<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 or Incorporation) (IRS Employer Identification No.)
12501 GRAND RIVER
BRIGHTON, MICHIGAN 48116
(810) 220-5000
(Address of principal executive offices and telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
NOT APPLICABLE
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding as of July 31, 1996
Common Stock, $.01 par value 10,577,388
<PAGE> 2
FRETTER, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Form 10-Q Cover Page 1
Form 10-Q Index 2
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of
Shareholders' Equity 5
Consolidated Statements of Cash Flow 6
Notes to Consolidated Financial
Statements 7-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-12
Part II. Other Information
Item 1-6. 13-14
Signatures 15
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
FRETTER, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Assets July 31, January 31,
1996 1996
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 216 $ 809
Accounts receivable, net 958 5,508
Merchandise inventory 1,241 27,930
Prepaid expenses 333 796
Deferred commissions 1,650 2,074
Refundable income taxes 699
--------- ---------
Total current assets 4,398 37,816
Property and equipment, net 52,378 60,123
Other assets 588 1,471
Deferred commissions 1,454 2,104
--------- ---------
$ 58,818 $ 101,514
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities
Current portion of long-term obligations $ 35,940 $ 48,459
Accounts payable 9,457 10,681
Current portion of deferred service contract revenue 8,281 10,452
Accrued liabilities 16,686 22,071
Reserve for store closings 4,860 9,931
--------- ---------
Total current liabilities 75,224 101,594
--------- ---------
Long-term obligations 1,137 945
--------- ---------
Deferred service contract revenue 7,164 10,514
--------- ---------
Net liabilities of and advances to unconsolidated
subsidiary 129,555 135,669
--------- ---------
Redeemable preferred stock 41,250 41,100
--------- ---------
Commitments and contingencies - -
--------- ---------
Shareholders' Equity (Deficit)
Preferred stock-authorized, 5,000,000 shares of $.01 par
value; issued; none
Common stock-authorized, 50,000,000 shares $.01 par
value; issued, 10,577,388 shares at July 31, 1996
and at January 31, 1996 106 106
Additional contributed capital 1,641 1,641
Retained (deficit) earnings (197,259) (190,055)
--------- ---------
(195,512) (188,308)
--------- ---------
$ 58,818 $ 101,514
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
FRETTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the six months ended July 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Three-months ended July 31, Six-months ended July 31,
--------------------------- -------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $8,017 $158,106 $30,034 $324,535
Cost of goods sold 5,769 113,473 26,838 230,769
---------- ---------- ---------- ----------
Gross profit 2,248 44,633 3,196 93,766
---------- ---------- ---------- ----------
Operating expenses
Selling 853 37,718 5,033 74,924
Warehouse and delivery 222 6,225 1,422 12,813
Administrative 2,341 8,589 5,608 17,139
---------- ---------- ---------- ----------
3,416 52,532 12,063 104,876
---------- ---------- ---------- ----------
Other income (expense)
Gain on sale of property and equipment 349 4,462
Interest and other, net 574 448 888 615
Interest expense (1,195) (2,726) (2,280) (5,452)
---------- ---------- ---------- ----------
(272) (2,278) 3,070 (4,837)
---------- ---------- ---------- ----------
Loss before income taxes (1,440) (10,177) (5,797) (15,947)
Income tax expense 220 (1,800)
---------- ---------- ---------- ----------
Net loss attributable to preferred dividends (1,440) (10,397) (5,797) (14,147)
Preferred stock dividend requirements 633 600 1,257 1,200
---------- ---------- ---------- ----------
Net loss attributable to common shareholders ($2,073) ($10,997) ($7,054) ($15,347)
========== ========== ========== ==========
Weighted average number of common shares 10,577,388 10,577,392 10,577,388 10,577,392
========== ========== ========== ==========
Net loss per common share ($0.20) ($1.04) ($0.67) ($1.45)
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
Fretter, Inc.
