<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended March 1, 1997
Commission File Number: 0-19269
SUN TELEVISION AND APPLIANCES, INC.
(Exact name of Registrant as specified in its charter)
OHIO NO. 31-1178151
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6600 PORT ROAD
GROVEPORT, OHIO 43125
(Address of principal executive offices, including zip code)
(614) 492-5600
(Registrant's telephone number, including area code)
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
The Registrant 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 has been subject to the filing requirements for at least the
past 90 days.
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. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $35,696,000 on May 20, 1997.
There were 17,439,202 shares of the Registrant's Common Stock
outstanding on May 20, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference in Part III.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
OVERVIEW
Sun Television and Appliances, Inc. (the "Company") is a specialty
retailer of consumer electronics and home appliances. Since 1986, the Company
has expanded from its base in Central Ohio to become a major regional chain,
operating a total of 41 stores in Ohio, Pennsylvania, West Virginia and
Kentucky. The Company's expansion strategy has been to open superstores,
averaging 40,000 to 60,000 square feet, in those markets where the Company
believed it could become the dominant retailer of its products. In larger
markets, the Company clusters its stores to benefit from the economies of scale
associated with operating multiple units in a single market. In small
communities, the Company seeks to achieve market dominance by opening a single
store which draws from a larger trading area. The close geographic proximity of
the Company's current markets provides the Company with significant operating
efficiencies.
During the fiscal year ended March 1, 1997 ("fiscal 1997"), the
Company opened seven new stores, one each in Beavercreek, North Randall,
Newark, and Chillicothe, Ohio and Beckley, Charleston, and Huntington, West
Virginia. The North Randall, Newark, and Chillicothe locations replaced older,
smaller stores. The Company closed three stores in Dayton and one store in
Springfield, Ohio and three stores in Buffalo and two stores in Rochester, New
York thereby exiting these markets. The closing of these nine stores was part
of a restructuring of the Company, including a re-engineering of job
responsibilities that resulted in the elimination of more than 1,000 full-time
positions. Also, the Company closed its Pittsburgh (August 1995) and Cleveland
(May 1996) distribution facilities as it believes it can serve all of its
stores more economically from the new Columbus warehouse and distribution
complex referred to below.
The Company commenced operation in its new 600,000 square foot
warehouse and distribution complex and moved into the 200,000 square foot
service and general office portion of the complex in 1995. Two leased warehouse
locations in Columbus were closed in April 1995, and the Company's older, owned
warehouse, distribution and office facility was sold in December 1996.
The Company plans to open two new stores during the fiscal year ending
February 28, 1998 ("fiscal 1998"), in Canton and Findlay, Ohio, and to close
the existing stores in both these areas as they will be better served by the
new stores.
In June 1996, the Company announced the resignation of Robert E.
Oyster as Chairman of the Board and Chief Executive Officer. In February 1997,
the Company retained Price Waterhouse Business Turnaround Services ("BTS") in
response to continuing difficulties in the consumer electronics retailing
industry. As part of the Company's agreement with BTS, R. Carter Pate, a
managing partner with BTS, joined the Company as Chairman of the Board. In May
1997, the Company announced the resignations of James R. Copitzky as President
and Chief Executive Officer and Steven A. Martin as Executive Vice President,
Treasurer and Chief Financial Officer. Additionally, in May 1997, the Company
announced the appointment of Mr. Pate as Chief Executive Officer on an interim
basis, named John J. Lynch, the Company's Controller, as interim Chief
Financial Officer until a successor for Mr. Martin is found, and named Dennis
L. May, the Company's Vice President of Sales and Marketing as Executive Vice
President and Chief Operating Officer.
The Company is currently in the process of implementing a new business
strategy aimed at boosting sales, maintaining market share and reinforcing its
role as a leading consumer electronics and appliances retailer in its markets.
Significant elements of this strategy, many of which are being test marketed in
Cincinnati, include an aggressive new marketing and promotional plan that
reinforces the Company's identity as the low-price retailer of consumer
electronics and appliances providing superior value to its customers;
institution of significant changes in customer service in the areas of employee
training and development, in-store sales and service, home delivery and repair;
revamping and re-laying existing stores to create a compelling shopping
environment; and improvement of operational efficiencies through new
point-of-sale information systems, improved inventory controls, and continued
re-engineering of corporate and administrative functions.
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This strategy is designed to build and improve upon the existing
knowledgeable, well-trained sales force, the established service department
offering in-home and carry-in repair services at all locations, the Company
operated home delivery, and other customer services such as the optional
extended warranty contracts, extensive product instruction and various sales
financing programs.
Additionally, the Company is currently test marketing, in Cincinnati,
an automatic price protection program (the "Price Protection Program"). The
Company's pricing policy has been supported by a "price guarantee" whereby the
Company will match a competitor's lower price or, for customers who have
purchased a product from the Company which is offered by a competitor at a
lower price, refund the difference between a competitor's lower price and the
Company's price upon request by the customer or give the customer a full refund
if the customer elects to return the goods. The Price Protection Program
supplements the "price guarantee," and is not intended to be a replacement.
Under the Price Protection Program, if a national competitor advertises a
product offered by the Company at a lower price than the price paid by a
customer of the Company within 30 days of the competitor's advertisement, the
Company will automatically refund the difference between the competitor's
advertised price and the price paid by the customer.
The Company's business was founded in 1949 by Macy T. Block and his
brother. In 1986, the Company was incorporated in Delaware in connection with
the acquisition of the business by Mr. Block and ZS Sun L.P. The Company
conducted its operations through a wholly owned subsidiary, Sun T.V., Inc. (the
"Subsidiary") until July 1994, at which time the Company was reincorporated in
Ohio and was merged with the Subsidiary.
EXPANSION STRATEGY
The Company's plans for expansion in the future will depend upon market
conditions, the extent and nature of competition in target markets, and the
Company's financial condition and the availability of capital. In selecting
which markets to enter, if any, in the future, the Company would expect to
evaluate a number of criteria, including proximity to existing operations as
well as the size, strength and merchandising philosophy of potential
competitors. In choosing specific sites within a market, the Company would
expect to apply site selection criteria which take into account numerous factors
including local demographics, traffic patterns and overall retail activity.
MERCHANDISING
Pricing
The Company's policy is to offer its products at the lowest prices in
each of its markets. The Company monitors pricing at competing stores on a
daily basis through extensive pricing surveys and adjusts its prices as
necessary to adhere to this policy and to ensure competitive positioning. The
Company does not engage in promotional advertising that emphasizes "sale"
pricing, but rather emphasizes its policy of consistent everyday low price
leadership. All pricing decisions are made centrally by the Company's buyers.
The Company's automatic Price Protection Program currently being test marketed
and its "price guarantee" are described above.
Products
The Company offers its customers the convenience of one-stop shopping
through a comprehensive selection of high quality, brand name consumer
electronic, home appliance and home office products. The Company offers
customers a wide range of price points within each product category, with the
greatest depth in moderately priced items. The Company believes that its
merchandising strategy, with its emphasis on products which the Company
believes represent the best value to its customers, appeals to a wide range of
customers and promotes customer loyalty and repeat business.
The store layout has been reexamined by the Company and a program to
attain consistent layouts at all stores has been instituted, which includes
better merchandise adjacencies providing for improved customer service and
convenience. Large, highly visible signage and floor displays highlight each
area and create an environment in which it is easy to shop.
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The following table, which is derived from the Company's internal
sales records, indicates the percentage of sales in each major product group
for the Company's last three fiscal years. Historical percentages may not be
indicative of the Company's future product mix.
PERCENTAGE OF NET SALES AND SERVICE REVENUES
<TABLE>
<CAPTION>
Fiscal
--------------------------------------
Product Category 1997 1996 1995
- ---------------- ---- ---- ----
<S> <C> <C> <C>
Television............................ 21.4% 22.1% 23.5%
Video(1).............................. 11.3 11.1 12.8
Appliances(2)......................... 17.5 18.7 19.0
Audio(3).............................. 14.4 9.1 12.2
Personal convenience(4)............... 7.1 9.8 8.9
Home office(5)........................ 21.7 22.6 17.0
Extended service contracts, service
revenues and other income(6)........ 6.6 6.6 6.6
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- -------------------
(1) Includes video recorders and players, camcorders, television/video
combination recorders and associated video accessories.
(2) Includes refrigerators, ranges, freezers, dishwashers, microwave ovens,
washing machines and dryers, air-conditioners, dehumidifiers, humidifiers
and disposals.
(3) Includes rack audio systems, receivers, cassette decks, compact disc
players, turntables, amplifiers, tuners, equalizers, speakers, headphones,
car stereo components, portable radio/cassette and microcassette
recorders, personal headphone stereo, clock radios and related
accessories.
(4) Includes prerecorded video and audio tapes and compact discs, electronic
musical keyboards, telephones, answering devices, cellular phones, fans,
other miscellaneous portable electronics, vacuum cleaners, gas grills,
housewares and home furnishings.
(5) Includes computers, computer accessories, software, fax machines, copiers,
electronic typewriters and word processors and calculators.
(6) Includes extended service policies, service repair revenues, parts and
warranty billings to manufacturers and miscellaneous income.
Purchasing
The Company purchases most of its merchandise directly from the
manufacturers. The Company has a staff of four buyers reporting to the
Executive Vice President and Chief Operating Officer. Each buyer has
responsibility for specified product categories and is supported by one or more
assistant buyers and an inventory control manager. For fiscal 1997, the
Company's largest supplier accounted for less than 10.0% of sales. The Company
typically does not maintain long-term purchase contracts with suppliers and
operates principally on a purchase order basis.
MARKETING
The Company's marketing programs are designed to create an awareness
of the Company's comprehensive selection of high quality, brand name
merchandise and its lowest price policy. The Company's primary advertising
vehicle in each of its markets is local newspaper advertising, supplemented
with radio and cable and broadcast television spots. The Company's newspaper
advertising program currently consists of full-color multiple page inserts and
periodic full-page advertisements. To reinforce the Company's policy of
offering its products at the lowest prices, the Company advertises a low price
guarantee in all of its markets and is test marketing the Price Protection
Program described above.
All print advertisements and media buying are handled internally by
the Company's advertising department.
