DIRECTORS' COMPENSATION
Board members receive an annual fee of $18,000; the Chairman of the Board
receives an annual fee of $40,000. The Board's committee chairmen each receive
an additional annual fee of $2,400. In addition, each Director is paid $1,000
for each meeting attended, $1,000 for each committee meeting attended on a day
other than the day of a Board meeting, and $500 for each committee meeting
attended on the day of a Board meeting; plus, with respect to each meeting,
reimbursement for reasonable out-of-pocket expenses. Robert N. Shrager has
waived his right to receive any of the foregoing fees. Directors who are
employees of the Company are not separately compensated for their services as
directors.
20
<PAGE> 21
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors was established by
the Board of Directors pursuant to the Company's By-Laws on June 18, 1986. The
Committee consists of Peter A. Dow, Ernest L. Grove, Jr. and Robert N. Shrager.
Mr. Shrager resigned May 10, 1996. The Compensation Committee is empowered to
review and make recommendations to the Board of Directors of the Company with
regard to compensation plans and arrangements with officers and directors of
the Company (including, but not limited to, compensation, fringe benefits,
stock incentive programs and contributions to the Company's profit sharing
plans); to serve as the Option Committee under the 1986 Fretter, Inc. Employee
Stock Option Plan; and to serve as the Bonus Committee under the 1988 Fretter,
Inc. Bonus Plan. In addition, Messrs. Grove and Dow also serve as the
Administrator of the Company's 1993 Long Term Incentive Plan.
The overall objectives of the Company's executive compensation program are
to (a) encourage the Company's executives to achieve performance of long term
and fiscal year goals, (b) provide compensation that will attract and retain
superior talent and reward initiative, innovation and industry, and (c) reward
achievement of goals and recognize extraordinary efforts or undertakings.
Accordingly, the Company's executive compensation is based on three components:
base salary, annual incentive bonuses and long term incentives through stock
options.
During the fiscal year, the Compensation Committee did not recommend any
raises in base salary for any executives, because the Compensation Committee,
in its subjective discretion, did not deem such raises advisable. The salary
of the Chief Executive Officer was set by contract entered into in a prior
year, and therefore was not subject to review by the Compensation Committee
during fiscal year 1996.
Annual incentive bonuses are generally paid pursuant to the Company's 1988
Fretter, Inc. Bonus Plan. The Bonus Plan is administered by the Compensation
Committee acting as the bonus committee under the Bonus Plan ("Bonus
Committee"). The Bonus Plan provides for the establishment of an additional
compensation fund available for bonuses for any taxable year (defined to
correspond to the Company's fiscal year) of 15 percent of net income of the
Company in excess of $4 million, up to a maximum fund of $1.5 million. As
defined in the Bonus Plan, net income means the net income of the Company for
the taxable year before the payment of or provision for bonus awards and any
federal income taxes (but not other taxes) on the net income of the Company for
such taxable year, and excluding gains or losses from the sale or other
disposition of capital assets during such taxable year and any net operating
loss carryforward. There is no requirement that any part of the additional
compensation fund be awarded as bonuses for any taxable year and no part of the
fund not awarded in one taxable year is carried forward to succeeding years.
To the extent funds are available for payment under the Plan, the Committee
allocates all or a portion thereof among the Company's executives and other
Company employees whom the Committee believes were responsible for the level of
Company earnings achieved. In early Fiscal 1996, the Committee awarded bonuses
under the Plan, based on prior year's profits. Bonuses paid to the executive
officers are depicted in the Summary Compensation Table found above in Item 11
of this Annual Report on Form 10-K.
Long term incentives for executives are created through utilization of the
Company's 1993 Long Term Incentive Plan and 1986 Fretter, Inc. Employee Stock
Option Plan (the "Option Plans"), approved by the shareholders of the Company
in December 1993 and March 1986, respectively. An aggregate of
21
<PAGE> 22
3,514,000 shares of the Company's Common Stock are authorized to be issued
pursuant to the Option Plans.
In view of the Compensation Committee's determination of the need to
retain the Company's key executives during the period the Company attempts to
reorganize its business affairs, in November 1995 the Compensation Committee
recommended to and the Board of Directors of the Company approved severance
agreements for Messrs. Campbell, Potts, Hourigan and Garson, described in this
Item 11. Such agreements provide for a severance payment equal to one year's
current base salary should the Company terminate their employment; as well as
a two part bonus payable in July and December 1996, each between 15% and 28% of
their annual salary.
In addition, the Compensation Committee recommended and the Board of
Directors approved severance agreements for approximately ten other
individuals, allowing for severance payments of between three and six months of
their annual salaries and a bonus payable in July 1996 equal to between 10% and
20% of their annual salary. The Compensation Committee determined that it was
vital to maintain continuity of management and operations to award the
foregoing agreements in view of the tenuous future of the Company and the
additional burdens placed on such individuals as the Company's business and
number of employees contracts.
The Option Plans are administered by the Compensation Committee or, as to
the 1993 Plan, by a subcommittee thereof. No member of the administering
committee is eligible to receive options under either Option Plan (or stock
options or stock appreciation rights under any other plan which may be adopted
in the future by the Company) while a member of the administering committee,
nor may any member of the administering committee have been eligible for any of
the foregoing at any time within one year prior to such member's appointment to
the administering committee.
By providing an exercise price equal to or exceeding the fair market price
of the Company's Common Stock at the time of grant, executives are encouraged
to achieve Company goals which create long term shareholder value and thus an
increase in the price of the Company's Common Stock. The Committee awards
incentive options among the Company's executives and other Company employees
whom the Committee believes have in the past year or are expected to favorably
address such long term objectives of the Company. In fiscal year 1996, a total
of 7,500 options were granted to employees of which 6,500 are null and void due
to employee terminations.
Peter A. Dow
Ernest L. Grove, Jr.
Robert N. Shrager
COMPANY PERFORMANCE
The following graph depicts a five year comparison of cumulative total
returns, assuming $100 was invested on January 31, 1991 and reinvestment of any
dividends or distributions in (a) the Company's Common Stock, (b) the entire
NASDAQ Stock Market (as a broad equity market index) and (c) the NASDAQ Retail
Trade Stock Index (as a peer group index utilizing a published industry index).
<TABLE>
<CAPTION>
FRETTER, INC. NASDAQ Stock Market NASDAQ Retail Trade Stocks
<S> <C> <C> <C>
1/31/91 100.00 100.00 100.00
1/31/92 100.00 152.99 174.61
1/31/93 58.35 173.01 157.52
1/31/94 109.91 198.97 169.47
1/31/95 79.28 189.75 149.43
1/31/96 7.21 266.74 170.95
</TABLE>
[GRAPH]
22
<PAGE> 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth the names of those shareholders known to
the Company to be the beneficial owners of more than five (5%) percent of the
Company's outstanding Common Stock as of April 30, 1996, and the number of
shares beneficially owned by all Officers and Directors of the Company as a
group on that date.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
----------------------- ----------------------
AMOUNT OF AMOUNT OF
NAME AND ADDRESS OF BENEFICIAL PERCENT BENEFICIAL PERCENT
BENEFICIAL OWNER(1) OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- - ------------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Oliver L. Fretter
28833 Telegraph Road
Southfield, Michigan 48034 3,468,991(2) 32.8%(2) -0- -0-
Howard O. Fretter(3)
28833 Telegraph Road
Southfield, Michigan 48034 1,570,296(4) 14.8%(4) -0- -0-
John B. Hurley
12501 Grand River
Brighton, Michigan 48116 5,983,669(5) 54.9%(5) -0- -0-
Dixons Overseas 3,000,000 100%
Investments Limited(6) (Series A)
29 Farm Street 1,500,000 100%
London, W1X 7RO England 7,444,454(7) 50.1%(7) (Series B)
</TABLE>
(1) Except as otherwise noted, each of Messrs. Fretter and Hurley holds his
shares of Common Stock in a revocable living trust under which, during his
lifetime, he is the sole trustee and beneficiary.
(2) Includes 3,452,671 shares owned by Oliver L. Fretter and 16,320 shares
held in irrevocable trusts for the benefit of his daughter and
grandchildren.
(3) Howard O. Fretter is the son of Oliver L. Fretter.
(4) Includes 1,558,056 shares owned by Howard O. Fretter and 12,240 shares
held in an irrevocable trust for the benefit of his children. Does not
include 100,000 shares held in other irrevocable trusts for the benefit of
his children.
23
<PAGE> 24
(5) Includes 5,135,207 shares owned by Oliver L. Fretter, Howard O. Fretter
and certain trusts for the benefit of the children of Howard O. Fretter,
over which John B. Hurley has voting power pursuant to a Shareholders
Agreement dated November 30, 1993. Under that agreement, Mr. Hurley has
also agreed to cast such votes, as long as the Fretter family holds in the
aggregate at least 10% of the outstanding Common Stock, in all elections
of directors, in such a way as to elect Oliver L. Fretter (or, if Oliver
L. Fretter so chooses or is unable to serve, Howard O. Fretter) to the
Board of Directors. Also under that agreement, Messrs. Fretter have
agreed not to sell any Common Stock if as a result of that sale Mr. Hurley
would then control the votes of less than 55% of the Common Stock
outstanding (disregarding any shares held by Dixons America Holdings, Inc.
or its affiliate). Included in the 5,135,207 shares are 1,638,800 shares
which Mr. Hurley also may acquire pursuant to various options. The total
number of shares held by Mr. Hurley (5,983,669) also includes 306,000
shares which Mr. Hurley may acquire from the Company upon the exercise of
options pursuant to his employment agreement which are presently vested or
will vest within sixty days after the date hereof, and 6,120 shares held
by Mr. Hurley as custodian for the benefit of his children. Mr. Hurley's
indicated holdings do not include any shares held by Dixons Overseas
Investments Limited as to which certain voting arrangements exist.
Percentage is based on 10,577,388 shares of Common Stock presently
outstanding, plus 306,000 shares issuable upon the exercise of certain
presently vested options. See footnote (7), below.
(6) Dixons Overseas Investments Limited ("Dixons Overseas") is a wholly-owned
indirect subsidiary of Dixons Group plc, a United Kingdom based
electronics retailer whose shares are traded on the London Stock Exchange.
(7) Consists of 3,164,804 shares of Common Stock presently held, together
with the 4,279,650 shares of Common Stock into which the 3,000,000 shares
of Series A Preferred Stock are presently convertible. Percentage is
based on 10,577,388 shares of Common Stock presently outstanding, plus the
4,279,650 shares which would be outstanding if Dixons Overseas were to
convert the 3,000,000 shares of Series A Preferred Stock it now holds.
Pursuant to a Voting Agreement dated December 3, 1993 (as amended) between
John B. Hurley and Dixons America Holdings, Inc. ("DAH"), the 3,164,804
shares of Common Stock held by Dixons Overseas (as long as it is
beneficially owned by DAH or its affiliates) shall be voted in all
elections of directors in direct proportion to the vote of all other
holders of shares of Common Stock, until the earlier of December 3, 1996,
or the conversion of more than 50% of the Series A Preferred Stock into
Common Stock or the sale or disposition of more than 50% of the Series A
Preferred Stock to a party other than an affiliate of DAH. Further, at
the sole option of DAH and its affiliates and upon the conversion of more
than 50% of the Series A Preferred Stock into Common Stock, (a) the Common
Stock then owned by DAH and its affiliates shall be voted for the election
of directors nominated by Mr. Hurley up to (i) the total number of
directors, less (ii) one-half of the total number of directors, rounded up
to the nearest whole number, minus one; and (b) the Common Stock owned by
Mr. Hurley (or for which he has voting power) shall be voted for the
election of directors nominated by DAH or its affiliates, up to one-half
of the total number of directors, rounded up to the nearest whole number,
minus one (inclusive of any directors to be elected by the holders of
Series A Preferred Stock and Series B Preferred Stock). The voting
agreements described in (a) and (b) above are revocable by DAH or its
affiliates at any time, and by Mr. Hurley during such time as he does not
have the power to elect a majority of the Board of Directors after giving
effect to the foregoing agreements.
The following table sets forth information as to each of the Directors and
information as to beneficial ownership of Common Stock by each of the persons
named in the Summary Compensation Table above and by all directors and
executive officers of the Company as a group, in each case, based on data
24
<PAGE> 25
furnished by him or them. Except as indicated in the footnotes, each person
has sole investment and voting power with respect to the shares shown.
<TABLE>
<CAPTION>
SERVED
AS A SHARES OF
DIRECTOR COMMON STOCK
PRINCIPAL OCCUPATION OF THE BENEFICIALLY
NAME OF INDIVIDUAL OR AND EMPLOYMENT FOR COMPANY OWNED AS OF PERCENT
IDENTITY OF GROUP AGE LAST FIVE YEARS SINCE MAY 1, 1996 OF CLASS
----------------- --- --------------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS
Ernest L. Grove, Jr. 71 Chairman of the 1987 1,000 *
Board of the
Company since
December 1993.
Retired Vice
Chairman of the
Board, Chief
Financial Officer
and Director of The
Detroit Edison
Company; Director
of Standard Federal
Bank; Trustee of
Cranbrook Funds.
Oliver L. Fretter 73 Chairman of the 1967 3,468,991 32.8%
Board of the
Company from 1985
to December 1993.
John B. Hurley 56 President of the 1978 5,983,669 54.9%
Company since 1985.
Dale R. Campbell 39 Executive Vice 1993 2,550(1) *
President of the
Company since June
1989. Prior
thereto he was
General Counsel of
the Company.
Peter A. Dow 62 Retired Vice 1986 510 *
Chairman, President
and Chief Operating
Officer of Lintas:
Campbell-Ewald, an
advertising agency.
Brian K. Friedman 39 General Counsel of 1994 -- *
Silo, Inc. from
1989 to 1993.
Resigned from Board
May 10, 1996.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
SERVED
AS A SHARES OF
DIRECTOR COMMON STOCK
PRINCIPAL OCCUPATION OF THE BENEFICIALLY
NAME OF INDIVIDUAL OR AND EMPLOYMENT FOR COMPANY OWNED AS OF PERCENT
IDENTITY OF GROUP AGE LAST FIVE YEARS SINCE MAY 1, 1996 OF CLASS
- - ----------------- --- ------------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Robert N. Shrager 47 Corporate Finance 1994 -- *
Director of Dixons
Group plc since
1988. Resigned
from Board May 10,
1996.