Consolidated Statements of Shareholders' Equity
For the six months ended July 31, 1995 and 1996
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
For the six-months --------------------- Contributed Retained
ended July 31, 1995 Shares $0.01 par Capital earnings Total
- ------------------------ --------- ---------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1995 10,577,392 $106 $1,641 $32,612 $34,359
Net loss for the six-months
ended July 31, 1995 (14,147) (14,147)
Preferred stock dividend
requirements (1,200) (1,200)
Preferred stock accretion (150) (150)
----------- ---- ------ -------- --------
BALANCE AT JULY 31, 1995 10,577,392 106 1,641 17,115 18,862
=========== ==== ====== ======== ========
For the six-months
ended July 31, 1996
- -----------------------
BALANCE AT FEBRUARY 1, 1996 10,577,392 $106 $1,641 ($190,055) ($188,308)
Net loss for the six-months
ended July 31, 1996 (5,797) (5,797)
Preferred stock dividend
requirements (1,257) (1,257)
Preferred stock accretion (150) (150)
----------- ---- ------ -------- --------
BALANCE AT JULY 31, 1996 10,577,392 $106 $1,641 ($197,259) ($195,512)
=========== ==== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
FRETTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended July 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before preferred dividends ($5,797) ($14,147)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Gain on sale of property and equipment (4,460)
Depreciation, amortization and write-off 3,767 8,746
Stock compensation expense 990 990
Other non-cash items 1,811
Change in assets and liabilities
Merchandise inventory 26,689 45,125
Other assets 6,785 3,747
Accounts payable (1,224) 9,400
Accrued liabilities (8,045) (17,066)
Deferred service contract revenue (5,521) (13,621)
Other liabilities (10,771) (7,944)
-------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,413 17,041
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (739)
Proceeds from sale of property and equipment 9,322
-------- --------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES 9,322 (739)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term obligations 510 4,879
Payments of long term obligations (12,838) (20,654)
Preferred stock dividends (1,200)
-------- --------
NET CASH USED FOR
FINANCING ACTIVITIES (12,328) (16,975)
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (593) (673)
Cash and cash equivalents at beginning of period 809 13,787
-------- --------
Cash and cash equivalents at end of period $216 $13,114
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
FRETTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. 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, which through its subsidiaries operated
the Silo consumer electronics and home appliance retail store chain, 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 3. All significant intercompany
accounts and transactions have been eliminated.
These interim unaudited consolidated financial statements reflect, in
the opinion of management, all adjustments necessary for a fair statement of
results for the interim periods. All adjustments are of a normal and recurring
nature. Certain amounts in prior years consolidated financial statements have
been reclassified to conform with the current year presentation. The
consolidated financial statements should be read in conjunction with the
financial statements and notes contained in the Company's Form 10-K filed with
the Securities and Exchange Commission for the year ended January 31, 1996.
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").
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
fiscal year ending January 31, 1996. 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, effective December 4, 1995, the Company no longer accounts
for DUS as a consolidated subsidiary. 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. Included in net liabilities of and
advances to unconsolidated subsidiary in the consolidated balance sheet as of
July 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 DUS.
The amounts included in net liabilities of and advances to
unconsolidated subsidiary 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.
3. 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. The Company closed
203 retail locations during fiscal 1996, including all of the operations of DUS
and its subsidiaries, closed an additional 33 retail locations subsequent to
January 31, 1996, including the remaining operating locations of the Company's
subsidiary Fred Schmid Appliance & T.V. Co., and the Company closed all of its
remaining retail locations in quarter ending July 31, 1996.
The Company continues to actively review alternatives as it relates to
potential 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 continues to consult with and seek advice from its
financial and legal advisors to assist in analyzing the potential alternatives
available to the Company. These alternatives include (a) eliminating all
operations except for the management of some or all of the Company's
significant real estate portfolio on an ongoing basis,
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<PAGE> 8
4. LONG-TERM OBLIGATIONS
The Company has maintained a revolving credit agreement with a
commercial credit company since 1993. In March 1996, this agreement was
amended to reduce the available line of credit from $50 million to $25 million.