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CUSTOMER SERVICE
Sales Associates
The Company strives to develop the technical and interpersonal skills
of its sales associates to ensure that customers consistently receive
knowledgeable and courteous assistance. In this regard, the Company has
embarked upon a Company-wide retraining of all its sales associates with
specific emphasis on determining customer wants and needs and understanding how
to best meet these needs. On an ongoing basis, all sales associates attend
frequent in-house training sessions conducted by experienced employees or
manufacturers' representatives and receive sales, product and other information
in daily manager meetings. Certain sales associates specialize in a particular
product category to provide customers with an increased level of technical
assistance. These specialized associates are an important part of the
Company's "team" selling approach.
The Company's sales associates are paid on a commission basis, with
commissions determined on the basis of profitability, inventory management and
other considerations. The Company also motivates its sales associates by
providing opportunities for advancement within the Company.
Services
The Company supports its merchandise sales by providing a number of
important customer services, including an established service department
offering in-home and carry-in repair services at all store locations, home
delivery, optional extended warranty contracts, extensive product instruction
and various sales financing programs.
Virtually all merchandise purchased from the Company may be returned
to any of the Company's stores for repair, whether the product is under the
manufacturer's warranty, an extended service protection contract or out of
warranty. The Company's service facility, located at its distribution center in
Columbus, Ohio, is one of the largest service centers in Ohio and has been
designated as an authorized service center by most of the Company's suppliers.
The Company operates a fleet of trucks, which enables it to provide in-home
repair and service for major appliances and televisions. Currently, in the
Northern and Southern Ohio market areas, merchandise generally is repaired and
serviced by independent contractors approved by the Company.
At the time of purchase, each customer may elect to purchase an
extended service plan contract which provides warranty coverage beyond the
duration of the manufacturer's warranty. Generally, these plans provide one to
five years of extended warranty coverage which helps ensure post-sale customer
satisfaction.
The Company periodically conducts free in-store classes to demonstrate
the use and operation of selected merchandise. These classes are particularly
useful to customers for newly introduced products and for those products which
require some skill in operation, such as video camcorders and personal
computers.
The Company accepts most major credit cards and introduced its own
private label credit card in Fall 1990. The Company has transferred credit risk
on its private label credit card to a third party. Purchases under installment
sales contracts may be arranged by the Company through independent financing
companies without recourse to the Company.
In the Fall of 1996, the Company contracted for the administration and
operation of its private label credit card with a new third party and embarked
on an extensive promotion of the new card.
STORE OPERATIONS
Stores
All of the Company's stores are located in high visibility, high
traffic commercial areas, including strip shopping centers and free-standing
sites in major regional shopping areas. Each store has large, readily
identifiable signage, easy access from major roads and adequate customer
parking.
The stores range in size from approximately 19,000 to 73,000 square
feet and have an average of 25,000 square feet of selling space. The stores are
open seven days and six nights per week, including most holidays.
The following table indicates the number of stores opened and closed
over the past three fiscal years. The stores closed in 1997 included three
stores in Buffalo and two stores in Rochester, New York, and three stores in
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Dayton and one store in Springfield, Ohio and were the markets exited by the
Company this year. Stores in North Randall, Newark and Chillicothe were
replaced by new superstores which the Company believes are at better locations.
The stores closed in fiscal 1996 and 1995 were in Columbus market areas which
are serviced by new superstores which the Company believes are at better
locations.
<TABLE>
<CAPTION>
Fiscal
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Number of stores open at beginning of period ......... 46 43 38
Number of stores opened during period................. 7 5 6
Number of stores closed during period 12 2 1
-- -- --
Number of stores open at end of period................ 41 46 43
== == ==
</TABLE>
The Company attains store operating efficiencies through comprehensive
merchandise, personnel and information controls. Changes in store operating
procedures and pricing policies are established by senior management at its
headquarters and are disseminated to each store through daily electronic mail
messages and weekly manager meetings. The Company's store level management
structure consists of a full-time manager, an operations manager, and two or
more department managers. Store operations also are supervised by three
district managers who report to the Company's Vice President of Field
Operations.
Distribution
The Company moved into its new, owned 800,000 square foot facility in
Columbus in Spring 1995. Approximately 600,000 square feet are devoted to
warehousing and distribution. The Company distributes products to all of its
stores from this facility. All of the Company's stores are located within
approximately 350 miles of this facility. The close proximity of the
distribution center to the stores allows the Company to make relatively
frequent deliveries to each store, enabling the Company to minimize in-store
out-of-stocks. Deliveries to stores in Central Ohio are made by the Company's
fleet of trucks, while deliveries to stores elsewhere are made by contract
carriers. The Company believes that its distribution center provides it with
significant labor, merchandise and freight savings by consolidating receiving
and handling functions and by enabling the Company to purchase in full
truckloads from suppliers.
The Company closed its Pittsburgh distribution facility in 1995 and
its Cleveland distribution facility in 1996 as it believes the new Columbus
facility will provide a cost-efficient means of supplying the Northern Ohio and
Pennsylvania stores as well as capacity for further expansion.
Management Information Systems
The Company has implemented an integrated retail management
information system. This system provides management with the information
necessary to manage inventory by providing current inventory, price and volume
information by stock keeping unit ("SKU"). The system also provides vendor
analysis, monitors sales and store activity on a daily basis, captures
marketing and customer information, tracks productivity by sales associate and
controls the Company's accounting operations.
The host computer is integrated with the Company's PC-based
point-of-sale system which serves as the collection mechanism for all sales
activity. The combined system provides for next-day review of inventory levels
and sales by store and by SKU and enables management to track merchandise from
receipt at the distribution center until time of sale. This capability allows
the merchandise staff to confirm delivery of products, to monitor future
delivery dates and to improve merchandise selection and product pricing.
The Company's PC-based point of sale system and software are being
replaced to provide for efficient and controlled integration into the
management information system.
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SEASONALITY
The Company's business is seasonal. As is the case with many other
retailers, the Company's net sales and service revenues and income from
operations are greater during the Christmas season than during other periods of
the year. The Company's February/March fiscal year end, however, mitigates
broad revenue swings in quarterly reporting. Future quarterly results for the
Company may not necessarily follow this pattern due to the timing and number of
new store openings and general economic conditions.
COMPETITION
The Company's business is intensely competitive in all product
categories. Competition is based primarily on price, although store location,
product selection and service are also significant factors. In general, the
Company's competitors include other specialty stores, independent electronics
and appliance stores, department stores, warehouse clubs, mass merchandisers,
discount stores and catalog showrooms, many of which are national in scope and
have significantly greater resources than the Company. In particular, the
Company believes that it competes in its current markets most directly with
Circuit City, Best Buy and Sears. In the future, there can be no assurance that
the Company will not face additional competition in its markets from new or
existing competitors.
EMPLOYEES
As of March 1, 1997, the Company employed approximately 3,400 persons,
2,500 of whom were full-time employees. As of April 1, 1997, the Company
employed approximately 2,500 persons, 1,800 of whom were full time employees.
The decrease in employees is primarily attributable to the nine store closings
and corporate restructuring previously mentioned. The Company is not a party to
any collective bargaining agreement and is not aware of any efforts to unionize
its employees. The Company considers its relations with employees to be good.
SERVICE MARKS
The Company has developed common law rights in its service marks. The
Company owns federal registrations for the marks SUN TELEVISION & APPLIANCES,
INC., SUN TELEVISION & APPLIANCES WHERE YOU KNOW YOU PAY LESS and Design, SUN
$UPER $AVINGS CENTERS and Design, QUICK WIZ and Design, and CRUISE LINE TRAVEL
THE WORLD and Design. SUN TELEVISION & APPLIANCES, INC., SUN SAVINGS CENTERS
and SUN SUPER SAVINGS CENTER are registered in the State of Ohio. SUN
TELEVISION & APPLIANCES and SUN SUPER SAVING CENTERS and Design are registered
in the Commonwealth of Pennsylvania.
BUSINESS RISKS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. In addition to the
other information in this report, readers should carefully consider the
following important factors, which, among others, in some cases have affected,
and in the future could affect, the Company's actual results and could cause
the Company's actual consolidated results of operations for fiscal 1998 and
beyond, to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources combined with its
borrowing capability and funds from operations will be sufficient to meet its
presently anticipated working capital and capital expenditure requirements both
for the short-term and through at least the end of fiscal 1998. The Company may
need to raise additional funds through public or private debt or equity
financings in order to respond to competitive pressures. The issuance of equity
securities is not likely to be possible unless the Company's profitability and
market conditions in the Company's industry improve significantly. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the then current stockholders of the Company may be
reduced and such equity securities may have rights, preferences or privileges
senior to those of the holders of the Company's common stock. There can be no
assurance that additional financing will be available on terms favorable to the
Company, or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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Competition. The Company's business is highly competitive. Some of the
Company's competitors have significantly greater resources than the Company. In
addition, the Company may face additional competition in its markets from new
or existing competitors. See "Business -- Competition."
Dependence on Suppliers. The success of the Company's business depends
upon its ability to select and purchase quality merchandise on favorable terms.
The Company has no continuing contracts with its suppliers for the purchase of
merchandise. The Company relies on favorable terms from its suppliers to obtain
merchandise. There can be no assurances that the Company will be able to
continue to obtain merchandise on terms favorable to the Company.
Product Demand. The Company's performance depends upon the demand for
its products, which in turn is dependent upon various factors, such as the
introduction and acceptance of new products and new product features and the
continued popularity of existing products. The timing of the announcement and
the introduction of new technology and new products similar to products offered
by the Company can have a material adverse affect on the Company's ability to
market products currently available from manufacturers and offered by the
Company. Sales of merchandise such as that offered by the Company are likely to
be affected by adverse trends in the general and regional economies, as well as
the availability of consumer credit. In most of the Company's product
categories, prices for comparable units have declined each year, a trend which
the Company expects to continue.
Quarterly Fluctuations and Seasonality. Similar to most retailers, the
Company's business is seasonal, with revenues and earnings being generally
lower during the first half of each fiscal year and greater during the second
half of the fiscal year, which includes the year-end holiday season. In
addition, the Company's working capital needs are seasonal, with the Company's
greatest working capital requirements occurring during the second half of each
fiscal year. Accordingly, the Company's operating results may be affected by
holiday spending patterns, as well as the timing of new store openings and
general economic conditions.
Volatility of Stock Price. The market price of the Company's common
stock is subject to significant fluctuations in response to variations in
quarterly operating results and other factors. In addition, the stock market in
recent years has experienced extreme price and volume fluctuations that often
have been unrelated or disproportionate to the operating performance of
companies. These broad fluctuations may affect adversely the market price of
the Company's common stock.