NON DIRECTOR EXECUTIVE OFFICERS
Daniel Hourigan 48 Resigned April 15, -- -- *
1996. Senior Vice
President - Store
Operations from
February 1994 to
April 1996. From
1991 to 1994,
Senior Vice
President at Silo,
Inc.
Julian L. Potts 48 Senior Vice -- 4,080(1) *
President-Advertising,
Merchandising
and Marketing since
December 1993.
Previously, Senior
Vice
President-Sales,
Operations,
Marketing and
Market Development.
Stuart G. Garson 40 Vice President and -- -- *
Secretary since
December 1993.
General Counsel
since November
1989.
All Executive Officers and Directors as a Group (ten persons) 5,995,889 55.0%
</TABLE>
- - ---------------
* less than 1%
(1) Represents shares of Common Stock which Messrs. Campbell and Potts have
the right to acquire through the exercise of stock options within 60 days
of May 1, 1996.
26
<PAGE> 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Two Company properties (Mt. Clemens and Southfield) are owned by Oliver L.
and Elma M. Fretter, wife of Oliver L. Fretter, and were leased to the Company
pursuant to leases having 12-year terms. The aggregate rental payments to
Oliver L. and Elma M. Fretter under these leases in fiscal year 1996 were
$281,370. As of the date of this Annual Report on Form 10-K, both of these
leases have been terminated.
The Company's store in Flint, Michigan is owned and was leased to the
Company by LEHO Co., a partnership in which Laura Fretter (50%) and Howard O.
Fretter (50%) are partners, each being adult children of Oliver L. Fretter.
This lease was terminated as of January 31, 1994, but continued on a
month-to-month basis on the same economic terms. Rental payments under this
lease in fiscal year 1996 were $84,000. The month-to-month agreement will
terminate in May 1996.
Pursuant to a Capital Contribution/Sale Agreement among the Company, John
B. Hurley and Oliver L. Fretter dated November 30, 1993, Mr. Fretter has agreed
to contribute to the capital of the Company shares of Common Stock he owns,
share for share to meet any exercises by Mr. Hurley of his option from the
Company to acquire up to 1,785,000 shares of Common Stock. Mr. Hurley has
agreed to pay Mr. Fretter $.97 for each share contributed to the Company by Mr.
Fretter.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following documents are filed as part of this report:
(1) FINANCIAL STATEMENTS
A list of the Financial Statements filed as a part of this Form
10-K is set forth in the index included in Item 8 and incorporated
by reference in response to this Item 14.
(2) FINANCIAL STATEMENT SCHEDULES
None.
(3) EXHIBITS
The "Exhibit Index" filed herewith is incorporated by reference in
response to this Item 14.
27
<PAGE> 28
(a) Reports on Form 8-K
Reports on Form 8-K
During the last quarter of the period covered by this report and the first
quarter subsequent thereto, the Company filed three reports on Form 8-K dated
November 2, 1995, December 12, 1995 and March 7, 1996, reporting the closing of
the Silo stores and Company inventory attributable thereto; reporting the
bankruptcy filing of Dixons U.S. Holdings, Inc. and its subsidiaries on
December 4, 1995; and reporting the closing of the Company's Fred Schmid
Appliance & T.V. Co. subsidiary stores, respectively.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: May 14, 1996 FRETTER, INC.
By: /s/ JOHN B. HURLEY
-------------------------------------
John B. Hurley
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- - ---- ----- ----
/s/ ERNEST L. GROVE, JR. Chairman of the Board of Directors 5/14/96
- - ------------------------
Ernest L. Grove, Jr.
/s/ JOHN B. HURLEY President, Chief Executive 5/14/96
- - ------------------ Officer, Chief Financial Officer
John B. Hurley and Director
/s/ DALE R. CAMPBELL Executive Vice President, 5/14/96
- - -------------------- Treasurer and
Dale R. Campbell Director
/s/ OLIVER L. FRETTER Director 5/14/96
- - ---------------------
Oliver L. Fretter
/s/ PETER A. DOW Director 5/14/96
- - ----------------
Peter A. Dow
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Fretter, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Fretter, Inc. and its subsidiaries at January 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended January 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 3 and
4 to the consolidated financial statements, the Company has suffered
significant losses from operations, has significantly curtailed its operating
activities, has a net working capital deficiency and has limited financing
available all of which raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are described
in Note 4. The financial statements do not include any adjustments that might
result if the Company is unable to continue as a going concern.
As discussed in Notes 1 and 2, the Company's wholly-owned subsidiary, Dixons
U.S. Holdings, Inc. and its subsidiaries (DUS), filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code on December 4,
1995. Effective December 4, 1995, the Company no longer accounts for DUS as a
consolidated subsidiary.
As discussed in Note 11 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", effective February 1, 1993.
Price Waterhouse LLP
Detroit, Michigan
April 26, 1996
F-1
<PAGE> 31
FRETTER, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- - ------------------------------------------------------------------------------------------------------------
JANUARY 31,
1996 1995
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 809 $ 13,787
Accounts receivable, net 5,508 24,058
Merchandise inventory 27,930 207,066
Prepaid expenses and other 796 4,926
Deferred commissions 2,074 4,872
Refundable income taxes 699
------------ ------------
Total current assets 37,816 254,709
Property and equipment, net 60,123 111,985
Goodwill, net 87,809
Other assets 1,471 6,991
Deferred commissions 2,104 7,114
------------ ------------
$ 101,514 $ 468,608
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of long-term obligations $ 48,459 $ 4,601
Accounts payable 10,681 49,491
Current portion of deferred service contract revenue 10,452 24,933
Accrued liabilities 22,071 73,021
Reserve for store closings 9,931 7,881
Income taxes payable 2,143
------------ ------------
Total current liabilities 101,594 162,070
------------ ------------
Long-term obligations 945 105,161
------------ ------------
Other noncurrent liabilities -- 26,008
------------ ------------
Deferred service contract revenue 10,514 36,169
------------ ------------
Employee benefit obligations -- 64,041
------------ ------------
Net liabilities of and advances to unconsolidated
subsidiary (Note 2) 135,669 --
------------ ------------
Redeemable preferred stock 41,100 40,800
------------ ------------
Commitments and contingencies (Notes 2, 3, 4 and 12) -- --
------------ ------------
Shareholders' equity (deficit)
Preferred stock - authorized: 5,000,000 shares of
$.01 par value; issued: none
Common stock - authorized: 50,000,000 shares of
$.01 par value; issued: 10,577,392 shares at
January 31, 1996 and 1995 106 106
Additional contributed capital 1,641 1,641
Retained (deficit) earnings (190,055) 32,612
------------ ------------
(188,308) 34,359
------------ ------------
$ 101,514 $ 468,608
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 32
FRETTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
YEARS ENDED JANUARY 31,
1996 1995 1994
<S> <C> <C> <C>
Net revenue $ 502,317 $ 858,849 $ 545,508
Cost of goods sold 408,921 630,435 407,129
------------ ------------ -----------
Gross profit 93,396 228,414 138,379
------------ ------------ -----------
Operating expenses
Selling 114,306 168,041 94,619
Warehouse and delivery 20,922 29,480 15,154
Administrative 27,213 14,363 15,133
Goodwill amortization and write-off 87,809 3,138 423
Store closure provision 67,485 4,000
------------ ------------ -----------
317,735 215,022 129,329
------------ ------------ -----------
Other income (expense)
Interest income and other, net 1,887 4,894 2,275
Interest expense (9,056) (9,721) (3,496)
------------ ----------- -----------
(7,169) (4,827) (1,221)
------------ ----------- -----------
(Loss) earnings before income taxes, extraordinary gains
and cumulative effect of change in accounting principle (231,508) 8,565 7,829
Income tax (benefit) expense (3,409) 2,500 11,281
------------ ----------- -----------
(Loss) earnings before extraordinary gains and cumulative
effect of change in accounting principle (228,099) 6,065 (3,452)
Extraordinary gains on forgiveness of debt (Note 4) 8,157
Cumulative effect of change in accounting for
income taxes (Note 11) 2,756
------------ ----------- -----------
Net (loss) earnings before preferred dividends (219,942) 6,065 (696)
Preferred stock dividend requirements 2,425 2,400 400
------------ ----------- -----------
Net (loss) earnings (attributable to) available for
common shareholders $ (222,367) $ 3,665 $ (1,096)
============ =========== ===========
Weighted average number of common shares 10,577,392 10,577,430 7,918,676
============ =========== ===========
(Loss) earnings per weighted average number of common shares:
(Loss) earnings per common share before extraordinary
gains and cumulative effect of change in accounting
principle $ (21.79) $ .35 $ (.49)
Extraordinary gains on forgiveness of debt (Note 4) .77
Cumulative effect of change in accounting
for income taxes .35
---------- ------- --------
Net (loss) earnings per common share $ (21.02) $ .35 $ (.14)
========== ======= ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 33
FRETTER, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
COMMON STOCK
-------------------------
ADDITIONAL
$0.01 PAR CONTRIBUTED RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1993 14,540,714 $ 145 $ 33,531 $ 30,343 $ 64,019
Net loss for the year ended
January 31, 1994 (696) (696)
Common stock issued for exercise
of stock options 6,929 28 28
Common stock redeemed (13,010)
Common stock cash
distribution (Note 10) (7,121,970) (71) (43,533) (43,604)
Common stock issued for
the acquisition of Dixons
U.S. Holdings, Inc. (Note 2) 3,164,804 32 11,615 11,647
Preferred stock dividend requirements (400) (400)
------------ ------ --------- ----------- ---------
Balance at January 31, 1994 10,577,467 106 1,641 29,247 30,994
Net earnings for the year ended
January 31, 1995 6,065 6,065
Common stock redeemed (75)
Preferred stock dividend requirements (2,400) (2,400)
Preferred stock accretion (300) (300)
------------ ------ --------- ----------- ---------
Balance at January 31, 1995 10,577,392 106 1,641 32,612 34,359
Net loss for the year ended
January 31, 1996 (219,942) (219,942)
Preferred stock dividend requirements (2,425) (2,425)
Preferred stock accretion (300) (300)
------------ ------ --------- ----------- ----------
Balance at January 31, 1996 10,577,392 $ 106 $ 1,641 $ (190,055) $(188,308)
============ ====== ========= ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 34
FRETTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
YEARS ENDED JANUARY 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings before preferred dividends $ (219,942) $ 6,065 $ (696)
Adjustments to reconcile net (loss) earnings to
net cash provided by (used for) operating activities
Depreciation and amortization 11,213 14,636 7,244
Goodwill amortization and write-off 87,809 3,138 423
Store closure provision 67,485
Stock compensation expense 1,979 1,979 1,243
Employee benefit plans (913) (12,688)
Non cash tax charge 3,900 3,117
Other 4,186 2,237 998
Change in assets and liabilities, net of DUS
acquisition in fiscal year 1994 and adjustments to
goodwill in 1995
Merchandise inventory 179,136 (12,326) 109,471
Other assets 26,331 (4,903) 27,865
Accounts payable (21,367) 20,627 (31,620)
Reserve for store closing (7,520) (31,874) (10,385)
Deferred service contract revenue (21,729) 10,754 12,294
Other liabilities (55,184) (54,088) (2,683)
------------ ---------- -----------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES 51,484 (52,543) 117,271
------------ ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of DUS (4,896)
Payment of pre-acquisition intercompany
obligation of DUS, net of cash acquired (43,615)
Purchase of property and equipment (1,448) (13,663) (12,951)
------------ ---------- -----------
NET CASH USED FOR INVESTING ACTIVITIES (1,448) (13,663) (61,462)
------------ ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term obligations 66,149 22,705
Payments of long-term obligations (60,358) (561) (19,714)
Preferred stock dividends (1,200) (2,400)
Payment of financing fees (1,456) (4,651)
Cash distribution to common shareholders (43,604)
Purchase of redeemable common stock (83)
Issuance of common stock 28
------------ ---------- -----------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (63,014) 63,188 (45,319)
------------ ---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,978) (3,018) 10,490
Cash and cash equivalents at beginning of year 13,787 16,805 6,315
------------ ---------- -----------
Cash and cash equivalents at end of year $ 809 $ 13,787 $ 16,805
============ ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 35
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
BASIS OF PREPARATION
The consolidated financial statements include Fretter, Inc. and its
wholly-owned subsidiaries including Dixons U.S. Holdings, Inc. (DUS) from
the date of acquisition (December 3, 1993) through December 4, 1995. As
discussed in Note 2, on December 4, 1995, DUS filed for voluntary
protection under Chapter 11 of the United States Bankruptcy Code.
Subsequent to that date, DUS is accounted for under the cost method in
the consolidated financial statements of Fretter. The consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles applicable to a going concern which,
except as otherwise disclosed, assume that assets will be realized and
liabilities will be discharged in the normal course of business. See
Notes 2 and 4. All significant intercompany accounts and transactions
have been eliminated.
NATURE OF BUSINESS AND REVENUE RECOGNITION
The Company is a retailer of consumer electronic goods and appliances
which, as of February 1, 1995, operated 242 retail locations. As
discussed in Note 3, during fiscal 1996 substantially all retail
locations have been closed, and as of April 30, 1996, the Company
operates only ten retail locations in Michigan, all of which the Company
will close in fiscal 1997. The Company recognizes revenue
from the sale of merchandise upon delivery of the merchandise to the
customer.
CASH EQUIVALENTS/STATEMENT OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
considers all highly-liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Supplemental cash flow information
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1996 1995 1994
<S> <C> <C> <C>
Interest paid, net of amounts capitalized $ 9,744 $ 8,700 $ 2,936
Federal income taxes paid $ - $ - $ 3,600
Acquisition of DUS in fiscal year 1994 and
adjustments to goodwill in 1995
Fair value of assets acquired, including goodwill $ 4,332 $ 406,561
Liabilities assumed $ 8,832 $ 345,018
Redeemable preferred stock issued $ (4,500) $ 45,000
Common stock issued $ 11,647
</TABLE>
MERCHANDISE INVENTORY
Merchandise inventory is stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
F-6
<PAGE> 36
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major replacements and
refurbishments are capitalized while replacements, repairs and
maintenance that do not extend the life of the respective property are
expensed when incurred. Interest costs relating to the construction of
capital assets are capitalized; such costs were not material during
fiscal years 1996, 1995 and 1994.