Further amendments have since reduced the available line of credit to $10
million. As of July 31, 1996, the Company is in default of certain covenants
of this agreement. During the quarter ended July 31, 1996, the holders of
letters of credit totaling $4.8 million drew the entire letters of credit
amount against this credit agreement. Borrowings outstanding were $6.6 million
and $12.2 million at July 31, 1996 and January 31, 1996, respectively.
The Company has a financing agreement with a bank heretofore used to
provide lines of credit for capital expenditures and merchandise purchases. In
March 1996, this agreement was amended resulting in the permanent suspension of
the extension of new advances under such facility, deferral of late charge
payments by the Company, converting borrowings under the capital expenditure
line of credit in the amount of $4.9 million to a term loan, adopting the
financial debt covenants used by the Company s commercial credit company,
extending the expiration date of the loan facility from December 1, 1996 to
April 1, 1997 and providing for maximum borrowings outstanding at certain
dates. As of July 31, 1996, the Company is in default of certain covenants of
this agreement. Additionally, the bank waived payments due on and May 1 and
June 1, 1996. The Company has no made any subsequent payments. Borrowings
outstanding were $29.3 million and $36.1 million as of July 31, 1996 and
January 31, 1996, respectively.
5. LOSS PER COMMON SHARE
Loss per common share is computed by dividing earnings after income
taxes by the weighted average number of common shares outstanding, including
common stock equivalents. Common stock equivalents include stock options
outstanding which may be converted to common stock. There were no common stock
equivalents used in the calculation at July 31, 1996.
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<PAGE> 9
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Six months ended July 31, 1996 and 1995)
OVERVIEW
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 achieved. 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 December 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 and DUS. As of
the date of this quarterly report, the Company has eliminated all of its
markets. The Company is currently undertaking the process to liquidate its
remaining inventory.
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, 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 43 store and warehouse locations, none
of which are operating. 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 periodic mandatory
principal reductions. As the Company and its subsidiaries have exited markets,
each has attempted to lease or sell its owned real estate, while resolving
lease agreements with its various landlords in such markets.
If the Company is unable to overcome the foregoing factors, 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.
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<PAGE> 10
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Six months ended July 31, 1996 and 1995)
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
period are not comparable to the prior year due to all of the reasons discussed
above.
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<PAGE> 11
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Six months ended July 31, 1996 and 1995)
CHANGES IN RESULTS OF OPERATIONS
Net Revenue
Net revenue decreased in the six month period ended July 31, 1996 as
compared to the six month period ended July 31, 1995 by $294.5 million
(90.7%). The decrease in total sales is primarily due to the lesser number of
stores operated by the Company.
Cost of Goods Sold and Gross Profit
Cost of goods sold decreased by $203.9 million (88.47%) and gross
profit decreased $90.6 million (96.6%) in the six month period ended July 31,
1996 as compared to the six month period ended July 31, 1995. Gross profit as a
percentage of net revenue decreased to 10.6% from 28.9% in the same six month
period. During the six month period ended July 31, 1996, the Company closed all
of its remaining locations, leading to these lesser margins.
Operating Expenses
Operating expenses comprise warehouse and delivery, selling and
administrative expenses. Operating expenses decreased by $92.8 million (88.5%)
in the six month period ended July 31, 1996 compared to the six month period
ended July 31, 1995 due to the closing of all Stores operated by the Company.
As a percentage of net revenue, operating expenses increased to 40.2% from 32.3%
in the same six month period.
Other Income (Expense)
Other income increased $4.7 million in the six month period ended July
31, 1996 compared to the six month period ended July 31, 1995. This increase is
primarily due to recorded gains on the sale of real estate totaling $4.5
million. The Company continues to sell or lease its owned real estate in all of
its closed markets. In addition, interest expense decreased $3.2 million due
to decreased borrowing levels and also due to the recapitalization of May and
June's interest expenses as noted above.