ITEM 2. PROPERTIES.
The Company's original store opened in Columbus in 1949 and was closed
in 1980 when the real estate was sold. The following table sets forth data
regarding the Company's current store locations:
<TABLE>
<CAPTION>
Gross Approximate Lease
Year Square Selling Expiration
Opened Footage Space(1) Date(2)
------ ------- -------- -------
<S> <C> <C> <C> <C>
Columbus Area Locations:
Alum Creek Drive 6/1995 50,100 39,630 6/2025
Morse Road 10/1993 65,000 53,426 Owned
West Broad Street 1973 19,393 10,808 Owned
Sawmill Road 11/1994 60,000 47,463 10/2030
Brice Road 11/1991 30,000 22,290 11/2016
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Northern Ohio Locations:
Warren 9/1991 26,550 15,019 Owned
Mentor 10/1991 34,950 23,334 10/2011
North Olmsted 10/1991 40,952 27,967 10/2011
Chapel Hill 11/1991 25,000 15,393 11/2011
Parma 11/1991 26,810 14,492 9/2011
North Randall 10/1996 73,128 49,929 9/2026
Elyria 7/1992 22,282 15,344 7/2012
Mayfield Heights 10/1992 19,450 13,144 7/2007
Rosemont 11/1992 25,500 20,410 11/2012
Boardman 11/1992 30,080 20,896 Owned
Cincinnati/Dayton Locations:
Colerain 11/1994 56,920 46,463 Owned
Florence, Kentucky 11/1994 56,920 46,863 10/2030
Eastgate 9/1995 48,820 37,872 Owned
Other Ohio Locations:
Newark/Heath 10/1996 30,400 23,707 10/2026
Zanesville 10/1986 25,600 19,132 6/2015
Mansfield/Ontario 11/1986 35,878 24,055 Owned
Chillicothe 10/1996 30,400 23,707 9/2021
Findlay 10/1987 24,300 11,940 10/1997
Canton 11/1989 25,650 14,088 Owned
Steubenville 2/1991 25,035 13,206 2/2011
Lima 10/1994 43,100 28,590 10/2030
St. Clairsville 9/1995 43,000 27,089 Owned
Lancaster 11/1995 40,950 33,552 11/2020
Pittsburgh Area Locations:
Mars Cranberry 10/1988 23,000 12,114 10/2004
West Mifflin Century 7/1989 45,210 31,400 7/2016
Monroeville 11/1989 33,547 22,787 11/2009
McKnight Road 6/1990 26,820 16,282 6/2010
Scott Township 7/1990 20,374 11,997 6/1999
Robinson Township 12/1992 22,220 16,742 12/2012
Other Pennsylvania Locations:
Erie 12/1992 36,960 25,388 Owned
Washington 12/1992 21,000 13,812 10/2007(3)
Johnstown 9/1993 30,281 23,384 9/2018
West Virginia Locations:
Beckley 9/1996 59,267 38,744 9/2019
Charleston 6/1996 45,000 34,929 6/2026
Parkersburg 3/1993 34,580 22,431 2/2003
Huntington 11/1996 30,403 23,937 11/2031
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Closed Store Locations:
Salem Mall (Ohio) 12/1994 40,710 -- 12/2009(4)
Dayton Mall (Ohio) 12/1994 50,000 -- 12/2014(4)
Springfield (Ohio) 10/1995 42,821 -- Owned
Beavercreek (Ohio) 3/1996 49,776 -- 3/2011(4)
Henrietta (New York) 9/1993 40,672 -- 9/2008(4)
Greece (New York) 10/1993 50,000 -- 10/2008(4)
Walden (New York) 11/1993 40,000 -- 11/2008(4)
Amherst (New York) 12/1993 40,011 -- 12/2008(4)
McKinley (New York) 12/1993 40,000 -- 12/2008(4)
</TABLE>
- ---------------------------
(1) Selling space is total square footage less the Company's estimate of space
per store not used for selling merchandise.
(2) Includes all renewal options, unless otherwise indicated.
(3) Although this lease has a 15-year term, the lease provides for a buyout
which can be exercised by the landlord at any time after September 1998 if
the adjacent tenant desires to acquire additional space.
(4) Lease expiration date is for original lease term.
In addition to the properties listed above, the Company owns a site in
Cuyahoga Falls, Ohio, and has signed leases for replacement stores in Canton
and Findlay, Ohio. The Company also owns sites in North Randall and
Springfield, Ohio for which alternatives for disposition or leasing are being
explored. Also, the Company still has leases for eight of the closed stores.
The landlords of six stores filed suits against the Company alleging the
Company breached its leases. The Company is currently negotiating with the
landlords to terminate these leases.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings that are
incidental to the conduct of its business. Although the ultimate resolution of
pending proceedings cannot be determined, in the opinion of management, subject
to the possible effect of the suits described below, the resolution of such
proceedings in the aggregate will not have a material adverse effect on the
Company's financial position or results of operations.
On April 30, 1997, the landlords of the three stores in Buffalo and the
two stores in Rochester, New York that the Company closed as part of
restructuring instituted a lawsuit against the Company. The lawsuit was filed in
the State of New York Supreme Court and alleges that the Company breached the
leases for each of the closed stores. The total amount claimed by the landlords
in the lawsuit is approximately $47.5 million. On May 16, 1997, the landlord of
the store in Beavercreek, Ohio that the Company closed as part of restructuring
instituted a lawsuit against the Company. The lawsuit was filed in the Court of
Common Pleas for Greene County, Ohio and alleges that the Company breached the
lease for the Beavercreek store, seeks restitution of the property, real estate
taxes, insurance and overdue rent totalling $0.1 million and seeks an additional
amount, unspecified, for damage to the premises and rent, common area
maintenance and interest for the remainder of the lease term. However, based on
discussions with counsel, the efforts of the Company to sublet the premises,
reserves recorded for store closings and other factors, the Company believes
that it has adequately provided for potential liabilities relating to these
cases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET PRICES
The Company's common stock is traded on the over-the-counter market.
The following table sets forth the high and low sales prices of the common
stock as well as the dividends per share for the periods indicated.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter $5.1875 $3.3125 $9.3750 $7.7500
2nd Quarter 5.2500 3.1875 8.3750 6.3750
3rd Quarter 3.5000 2.3750 7.5000 4.8750
4th Quarter 4.8750 1.9688 5.8750 3.6250
</TABLE>
On May 20, 1997 the last reported sale price for the Company's common
stock on the NASDAQ National Market was $2.3125 per share. As of May 20, 1997
there were approximately 861 holders of record of the Company's common stock.
STOCK LISTING
Traded: NASDAQ-NM
Symbol: SNTV
DIVIDENDS
The Company has not paid a dividend since August 1996. The Company paid
a quarterly dividend of $.00875 in May and August 1996 and in each quarter of
fiscal 1996 and 1995. The Company is currently restricted on the payment of
dividends to a maximum of $750,000 per year.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED MARCH 1, 1997, MARCH 2, 1996, FEBRUARY 28, 1995,
1994 AND 1993 (Amounts in thousands, except number of
stores and per share data)
<TABLE>
<CAPTION>
1997 1996(1) 1995 1994 1993
------------ ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net Sales and
Service Revenues............... $ 683,386 $ 806,179 $ 751,883 $ 575,893 $ 398,642
Gross Profit........................ 149,714 200,156 191,933 151,188 108,140
(Loss) Income from Operations....... (46,608) 14,306 30,749 27,935 19,544
Interest Expense.................... 5,537 4,675 2,316 440 626
Net (Loss) Income Before
Extraordinary Loss............. (43,722) 6,591 17,531 16,965 11,598
Extraordinary Loss.................. (1,619) -- -- -- --
Net (Loss) Income................... (45,341) 6,591 17,531 16,965 11,598
Net (Loss) Income Before
Extraordinary Loss per Primary
and Fully Diluted Shares(2).... (2.51) 0.38 1.00 0.96 0.78(3)
Extraordinary Loss.................. (.09) -- -- -- --
Net (Loss) Income................... (2.60) 0.38 1.00 0.96 0.78
Working Capital..................... 63,535 95,768 97,937 90,100 73,877
Total Assets........................ 257,713 285,342 280,005 218,613 175,644
Long-Term Debt...................... 41,007 30,000 30,000 -- --
Capital Lease Obligations........... 14,358 14,651 13,070 9,959 968
Stockholders' Equity................ 108,083 153,516 147,232 130,264 112,651
Book Value per Common Share(2)...... 6.20 8.84 8.52 7.54 6.57
Cash Dividends per
Common Share(2)................ .0175 .035 .035 .035 .0275
Return on Average
Stockholder's Equity........... NA 4.4% 12.6% 14.0% 14.0%
Number of Common Shares
Outstanding at Year End(2)..... 17,439 17,364 17,278 17,267 17,151
Weighted Average Shares(2)
Primary........................ 17,407 17,430 17,536 17,669 14,921
Fully Diluted.................. 17,407 17,430 17,541 17,674 15,039
Number of Stores at Year End........ 41(4) 46 43 38 31
</TABLE>
(1) Beginning March 1, 1995 each fiscal year ends on the Saturday closest to
February month end. See Note 1 of "Notes to Financial Statements."
(2) Adjusted to reflect 2-for-1 stock split, effective July 22, 1993.
(3) The net income for primary and fully diluted shares was $0.78 and $0.77,
respectively.