Depreciation and amortization are computed using the straight-line method
for financial reporting purposes and accelerated methods for income tax
reporting purposes. Estimated useful lives for computing depreciation
and amortization for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Buildings and improvements 18-40 years
Furniture, fixtures and office equipment 5-10 years
Automotive equipment 3-8 years
Leasehold improvements Lesser of lease term or 10 years
</TABLE>
LEASES
Leases which meet the accounting criteria for capital leases are recorded
as property and equipment, and the related capital lease obligations (the
aggregate present value of future minimum lease payments, excluding
executory costs such as taxes, maintenance and insurance) are included in
long-term obligations. Depreciation and interest are charged to expense,
and rent payments are treated as payments of long-term debt, accrued
interest and executory costs. All other leases are accounted for as
operating leases.
DEFERRED FINANCING COSTS
Included in other assets as of January 31, 1996 and 1995 are deferred
financing costs of $5.1 million associated with obtaining the revolving
credit agreement and in amending and restating the Company's loan and
financing agreement (as described in Note 7) in connection with the
acquisition of DUS. Such costs are being amortized over the term of the
related agreements. Amortization aggregated $1.7 million, $1.7 million
and $.3 million in the years ended January 31, 1996, 1995 and 1994,
respectively. Accumulated amortization was $3.7 million and $2.0 million
as of January 31, 1996 and 1995, respectively.
Costs incurred in amending the revolving credit agreement and the loan
and financing agreements during the year ended January 31, 1996 (as
described in Note 7) were expensed as incurred.
GOODWILL
The Company recorded the excess of cost over the fair value of net assets
acquired in purchase business combinations as goodwill, which was being
amortized on a straight-line basis over thirty years. Recoverability of
goodwill is evaluated based upon actual and projected results of
operations and cash flows to determine if any impairment in the carrying
amount has occurred. Due to substantial operating losses and negative
cash flows during the year and future projections, the Company determined
that the carrying value of
F-7
<PAGE> 37
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
goodwill was impaired. Accordingly, during fiscal 1996, the Company
recorded a charge of $85.5 million to write off the remaining unamortized
goodwill balance. Goodwill amortization recorded during the years ended
January 31, 1996, 1995 and 1994 was $2.3 million, $3.1 million and $.4
million, respectively. Accumulated amortization at January 31, 1995 was
$3.7 million.
SERVICE CONTRACTS
The Company recognizes revenue from the sale of service contracts sold by
the Company 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.
During the period November 1, 1994 through October 31, 1995, 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 issued to the Company's customers extended service
contract sold by the Company's salespersons. The Company recorded the
sale of these contracts as a component of net revenue, recorded the
amount payable to the third party as a component of cost of goods sold
and recorded salesperson commissions as a component of selling expense at
the time of sale to a customer. For the years ended January 31, 1996 and
1995, the Company recorded net sales of approximately $25.6 million and
$17.1 million, respectively, related to the sale of these contracts.
A liability for the estimated costs of servicing contracts of DUS which
existed at the acquisition date was recorded by DUS. No revenue or costs
associated with these acquired contracts was recognized subsequent to the
acquisition. The current and noncurrent portions of the liability were
included in accrued liabilities and other noncurrent liabilities,
respectively, as of January 31, 1995 and were reclassified to net
liabilities of and advances to unconsolidated subsidiary effective
December 4, 1995. See Note 2.
INCOME TAXES
Deferred taxes are provided to give recognition to the effect of expected
future tax consequences of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the
related tax basis for income tax purposes. See Note 11.
ADVERTISING
The Company recognizes the costs of advertising expense as incurred, net
of amounts expected to be reimbursed by vendors. Included in selling
expense in the consolidated statement of operations is net advertising
expense of $22.4 million, $30.2 million and $19.8 million in fiscal 1996,
1995 and 1994, respectively.
PREOPENING COSTS
The Company expenses preopening costs of new retail stores, such as
training and advertising, as incurred.
F-8
<PAGE> 38
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable approximates fair
value. The carrying value of the redeemable preferred stock was
determined based upon an independent appraisal as of the DUS acquisition
date. Due to the Company's current financial condition, it is
impractical to determine the fair value of the Company's long-term debt
and redeemable preferred stock as of January 31, 1996.
EARNINGS PER SHARE
Primary (loss) earnings per weighted average number of common shares is
based upon the average number of common shares outstanding plus common
share equivalents arising from dilutive stock options. Fully diluted
earnings per share assumes conversion of the convertible preferred stock
into common stock, if dilutive. The inclusion of such items did not have
an impact on primary or fully diluted earnings per share in the years
presented as they were either insignificant or antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform with the current year presentation.
2. INVESTMENT IN DIXONS U.S. HOLDINGS, INC. (DUS)
On December 3, 1993, the Company acquired DUS. In exchange for all of
the issued and outstanding equity securities of DUS, the Company issued
to Dixons America Holdings, Inc. (DAH) 3,164,804 shares of the Company's
Common Stock, 3,000,000 shares of newly-created Convertible Preferred
Stock, Series A, and 1,500,000 shares of newly-created Preferred Stock,
Series B (the "Share Issuance"). Immediately prior to the consummation
of the Share Issuance, Company shareholders were granted $3.00 in
exchange for .49 of each share of Company Common Stock owned as of
December 3, 1993. The acquisition of DUS was accounted for using the
purchase method and, accordingly, the purchase price was allocated to the
acquired assets and liabilities based upon their respective fair values
at the date of acquisition, with the excess of the purchase price over
the fair value of the net assets acquired being recorded as goodwill.
Total goodwill recorded as a result of this transaction was $93.3 million
which was being amortized over a thirty year period.
F-9
<PAGE> 39
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
2. INVESTMENT IN DIXONS U.S. HOLDINGS, INC. (DUS) (CONTINUED)
On December 4, 1995, DUS and its subsidiaries (the "Silo Debtors") filed
voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code. This action was taken in response to the inability of
DUS to operate profitably and the substantial operating losses incurred
during the current year. As of the time of the filing of the petitions
or shortly thereafter, the Silo Debtors substantially ceased all business
operations. Prior to the bankruptcy petition filings, the management and
directors of DUS resigned and were replaced by an outside individual.
As a result of the above circumstances, effective as of bankruptcy
petition filings by the Silo Debtors, the Company no longer has the
ability to exercise significant influence over the operations and
financial affairs of DUS. Accordingly, the Company no longer accounts
for DUS as a consolidated subsidiary effective December 4, 1995.
Included in the consolidated results of operations for the year ended
January 31, 1996 are the results of operations of DUS and its
subsidiaries through December 4, 1995. The income and expenses of DUS
and its subsidiaries subsequent to December 4, 1995 are excluded from the
consolidated results of operations of the Company. The operating results
of DUS included in the consolidated results of the Company since the date
of acquisition by the Company are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1996* 1995 1994**
(THOUSANDS)
<S> <C> <C> <C>
Net Revenue $ 278,344 $ 552,099 $ 167,129
============ ============ ===========
Loss before income taxes $ 199,744 $ 22,287 $ 5,983
============ =========== ===========
</TABLE>
* Through December 4, 1995
** From date of acquisition, December 3, 1993
Included in net liabilities of and advances to unconsolidated subsidiary
in the consolidated balance sheet as of January 31, 1996 is the amount by
which the liabilities of DUS and its subsidiaries exceeded their assets
at the time management determined that consolidation was no longer
appropriate, adjusted for additional cash advances by Fretter subsequent
to December 4, 1995. The additional cash advances by Fretter subsequent
to December 4, 1995 were made to fund certain obligations of DUS and are
secured by certain properties owned by the DUS. A summary of the net
liabilities of and advances to DUS is as follows:
F-10
<PAGE> 40
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
2. INVESTMENT IN DIXONS U.S. HOLDINGS, INC. (DUS) (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31, 1996
(THOUSANDS)
<S> <C>
Assets and liabilities of DUS as of December 4, 1995:
Cash and cash equivalents $ 450
Prepaid expenses and other assets 618
Property and equipment, net 1,574
Prepaid pension asset 3,961
Deferred commissions 3,574
-----------
Total assets 10,177
-----------
Accounts payable 17,443
Accrued liabilities 16,200
Secured note payable to Fretter 1,031
Intercompany payable to Fretter 29,669
Reserve for store closings 25,129
Income taxes payable 1,629
Deferred service contract revenue 18,407
Employee benefit obligations 63,319
Other noncurrent liabilities 5,531
-----------
Total liabilities 178,358
------------
Excess of liabilities over assets at December 4, 1995 168,181
Elimination of intercompany payables (30,700)
Cash advances subsequent to December 4, 1995 (1,812)
-----------
Net liabilities of and advances to unconsolidated subsidiary $ 135,669
============
</TABLE>
The amounts listed in the table above do not reflect any adjustments
resulting from the DUS bankruptcy petition filings. Certain items,
however, would be significantly impacted by a liquidation of DUS and/or
the filing for relief under Chapter 11 of the United States Bankruptcy
Code by the Company. In addition, certain items may be significantly
impacted by litigation anticipated to be commenced by the Silo Debtors
against the Company. The ultimate disposition of the amounts are not
expected to be finalized until the resolution of the DUS bankruptcy
proceedings, the timing of which cannot currently be estimated.
F-11
<PAGE> 41
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. RESERVE FOR STORE CLOSINGS
In conjunction with the acquisition of DUS, the Company developed a plan
to integrate operations and improve the profitability of the combined
entities. The plan included the elimination of duplicate facilities and
the closure of overlapping and competing stores and other low performing
stores. At the time of the December 3, 1993 acquisition, Fretter
operated 105 retail locations and DUS operated 182 retail locations. The
Company's integration plan included closure of certain former DUS
locations and existing Fretter locations, principally located in
Colorado, Illinois, Indiana, Los Angeles and Louisiana. In addition,
prior to the time of acquisition, DUS had closed 50 stores in early 1993.
Estimated exit costs for former DUS stores, including stores previously
closed, were recorded as adjustments to the fair value of the assets and
liabilities acquired. The estimated costs for Fretter stores of
approximately $4.0 million were charged to the store closure provision in
the statement of operations during the year ended January 31, 1994. This
charge consisted of estimated losses associated with the disposal of
merchandise ($1.7 million), fixed assets ($1.4 million) and leases ($.7
million), and employee termination and other costs ($.2 million).
During the year ended January 31, 1995 estimates for closure of the
former DUS locations were revised based upon available information. The
adjustments to the reserve for store closures as a result of these
revisions was recorded as an adjustment to goodwill during fiscal 1995.
During fiscal 1996, the Company instituted a program to close
unprofitable stores in several geographic markets. During fiscal 1996,
the Company closed 203 stores, including all 151 remaining stores
operated by DUS. Additionally, in connection with the fiscal 1996
program, the Company has closed 29 retail locations subsequent to January
31, 1996. Further, the Company is considering plans to close all
remaining retail locations in fiscal 1997. A charge of $67.5 million has
been recorded in the consolidated statement of operations to reflect
associated lease disposition costs, estimated losses from the disposal of
fixed assets and employee termination and other costs. Management
believes that it is reasonably possible that this charge may be revised
in the near term as additional facts and information are determined.
F-12
<PAGE> 42
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
3. RESERVE FOR STORE CLOSINGS (CONTINUED)
The following table sets forth the store closure reserve activity during
1995 and 1996:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------------------------------------------------------------------
LEASE OPERATING SEVERANCE FIXED ASSET
COSTS LOSSES AND OTHER DISPOSALS TOTAL
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1994 $ 26,072 $ 6,529 $ 12,215 $ -- $ 44,816
Adjustment charged to goodwill (2,679) (168) 4,508 1,661
Reserves utilized (9,630) (5,861) (16,383) (31,874)
----------- ----------- ----------- ----------- -----------
Balance at January 31, 1995 13,763 500 340 14,603
Amounts charged to operations 21,980 5,997 39,508 67,485
Reserves utilized (4,314) (500) (2,706) (39,508) (47,028)
Reclassification to net liabilities of
and advances to unconsolidated
subsidiary (24,233) (896) (25,129)
----------- ----------- ----------- ----------- -----------
Balance at January 31, 1996 $ 7,196 $ -- $ 2,735 $ -- $ 9,931
=========== =========== =========== =========== ===========
</TABLE>
4. OPERATIONS OF THE COMPANY
As discussed in Note 2, on December 4, 1995, DUS and its subsidiaries
filed for relief under Chapter 11 of U.S. Bankruptcy Code. Further, as
discussed in Note 3, the Company closed 203 retail locations during
fiscal 1996, including all of the operations DUS and its subsidiaries,
closed an additional 29 retail locations subsequent to January 31, 1996,
including the remaining operating locations of Fred Schmid, and is
planning to close its ten remaining retail locations in fiscal
1997.
The Company continues to actively review alternatives as it relates to
the future operations of the Company, including seeking relief under the
U.S. Bankruptcy Code for the Company and/or one or more of its remaining
subsidiaries. The Company has hired financial and legal advisors to
assist in analyzing the potential alternatives available to the Company.
These alternatives include (a) re-entering the appliance and consumer
electronics market through a new retail format, (b) eliminating all
operations except for the management of some or all of the Company's
significant real estate portfolio on an ongoing basis, (c) some
combination of (a) and (b), or (d) liquidation of the Company. However,
no assurances can be given that the Company will be successful in
implementing new retail concepts nor raising the requisite capital.
Further, assuming that new retail methods are developed and capital is
raised, there is no assurance that the Company will regain positive cash
flows and profitable operations.
F-13
<PAGE> 43
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
4. OPERATIONS OF THE COMPANY (CONTINUED)
The Company's liquidity continued to deteriorate throughout the year.