Net Loss Before Preferred Stock Dividend
Net loss before preferred stock dividend decreased $8.3 million from
a net loss of $14.1 million in the six month period ended July 31, 1995 to a
net loss of $5.8 million in the six month period ended July 31, 1996. The
decreases mentioned above are due to the decreased level of activity in the
current financial statement periods.
Liquidity and Capital Resources
As previously discussed, the Company has closed its retail stores 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.
See Note 4, Notes to Consolidated Financial Statements.
The Company amended its agreement with a commercial bank in March 1996
to provide, in part, for a modified payment plan requiring a systematic
reduction of the outstanding balance until the new maturity date of April 1,
1997. Further, the Company reduced its line of credit with a commercial credit
company to $10 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 July 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 certain 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 1, 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.
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<PAGE> 12
PART I. ITEM 2. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Six months ended July 31, 1996 and 1995)
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, eliminating all operations except for managing the
real estate portfolio on an ongoing basis and/or liquidation of the Company.
The Company cannot reasonably predict nor give assurance regarding the
outcome or success of these alternatives.
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<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 past and present 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 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 previously
collateralized by a letter of credit. Subsequent to April 30, 1996, the
Travelers advised the Company that it would draw down upon the entire letter of
credit. The Company objected and filed a lawsuit against the Travelers now
pending in the United States District Court, Eastern District of Michigan, Case
No. 96-72279. 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 case is now in
discovery. Neither party has disclosed an expert witness. An adverse
judgment that the Company's liability significantly exceeds the amount of the
drawn down collateral letter of credit will result in the need for the Company
to seek protection under the United States Bankruptcy Code.
Item 2. Changes in Securities
None
Item 3. Default upon Senior Securities
As of July 31, 1996, the Company has failed to meet the Interest
Coverage Ratio Covenant of its Senior Indebtedness to BT Commercial
Corporation, agent for constituent lenders under the Company's 1993 $140
million Revolving Credit Agreement, which credit agreement has been amended to
provide for total maximum borrowings of $10 million. Default under such
Senior Indebtedness resulted in defaults being declared in the Company's bank
facility maintained for capital expenditures. The Company has engaged
financial and legal advisers to assist it in analyzing various alternative
strategies, each of which would lead to a material adverse impact on the
ability of the Company to continue its current operations in the current
fashion. Accordingly, the Company is actively considering all of its options
including seeking relief under the United States Bankruptcy Code for the
Company and/or one or more of its remaining subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders
None
13 of 16
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27. Selected Financial Data Schedule per Item 601(c)(1)(ii) of Regulation S-K.
b. Reports on Form 8-K
None
</TABLE>
14 of 16
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRETTER, INC.
Registrant
Date: September 19, 1996 By: /s/John Hurley
----------------------------
John Hurley
Chief Executive Officer
Date: September 19, 1996 By: /s/J. Michael McLean
----------------------------
J. Michael McLean
Chief Accounting Officer
15 of 16
<PAGE> 16
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
16 of 16
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<NAME> FRETTER, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 216
<SECURITIES> 0
<RECEIVABLES> 958
<ALLOWANCES> 0
<INVENTORY> 1,241
<CURRENT-ASSETS> 4,398
<PP&E> 52,378
<DEPRECIATION> (13,994)
<TOTAL-ASSETS> 58,818
<CURRENT-LIABILITIES> 75,224
<BONDS> 0
0
41,250
<COMMON> 106
<OTHER-SE> 195,618
<TOTAL-LIABILITY-AND-EQUITY> 58,818
<SALES> 8,017
<TOTAL-REVENUES> 8,017
<CGS> 5,769
<TOTAL-COSTS> 5,769
<OTHER-EXPENSES> 3,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,195
<INCOME-PRETAX> (2,073)
<INCOME-TAX> (2,073)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,073)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