(4) Reflects the closing of nine stores previously announced and which were
closed the first week of March 1997.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company's financial condition has been impacted by the consumer
electronics industry slowdown and the increased competition in the Company's
markets which led to the decision to exit the Buffalo and Rochester, New York
and Dayton and Springfield, Ohio markets. This resulted in the closing of nine
stores and a restructuring charge of $14.7 million in the fourth quarter of
this year, which combined, with an earlier restructuring charge of $2.0
million, primarily for severance costs, resulted in a total charge of $16.7
million for the year. The Company recorded a net loss of $(45,341,000) or
$(2.60) per share for the fiscal year ended March 1, 1997 as compared to net
income of $6,591,000 or $0.38 per share and $17,531,000 or $1.00 per share for
the fiscal years ended March 2, 1996 and February 28, 1995, respectively. The
following table sets forth the percentage relationship to net sales and service
revenues of certain income and expense items:
<TABLE>
<CAPTION>
Fiscal
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales and service
revenues................. 100.0% 100.0% 100.0%
Cost of sales.................... 78.1 75.2 74.5
------ ------ ------
Gross profit..................... 21.9 24.8 25.5
Selling, general and
administrative expenses.. 26.2 23.0 21.3
Restructuring charge............. 2.4 -- --
Amortization of
intangibles.............. .1 .1 .1
------ ------ ------
(Loss) income from operations.... (6.8) 1.7 4.1
Interest income.................. .1 .1 .1
Interest expense................. (.8) (.6) (.3)
Other ........................... (.2) .1 --
------ ------ ------
(Loss) income before
income taxes......... (7.7) 1.3 3.9
Income tax (benefit) expense..... (1.3) .5 1.6
------ ------ ------
Net (loss) income before
extraordinary loss... (6.4%) 0.8% 2.3%
Extraordinary (Loss)............. (.2) -- --
------ ------ ------
Net (Loss) income........ 6.6% 0.8% 2.3%
====== ====== ======
</TABLE>
NET SALES AND SERVICE REVENUES
Net sales and service revenues for fiscal 1997 were $683.4 million, a
decrease of $122.8 million (15.2%) from $806.2 million for fiscal 1996. The
decrease is attributable to a comparable store decrease of $168.7 million
(22.4%) offset by the opening of seven new stores (including three replacement
stores) and a full year's contribution to revenues of the five new stores
(including one replacement store) opened in fiscal 1996. The decline in
comparable store sales is attributable to the continuing soft sales environment
impacting the consumer electronics industry plus the increased competition from
national competitors in all our major markets. In addition, the Company
announced the closing of nine stores in Buffalo and Rochester, New York and
Dayton and Springfield, Ohio in January 1997. The inventory at these stores was
liquidated during the last two months of the year. All major product categories
contributed to the decline in sales with computers and computer accessories and
color televisions reflecting the largest dollar declines. Seven new stores
opened in fiscal 1997; one each in Beavercreek, Chillicothe, Newark and North
Randall, Ohio and Beckley, Charleston and Huntington, West Virginia. The
Chillicothe, Newark and North Randall stores were replacement stores for older
smaller locations and the Beavercreek store was closed as part of the Dayton
market withdrawal.
During fiscal 1995, the Company commenced selling third party extended
service policies in addition to its own extended service policies. In the
fourth quarter of fiscal 1994, the Company entered into an agreement whereby
13
<PAGE> 14
certain extended service policies purchased by customers of the Company are
assumed by a third party. The amount of revenues recognized during fiscal 1997
from these third party service policies was approximately 2.5% of Net Sales and
Service Revenues versus 2.8% for fiscal 1996 and 2.5% for fiscal 1995. The
number of third party policies sold and Company policies assumed during fiscal
1997 was 29.9% and for fiscal 1996 was 26.1% of all policies sold by the
Company in the respective years.
Net sales and service revenues for fiscal 1996 were $806.2 million, an
increase of $54.3 million (7.2%) from the $751.9 million for fiscal 1995. The
increase was attributable to the opening of five new stores in fiscal 1996
(including one replacement store), a full year's contribution to revenues of
the six new stores (including one replacement store) opened in fiscal 1995
offset by a comparable store sales decrease of $46.1 million (6.3%), and the
closing of a small store in Columbus. While declines were seen in all major
merchandise categories, sales showed some improvements in the home office
category, which continued its growth with the sales of computers and related
accessories being the most significant contributors to the category growth.
GROSS PROFIT
Gross profit for fiscal 1997 was $149.7 million, a decrease of $50.5
million (25.2%) from the $200.2 million in fiscal 1996. As a percentage of
sales, gross profit for fiscal 1997 was 21.9% as compared to 24.8% for fiscal
1996. The decline in gross profit percentage was attributable to the nine store
closings where the inventory was sold at slightly less than cost plus a higher
cost of merchandise due to the Company not being able to take advantage of
better discounts since the volume of purchases did not meet certain vendor
criteria. These factors combined with the increasingly competitive environment
and the soft consumer electronics industry sales trend resulted in the 2.9%
percentage point decrease in gross profit this year versus last year. Gross
profit represents total revenues less the cost of merchandise sold, the cost of
parts related to service contracts retained by the Company, and the fees due to
third parties related to sales of third party service contracts and Company
contracts assumed by a third party. The gross profit rate related to service
revenues is substantially higher than the gross profit rate applicable to
merchandise sales.
Gross profit for fiscal 1996 was $200.2 million, an increase of $8.3
million (4.3%) from the $191.9 million in fiscal 1995. As a percentage of
sales, gross profit for fiscal 1996 was 24.8% as compared to 25.5% for fiscal
1995. The decline in gross profit as a percentage of sales was primarily
attributable to the significantly intensified competitive environment that
exists within most of our markets. This combined with the growth in sales of
computers and accessories, which have a lower than average gross profit rate,
accounted for the decrease.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The Company's selling, general and administrative expenses decreased by
$6.3 million (3.4%) to $179.1 million during fiscal 1997 from $185.4 million
during fiscal 1996. The decrease is mostly attributable to payroll costs,
primarily selling, partially offset by higher occupancy costs, higher third
party service repair costs and higher equipment rental costs for computer and
point of sale equipment. The payroll cost decline was largely due to the sales
decrease this year as most sales associates are commission based. Occupancy
costs increased due to the opening of new stores while the higher third party
service repair costs were more than offset by payroll reductions in the service
area.
Selling, general and administrative expense for fiscal 1996 was $185.4
million, an increase of $24.7 million (15.4%) from the $160.7 million for
fiscal 1995. The increase reflects increases in payroll and related benefits,
advertising and occupancy expenses. Also, higher equipment rental costs were
incurred for the installation of new point of sale and mainframe equipment for
a new point of sale software system and major systems conversion. The major
systems conversion occurred in August 1996 and the point of sale conversion has
been delayed until the summer of 1997.
14
<PAGE> 15
RESTRUCTURING CHARGE
During fiscal 1997, the Company provided for two restructuring charges
totalling $16.7 million. The Company recorded a charge for $2.0 million during
the first quarter for severance pay relating to the change of executive
management and the restructuring of the buying, logistics, store and field
operations in an effort to clarify accountability, streamline responsibilities
and improve operations with the goal of better satisfying customer needs and
demands. In the fourth quarter of fiscal 1997, the Company recorded a $14.7
million restructuring charge primarily relating to the closing of nine stores
in the Buffalo and Rochester, New York and Dayton and Springfield, Ohio
markets. Of this amount, $12.3 million was for the write-down of property and
equipment, settlement of lease obligations and legal and real estate
commissions, $2.0 million was for professional and consulting fees and
termination of an outside home delivery contract and $.4 million was for
severance costs. In fiscal 1997, the nine closed stores had sales of $108.3
million versus $124.1 million for the prior year.
OTHER INCOME/EXPENSE
Interest expense increased $0.8 million in fiscal 1997 to $5.5 million
from $4.7 million in 1996. The increase is attributable to an increase in the
average amount borrowed during the year as well as an increase in the interest
rate charged on the borrowings.
Interest expense increased $2.4 million in fiscal 1996 to $4.7 million
from $2.3 million in 1995. The increase is attributable to the full year's
expense of the private placement of $30 million of 8.18% Senior Notes in
September 1994 versus fiscal 1995 including only five months expense. Also,
there were short-term borrowings during fiscal 1996 which increased interest
expense.
Interest income decreased $0.7 million in fiscal 1996 from $1.2 million
in 1995 as the Company only had excess funds to invest in Treasury Bills during
the first quarter of fiscal 1996.
Other for fiscal 1997 represents the loss on the sale of certain
property and equipment as well as the write-down of a property to be disposed of
to its estimated realizable value. Other income in fiscal 1996 represents the
gain on sale of a replaced store and disposal of replaced Point of Sale
equipment.
EXTRAORDINARY LOSS
In the fourth quarter of this year, the Company signed a new three year
revolving credit agreement that provides for variable interest rate options of
LIBOR +3% and prime rate plus .50%. Proceeds from the new credit agreement were
used to repay the Senior Note holders and the outstanding balance to the banks
under the Reducing Revolving Loan. In connection with the repayments the
Company incurred certain prepayment costs on the Senior Notes as well as legal
and other fees which are reflected as an extraordinary loss.
INCOME TAXES
The Company's effective income tax rate was 16.6% for fiscal 1997 and
40.5% for fiscal 1996 and 40.8% for fiscal 1995. The rate for 1997 reflects the
estimated Federal income tax receivable applicable to the loss incurred this
year less the write-off or reserve recorded against the deferred tax assets
which are estimated to not be recoverable until the Company returns to
profitability.
The slight decrease in effective tax rate from 1995 to 1996 is
primarily attributable to the decrease in the state tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The consumer electronics industry slowdown, increased competition in
the Company's markets and restructuring charges, resulting in a net loss of
$45.3 million, as discussed previously, have had an impact on the Company's
financial condition. Cash and cash equivalents were reduced to $1.8 million
this year from $13.6 million last year and the current ratio was 1.83 as
compared to 2.46 for fiscal 1996. Net cash used in operating activities was
15
<PAGE> 16
$10.1 million in fiscal 1997, compared to $11.1 million provided by operating
activities in fiscal 1996 and $3.8 million used in fiscal 1995. The decrease in
cash provided by operating activities is primarily attributable to the net loss
for the year plus the related increase in income tax receivable offset
partially by the decline in inventory and increases in trade accounts payable
and accrued liabilities.
The Company funded capital expenditures of $17.6 million this year
through the reduction of cash and cash equivalents and proceeds from the
disposal of property and equipment. The capital expenditures were primarily for
the seven new stores (three replacement stores) opened during the year. Capital
expenditures of $26.8 million in fiscal 1996 were for the completion of the new
general office, warehouse/distribution complex and the five new stores (one
replacement store) opened during the year and were funded by cash provided by
operating activities and proceeds from the sale/leaseback of three stores and
the disposal of property and equipment. Capital expenditures of $45.6 million
in fiscal 1995 were primarily for the new general office warehouse/distribution
complex and the six new stores (one replacement stare) opened during the year
and were funded through the issuance of $30.0 million of 8.18% Senior Notes due
in 2004 and a reduction in cash and cash equivalents.