During the fourth quarter of this fiscal year, the Company began the
process of renegotiating certain obligations to vendors in an attempt to
maximize its available cash. Included as extraordinary gains in the
current year consolidated statement of operations is $8.2 million,
representing the amount of debt forgiven by vendors of the Company in
conjunction with this renegotiation process. As of January 31, 1996, the
Company maintains a working capital deficiency of $63.8 million, is
currently in default of its loan agreements and is in arrears on payment
of preferred dividends. Accordingly, the ability of the Company to
proceed with certain of the alternatives under evaluation will ultimately
depend on the ability of the Company to generate sufficient cash flows
from the disposition of assets and/or the implementation of the
alternative operating strategies discussed above and the ability of the
Company to maintain long-term financing. In addition, the Company's
alternatives will be significantly affected by the outcome of claims
asserted by the Silo Debtors.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
(THOUSANDS)
<S> <C> <C>
Buildings and improvements $ 49,570 $ 50,783
Furniture, fixtures and equipment 5,173 42,860
Automotive equipment 438 1,430
Leasehold improvements 366 32,843
----------- -----------
55,547 127,916
Accumulated depreciation and amortization (17,717) (39,153)
------------ -----------
37,830 88,763
Land 22,293 23,124
Construction-in-process 98
------------ -----------
$ 60,123 $ 111,985
=========== ===========
</TABLE>
F-14
<PAGE> 44
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
6. ACCRUED LIABILITIES
Accrued liabilities consist of:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
(THOUSANDS)
<S> <C> <C>
Workers' compensation $ 962 $ 8,375
Stock option expense 5,204 3,225
Salary and wages 944 2,084
Vacation 529 1,517
Medical claims 445 1,908
Other employee related accruals 273 2,058
Advertising 1,179 13,194
Service contract liability 6,447 9,907
Property related accruals 612 3,136
Customer deposits 1,078 5,675
In-transit inventory 6,523
Sales tax accrual 473 1,789
Preferred dividends 1,625 400
Other 2,300 13,230
----------- ----------
$ 22,071 $ 73,021
=========== ==========
</TABLE>
7. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
(THOUSANDS)
<S> <C> <C>
Bank credit agreement $ 12,151 $ 82,893
Capital expenditure line of credit 11,203 6,736
Merchandise line of credit 24,918
Inventory financing agreement 14,905
Notes payable and other 1,132 5,228
----------- -----------
49,404 109,762
Less - current portion (48,459) (4,601)
------------ -----------
$ 945 $ 105,161
=========== ===========
</TABLE>
Principal payments on long-term obligations for the five fiscal years
subsequent to 1996 are: 1997 - $48,459,000; 1998 - $26,000; 1999 -
$28,000; 2000 - $30,000; 2001 - $27,000; thereafter - $834,000.
F-15
<PAGE> 45
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
7. LONG-TERM OBLIGATIONS (CONTINUED)
In 1993, in connection with the acquisition of DUS, the Company entered
into a revolving credit agreement with a commercial credit company which
committed a maximum of $140 million to the Company for cash borrowings
and letters of credit. On November 1, 1995, the Company amended its
original agreement with the lender which resulted in the reduction of the
available line of credit to $50 million, and the bank granting a waiver
of existing defaults of loan covenants through the date of the amendment.
This amendment also eliminated certain consolidated book net worth,
consolidated net income and debt service loan covenants, and revised the
borrowing base and interest coverage ratio covenants. Interest on
amounts outstanding under this facility continues to accrue at 1.25%
above the bank's prime rate. This facility expires on November 30, 1996.
Borrowings under the credit agreement are secured by accounts receivable,
personal property and inventory of the Company, as defined. A fee on the
unused portion of the facility is payable at the rate of 0.5% per annum.
Additionally, the agreement provides for a payment of a fee of 0.25% on
the face amount of each standby letter of credit upon its issuance and 2%
per annum on the outstanding face amount of such letters of credit. At
January 31, 1996 and 1995, there was $12.2 million and $82.9 million,
respectively, outstanding under the revolving loan, and zero and $7.5
million, respectively, in letters of credit outstanding under the
facility. As of January 31, 1996, the Company is in default of certain
covenants of this agreement. Subsequent to year end, this agreement was
again amended to reduce the available line of credit from $50 million to
$25 million. There were no other significant changes in the
aforementioned loan terms as a result of this loan amendment.
The Company also has a financing agreement with a bank which has
committed $50 million for lines of credit (including standby letters of
credit). The commitment is comprised of a $25 million line of credit (to
fund obligations under a letter of credit issued to the credit
organization that finances the Company's merchandise purchases described
below) and a $25 million capital expenditure line of credit for eligible
real estate, as defined. The facilities expire November 1, 1996 and
December 1, 1996, respectively. Borrowings under the line of credit to
fund obligations under letters of credit are payable on demand plus three
days. Letter of credit fees equal to 1.25% per annum are charged on the
undrawn amount. The capital expenditure line of credit requires
interest-only monthly payments. The outstanding principal balance on
December 1st of 1994, 1995, and 1996 will be refinanced under separate
term loans. The term and amortization of each of the notes vary based
upon the year the note is funded. A fee of 1.5% is charged for each cash
advance. At January 31, 1996 and 1995, there was $11.2 million and $6.7
million, respectively, outstanding under the capital expenditure line of
credit, and at January 31, 1996, $24.9 million outstanding against the
line of credit to fund obligations under letters of credit. The letter
of credit issued by the bank is secured by owned real estate, not
previously pledged to the bank. Subsequent to year end, this financing
agreement was amended resulting in the deferral of late charge payments
by the Company until April 1, 1997, unless such terms of the amendment
were complied with during the term of the amendment, in which case, all
late charges would be waived by the lender. This amendment also
converted borrowings under the capital expenditure line of credit in the
amount of $4.9 million to a term loan. The term loan accrues interest at
an annual rate of prime plus 1.5% per year, and payments are required
monthly in the amount of $29,042 plus accrued interest. This amendment
also
F-16
<PAGE> 46
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
7. LONG-TERM OBLIGATIONS (CONTINUED)
adopted the financial debt covenant amendments in the Company's March
1996 amended loan agreement with the commercial credit company described
above, and extended the expiration date of the loan facility from
December 1, 1996 to April 1, 1997. Under terms of the amended agreement,
total borrowings outstanding shall not exceed the following amounts on
the following dates:
<TABLE>
<S> <C>
June 1, 1996 $ 33,451,102
October 1, 1996 $ 30,951,102
January 1, 1997 $ 28,451,102
April 1, 1997 Zero
</TABLE>
The above agreements limit the amounts for capital expenditures and
additional indebtedness which the Company may incur. The facilities also
limit certain other nonoperating activities of the Company.
The Company maintained a loan agreement with an independent credit
organization that finances certain of its merchandise purchases. The
loan agreement, which was entered into in connection with the acquisition
of DUS, was terminated in January 1996, at which time the balance
outstanding was repaid by drawing on the $25.0 million letter of credit
issued by the bank described above. Interest on amounts outstanding was
calculated at .7% below prime rate, as defined. The maximum financing
provision of the loan agreement limited the borrowing to $30.0 million.
Covenants of the loan agreement, among other things, required the Company
to maintain certain levels of tangible net worth, as defined, and placed
restrictions or limitations on the pledging of merchandise inventory and
equipment as collateral for present and future obligations of the
Company. At January 31, 1996 and 1995, there was zero and $14.9 million,
respectively, outstanding under this loan agreement.
During fiscal 1994, the Company issued a $3.7 million secured purchase
money note in connection with the acquisition of its new corporate
headquarters. This note required 6.5% interest-only quarterly payments
and was due and paid on March 1, 1995. The Company has outstanding
mortgages, which are payable in monthly installments through the year
2013 with interest ranging from 7% to 9%. At January 31, 1996 and 1995,
approximately $1,132,000 and $985,000, respectively, was outstanding.
8. OTHER NONCURRENT LIABILITIES
Other noncurrent liabilities at January 31, 1995 consist of the
noncurrent portion of the estimated costs of servicing extended product
warranty contracts of DUS which existed at the acquisition date ($10.3
million), the noncurrent portion of estimated future costs to be incurred
related to store closings as discussed in Note 3 ($6.7 million) and the
noncurrent portion of unfavorable lease obligations related to the
acquisition of DUS ($9.0). The DUS obligations were reclassified to net
liabilities of and advances to unconsolidated subsidiary effective with
the bankruptcy petition filings by DUS and its
F-17
<PAGE> 47
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
subsidiaries. See Note 2.
9. REDEEMABLE PREFERRED STOCK
On December 3, 1993 in connection with the acquisition of DUS, in
addition to the issuance to DAH of 3,164,804 shares of common stock, the
Company issued to DAH 3,000,000 shares of newly-created Convertible
Preferred Stock, Series A, and 1,500,000 shares of newly-created
Preferred Stock, Series B, each having a stated value of $10 per share,
representing all authorized shares. Dividends on the Series A and Series
B Preferred shares at an annual rate of 5% and 6%, respectively, are
cumulative from the issue date and are payable quarterly. Additional
dividends at the rate of 5% and 6% per year, respectively, shall accrue
on any unpaid cumulating dividends. Included in accrued liabilities at
January 31, 1996 is dividends payable of $1.6 million, of which $1.2
million is in arrears.
The Series A and Series B Preferred shares are mandatorily redeemable on
December 3, 2008 at a per share redemption price equal to stated value
plus all accumulated and unpaid dividends up to the date of redemption.
In addition, the Company may, at any time, redeem shares of the preferred
stock at the per share redemption price, equal to the stated value plus
all accumulated and unpaid dividends, provided that (a) the aggregate
value being redeemed at any one time must be at least $5.0 million, and
(b) no Series A Preferred may be redeemed until all of the Series B
Preferred has been redeemed. As of January 31, 1996, no shares of Series
A or Series B Preferred have been redeemed.
The Series A Preferred shares are convertible, at the option of the
holder, into shares of common stock at the then applicable conversion
rate (currently 1.42655 shares of common stock for each share of Series A
Preferred). The conversion rate is subject to adjustment in the event of
certain dilutive issuances of common stock or upon the occurrence of
certain other events. As of January 31, 1996, no shares of Series A
Preferred have been converted.
In connection with the acquisition of DUS, the Company obtained an
independent appraisal of the fair market value of the redeemable Series A
Convertible Preferred Stock and Series B Preferred Stock. Based upon
this appraisal, the value of the redeemable preferred stock has been
recorded at $40.5 million as of the date of acquisition. The difference
between the fair market value and the redemption value is being accreted
to the stated redemption value as a charge directly to retained earnings.
During both fiscal 1996 and 1995, $.3 million of such accretion was
recorded.
10. SHAREHOLDERS' EQUITY (DEFICIT)
Effective December 3, 1993, in connection with the acquisition of DUS,
Fretter's shareholders authorized an exchange whereby the shareholders of
Fretter became entitled to receive $3.00 in exchange for each .49 of each
share of common stock owned as of that date. Distributions of $43.6
million have been accounted for as a return of capital, resulting in a
reduction of additional contributed capital in an amount equal to the
cash distribution. All weighted average share and per share amounts have
been restated to retroactively reflect the exchange.
F-18
<PAGE> 48
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
10. SHAREHOLDERS' EQUITY (DEFICIT)
The Company is authorized to repurchase up to 2,000,000 shares of its
issued and outstanding stock. As of January 31, 1996, 1,347,800 shares
of common stock have been reacquired. In accordance with the Michigan
Business Corporation Act, all reacquired common stock has the status of
authorized but unissued shares.
11. INCOME TAXES
Effective February 1, 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" (SFAS 109).
The adoption of SFAS 109 changed the method of accounting for incomes
taxes from the deferred method (APB 11) to an asset and liability method.
The asset and liability method recognizes the deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amount and the tax basis of the assets
and liabilities.
Under SFAS 109, assets and liabilities acquired in purchase accounting
are assigned their fair values assuming equal tax and financial reporting
bases and deferred taxes are provided for basis differences. Under APB
11, values were assigned net of tax. In adopting SFAS 109, the Company
adjusted the carrying values of assets so acquired. The cumulative
effect of the change in accounting principle at the date of adoption was
$2.8 million, or $.35 per share.
The consolidated (benefit) provision for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1996 1995 1994
(THOUSANDS)
<S> <C> <C> <C>
Current
Federal $ (3,409) $ (1,400) $ 2,273
State 510
----------- ----------- ----------
Total current (3,409) (1,400) 2,783
----------- ----------- ----------
Deferred
Federal 6,986
----------- ----------- ----------
Total deferred - - 6,986
----------- ----------- ----------
Benefit of acquired net deferred tax
assets used to reduce goodwill 3,900 1,152
----------- ----------- ----------
Total provision $ (3,409) $ 2,500 $ 11,281
=========== =========== ==========
</TABLE>
F-19
<PAGE> 49
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. INCOME TAXES (CONTINUED)
In connection with the acquisition of DUS, the Company reevaluated the
carrying value of its deferred tax assets. Primarily due to the net
operating loss carryforward position of DUS, a valuation allowance for
the net deferred tax asset balance was provided in fiscal 1994. All
deferred tax assets arising in fiscal 1995 and 1996 have also been
reserved.
The tax effects of temporary differences and carryforwards which give
rise to deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
1996 1995
(THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Depreciation and amortization $ (1,731) $ -
Inventory (1,169) (431)
---------- ----------
Total deferred tax liabilities (2,900) (431)
---------- ----------
DEFERRED TAX ASSETS
Depreciation and amortization 1,737
Deferred service contract revenue 5,659 25,198
Accrued expenses 7,018 15,296
Retiree medical benefits 20,881
Net liabilities of and advances to unconsolidated subsidiary 33,927
NOL carryforward 2,340 88,466
---------- ----------
Total deferred tax assets 48,944 151,578
---------- ----------
Net deferred tax asset 46,044 151,147
Valuation allowance (46,044) (151,147)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
</TABLE>
The Company files a consolidated federal income tax return which includes
DUS. The consolidated group has approximately $438.3 million of net
operating loss (NOL) carryforwards of which $431.4 million represents
DUS' allocable share and $6.9 million represents Fretter's allocable
share. Fretter's NOL carryforward represents its allocable share
remaining after benefit of NOL carried back and utilized against its
income in a previous year. These NOL carryforwards will expire though
the year ended 2010. Deferred tax assets related to the DUS NOL
carryforwards are included in net liabilities of and advances to
unconsolidated subsidiary and valuation allowances have been provided for
the full amount.
F-20
<PAGE> 50
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
11. INCOME TAXES (CONTINUED)
A reconciliation of the Company's effective tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
1996 1995 1994
(THOUSANDS)
<S> <C> <C> <C>
Federal income taxes (benefit) at statutory rates $ (76,057) $ 2,912 $ 2,740
State taxes, net of federal benefit 337
Non-deductible goodwill and other
permanent items 31,065 829 195
Valuation allowance 41,583 (1,241) 8,009
----------- ----------- ----------
Income tax expense (benefit) $ (3,409) $ 2,500 $ 11,281
=========== =========== ==========
</TABLE>
The change in the valuation allowance is attributable to the $41.6
million current year increase, offset by a $146.7 million decrease
representing the tax effect of the DUS NOL carryforwards for which no
deferred tax asset is recognized in Fretter's financial statements.
12. COMMITMENTS AND CONTINGENCIES
LITIGATION
Largely as a result of the DUS bankruptcy filed December 4, 1995 (In
Re: Dixons U.S. Holdings, Inc., et. al., United States Bankruptcy Court,
District of Delaware, Case No. 95-1577 (PJW), Jointly Administered), the
Company is party to a substantial number of legal proceedings. Many
creditors of DUS are seeking through such litigation to hold the Company
liable for the debts of DUS under various legal theories by which such
creditors believe that DUS and the Company should be treated as a single
legal entity. The Company has aggressively defended such actions and has
obtained a preliminary injunction in the DUS Bankruptcy Court against the
prosecution of such claims by such creditors. Such preliminary
injunction, however, does not preclude the prosecution of cases by such
DUS creditors against the Company where such creditors' cases are
characterized as direct claims against the Company as opposed to theories
by which such creditors seek a determination that the Company and DUS
should be treated as a single legal entity. Further, such preliminary
injunction was issued based in part upon a representation by DUS to the
DUS Bankruptcy Court that DUS itself is likely to bring an action against
the Company seeking to hold the Company liable for the debts of DUS on
various theories of consolidation.
In the event the preliminary injunction issued in the DUS Bankruptcy
Court is dissolved, it is unlikely that the Company will have adequate
financial resources to fund the defense of all such lawsuits or adverse
judgments, if any, rendered in such cases, which would likely result in
the need for the Company to seek protection under the United States
Bankruptcy Code. In addition, many creditors of DUS have characterized
their claims against the Company as direct claims as opposed to single
legal entity claims. Given the Company's lack of liquidity, the expenses
of protracted litigation in such cases and adverse results in any several
of such lawsuits would likely result in the need for the Company to seek
protection under the United States Bankruptcy Code. Further, in the
event DUS brings its own action against the Company as DUS has indicated
to the DUS Bankruptcy Court is likely, while the Company would
aggressively defend such action, an adverse ruling therein or the
Company's determination that there would be a significant risk of an
adverse ruling, each would likely result in a determination by the
Company to itself seek the protection of the United States Bankruptcy
Code.
On April 26, 1996, Hilco Trading Company, Inc. and Garcel, Inc. filed a
lawsuit against the Company and certain of its officers and employees
(United States District Court, Northern District of Illinois, Eastern
Division Case No. 96-2520) by which the Plaintiffs seek damages against
the Company and other defendants arising out of the Plaintiffs' purchase
and liquidation of the Company's retail inventory in several markets in
which the Company and DUS closed stores. The Plaintiffs' claim that the
Company and other Defendants misled the Plaintiffs as to the quantity,
quality and cost of such inventory. In their Complaint, Plaintiffs seek
damages of forty-one million dollars, which includes treble damages under
18 U.S.C. Section 1964(c), although the Plaintiffs' calculus of their
damages is vague, at best. The Company denies liability to Plaintiffs'
and intends to aggressively defend the action. Given the vague
recitation of the Plaintiffs' damages claims, it is not possible to
determine the effect upon the Company in the unlikely event of a judgment
adverse to the Company. However, given the Company's lack of liquidity,
a significant adverse judgment will result in the need for the Company to
seek protection under the United States Bankruptcy Code.
The Travelers Insurance Company has provided the Company and its
subsidiaries a modified paid loss liability insurance program
collateralized by a letter of credit. The Company believes that each
constituent subsidiary or parent entity forming the Company is responsible
only for their own allocated premiums and losses. The Travelers believes
that the liability is joint and several between the constituent entities.
The Company has also objected to both the reserve and claims handling
practices of the Travelers, which practices the Travelers believes
suggests a liability of over two million dollars in excess of the
collateral letter of credit posted by the Company. The Company believes
that more responsible claims handling and reserve practices would suggest
a liability somewhat less than the collateral letter of credit. Neither
the Travelers nor the Company has initiated litigation to resolve what
liability, if any, the Company may have with respect to this liability
insurance program. However, in the event litigation is commenced, given
the Company's lack of liquidity, an adverse judgment that the Company's
liability significantly exceeds the collateral letter of credit will
result in the need for the Company to seek protection under the United
States Bankruptcy Code.
OPERATING LEASES
The Company is obligated under several long-term and month-to-month real
estate operating leases, with the long-term leases expiring through
January 2013. Under the terms of a portion of these leases, the Company
is obligated to pay certain operating expenses. Such leases can be
terminated by the Company at any time without cost.
The amounts charged to operations in connection with operating leases,
including additional rentals based on a percentage of sales, for the
years ended January 31, 1996, 1995 and 1994 were $19.6 million, $26.8
million and $5.5 million, respectively. Certain of the store operating
leases contain provisions which require additional rentals based on a
percentage of sales. The amount of additional rentals paid was not
significant during the years ended January 31, 1996, 1995 and 1994.
F-21
<PAGE> 51
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum annual rental payments under non-cancelable operating
lease approximate $2 million annually and aggregate approximately $14
million over the remaining non-cancelable term of the leases.
13. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
EMPLOYEE BENEFIT PLANS
Fretter sponsors a profit sharing plan which covers substantially all
full-time employees of Fretter and Fred Schmid. Contributions to the
plan are based solely upon management's discretion. Profit sharing
expenses totalled $275,000 and $352,000 in fiscal 1995 and 1994,
respectively. There were no contributions to the plan for fiscal 1996.
DUS sponsors a 401(k) plan which covered substantially all full-time
employees of DUS and its subsidiaries. Contributions under this plan
consist primarily of matching amounts. Expense recorded under this plan
totalled $138,000, $276,000 and $248,000 in fiscal 1996, 1995 and 1994.
In connection with the acquisition of DUS, the Company assumed
responsibility for several noncontributory defined benefit pension plans
which cover substantially all former DUS full-time employees. Pension
benefits under these plans are based upon years of service or average
monthly compensation, as defined.
During the year ended January 31, 1996, DUS made cash contributions to
the plan of $191,000. The prepaid pension asset as of December 4, 1995
of $4.0 million was reclassified to net liabilities of and advances to
unconsolidated subsidiary effective with the bankruptcy petition filing
by DUS. See Note 2.
During 1995 the Company changed the defined benefit plans resulting in
the freezing of benefits effective February 1, 1995. In addition, in
excess of 50% of the employees covered by the plans were terminated
during fiscal 1995 as a result of combining the Fretter and DUS
operations. The reduction in the projected benefit obligations as a
result of the suspension of future benefit increases and termination of
employees has been accounted for as plan curtailments. Accordingly,
during fiscal 1995 the Company recognized curtailment gains of $2.7
million.
At January 31, 1995 $3.8 million is included in other assets representing
the excess of plan assets of $11.3 million over projected benefit
obligations of $7.5 million, of which $7.0 million is vested. The
weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations for the Company's defined
benefit pension plans as of January 31, 1995 was 8.5%. As a result of
the freezing of benefits there is no assumed increase in future
compensation levels.
F-22
<PAGE> 52
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company's policy is to immediately recognize in the statement of
operations gains and losses from experience different from that assumed
and the effect of changes in actuarial assumptions. During the year
ended January 31, 1995 the Company made cash contributions of $1.4
million and recognized a pension benefit of $2.5 million comprised of a
benefit from changes in actuarial assumptions of $3.6 million offset by
service cost of $.4 million, interest cost of $.6 million and loss on
plan assets of $.1 million.
The net periodic pension cost and the contributions made to the plans
from the date of acquisition to January 31, 1994 were not material.
OTHER POSTRETIREMENT BENEFITS
A DUS subsidiary has recorded a postretirement benefit liability which
represents the actuarial present value of future obligations of certain
health and life insurance benefits payable to eligible retired employees
of steel operations previously conducted by Silo, Inc., an indirect
wholly owned subsidiary of DUS. Silo, Inc. funds the postretirement
benefit costs as they are incurred.
Prior to the bankruptcy petition filings by DUS and each of its
subsidiaries, the expenses and gains resulting from the operation of this
plan were included in consolidated operations of the Company, and the
liability was recorded as a liability of the Company on a consolidated
basis. Effective with the bankruptcy petition filings, the liability was
reclassified to net liabilities of and advances to unconsolidated
subsidiary. See Note 2.
The Company's policy is to immediately recognize in the statement of
operations gains and losses from experience different from that assumed
and the effect of changes in actuarial assumptions. The components of
the expense (benefit) recognized as a component of administrative costs
in the consolidated statement of operations for the years ended January
31, 1996 and 1995 are:
<TABLE>
<CAPTION>
JANUARY 31,
1996* 1995
<S> <C> <C>
Interest cost $ 3,843 $ 5,418
Recognition of actuarial gains (12,862)
------------ ------------
Net (benefit) expense $ 3,843 $ (7,444)
============ ============
</TABLE>
* Through December 4, 1995
Included in employee benefit obligations at January 31, 1995 is $64.0
million representing the actuarial present value of accumulated
postretirement benefit obligations determined using a weighted average
discount rate of 8.75%.
F-23
<PAGE> 53
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
13. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
The health care cost trend rates used to determine the actuarial present
value of the accumulated postretirement benefit obligation in the
January 31, 1995 valuation ranged from 10.0% to 13.0% as a result of
various plans offered and gradually declined to 6.25% for all plans in
2004, and remaining at that level thereafter. No valuation was performed
as of January 31, 1996 as a result of the reclassification to net
liabilities of and advances to unconsolidated subsidiary.
14. STOCK OPTION PLANS
In March 1986, the Company adopted a stock option plan for officers and
key management employees, pursuant to which an aggregate of 250,000
shares of the Company's common stock may be issued. The options are
granted at no less than fair market value at the date of grant. At
January 31, 1996, 50,571 options are outstanding under this plan which
expire at various dates through April 2000, all of which are exercisable.
On October 1, 1991, in connection with an employment agreement, stock
options to acquire 800,000 shares at $.50 to $1.00 per share were granted
to the President of the Company. Under this agreement, the options are
exercisable at various dates through October 1, 2001. In a related
agreement (the "Principal Shareholder Plan"), the President was also
granted options from two of the Company's largest shareholders to
purchase a total of 1,200,000 shares at a rate of 120,000 shares per year
for $3 per share on each October 1 beginning October 1, 1992 through
October 1, 2001. Effective December 3, 1993, the above agreements were
amended and restated. The agreements, as amended and restated, expire
December 3, 1999 and provide the President of the Company the option to
acquire 306,000 shares at $.97 per share from the Company and 612,000
shares at $.97 per share under the previously existing Principal
Shareholder Plan. The Company records compensation expense for these
options based upon the difference between the fair market value of its
common stock at the date of grant and the option price, as amended and
restated. Compensation expense recorded for the years ended January 31,
1996, 1995 and 1994 was $.9 million, $.9 million and $1.1 million,
respectively. At January 31, 1996, 918,000 options related to the above
agreements are outstanding, of which 703,800 are exercisable.
On December 3, 1993, in connection with the adoption of a long-term
incentive plan, stock options to acquire 1,785,000 shares at $.01 per
share were granted to the President of the Company. Such options vest in
equal amounts annually in each of the three years subsequent to the date
of issuance and expire six years from the date of issuance. The Company,
its President and one of its principal shareholders have entered into a
related agreement whereby the President may exercise these options only
if the principal shareholder contributes shares of common stock to the
capital of the Company, share for share to meet the President's option
exercise. The President must pay the principal shareholder $.97 per
share for each share so contributed. The Company records compensation
expense for these options based on the difference between the fair market
value of its common stock at the date of grant and the option price.
Compensation expense recorded for the years ended January 31, 1996, 1995
and 1994 related to these options was $1.1 million, $1.1 million and $.2
million, respectively. At January 31, 1996, 1,785,000 options related to
the above agreements are outstanding of which 1,190,000 are exercisable.
F-24
<PAGE> 54
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
14. STOCK OPTION PLANS (CONTINUED)
In connection with the adoption of the long-term incentive plan, on
February 2, 1994 1,006,550 stock options with an exercise price of $3.50
per share were granted to various employees of the Company. Such options
vest three years from the date of issuance and expire ten years and six
months from the date of issuance or upon the employee's termination. At
January 31, 1996, 616,500 of these options were outstanding, none of
which are exercisable.
The following is a summary of stock option activity for all plans,
exclusive of the Principal Shareholder Plan and the options granted
December 3, 1993.
<TABLE>
<CAPTION>
Number Option
of shares price range
<S> <C> <C>
Balance at January 31, 1993 708,500 $1.00 - $5.0625
Exercised (6,929) $3.1875 - $4.4375
Terminated (44,000) $3.1875
Effect of exchange (1) (294,000)
-----------
Balance at January 31, 1994 363,571 $.97 - $5.0625
Granted 1,006,550 $3.50
Terminated (122,000) $3.50 - $4.625
-----------
Balance at January 31, 1995 1,248,121 $.97 - $5.0625
Granted 7,500 $3.50
Terminated (282,550) $3.1875 - $4.625
-----------
Balance at January 31, 1996 973,071 $.97 - $5.0625
===========
Exercisable at January 31, 1996 305,571 $.97 - $5.0625
===========
</TABLE>
(1) As discussed above, the October 1, 1991
agreements were amended and restated to
reflect the December 3, 1993 exchange,
thus reducing the number of options
outstanding.