Total assets at March 1,1997 were $257.7 million, a decrease of $27.6
million (9.7%) from March 2, 1996. Decreases of $17.4 million in inventory,
$11.8 million in cash and cash equivalents, $7.0 million in accounts receivable
and $6.2 million in deferred taxes were partially offset by the increase of
$14.6 million in income taxes receivable. The decrease in inventory reflects
the closing of nine stores as well as the better management of inventory; the
decrease in cash reflects the use of funds towards the net loss; the decrease
in receivables reflects the increased emphasis on the Company revolving charge
card where funds are collected faster versus the installment finance contracts;
and the decrease in deferred taxes reflects the Company writing-off/reserving
for deferred tax assets that are not/may not be utilizable due to the Company's
loss. These decreases were partially offset by the income tax receivable
increase of $14.6 million attributable to the Company's loss.
Stockholders' equity decreased 29.6% in fiscal 1997 from 1996
reflecting the net loss for the year. The return on average stockholders'
equity was negative in fiscal 1997, 4.4% in fiscal 1996 and 12.6% in 1995. This
decreasing trend from 1995 to 1996 and negative return in 1997 reflects the
continued softness in the consumer electronics industry and the continued
intensified competition in the Company's markets. This has affected sales,
gross margin and expense rates and brought about the need for the store
closings in New York and Ohio and the restructuring charge and ultimately has
negatively affected results from operations.
During the fourth quarter of fiscal 1997, the Company negotiated a new,
collateralized $100 million revolving credit agreement with CIT Group/Business
Credit, Inc. The new credit facility is for a term of three years, provides
variable interest rate options of LIBOR + 3% and prime rate plus .50% and is
collateralized by inventory and receivables. Proceeds from the new facility
were used to repay the Senior Note holders and the revolving bank loans. In
connection with repaying the Senior Note holders and the bank loans the Company
incurred professional fees and repayment penalties totalling $1.6 million net of
income tax benefit which the Company expensed this year as an extraordinary
loss. In connection with this refinancing, the Company's reducing revolving
credit agreement with its banks, which was increased in fiscal 1996 from $27.8
million to $50.0 million, was terminated. Also, the $30.0 million 8.18% Senior
Notes due 2004 were repaid and cancelled at the same time.
The Company's primary capital requirements this past year have been for
the seven new stores opened during the year. At the end of fiscal 1997, the
Company owns a site for future development in Cuyahoga Falls, Ohio and has
signed leases for replacement stores in Canton and Findlay, Ohio. The Company
estimates that capital expenditures for the two new replacement stores and the
remodel of three existing stores will be approximately $2.5 million. The
Company anticipates funding these expenditures through its existing credit
agreement. In addition, the Company is exploring additional financing
arrangements to assist in implementing its new business strategy and provide
capital for more remodels of existing stores and allow for the opening of new
stores.
16
<PAGE> 17
YEAR 2000
During fiscal 1997 the Company installed an integrated retail
management system which the Company believes is year 2000 compliant. In
addition, most of the Company's financial operating software has been supplied
by outside vendors and it is believed that such software is year 2000
compliant. Certain peripheral support software will need to be modified, but
the Company believes that the expenditures necessary to be year 2000 compliant
in the software will not be material to its financial condition or results of
operation in any given year.
FUTURE COMPETITION
Fiscal 1997 brought with it increased intensification of the
competition in the Company's major markets. This, combined with the slowdown in
the consumer electronics industry, has impacted sales volume, gross profit
rates and expense rates during the past year and has continued into the first
part of the new year. The Company is currently testing a new business and
marketing strategy in Cincinnati, Ohio as well as exploring further expense
savings programs to ensure that it will remain highly competitive in existing
markets.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Company cautions that any forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) contained
in this report or made by management of the Company involve risks and
uncertainties, and are subject to change based on various important factors.
The following factors, among others, in some cases have affected and in the
future could affect the Company's financial performance and actual results and
could cause actual results for fiscal 1998 and beyond to differ materially from
those expressed or implied in any such forward-looking statements: changes in
consumer spending patterns, consumer preferences and overall economic
conditions; technological changes; future capital needs; uncertainty of
additional financing; competition; dependence on suppliers, product demand,
quarterly fluctuations and seasonality; and volatility of stock price. See
Business -- Business Risks.
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------------------
March 1, March 2, February 28,
1997 1996 (Note 1) 1995
-------- ------------- ------------
<S> <C> <C> <C>
Net sales and service revenues..................... $ 683,386 $ 806,179 $ 751,883
Cost of sales...................................... 533,672 606,023 559,950
----------- ----------- -----------
Gross profit.............................. 149,714 200,156 191,933
Selling, general and administrative expense........ 179,106 185,356 160,690
Restructuring charge............................... 16,723 -- --
Amortization of intangibles (Note 1) 493 494 494
----------- ----------- -----------
(Loss) income from operations (46,608) 14,306 30,749
----------- ----------- -----------
Other income (expense):
Interest income.............................. 460 549 1,201
Interest expense............................. (5,537) (4,675) (2,316)
Other........................................ (709) 895 --
----------- ----------- -----------
(5,786) (3,231) (1,115)
----------- ----------- -----------
(Loss) income before income taxes
and extraordinary loss................ (52,394) 11,075 29,634
Income tax (benefit) expense (Notes 1 and 6)....... (8,672) 4,484 12,103
----------- ----------- -----------
Net (loss) income before extraordinary
loss................................. (43,722) 6,591 17,531
Extraordinary loss related to early
extinguishment of debt, Net of income
tax benefit................................. (1,619) -- --
----------- ----------- -----------
Net (loss) income................................. $ (45,341) $ 6,591 $ 17,531
=========== =========== ===========
Primary and Fully diluted per share amounts (Note 1):
(Loss) income before extraordinary loss..... $ (2.51) $ 0.38 $ 1.00
Extraordinary loss.......................... (.09) -- --
----------- ----------- -----------
Net (loss) income........................... $ (2.60) $ 0.38 $ 1.00
=========== =========== ===========
Weighted average shares outstanding (Note 1):
Primary..................................... 17,407 17,430 17,536
=========== =========== ===========
Fully diluted............................... 17,407 17,430 17,541
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
18
<PAGE> 19
BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS March 1, March 2,
1997 1996 (Note 1)
-------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1)............................ $ 1,828 $ 13,583
Trade accounts receivable, net of allowance
for doubtful accounts of $475 and $400.................... 11,597 18,943
Income taxes refundable....................................... 14,619 --
Merchandise inventory (Note 1)................................ 97,368 114,777
Prepaid expenses and other.................................... 7,143 5,903
Deferred income taxes (Notes 1 and 6)......................... 7,224 8,116
---------- ----------
Total current assets...................................... 139,779 161,322
---------- ----------
Property and equipment, net (Note 2).............................. 100,267 100,563
Deferred income taxes (Notes 1 and 6)............................. 3,114 8,410
Intangible assets (Note 1)........................................ 14,553 15,047
---------- ----------
Total assets......................................... $ 257,713 $ 285,342
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................ $ 28,607 $ 20,100
Accrued liabilities (Note 9).................................. 31,604 23,431
Income taxes payable.......................................... -- 3,934
Current portion of deferred revenue (Note 1) 16,033 18,089
---------- ----------
Total current liabilities................................. 76,244 65,554
---------- ----------
Capital lease obligations (Note 5)................................ 14,358 14,651
Deferred revenue, noncurrent (Note 1)............................. 18,021 21,621
Long-term debt (Note 4)........................................... 41,007 30,000
Commitments and contingencies (Notes 5 and 11) Stockholders' equity
(Notes 1 and 7):
Preferred stock, $.01 par value, 500 shares
authorized, none issued................................... -- --
Common stock, $.01 par value, 30,000 shares
authorized, 17,439 and 17,364 shares issued
and outstanding........................................... 174 174
Additional paid-in capital.................................... 88,480 88,268
Retained earnings............................................. 19,429 65,074
---------- ----------
Total stockholders' equity................................ 108,083 153,516
---------- ----------
Total liabilities and stockholders' equity $ 257,713 $ 285,342
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE> 20
STATEMENT OF STOCKHOLDERS' EQUITY FOR
THE YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 28, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Additional Total
Number Paid-In Retained Stockholders'
of Shares Amount Capital Earnings Equity
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1994 17,267 $ 173 $ 87,930 $ 42,161 $ 130,264
Shares issued under stock
options...................... 11 - 41 - 41
Net income....................... - - - 17,531 17,531
Cash dividends
($0.035 per share)............ - - - (604) (604)
------- ------- -------- -------- ---------
Balance, February 28, 1995 17,278 173 87,971 59,088 147,232
Shares issued under stock
options and restricted stock 86 1 297 - 298
Net income....................... - - - 6,591 6,591
Cash dividends
($0.035 per share) - - - (605) (605)
------- ------- -------- -------- ---------
Balance, March 2, 1996.............. 17,364 174 88,268 65,074 153,516
Shares issued under stock
options and restricted stock 75 - 212 - 212
Net loss......................... - - - (45,341) (45,341)
Cash dividends
($0.0175 per share) - - - (304) (304)
------- ------- -------- -------- ---------
Balance, March 1, 1997.............. 17,439 $ 174 $ 88,480 $ 19,429 $ 108,083
======= ======= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
20
<PAGE> 21
STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------------------
March 1, March 2, February 28,
1997 1996 (Note 1) 1995
--------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(45,341) $6,591 $17,531
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization.................. 9,567 8,059 6,035
Deferred revenue............................... (5,656) (1,138) 708
Deferred income taxes.......................... 6,188 (625) (1,986)
(Gain) loss on sale of property and equipment.. 109 (894) -
Restructuring charge........................... 16,723
Impairment of long-lived assets (note 1)........ 600
Changes in items affecting operations:
Trade accounts receivable...................... 6,992 776 (8,218)
Merchandise inventory.......................... 17,409 1,404 (26,968)
Prepaid expenses and other..................... (1,478) (1,639) (1,466)
Trade accounts payable......................... 8,506 (1,203) 3,642
Accrued liabilities............................ (5,144) 2,347 6,731
Income taxes (refundable) payable.............. (18,554) (2,534) 232
-------- ------- --------
7,731 (849) (26,047)
------- ------- --------
Net cash (used in) provided by
operating activities........................ (10,079) 11,144 (3,759)
------- ------- --------
Cash flows from financing activities:
Borrowings under revolving credit
agreement.................................... 41,007 23,000 -
Repayment of short-term bank credit line
borrowing.................................... - (23,000) -
Issuance of long-term debt..................... - - 30,000
Repayment of long-term debt.................. (30,000) - -
Reduction of capital lease obligations......... (293) (423) (314)
Issuance of common stock under stock
options and restricted stock................. 212 298 41
Cash dividends on common stock................. (304) (605) (604)
-------- ------- --------
Net cash provided by (used in) financing
activities............................... 10,622 (730) 29,123
-------- ------- --------
Cash flows from investing activities:
Additions to property and equipment............ (17,599) (26,797) (45,616)
Proceeds from sales/leaseback.................. - 10,446 -
Proceeds from disposal of property and
equipment.................................. . 5,301 2,784 -
------- -------- --------
Net cash (used in) investing activities.... (12,298) (13,567) (45,616)
------- -------- --------
Decrease in cash and cash equivalents...... (11,755) (3,153) (20,252)
Cash and cash equivalents, beginning of year........... 13,583 16,736 36,988
------- ------- -------
Cash and cash equivalents, end of year................. $ 1,828 $13,583 $16,736
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................... $3,825 $2,783 $1,132
Income taxes............................... 3,130 9,148 14,714
Supplemental schedule of noncash investing and
financing activities:
Capital lease obligations...................... - $2,004 $3,425
</TABLE>
The accompanying notes are an integral part of the financial statements.