F-25
<PAGE> 55
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------
APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 TOTAL
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Fiscal year 1996
Net revenue $ 166,429 $ 158,106 $ 134,173 $ 43,609 $ 502,317
Gross profit (loss) 47,481 43,406 (5,790) 8,299 93,396
(Loss) before income taxes and
extraordinary gains (5,770) (10,177) (188,886) (26,675) (231,508)
Net (loss) attributable to common
shareholders (4,350) (10,997) (189,494) (17,526) (222,367)
Net (loss) attributable to common
shareholders per weighted average
number of common shares (.41) (1.45) (17.92) (1.24) (21.02)
Fiscal year 1995
Net revenue $ 182,004 $ 205,546 $ 204,024 $ 267,275 $ 858,849
Gross profit 48,922 54,130 55,250 70,112 228,414
(Loss) earnings before income taxes (5,521) (1,463) (1,768) 17,317 8,565
Net (loss) earnings (attributable to)
available for common shareholders (4,133) (1,537) (1,731) 11,066 3,665
(Loss) earnings for common stock
per weighted average number of
common shares (.39) (.15) (.16) 1.05 .35
</TABLE>
Quarterly per share amounts are based on the weighted average shares
outstanding during the respective quarters.
Included in (loss) before income taxes and extraordinary gains for the
quarter ended October 31, 1995 is a $55.1 million provision for the
closure of certain DUS and Fretter locations. An additional provision
for the closure of certain additional locations in the amount of $12.4
million was recorded in the quarter ended January 31, 1996. The
provision for store closings was $67.5 million for the full year. See
Note 3.
Included in (loss) before income taxes and extraordinary gains for the
quarter ended October 31, 1995 is a charge of $82.3 million related to
the write-off of goodwill associated with the acquisition of DUS. In
addition, a charge of $3.2 million related to the write-off of goodwill
associated with the acquisition of Fred Schmid Appliance & TV. Co. in
fiscal 1992 was recorded in the quarter ended January 31, 1996.
The quarter ended January 31, 1996 includes the recognition of
approximately $8.2 million of extraordinary gains related to the
forgiveness of debt. See Note 4.
The quarter ended January 31, 1995 includes the recognition of
approximately $16.0 million of gains related to employee benefit plan
valuations. The net benefit related to the employee benefit plans was
$12.3 million for the full year. See Note 13.
F-26
<PAGE> 56
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------ ----------- ------------
2.1 Stock Purchase Agreement and Plan of Tax-Free (2)
Reorganization, dated as of 9/15/93, among the
Company, Dixons America Holdings, Inc. and Dixon
U.S. Holdings, Inc.
2.2 Agreement, Plan and Certificate of Merger, dated (1)
as of 11/29/93, by and between the Company and
Gabrielle Co.
2.3 Certificate of Voting Powers, Designations, (2)
Preferences and Relative, Participating,
Optional or Other Special Rights of the
Convertible Preferred Stock, Series B
3.1 Restated Articles of Incorporation of the Company (3)
3.2 Amendment to the Articles of Incorporation of (4)
the Company, dated 6/23/87
3.3 Second Amended and Restated Bylaws of the (3)
Company, effective as of April 22, 1986
9.1 Voting Agreement, dated 12/3/93, by and between (1)
Dixons America Holdings, Inc. and John B. Hurley
9.2 Letter Agreement amending the Voting Agreement, (1)
dated 12/3/93
9.3 Shareholder Agreement, dated 11/30/93, by and (1)
among Oliver L. Fretter, in his personal
capacity and as Trustee under the Oliver L.
Fretter Revocable Living Trust dated 1/11/74, as
amended, Howard O. Fretter, in his personal
capacity and as Trustee under the Howard O.
Fretter Revocable Trust Agreement dated 3/15/86,
John B. Hurley, in his personal capacity and as
Trustee under the John B. Hurley Revocable Trust
Agreement dated 3/14/86, and the Company
10.1 Supplemental Agreement, dated 11/30/93, by and (1)
among Oliver L. Fretter, in his personal
capacity and as Trustee under the Oliver L.
Fretter Revocable Living Trust dated 1/11/74, as
amended, Howard O. Fretter, in his personal
capacity and as Trustee under the Howard O.
Fretter Revocable Trust Agreement dated 3/15/86,
John B. Hurley, in his personal capacity and as
Trustee under the John B. Hurley Revocable Trust
Agreement dated 3/14/86, and the Company
10.2 Registration Rights Agreement, dated 12/3/93, by (1)
and between the Company and Dixons America
Holdings, Inc.
10.3 Registration Rights Agreement, dated 12/3/93, (1)
among the Company, Oliver L. Fretter, John B.
Hurley and Howard O. Fretter#
10.4 Employment Agreement, dated 11/30/93, by and (1)
between the Company and Oliver L. Fretter#
<PAGE> 57
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------- ----------- ----
10.5 Employment Agreement, dated 10/1/91, by and between the (5)
Company and John B. Hurley#
10.6 First Amendment to Employment Agreement, dated (1)
11/30/93, by and between the Company and John B.
Hurley#
10.7 Capital Contribution/Sale Agreement, dated 11/30/93, (1)
among the Company, John B. Hurley and Oliver L.
Fretter#
10.8 Agreement for Wholesale Financing, dated as of (1)
11/30/93, by and between the Company and ITT Commercial
Finance Corp.
10.9 Reimbursement Agreement, dated as of 11/30/93, by and (1)
between the Company and Dixons Treasury Management
Limited
10.10 Loan and Financing Agreement, dated as of 11/30/93, by (1)
and between the Company and Michigan National Bank
10.11 First Amendment to Loan and Financing Agreement, dated (8)
as of December 8, 1994, by and between the Company and
Michigan National Bank
10.12 Credit Agreement, dated as of 11/30/93, among the (1)
Company, BT Commercial Corporation and various other
lenders
10.13 First Amendment to Credit Agreement, dated January 26, (8)
1994, among the Company, BT Commercial Corporation and
various other lenders
10.14 Second Amendment and Consent to Credit Agreement, dated (8)
October 28, 1994, among the Company, BT Commercial
Corporation and various other lenders
10.15 Employee Cash or Deferred Profit-Sharing Plan and Trust# (3)
10.16 Amendment to Employee Cash or Deferred Profit-Sharing (4)
Plan and Trust, dated 5/18/87#
10.17 1986 Employee Stock Option Plan# (3)
10.18 Amendment to 1986 Employee Stock Option Plan, dated (4)
12/23/87#
10.19 Stock Option Agreement, dated 11/30/93, by and between (1)
the Company and John B. Hurley#
10.20 Stock Option Agreement, dated 2/1/94, by and between (8)
the Company and Dale R. Campbell#
10.21 Stock Option Agreement, dated 2/1/94, by and between (8)
the Company and Daniel C. Hourigan#
10.22 Stock Option Agreement, dated 2/1/94, by and between (8)
<PAGE> 58
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------- ----------- ----
the Company and Julian Potts#
10.23 Stock Option Agreement, dated 2/1/94, by
and between the Company and Stuart Garson# (8)
10.24 Bonus Plan# (4)
10.25 1993 Long Term Incentive Plan# (6)
10.26 Employment Agreement, dated 1/31/89, by and (7)
between the Company and Douglass T.
Hickman#
10.27 Indemnification Agreement, dated 10/8/87, (4)
by and between the Company and Oliver L.
Fretter#
10.28 Indemnification Agreement, dated 10/8/87, (4)
by and between the Company and John B.
Hurley#
10.29 Indemnification Agreement, dated 10/8/87, (4)
by and between the Company and Peter A.
Dow#
10.30 Amended and Restated Stock Option Agreement (1)
between Howard O. Fretter and John B.
Hurley dated November 30, 1993#
10.31 Amended and Restated Stock Option Agreement (1)
between Oliver L. Fretter and John B.
Hurley dated November 30, 1993#
10.32 Lease Amendment Agreement among the (1)
Company, Oliver L. Fretter, Howard O.
Fretter and John B. Hurley dated November
30, 1993#
10.33 Employment Termination Agreement, dated (8)
January 20, 1995, by and between the
Company and Donald Andresen#
10.34 Merchant Agreement, dated March 1, 1994, by (8)
and between the Company and Household Bank
(Illinois), N.A.
10.35 Merchant Agreement, dated March 1, 1994 by (8)
and between the Company and Household Retail
Services, Inc. Bank (Illinois), N.A.
10.36 Universal International Re-Insurance Ltd. (8)
Consumer Protection Plan Master Policy of
Insurance No. 2661P and Declarations, dated
November 1, 1994
10.37 Form of Employment Severance/Bonus
Agreement #
10.38 Third Amendment to Credit Agreement, dated
November 1, 1995, among the Company, BT
Commercial Corporation and various other
lenders
21 List of Subsidiaries (1)
23 Consent of Price Waterhouse, LLP
27 Financial Data Schedule (Edgar Version ONLY)
<PAGE> 59
- - ---------------
# Management contract or compensatory plan or arrangement required to be
identified by Form 10-K Item 14
(1) Incorporated by reference to the Company's Report Form 10-K for fiscal
year ended January 31, 1994
(2) Incorporated by reference to the Company's Report on Form 8-K dated
December 10, 1993
(3) Incorporated by reference to Amendment No. 1 to the Company's Form S-1
Registration Statement No. 33-4146
(4) Incorporated by reference to the Company's Form 10-K for fiscal year
ended January 31, 1988
(5) Incorporated by reference to Schedule 13-D filed November 2, 1991 by John
B. Hurley
(6) Incorporated by reference to the Company's Solicitation Statement for
Action to be taken by Written Consent of Shareholders dated December 1,
1993
(7) Incorporated by reference to the Company's Form 10-K for fiscal year
ended January 1, 1989
(8) Incorporated by reference to the Company's Form 10-K for fiscal year ended
January 31, 1995
<PAGE> 1
Exhibit 10.37
SEVERANCE AGREEMENT
Agreement made this 29th day of November, 1995, by and between Fretter,
Inc., a Michigan Corporation (the "Company"), and ________________________ (the
"Employee").
BACKGROUND
Employee is currently employed by the Company in the position of
______________________________. In consideration of Employee's past, present
and future services to the Company, the Company desires to provide for the
payment of certain compensation to Employee upon the occurrence of certain
events, all as more fully set forth below.
In consideration of the mutual covenants and agreements herein contained,
and intending to be legally bound hereby, the parties agree as follows:
1. TERM. This Agreement shall continue for a period beginning on the
date hereof and ending on the earliest of the following (as defined below,
hereinafter, the "Term"):
(a) the date Employee dies or becomes permanently disabled
(permanent disability, being defined as his failure to render services of
the character which he had previously rendered to the Company, because of
his physical or mental illness or other incapacity beyond his control,
for a significant period of time, as reasonably determined by the Board
of Directors of the Company or its chief executive officer;
(b) the date of termination of Employee's employment with the
Company for cause (as defined in Section 2);
(c) by mutual agreement of the Company and Employee; or
(d) upon the voluntary termination by Employee of Employee's
employment with the Company by resignation, retirement or otherwise.
2. CAUSE DEFINED. For purposes of this Agreement, termination by the
Company for "Cause" shall mean termination for any one of the following
reasons:
(a) the Employee's continued and deliberate neglect of his
employment duties as determined by the Board of Directors of the Company
or its chief executive officer;
(b) the Employee's use, possession, or distribution of illegal drugs
on Company property or during Company time, or evidence of habitual use
or distribution of such substances at any time;
<PAGE> 2
(c) deliberate misconduct of the Employee in connection with the
performance of his duties, including without limitation, violation of the
Company's express written policies, misappropriation of funds or property
of the Company, accepting bribes or kick-backs in connection with any
transaction entered into on behalf of the Company or disclosing
information of the Company known to be confidential;
(d) the Employee's failure to disclose to the Company any personal
interest he has in a Company transaction;
(e) conviction of Employee for any felony, fraud or embezzlement; or
(f) the willful engaging by the Employee in gross misconduct which
is likely to be injurious to the Company, monetarily or otherwise, in the
Company's reasonable judgement.
3. TERMINATION. In addition to the "incentive compensation bonus" more
fully described in Section 4(a), if, during the Term of this Agreement,
Employee's employment with the Company is terminated as set forth below, the
Company will pay to Employee "severance compensation" in the amount and manner
more fully described in Section 4(b):
(a) The Company terminates Employee's employment without Cause; or
(b) The Employee terminates Employee's employment due to the fact
that without Employee's consent: (i) the duties or responsibilities
assigned to Employee are substantially and materially reduced to a level
beneath that which Employee enjoys on the date which the Company notifies
Employee of such reduction in duties and responsibilities; (ii) the
duties and responsibilities assigned to Employee are substantially and
materially inconsistent with those which Employee has on the date which
the Company assigns such inconsistent duties and responsibilities; (iii)
Employee's base annual salary is materially reduced to a level below that
which Employee enjoys on the date of notification of such reduction; and
(iv) Employee's principal place of employment with the Company is changed
to a location greater than seventy-five (75) miles from Employee's
current principal place of employment with the Company on the date
hereof; provided however, that for any termination by Employee under this
Section 3(b), the Employee shall first have given the Company written
notice of Employee's intention to terminate his employment, specifying
the reason(s) therefor, and provided further, that the Company shall not
have cured or remedied the reason(s) specified in such notice prior the
expiration of ten (10) business days following receipt of notice by the
Company.
2
<PAGE> 3
4. COMPENSATION PAYMENTS TO EMPLOYEE.
(a) Incentive Compensation Bonus. Employee shall be entitled to
receive a bonus for each of the periods ending July 31, 1996 and December
31, 1996 (each, a "Bonus Payment Date") equal to $______ payable on each
Bonus Payment Date if, and only if, Employee is employed by the Company
as of the respective Bonus Payment Date. If Employee's employment with
the Company is terminated for reasons specified in Section 3, or the term
of this Agreement expires for the reason specified in Section 1(a), in
either case prior to a Bonus Payment Date, Employee shall be entitled to
a portion of the Incentive Compensation Bonus payable on such Bonus
Payment Date prorated for the period up to the date of Employee's
termination or Agreement expiration, in such case, payable in the same
manner as Severance Compensation, as particularly described in Section
4(b).
(b) Severance Compensation. If Employee's employment with the
Company is terminated for reasons specified in Section 3, then employee
shall be entitled to a one-time lump sum payment in the amount of
$_______, payable not later than 10 days from the date of Employees
termination.
5. WITHHOLDING. Company may withhold from any benefits payable under
this Agreement all federal, state, city or other taxes as shall be required
pursuant to any law or governmental regulation or ruling.
6. NONASSIGNABILITY. Neither this Agreement nor any right or interest
hereunder shall be assignable by Employee or his legal representatives.
7. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Company which may
acquire, directly or indirectly, by merger, consolidation, purchase, or
otherwise, all or substantially all of the assets of the Company, and shall
otherwise inure to the benefit of and be binding upon the parties hereto and
their respective heirs, executors, administrators, successors and assigns.
Nothing in this Agreement shall preclude the Company from consolidating or
merging into or with or transferring all or substantially all of its assets to
another person. In that event, such other person shall assume this Agreement
and all obligations of the Company hereunder. Upon such a consolidation,
merger, or transfer of assets and assumption, the term "Company" as used
herein, shall mean such other person and this Agreement shall continue in full
force and effect.
8. WAIVERS NOT TO BE CONTINUED. Any waiver by a party of any breach of
this Agreement by another party shall not be construed as a continuing waiver
or as a consent to any subsequent breach by the other party.
9. NOTICES. All notices, requests, demand and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mail, certified or
3
<PAGE> 4
registered mail, return receipt requested, with postage prepaid, to the
following addresses or to such other address as either party may designate by
like notice:
If to Employee, to:
______________________
______________________
______________________
If to the Company, to:
______________________
______________________
______________________
ATTN: _______________
With a copy to:
______________________
______________________
______________________
ATTN: _______________
and to such other or additional person or persons as either party shall have
designated to the other party in writing by like notice.
10. GENERAL PROVISIONS.
(a) This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof, and supersedes and
replaces all prior agreements between the parties. No amendment,
supplement, waiver or termination hereof shall be binding unless reduced
to writing and executed by the parties hereto.
(b) This Agreement shall not limit or infringe upon the right of the
Company to terminate the employment of Employee at any time for any
reason, nor upon the right of Employee to terminate his employment with
the Company.
(c) The term "person" as used in this Agreement means a natural
person, joint venture, corporation, sole proprietorship, trust, estate,
partnership, cooperative, association, non-profit organization or any
other legally cognizable entity.
(d) No failure on the part of any party hereto to exercise and no
delay in exercising any right, power or remedy hereunder shall operate as
a waiver thereof; nor shall any
4
<PAGE> 5
single or partial exercise of any right, power or remedy hereunder
preclude any other or further exercise thereof or the exercise of any
other rights, power or remedy.
(e) The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall in no way restrict
or modify any of the terms or provisions hereof.
(f) This Agreement shall be governed and construed and the legal
relationships of the parties determined in accordance with the laws of
the State of Michigan applicable to contracts executed and to be
performed solely in the State of Michigan.
IN WITNESS WHEREOF, the parties have executed this Severance Agreement
as of the day and year first above written.
"COMPANY"
FRETTER, INC.
By: _________________________________
Its: ________________________________
"EMPLOYEE"
_____________________________________
5
<PAGE> 1
EXHIBIT 10.38
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT
THIS THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT (this "Amendment") is
entered into as of November 1, 1995 by and among Fretter, Inc., a Michigan
corporation (the "Borrower"), the LENDERS listed on the signature pages hereof,
and BT COMMERCIAL CORPORATION, as Agent, in its capacity as Agent for the
Lenders. Words and phrases having defined meanings in the Existing Credit
Agreement referred to below shall have the same respective meanings when used
herein, unless otherwise expressly defined herein.
WITNESSETH:
WHEREAS, the parties hereto have entered into a Credit Agreement, dated as
of November 30, 1993, relating to a revolving credit facility in an amount not
to exceed $140,000,000 for the Borrower's ongoing working capital, letter of
credit and general corporate needs, as amended by that certain First Amendment
to Credit Agreement dated as of January 26, 1994 and that certain Second
Amendment to Credit Agreement dated as of October 28, 1994 (as so amended, the
"Existing Credit Agreement" and as amended by this Amendment, the "Credit
Agreement");
WHEREAS, in connection with the Borrower's closing of numerous retail
store locations and a decreased need for working capital financing the Borrower
has requested that the Lenders decrease their Commitments by an aggregate
amount equal to $90,000,000; and
WHEREAS, the Borrower and the Lenders desire to make certain other
amendments and modifications to the Existing Credit Agreement;
NOW THEREFORE, in consideration of the premises and the mutual agreements
set forth herein and for other consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Amendments to Existing Credit Agreement. Subject to and conditioned
upon the fulfillment of each of the conditions precedent set forth in Section 4
hereto:
1.1 Annex I to the Existing Credit Agreement is hereby amended by deleting
the terms thereof in their entirety and inserting Annex I attached hereto
therefor. On the effective date of this Amendment, the Borrower shall pay to
each Lender the amount by which the outstanding principal balance of the
Revolving Loans of each Lender exceeds such Lender's Commitment (as amended by
this Amendment) together with all accrued interest and fees owed to such Lender
(other than attorneys' fees and expenses). From and after the date hereof, any
such Lender whose Commitment, as listed on Annex I, is $0 shall no longer
constitute a "Lender" for purposes of the Credit Agreement with
<PAGE> 2
respect to any events or acts which occur after the date of such payment.
1.2 Section 1.1 (General Definitions) of the Existing Credit Agreement is
hereby amended by deleting the definition of Borrowing Base set forth therein
and inserting the following therefor:
Borrowing Base means the sum of:
(A) eighty-five percent (85%) of Eligible Accounts Receivable, plus;
(B) fifty percent (50%) of Eligible Inventory (provided, that the
percentage set forth in this clause B shall be sixty-five percent (65%)
from and including November 1, 1995 to and including January 31, 1996),
minus;
(C) the aggregate amount of reserves, if any, established by the
Agent under Section 2.1(b).
1.3 Section 1.1 of the Existing Credit Agreement is hereby further amended
by deleting the definition of EBITDA set forth therein and inserting the
following therefor:
EBITDA for a period means the consolidated net income (determined
without giving effect to preferred stock dividends declared during such
period and without regard to the cumulative tax effect, if any, of net
operating losses utilized on goodwill and net worth and determined as if
goodwill is amortized over a 30-year period) of the Borrower and its
Subsidiaries other than any Dixon Entities or Fretter Auto (excluding
extraordinary items) (a) plus all Interest Expense (less interest income,
if any), income tax expense, depreciation and amortization (including
amortization of any goodwill or other intangibles), (b) less gains and
plus losses attributable to any fixed asset sales, (c) plus or minus any
other non-cash charges which have been subtracted or added in calculating
consolidated net income of the Borrower and its Subsidiaries (other than
any Dixon Entities or Fretter Auto) and (d) plus amounts expended by the
Borrower in connection with the closing of its operations in the Boston
metropolitan area.
1.4 Section 1.1 of the Existing Credit Agreement is hereby further amended
by deleting the definition of Insolvency Event set forth therein and inserting
the following therefor:
Insolvency Event means, with respect to any Person, the occurrence
of any of the following: (a) a voluntary or involuntary petition for
bankruptcy or other relief involving that Person, its assets or its
liabilities under the Bankruptcy Code or any similar statute, (b) an
assignment of its assets for the benefit of creditors, (c)
2
<PAGE> 3
its failure or suspension of business operations, or (d) appointment of a
receiver or trustee for it or a substantial portion of its assets.
1.5 Section 1.1 of the Existing Credit Agreement is hereby further
amended by deleting the definition of Interest Expense set forth therein and
inserting the following therefor:
Interest Expense means the consolidated expense of the Borrower and
its Subsidiaries other than any Dixon Entities or Fretter Auto for
interest on Indebtedness, including, without limitation, amortization
of original issue discount, incurrence fees (to the extent included in
interest expense), the interest portion of any deferred payment
obligation and the interest component of any capital lease obligation;
provided, however, that the closing fees paid to the Agent and the
Lenders in connection with the execution and delivery of the Third
Amendment to this Credit Agreement (and the amortization thereof) shall
be deemed not to constitute Interest Expense.
1.6 Section 1.1 of the Existing Credit Agreement is hereby amended by
amending the definition of Eligible Inventory set forth therein by changing the
period at the end of subsection (f) thereof to a semi-colon, adding the word
"or" thereafter, and adding the following new subsection (g) as follows:
(g) it is in the possession or under the control of, or it is
located at any location that is owned by, leased by, operated by or under
the possession or control of, any of the Dixon Entities or Fretter Auto.
1.7 Section 1.1 of the Existing Credit Agreement is hereby amended by
adding the following defined terms to Section 1.1 in alphabetical order:
Dixon Entities means any of Dixons US, Silo Holdings, Inc., Silo,
Inc., Silo-Dixon, Inc., Silo California, Inc., Tipton Centers, Inc., BB
Lease Co., Silo Financial Services, Inc., and Silo Distribution Services,
Inc.
Fretter Auto means, collectively, Fretter Auto Sound, Inc., and its
wholly owned subsidiary, The New Haney's Company, Inc.
1.8 Section 3.1(a) of the Existing Credit Agreement is hereby amended by
deleting the term "$25,000,000" set forth therein and inserting the term
"$15,000,000" therefor.
1.9 Section 4.7(a) of the Existing Credit Agreement is hereby amended by
deleting the terms thereof in their entirety and inserting the following
therefor:
3
<PAGE> 4
(a) General Provisions. Subject to the provisions set forth
in the fee letter executed by the Borrower in favor of the Lenders in
connection with the Third Amendment and Waiver to this Credit Agreement,
if the Commitments are reduced or terminated for any reason (including
as a result of the occurrence of an Insolvency Event) prior to the
Expiration Date, the Borrower will pay to the Agent, for the ratable
benefit of the Lenders, a fee (the "Early Termination Fee") in an amount
equal to two percent (2%) of the amount of each such reduction.
1.10 Section 6.13 (No Defaults) of the Existing Credit Agreement is
hereby amended by adding the following sentence at the end thereof:
Neither the Borrower nor Fred Schmid Appliance & TV Co. ("Fred Schmid")
is in payment default under the term of any lease to which either of them
is a party or for which either of them is liable (contingently or
otherwise) covering any retail store or warehouse location of the
Borrower or Fred Schmid or any other Person, which default could
reasonably be expected to have a Material Adverse Effect.
1.11 Sections 8.1 (Consolidated Book Net Worth) and 8.2 (Consolidated
Net Income) of the Existing Credit Agreement are hereby amended by deleting the
terms thereof in their entirety.
1.12 Section 8.3 of the Existing Credit Agreement is hereby amended by
deleting the terms thereof in their entirety and inserting the following
therefor:
8.3 Interest Coverage Ratio. The Borrower shall have as of the
end of each of its fiscal quarters a ratio of EBITDA to Interest Expense
for such quarter of not less than 1.0 to 1.
1.13 Section 8.4 (Capital Expenditures) of the Existing Credit
Agreement is hereby amended by deleting the first sentence thereof in its
entirety and inserting the following therefor:
The Borrower and its Subsidiaries shall not make payments for Capital
Expenditures in excess of $25,000,000 in the aggregate per fiscal year;
provided, however that during the period commencing October 1, 1995
through the Expiration Date the Borrower and its Subsidiaries shall not
make payments for Capital Expenditure in excess of $5,000,000.
1.14 Section 8.5 (Debt Service) of the Existing Credit Agreement is
hereby amended by deleting the terms thereof in their entirety.
4
<PAGE> 5
1.15 Section 8.10 of the Existing Credit Agreement is hereby amended
by deleting the terms thereof in their entirety and inserting the following
therefor:
8.10 Restricted Payments. The Borrower shall not, and shall not
permit any of its Subsidiaries (other than Dixon Entities or Fretter
Auto) to, directly or indirectly, (a) declare or pay any dividend (other
than dividends payable solely in common stock of the Borrower) on, or
make any payment on account of, or set apart assets for a sinking or
other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of capital
stock of the Borrower or any warrants, options or rights to purchase any
such capital stock, whether now or hereafter outstanding, or make any
other distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Borrower or any of
its Subsidiaries except that any Subsidiary may declare and pay dividends
to the Borrower or any other Subsidiary except as provided herein; or (b)
make any optional payment or prepayment on or redemption (including,
without limitation, by making payments to a sinking or analogous fund) or
repurchase of any Indebtedness (other than Indebtedness pursuant to this
Credit Agreement) or of any Mandatory Redeemable Obligation; provided that
any Subsidiary may make payments on account of Indebtedness owing to the
Borrower or any other Subsidiary in accordance with the terms thereof,
except as provided herein. Notwithstanding anything to the contrary in
this Agreement, the Borrower shall not, and shall not permit any of its
Subsidiaries (other than Dixon Entities or Fretter Auto) to, declare or
pay any dividend to (other than dividends payable solely in common stock
of the Borrower), loan or transfer any funds to, pay any indebtedness on
account of, or transfer any Collateral to any Dixon Entities or Fretter
Auto; provided, however, that amounts in an aggregate amount not to
exceed $1,000,000 may be transferred by the Borrower to the Dixon
Entities or Fretter Auto to pay liabilities of such Persons for (i)
operating expenses in connection with the operation of the five stores
leased by the Dixon Entities and operated as Fred Schmid stores in the
State of Colorado, (ii) severance costs related to the termination of
employees of the Dixon Entities or Fretter Auto and (iii) COBRA
liabilities of Silo, Inc.