21
<PAGE> 22
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
Pursuant to shareholder approval in July 1994, Sun Television and Appliances,
Inc. (the "Company") was reincorporated in the state of Ohio. Subsequently, the
Board of Directors of the Company approved the merger of the wholly-owned
subsidiary into the Company.
The financial statements include the accounts of Sun Television and Appliances,
Inc., and its wholly-owned subsidiary through the date of the merger and the
accounts of the Company since that date. The company is a specialty retailer of
consumer electronics and home appliances.
CHANGE IN FISCAL YEAR:
Effective with the beginning of fiscal 1996, the Company changed its fiscal
year end to the Saturday closest to February 28 from a calendar month-end of
February. The twelve months ended March 2, 1996 Contained 368 days.
REVENUE RECOGNITION:
Revenues from the sale of merchandise are recognized at the time that the
customer accepts physical possession of the merchandise.
The Company sells service contracts which extend beyond the manufacturers'
warranty period, usually with terms of coverage (including the manufacturers'
warranty period) between 12 and 60 months. Revenues from the sale of service
contracts, net of direct selling expenses, are deferred at the time of sale and
amortized on a straight-line basis over the lives of the contracts.
In fiscal 1994, the Company entered into an agreement with a subsidiary of an
insurance company under which the insurance company subsidiary assumes, for a
specified fee, certain extended service contracts purchased by customers of the
company. The agreement specifies the types of merchandise covered, the terms of
the contract and the geographical markets within which the policies may be
sold. In addition, the Company sells third party extended service policies.
The Company recognizes the revenues from the sale of these third party
contracts and assumed contracts, along with the related fees and any other
related costs, at the time of sale.
ADVERTISING EXPENSE:
The advertising expenses for March 1, 1997, March 2, 1996 and February 28, 1995
were $31,216,000, $31,239,000, and $28,035,000, respectively. Advertising
expenses incurred during the year are expensed at the time the promotion first
appears in the media or in the stores.
MERCHANDISE INVENTORY:
Inventory is valued at the lower of most recent cost or market at the balance
sheet date which approximates cost using the first-in, first-out (FIFO) method.
PREOPENING EXPENSES:
Costs of opening new stores are capitalized and amortized on a straight-line
basis over the twelve-month period following the store opening.
IMPAIRMENT OF LONG-LIVED ASSETS:
For the first quarter of fiscal 1997 the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and of Long-Lived Assets to be Disposed of." SFAS No. 121
requires impairment recognition in the event that fact and circumstances
indicate that the carrying amount may not be recoverable. The Company records
the impairment if the estimate of future undiscounted cash flows in less than
the carrying value amount. The affect of adopting this statement was not
material.
22
<PAGE> 23
INTANGIBLE ASSETS:
In accordance with purchase accounting, the Company recorded certain intangible
assets as a result of an acquisition in 1986 including excess purchase price
over fair value of assets acquired of $19,734,000. Management periodically
considers whether there has been impairment in the value of goodwill by
evaluating various factors, including current and projected operating results
and undiscounted cash flows. The Company does not believe there has been any
material impairment in the carrying value of its goodwill.
The excess purchase price is being amortized over 40 years on a straight-line
basis. Total accumulated amortization of intangible assets was $5,181,000 at
March 1, 1997 and $4,687,000, at March 2, 1996.
CASH EQUIVALENTS:
The Company includes all highly liquid debt instruments purchased with an
original maturity of three months or less as cash equivalents.
INCOME TAXES:
Income taxes are accounted for under the asset and liability method. Deferred
income taxes are recognized for all temporary differences between the financial
reporting and tax basis of assets and liabilities based upon enacted tax laws
and statutory tax rates applicable to the periods in which the temporary
differences are expected to be recovered or settled.
EARNINGS PER SHARE:
Net income (loss) per common share is computed using the weighted average
number of common and common equivalent shares (stock options) outstanding
during the period. Shares issuable upon the exercise of stock options have not
been included in the earnings per share computation for fiscal 1997 because
the effect of such would be anti-dilutive.
FINANCIAL INSTRUMENTS:
Cash and cash equivalents, trade accounts receivable, trade accounts payable
and accrued liabilities are financial instruments for which the carrying amount
approximates fair value because of the short maturity of these instruments.
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of the same remaining maturities.
The estimated fair value of the Company's long-term debt is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revolving Credit Agreement,
(8.75% at March 1, 1997), due February 28, 2000
Carrying amount $41,007 --
======= =======
8.18% Senior Notes, due
August 31, 2004
Carrying amount -- $30,000
======= =======
Fair Value $41,007 $28,000
======= =======
</TABLE>
NEW FINANCIAL ACCOUNTING STANDARDS:
SFAS 128, "Earnings Per Share", was issued in February 1997 and effective for
financial statements issued for periods after December 15, 1997. The statement
specifies the computation, presentation and disclosure requirements for
23
<PAGE> 24
earnings per share for entities with publicly held common stock. The impact of
the statement on earnings per share is not expected to be material.
RISKS AND UNCERTAINTY:
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.
24
<PAGE> 25
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- -------
<S> <C> <C>
Land ...................................... $ 15,032 $ 15,406
Buildings...................................... 46,592 52,995
Leasehold improvements......................... 16,877 8,054
Furniture, fixtures and equipment.............. 31,647 30,021
Vehicles....................................... 1,442 1,510
Capital lease-buildings........................ 15,754 15,754
---------- ---------
127,344 123,740
Less accumulated depreciation and
amortization......................... 27,077 23,177
---------- ---------
$ 100,267 $ 100,563
========= =========
</TABLE>
Depreciation and amortization, which includes the amortization of capital
leases, is recognized on the straight-line method in amounts adequate to
allocate costs over the following estimated useful lives: Buildings, 30 to 39
years; capital leases, 15 to 20 years; leasehold improvements, 5 to 20 years;
furniture, fixtures and equipment, 3 to 7 years; and vehicles, 3 years.
Accumulated amortization related to the capital leases was $2,972 and $1,987 at
March 1, 1997 and March 2, 1996, respectively.
Expenditures for maintenance, repairs and minor renewals are charged to
operating expenses as incurred; major renewals and betterments are capitalized.
Disposals are removed from the asset and accumulated depreciation or
amortization accounts, and any profit or loss from disposition is included in
operations.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the fourth quarter of fiscal 1994, the Company entered into an agreement
with a wholly-owned subsidiary of a publicly held corporation pursuant to which
the wholly-owned subsidiary assumed, for a specified fee ($3,238,000 in fiscal
1997, $4,442,000 in fiscal 1996 and $4,375,000 in fiscal 1995), certain
extended service contracts purchased by customers of the Company. Certain
directors of the Company have a financial interest in the publicly held
corporation. The Company paid a management fee of $60,148 in fiscal 1995 to an
affiliate of a partnership which owned 11.4% of the Company's Common Stock at
February 28, 1994.
25
<PAGE> 26
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Revolving credit agreement, variable rate (8.75% at
March 1, 1997) due February 28, 2000.............. $41,007 -
Reducing revolving credit notes, variable rate
maturing to August 31, 2000....................... - -
8.18% Senior Notes, due August 31, 2004.............. - $30,000
------- -------
Total long-term debt $41,007 $30,000
======= =======
</TABLE>
In the fourth quarter of Fiscal 1997, the Company retired the reducing revolving
credit notes and the senior notes, replacing both credit facilities with one
collateralized revolving credit agreement. The new revolving agreement has a
term of three years, is due February 28, 2000, and is collateralized by
inventory and receivables. The Company may borrow up to a maximum of
$100,000,000, depending primarily on inventory levels. Interest on borrowings
will either be at prime rate + .50% or LIBOR + 3.00%, depending on how the
Company chooses to borrow funds. The daily cash receipts of the Company will pay
down the line of credit. The most restrictive covenant details the granting of
liens on most of the Company's current assets. In addition, the Company is
currently restricted on the payment of dividends to a maximum of $750,000 per
year. The Company is in compliance with the covenants of the debt agreement.
26
<PAGE> 27
NOTE 5 - LEASES
The Company leases store and distribution sites and equipment under various
capital and operating leases.
The Company's required payments for the next five years and in the aggregate on
capital lease obligations outstanding at March 1, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
1998 $ 1,945
1999 2,005
2000 2,082
2001 2,116
2002 2,133
Thereafter 18,567
----------
Net minimum lease payments under capital leases 28,848
Less amount representing interest 14,126
----------
Present value of net minimum lease payments
under capital leases 14,722
Less current portion 364
---------
Total long-term capital lease obligations $ 14,358
=========
</TABLE>
The Company leases store and distribution sites and equipment under various
leases classified as operating leases. The store leases expire from October
1997 to October 2016. The equipment leases expire on various dates through
February 2002. Certain leases contain renewal options for periods from five to
fifteen years. Rent expense was $13,217,000, $10,485,000, and $8,704,000 for
the years ended March 1, 1997, March 2, 1996, and February 28, 1995,
respectively.