1.16 Section 8.17 (No Corporate Changes) of the Existing Credit
Agreement is hereby amended by deleting the last clause of Section 8.17, which
begins with the words "provided that", and replacing that clause with the
following:
provided that, notwithstanding the foregoing, none of the Dixon
Entities or Fretter Auto shall be merged or consolidated with the
Borrower or any Subsidiary (other than any of the Dixon Entities
or Fretter Auto).
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<PAGE> 6
1.17 Section 9.1(f) of the Existing Credit Agreement is hereby
amended by deleting the terms thereof in their entirety and inserting the
following therefor:
(f) The Borrower or any other Credit Party (other than any such
other Credit Party having a net worth that is less than 5% of the
aggregate net worth of all of the Credit Parties and other than Fretter
Auto or any of the Dixon Entities) shall become the subject of an
Insolvency Event, and in the case of any Insolvency Event which is not
commenced by the Borrower or the applicable Credit Party, such Insolvency
Event is not resolved or dismissed within thirty (30) days.
1.18 Section 9.1 (Events of Default and Remedies) of the Existing
Credit Agreement is hereby further amended by inserting the following Section
9.1(k) at the end thereof:
(k) Maximum Outstanding Obligations. The Borrower shall fail to
reduce on at least one Business Day between January 24, 1996 and February
7, 1996 the aggregate outstanding balance of all Revolving Loans plus the
principal amount of all outstanding Letter of Credit Obligations with
respect to all Letters of Credit to an amount not greater than
$25,000,000.
2. Waiver of Early Termination Fee. Subject to and conditioned upon
the fulfillment of each of the conditions precedent set forth in Section 4
hereto, each of the Lenders hereby waives any Early Termination Fee which it
may have been entitled to pursuant to the terms of the Existing Credit
Agreement as a result of the reduction of the Commitments from $140,000,000 to
$50,000,000 pursuant to the terms of this Amendment.
3. Waiver of Existing Events of Default and Certain Future Events of
Default. Subject to and conditioned upon the fulfillment of each of the
conditions precedent set forth in Section 4 hereto, effective as of the date
hereof, each of the Lenders agrees to waive:
(i) the Events of Default under the Existing Credit Agreement which
have arisen directly as a result of the Borrower's failure to comply with
requirements of Section 8.1 (Consolidated Book Net Worth), 8.2
(Consolidated Net Income), or 8.3 (Interest Coverage Ratio) for the
period commencing August 1, 1995 through the date hereof;
(ii) the Events of Default under Section 9.1(h) of the Existing
Credit Agreement which have arisen solely as a result of the existence of
certain events of default under the Fixed Asset Loan Credit Documents or
the ITT Agreement for the period commencing August 1, 1995 through the
date hereof;
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<PAGE> 7
(iii) any Event of Default which may arise upon or after the
commencement of an Insolvency Event (as defined in the Existing Credit
Agreement) by or against any Dixon Entities or Fretter Auto as a result
of the failure of any Dixon Entities or Fretter Auto to comply (or the
Borrower's failure to cause any of the Dixon Entities or Fretter Auto to
comply) with any requirement set forth in the Credit Agreement or any
other Credit Document applicable to any Dixon Entities or Fretter Auto;
and
(iv) Any Material Adverse Effect that consists of a material adverse
effect solely upon, or that is solely attributable to the initiation of
an Insolvency Event by or against, any Dixon Entities or Fretter Auto.
4. Conditions Precedent to Amendment and Waiver Effectiveness. The
amendments and modifications set forth in Section 1 and the waivers set forth
in Section 3 hereof shall become effective upon, and are expressly conditioned
upon, the fulfillment of each of the following conditions precedent (unless
waived by the Majority Lenders, or in the case of paragraph (h) below each of
the Lenders receiving the payments described therein):
(a) The Agent shall have received original executed
counterparts of this Amendment from the Borrower and each of the Lenders.
(b) The Agent shall have received a copy of a resolution of the
Board of Directors of the Borrower and each of its Subsidiaries
identified in Section 4(c) authorizing the execution and delivery of
this Amendment (or, in the case of Subsidiaries, the consent described in
Section 4(c) and the release described in Section 4(d)), certified by
the Secretary or an Assistant Secretary of the Borrower or the
Subsidiary, as applicable.
(c) Each Subsidiary of the Borrower which has executed a
Guarantee shall have executed a Consent satisfactory in form and
substance to the Agent reaffirming such Subsidiary's obligations under
its respective Guarantee and consenting to the Borrower's execution,
delivery and performance of this Amendment.
(d) The Agent shall have received a release in the form of
Exhibit A hereto executed by the Borrower and each Guarantor.
(e) The Agent shall have received an opinion of counsel of the
Borrower in form and substance satisfactory to the Agent.
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<PAGE> 8
(f) The Agent and the Lenders shall have received the fees
provided in those certain letter agreements of even date herewith
executed by the Borrower.
(g) The Borrower and Michigan National shall have entered into
an amendment and waiver to the Fixed Asset Loan Credit Documents in form
and substance satisfactory to the Agent providing for, among other things,
the waiver of all existing defaults and events of defaults thereunder and
the amendment of certain covenants set forth therein.
(h) Concurrently with the effectiveness of this Amendment, the
Lenders shall have received the amounts required to be paid pursuant to
Section 1.1 of this Amendment.
5. Representations and Warranties. In order to induce the Lenders to
enter into this Amendment, the Borrower hereby represents and warrants to the
Lenders as follows:
(a) The execution, delivery and performance by the Borrower of
this Amendment (i) are within the Borrower's corporate powers, (ii) have
been duly authorized by all necessary corporate action, (iii) require no
action by or in respect of, or filing with, any governmental body,
agency or official, (iv) do not contravene, or constitute a default
under, any provision of any applicable law, statute, ordinance,
regulation, rule, order or other governmental restriction or of the
Articles or Certificate of Incorporation or By-Laws of the Borrower, (v)
do not contravene, or constitute a default under, any agreement,
judgment, injunction, order, decree, indenture, contract, lease,
instrument or other commitment to which the Borrower is a party or by
which the Borrower or any of its assets are bound and (vi) will not
result in the creation or imposition of any Lien upon any asset of the
Borrower under any existing indenture, mortgage, deed of trust, loan or
credit agreement or other agreement or instrument to which the Borrower
is a party or by which it or any of its assets may be bound or affected.
(b) This Amendment and the Existing Credit Agreement as
amended by this Amendment are the legal, valid and binding obligation of
the Borrower, and are enforceable against the Borrower in accordance with
their terms.
(c) The representations and warranties contained in the Existing
Credit Agreement and the other Credit Documents, except as expressly
modified, deleted, or waived in this Amendment, are true and correct in
all material respects on and as of the date hereof as though made on the
date hereof, except to the extent that such representations expressly
relate solely to an earlier date (in which case
8
<PAGE> 9
such representations and warranties were true and accurate on and as of
such earlier date).
(d) Except for the Events of Default which are being waived
pursuant to Sections 2 and 3 above, no Default or Event of Default has
occurred and is continuing.
6. Reference to and Effect Upon the Existing Credit Agreement. Upon
the effectiveness of this Amendment, each reference in the Existing Credit
Agreement to "the Agreement", "hereunder", "hereof", "herein", or words of like
import, shall mean and be a reference to the Existing Credit Agreement, as
amended hereby, and each reference to the Existing Credit Agreement in any
other Credit Document shall mean and be a reference to the Existing Credit
Agreement, as amended hereby.
7. Reaffirmation; Expenses. The Borrower hereby reaffirms to the
Agent and each of the Lenders that, except as modified hereby, the Existing
Credit Agreement and all of the Credit Documents remain in full force and
effect and have not been otherwise waived, modified or amended. Except as
expressly modified hereby, all of the terms and conditions of the Existing
Credit Agreement shall remain unaltered and in full force and effect. The
Borrower acknowledges that all legal expenses of the Agent related to this
Amendment shall be paid by the Borrower.
8. Choice of Law. This Amendment has been delivered in Chicago,
Illinois, and shall be governed by and construed in accordance the laws and
decisions of the State of Illinois without giving effect to the conflicts of
law principles thereunder.
9. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. One or more
counterparts of this Amendment may be delivered by telecopier, with the
intention that they shall have the same effect as an original counterpart
thereof.
[SIGNATURE PAGES FOLLOW]
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their proper and duly authorized officers as of the
date set forth above.
BORROWER:
FRETTER, INC.,
a Michigan corporation
By
-----------------------
Title:
AGENT:
BT COMMERCIAL CORPORATION,
as Agent
By
-----------------------
Vice President
LENDERS:
BT COMMERCIAL CORPORATION
By
-----------------------
Vice President
SANWA BUSINESS CREDIT CORPORATION
By
-----------------------
Title:
HARRIS TRUST AND SAVINGS BANK
By
-----------------------
Title:
LASALLE NATIONAL BANK
By
-----------------------
Title:
MERCANTILE BUSINESS CREDIT, INC.
By
-----------------------
Title:
10
<PAGE> 11
THE BANK OF NEW YORK COMMERCIAL
CORPORATION
By
-----------------------
Title:
HELLER FINANCIAL, INC.
By
-----------------------
Title:
NATIONSBANK BUSINESS CREDIT
By
-----------------------
Title:
NATIONAL CANADA FINANCE CORP.
By
-----------------------
Title:
By
-----------------------
Title:
NBD BANK (f/k/a NBD BANK, N.A.)
By
-----------------------
Title:
11
<PAGE> 12
CONSENT
By Subsidiary Guarantee dated as of November 30, 1993 (each a
"Guarantee"), each of the undersigned (the "Guarantors") guaranteed to the
Guaranteed Parties (as defined therein), subject to the terms, conditions and
limitations set forth therein, the prompt payment and performance of all of the
Guaranteed obligations (as defined therein). Each Guarantor consents to the
Borrower's execution of the foregoing Third Amendment and Waiver to Credit
Agreement and acknowledges the continued validity, enforceability and
effectiveness of the Guarantee executed by it with respect to all loans,
advances and extensions of credit to the Borrower, whether heretofore or
hereafter made, together with all interest thereon and all expenses in
connection therewith.
FRETTER AUTO SOUND, INC.
FRETTER ACQUISITION COMPANY, INC.
FRED SCHMID APPLIANCE & TV CO.
FRETTER REAL ESTATE COMPANY
SILO HOLDINGS, INC.
SILO, INC.
SILO CALIFORNIA, INC.
SILO-DIXON, INC.
DIXONS U.S. HOLDINGS, INC. FRETTER
WAREHOUSE COMPANY, INC.
By
-----------------------
Title:
Dated: November 1, 1995
12
<PAGE> 13
ANNEX I
Name and Address of Lender Commitment
- - -------------------------- -----------
BT Commercial Corporation $15,000,000
233 South Wacker Drive
Suite 8400
Chicago, Illinois 60606
Attn: Wayne D. Hillock
Phone No.: 312-993-8155
Fax No: 312-993-8096
Sanwa Business Credit $13,000,000
Corporation
One South Wacker Drive
Chicago, Illinois 60606
Attn: Barbara A. Horton,
Account Executive
Phone: 312-853-8051
Fax: 312-782-6035
Harris Trust and Savings Bank $0
111 West Monroe Street
Chicago, Illinois 60690
Attn: M. Elizabeth Gilliam/
Patrick McDonnell-2West
Phone: 312-461-5111 (EG)
Phone: 312-461-5054 (PM)
Fax: 312-461-2591
LaSalle National Bank $15,000,000
120 South LaSalle Street
Suite 509
Chicago, Illinois 60603
Attn: Christopher G. Clifford,
Vice President
Phone: 312-781-8415
Fax: 312-750-6450
13
<PAGE> 14
Name and Address of Lender Commitment
- - -------------------------- ----------
Mercantile Business Credit, $0
Inc.
100 South Brentwood Blvd.
Suite 500
St. Louis, MO 63105
Attn: Jeanne Gieseke, Vice
President
Phone: 314-579-8447
Fax: 314-579-8502
The Bank of New York $0
Commercial Corporation
1290 Avenue of the Americas
3rd Floor
New York, NY 10104
Attn: Dan Murray, Vice
President
Phone: 212-408-4088
Fax: 212-408-4313
Heller Financial, Inc. $0
500 West Monroe, 18th Floor
Chicago, Illinois 60661
Attn: Joel Richards, Vice
President
Phone: 312-441-7439
Fax: 312-441-7026
NationsBank Business Credit, $7,000,000
Inc.
901 Main Street, 6th Floor
Dallas, TX 75202
Attn: Bart Bearden, Vice
President
Phone: 214-508-0433
Fax: 214-508-3501
14
<PAGE> 15
Name and Address of Lender Commitment
- - -------------------------- ----------
National Canada Finance Corp. $0
American Center Building
27777 Franklin Road, Suite
1570
Southfield, MI 48034
Attn: Jeffrey C. Angell,
Vice President
Phone: 810-354-4800
Fax: 810-354-1768
NBD Bank $0
1190 First National Building
Detroit, MI 48226
Attn: Bruce Thompson
Phone: 313-225-4337
Fax: 313-225-4355
15
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 33-56307) of Fretter, Inc. of our
report dated April 26, 1996 appearing on page F-1 of this Form 10-K.
Detroit, Michigan
May 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 809
<SECURITIES> 0
<RECEIVABLES> 5,508
<ALLOWANCES> 0
<INVENTORY> 27,930
<CURRENT-ASSETS> 37,816
<PP&E> 60,123
<DEPRECIATION> (17,717)
<TOTAL-ASSETS> 101,514
<CURRENT-LIABILITIES> 101,594
<BONDS> 945
41,100
0
<COMMON> 106
<OTHER-SE> (188,414)
<TOTAL-LIABILITY-AND-EQUITY> 101,514
<SALES> 502,317
<TOTAL-REVENUES> 502,317
<CGS> 408,921
<TOTAL-COSTS> 408,921
<OTHER-EXPENSES> 315,848
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,056
<INCOME-PRETAX> (231,508)
<INCOME-TAX> (3,409)
<INCOME-CONTINUING> (228,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 8,157
<CHANGES> 0
<NET-INCOME> (222,367)
<EPS-PRIMARY> (21.02)
<EPS-DILUTED> (21.02)
</TABLE>