At March 1, 1997, future minimum lease payments for all noncancelable leases
and lease commitments with terms in excess of one year are as follows (in
thousands):
<TABLE>
<CAPTION>
Property Equipment
Year Ending Leases Leases Total
----------- -------- --------- -----
<S> <C> <C> <C>
1998 $ 9,963 $1,981 $ 11,944
1999 9,917 1,025 10,942
2000 9,822 648 10,470
2001 9,268 271 9,539
2002 8,089 47 8,136
Thereafter 56,069 -- 56,069
-------- ------ --------
$103,128 $3,972 $107,100
======== ====== ========
</TABLE>
27
<PAGE> 28
NOTE 6 - INCOME TAXES
The (benefit) provisions for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- --------
<S> <C> <C> <C>
Current taxes:
Federal.......................... $ (14,860) $ 4,323 $ 11,506
State and local.................. -- 786 2,583
--------- ----------- ---------
Total........................ (14,860) 5,109 14,089
Deferred taxes........................ 6,188 (625) (1,986)
--------- ------------ ----------
$ (8,672) $ 4,484 $ 12,103
========= ========== =========
</TABLE>
The (benefit) provisions for income taxes as reported are different from the tax
provisions computed by applying the statutory federal income tax rate. The
differences are reconciled as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- --------
<S> <C> <C> <C>
Federal income tax at
statutory rate............... (35.0%) 35.0% 35.0%
Goodwill amortization
not deductible for
tax purposes................. 0.2 1.0 0.4
State and local taxes,
net of federal income
tax benefit.................. 0.0 4.4 4.8
Deferred tax valuation allowance...... 14.3 - -
Write-off of deferred tax............. 2.7 - -
Other, net ........................... 1.2 0.1 0.6
------ ---- ----
(16.6%) 40.5% 40.8%
====== ==== ====
</TABLE>
Deferred taxes result from temporary differences between the financial
statement and tax basis of assets and liabilities. Significant components of
the Company's deferred tax assets (liabilities) as of March 1, 1997 and March
2, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue on service contracts........... $12,284 $15,963
Restructuring accruals.......................... 5,730 --
Excess of tax over book inventory valuation..... 484 270
Other .......................................... 1,202 1,791
------- -------
Subtotal............................................. 19,700 18,024
Valuation allowance.................................. (7,865) --
------- -------
Total gross deferred tax assets................. 11,835 18,024
------- -------
Deferred tax liabilities:
Accelerated depreciation........................ (1,374) (1,498)
Other........................................... (123) -
-------- ----
Total gross deferred tax liabilities........ (1,497) (1,498)
------- -------
Net deferred tax asset...................... $10,338 $16,526
======= =======
</TABLE>
28
<PAGE> 29
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has
established a valuation allowance of $7,865,000 as of March 1, 1997 for the
amount of the deferred tax asset that is not expected to be recoverable through
available tax carrybacks or the reversal of existing taxable temporary
differences.
In addition, net deferred tax assets of approximately $1,500,000 for New York
and Ohio have been written off since the Company has ceased operations in the
state of New York and it is considered remote that the Company will be a net
income taxpayer in the immediate future in Ohio.
29
<PAGE> 30
NOTE 7 - STOCKHOLDERS' EQUITY
During the year ending February 28, 1995, the Board of Directors and
Shareholders approved an amendment to the 1991 Stock Option Plan under which
the Company may grant options to key employees for the purchase of up to
2,500,000 shares of common stock. The following is a summary of stock option
activity for the last three fiscal years:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at February 28, 1994...................... 906,218 $ 9.66
Granted............................................... 645,000 9.43
Exercised............................................. (10,934) 3.00
Cancelled............................................. (469,167) 14.57
---------- ---------
Outstanding at February 28, 1995...................... 1,071,117 7.45
Granted............................................... 848,000 4.47
Exercised............................................. (36,376) 1.60
Cancelled............................................. (132,668) 8.24
---------- ---------
Outstanding at March 2, 1996.......................... 1,750,073 6.07
Granted............................................... 907,500 2.97
Exercised............................................. (75,316) 1.60
Cancelled............................................. (891,751) 6.60
---------- ---------
Outstanding at March 1, 1997.......................... 1,690,506 $ 4.32
========= =========
</TABLE>
For the options granted at $1.60 per share, compensation expense, representing
the difference between the option price and the fair value at the date of
grant, was accrued over the three year vesting period. All subsequent option
grants were at fair market value. Options are generally exercisable over a
period of from one to ten years from the date of grant. As of March 1, 1997,
options for 498,194 shares were exercisable and 1,690,506 shares of common
stock were reserved for outstanding options. The Company had 220,334 shares
available for grant at March 1, 1997 and 236,083 and 951,415, at March 2, 1996
and February 28, 1995, respectively.
The following table summarizes stock options outstanding and exercisable at
March 1, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life (in Yrs.) Price Exercisable Price
-------- ----------- -------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.60 36,752 3.8 $1.60 36,752 $1.60
$2.59-$3.67 674,250 9.6 $2.62 -- $ --
$4.00-$4.94 679,000 9.0 $4.42 197,784 $4.42
$6.19 101,004 4.8 $6.19 101,004 $6.19
$8.25-$10.25 199,500 7.4 $9.29 162,654 $9.10
---------- --------- --- ----- ------- -----
1,690,506 9.0 $4.32 498,194 $6.10
</TABLE>
The Company makes no recognition of the options in the financial statements
until they are exercised. Pro forma disclosures are provided for fiscal 1997
and 1996 as if the Company adopted the cost recognition requirements under
Statement of Financial Accounting Standard 123 (SFAS 123) - "Accounting for
Stock-Based Compensation."
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net (loss) income - pro forma (in thousands) $(45,841) $6,416
Net (loss) income per common share - pro forma $ (2.63) $ .37
Weighted average fair value of options granted $ 1.36 $ 2.07
</TABLE>
The weighted average fair value of options granted in fiscal 1997 and 1996,
indicated above, was determined using the Black-Scholes option-pricing model
using the following assumptions:
30
<PAGE> 31
<TABLE>
<CAPTION>
Assumptions 1997 1996
- ----------- ---- ----
<S> <C> <C>
Annualized dividend yield 0% 0%
Common stock price volatility 48.7% 48.7%
Weighted average risk-free interest rate 6.28% 5.45%
Expected option term (in years) 5 5
</TABLE>
In February 1997, the Company retained Business Turnaround Services (BTS), a
subsidiary of Price Waterhouse, Inc. to assist the Company in its turnaround
efforts. As part of this agreement, the Company granted to BTS a stock option
for 500,000 shares of common stock at an option price of $2.1875, the fair
market value at date of grant. This has been treated as a non-employee stock
option and the Company recognized $8,000 of expense in 1997. In determining the
expense recorded for 1997, the Company used the Black-Scholes option pricing
model with the following assumptions: (1) annualized dividend yield of 0%; (2)
common stock price volatility of 48.7%; (3) risk-free interest rate of 6.14%;
and (4) an expected term of 4.5 years. The fair value of the options granted
was $1.04 per option.
During the years ended March 1, 1997 and March 2, 1996, respectively, the Board
of Directors granted 16,667 and 49,776 shares of restricted stock to two
executives at no cost. The restrictive covenants on the stock lapse at the time
of vesting, which occurs over the next two to four years. Compensation expense,
representing the difference between the grant price and the fair value at the
date of grant is being accrued over the period in which the shares vest. As of
March 1, 1997 and March 2, 1996, respectively, a total of 46,097 and 6,802
shares vested.
NOTE 8 - EMPLOYEE RETIREMENT PLAN
The Company has a defined contribution 401(k) plan which covers substantially
all of the employees of the Company. Contributions and costs are generally
determined as a percentage of the covered employee's annual salary. The Company
may, at its discretion, make matching contributions to the plan. Expense for
the plan totaled $134,000, $150,000, and $175,000 for the years ended March 1,
1997, March 2, 1996, and February 28, 1995, respectively.
NOTE 9 -ACCRUED LIABILITIES
Accrued Liabilities consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Third party service fee $ 8,763 $ 8,532
Restructuring charge 10,580 --
Payroll and payroll taxes 3,490 3,191
Sales tax payable 2,459 4,041
Other 6,312 7,667
------- -------
Accrued Liabilities $31,604 $23,431
======= =======
</TABLE>
NOTE 10 - RESTRUCTURING CHARGE
During fiscal 1997, the Company recorded restructuring charges totaling $16.7
million ($10.9 million after tax or $0.62 per share) to provide for the closing
of nine stores and the restructuring of management, buying, logistics, store
and field operations. This restructuring charge includes $12.3 million for the
write-down of property and equipment, settlement of lease obligations, legal
fees and real estate commissions relating primarily to the closing of nine
stores, $2.4 million for severance and benefit costs of approximately 1,000
full time personnel and $2.0 million for professional and consulting fees. The
closed stores were in Buffalo (3) and Rochester (2), New York and Dayton (3)
and Springfield
31
<PAGE> 32
(1), Ohio, markets from which the Company decided to withdraw. In fiscal 1997,
the nine stores had sales of $108.3 million versus $124.1 million for the prior
year.
The balance of $10.6 million at March 1, 1997, which is included in Accrued
Liabilities on the balance sheet, is expected to be settled during fiscal 1998.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that are incidental to the
conduct of its business. Management believes that any resulting liability will
not have a material adverse effect on the Company's financial position or
results of operations.
On April 30, 1997, the landlords of the three stores in Buffalo and the two
stores in Rochester, New York that the Company closed as part of restructuring
instituted a lawsuit against the Company. The lawsuit was filed in the State of
New York Supreme Court and alleges that the Company breached the leases for each
of the closed stores. The total amount claimed by the landlords in the lawsuit
is approximately $47.5 million. It is too early to predict the resolution of
this case. However, based on discussions with counsel, the efforts of the
Company to sublet the premises, reserves recorded for store closings and other
factors, the Company believes that it has adequately provided for potential
liabilities relating to this case.
32
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Sun Television and Appliances, Inc.
We have audited the accompanying balance sheets of Sun Television and
Appliances, Inc. as of March 1, 1997 and March 2, 1996 and the related
statements of operation, stockholders' equity, and cash flows for the years
ended March 1, 1997, March 2, 1996 and February 28, 1995. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sun Television and Appliances,
Inc. as of March 1, 1997 and March 2, 1996, and the results of its operations
and cash flows for each of the years ended March 1, 1997, March 2, 1996 and
February 28, 1995 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Columbus, Ohio
May 5, 1997
33
<PAGE> 34
QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's business is seasonal. As is the case with many other retailers,
the Company's net sales and service revenues and income from operations are
greater during the Christmas season than during other periods of the year. The
Company's February fiscal year end, however, mitigates broad revenue swings
in quarterly reporting. Future quarterly results for the Company may not
necessarily follow this pattern due to the timing and number of new store
openings and general economic conditions. The following table sets forth
summarized quarterly financial results for fiscal 1997 and 1996 (in thousands,
except per share data):
<TABLE>
<CAPTION>
FISCAL 1997
THREE MONTHS ENDED
-------------------------------------------------------
June 1, August 31, November 30, March 1,
1996 1996 1996 1997
-------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Net sales and service revenues........................... $153,659 $150,389 $181,949 $197,389
Gross profit............................................. 37,157 38,952 42,107 31,498
(Loss) from operations before extraordinary loss......... (6,791) (3,221) (5,351) (28,359)
Extraordinary loss related to early extinguishment
of debt net of income tax benefit..................... -- -- -- (1,619)
Net (loss)............................................... (4,588) (2,561) (4,068) (34,124)
Net (loss) per share before extraordinary loss.......... -- -- -- $ (1.87)
Net (loss) per share..................................... $ (.26) $ (.15) $ (.23) $ (1.96)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
THREE MONTHS ENDED
-------------------------------------------------------
May 27, August 26, November 25, March 2,
1995 1995 1995 1996
-------- ---------- ------------ --------
<S> <C> <C> <C> <C>
Net sales and service revenues........................... $164,480 $183,234 $202,632 $255,834
Gross profit............................................. 41,639 47,612 50,420 60,485
Income from operations................................... 1,081 4,006 3,360 5,860
Net income............................................... 211 2,256 1,367 2,758
Net income per share..................................... $ .01 $ .13 $ .08 $ .16
</TABLE>
34
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is included under the captions
"ELECTION OF DIRECTORS," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement (the "Proxy
Statement") relating to the Company's Annual Meeting of Shareholders to be held
in July 1996, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the captions
"Information Concerning the Board of Directors" and "Executive Compensation" in
the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the captions
"Ownership of Common Stock by Directors and Executive Officers" and "Ownership
of Common Stock by Principal Shareholders" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the captions
"Transactions with Principal Shareholders, Directors and Executive Officers"
and "Compensation Committee Interlocks and Insider Participation" in the Proxy
Statement and is incorporated herein by reference.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Form 10-K
Page
---------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts.................
Report of Independent Accountants on
Financial Statement Schedule.................................
</TABLE>
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.
36
<PAGE> 37
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT EXHIBIT INDEX
NUMBER DESCRIPTION PAGE NUMBER
<S> <C> <C>
3(a) Second Amended and Restated Articles of Incorporation of the
Registrant. (Reference is made to Exhibit 4(b) to the Registrant's
Post-Effective Amendment No. 2 to Registration Statement on Form
S-8 (Registration No. 33-44932), and incorporated herein by
reference.)
3(b) Code of Regulations of the Registrant. (Reference is made to
Exhibit 4(a) to the Registrant's Post-Effective Amendment No. 2 to
Registration Statement on Form S-8 (Registration No. 33-44932),
and incorporated herein by reference.)
4 Article FOURTH of the Registrant's Second Amended and Restated
Articles of Incorporation (contained in the Registrant's Second
Amended and Restated Articles of Incorporation filed as Exhibit
3(a)).
10(a) Employment Agreement, dated as of April 1, 1995, between the
Registrant and Robert E. Oyster. (Reference is made to Exhibit
10(a) to the Registrant's Annual Report on Form 10-K for the year
ended February 28, 1995, and incorporated herein by reference.)
10(b) Employment Agreement, dated as of January 18, 1996, between the
Registrant and James R. Copitzky. (Reference is made to Exhibit
10(b) to the Registrant's Annual Report on Form 10-K for the year
ended March 1, 1996, and incorporated herein by reference.)
10(c) Credit Agreement, dated as of September 13, 1994, among the
Registrant, National City Bank, Columbus, The Huntington National
Bank, and National City Bank, Columbus, as Agent. (Reference is
made to Exhibit 10(b) to the Registrant's Annual Report on Form
10-K for the year ended February 28, 1995, and incorporated
herein by reference.)
10(d) Purchase Agreement dated as of September 15, 1994, among the
Registrant and the Purchasers named in Schedule 1 thereto with
respect to $30,000,000 principal amount of 8.18% Senior Notes due
August 31, 2004. (Reference is made to Exhibit 10(c) to the
Registrant's Annual Report on Form 10-K for the year ended
February 28, 1995, and incorporated herein by reference.)
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C> <C>
10(e) Indemnification Agreement, dated as of July 18, 1994, between the
Registrant and Thomas Epstein. (Reference is made to Exhibit 10(d)
to the Registrant's Annual Report on Form 10-K for the year ended
February 28, 1995, and incorporated herein by reference.)
10(f) Information concerning Indemnification Agreements substantially
similar to Exhibit 10(d). (Reference is made to Exhibit 10(e) to the
Registrant's Annual Report on Form 10-K for the year ended
February 28, 1995, and incorporated herein by reference.)
10(g) 1991 Stock Option Plan. (Reference is made to Exhibit 4(a) to the
Registrant's Post-Effective Amendment No. 2 to Registration
Statement on Form S-8 (Registration No. 33-44932), and
incorporated herein by reference.)
10(h) First Amendment to Purchase Agreement dated as of May 31, 1996,
among the Registrant and Teachers Insurance and Annuity
Association of America with respect to $30,000,000 principal amount
of 8.18% Senior Notes due August 31, 2004. (Reference is made to
Exhibit 10(a) to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 1, 1996, and incorporated herein by
reference.)
10(i) Third Modification of Credit Agreement, dated as of May 31, 1996,
among the Registrant, National City Bank of Columbus, The
Huntington National Bank, and National City Bank of Columbus, as
Agent. (Reference is made to Exhibit 10(b) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 1, 1996,
and incorporated herein by reference.)
10(j) Employment Agreement, dated as of May 22, 1996, between the
Registrant and Steven A. Martin. (Reference is made to Exhibit
10(q) of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1996, and incorporated herein by
reference.)
10(k) Revolving Credit Agreement, dated as of December 19, 1996, among
the Registrant, various lenders participating thereto, The CIT
Group/Business Credit, Inc., as Agent, and National City Commercial
Finance, Inc., as Co-Agent. (Reference is made to Exhibit 10 of the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended
November 30, 1996, and incorporated herein by reference.)
10(l) Resignation and Release, dated as of May 7, 1997, between the
Registrant and James R. Copitzky. (Reference is made to Exhibit
10(l) of the Registrant's Annual Report on Form 10-K for the year
ended March 1, 1997, and incorporated herein by reference.)
10(m) Resignation and Release, dated as of April 21, 1997, between the
Registrant and Steven A. Martin. (Reference is made to Exhibit
10(m) of the Registrant's Annual Report on Form 10-K for the year
ended March 1, 1997, and incorporated herein by reference.)
10(n) Letter Agreement, dated as of February 11, 1997, between the
Registrant and BTS LLC, a subsidiary of Price Waterhouse LLP.
(Reference is made to Exhibit 10(n) of the Registrant's Annual
Report on Form 10-K for the year ended March 1, 1997, and
incorporated herein by reference.)
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C> <C>
10(o) Mortgage Deed, Security Agreement, and Assignment of Leases and
Rents, dated as of April 2, 1997, between the Registrant and The CIT
Group/Business Credit, Inc., as agent. (Reference is made to
Exhibit 10(o) of the Registrant's Annual Report on Form 10-K for
the year ended March 1, 1997, and incorporated herein by
reference.)
10(p) Severance Agreement, dated as of June 10, 1996, between the
Registrant and Robert E. Oyster. (Reference is made to Exhibit 10(a)
to the Current Report on Form 8-K, dated June 11, 1996, and
incorporated herein by reference.)
10(q)* First Amendment Agreement, dated as of January 28, 1997, between
the Registrant and The CIT Group/Business Credit, Inc., as
Administrative Agent and National City Commercial Finance, Inc. as
Co-Agent and IBJ Schroder Bank & Trust Company.
10(r)* Second Amendment Agreement, dated as of March 10, 1997, between
the Registrant and The CIT Group/Business Credit, Inc., as
Administrative Agent and National City Commercial Finance, Inc. as
Co-Agent and IBJ Schroder Bank & Trust Company.
10(s)* Third Amendment Agreement, dated as of April 3, 1997, between
the Registrant and The CIT Group/Business Credit, Inc., as
Administrative Agent and National City Commercial Finance, Inc. as
Co-Agent and IBJ Schroder Bank & Trust Company.
11 Statement re: Computation of Net Income Per Common Share.
(Reference is made to Exhibit 11 of the Registrant's Annual Report
on Form 10-K for the year ended March 1, 1997, and incorporated
herein by reference.)
23* Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney. (Reference is made to Exhibit 24 of the
Registrant's Annual Report on Form 10-K for the year ended March
1, 1997, and incorporated herein by reference.)
27* Financial Data Schedule.
</TABLE>
* Filed with this Report.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
The exhibits to this report begin on page __.
(d) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the independent accountant's report
thereon are included on the following pages.
39
<PAGE> 40
Schedule II
SUN TELEVISION AND APPLIANCES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 1, 1997, MARCH 2, 1996 AND FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to
Description Beginning Costs and Balance at
Year Ended of Year Expenses Deductions End of Year
---------- ---------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts(1):
March 1, 1997...................... $400 $2,363 $2,288 $ 475
March 2, 1996...................... 325 2,022 1,947 400
February 28, 1995.................. 250 1,588 1,513 325
Deferred Income Tax Asset
Valuation Allowance(2):
March 1, 1997...................... $ -- $7,865 $ -- $7,865
</TABLE>
- -------------
(1) Offset against trade accounts receivable. Deductions represent
write-offs, net of recoveries.
(2) Offset against current deferred income taxes ($5,101) and non-current
deferred income taxes ($2,764).
40
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the financial statements of Sun Television and Appliances, Inc.
is included in this Form 10-K on page 33. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule on page 40 on this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole
presents fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
Columbus, Ohio
May 5, 1997
41
<PAGE> 42
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.
SUN TELEVISION AND APPLIANCES, INC.
Date: June 3, 1997 By: /s/ R. CARTER PATE
-------------------------------
R. Carter Pate, Chairman of the
Board and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 29th day of May, 1997.
Signature Title
--------- -----
/s/ R. CARTER PATE Chairman of the Board and
- ------------------------------- Chief Executive Officer
R. Carter Pate
/s/ JOHN J. LYNCH Chief Financial Officer, Treasurer
- ------------------------------- and Controller
John J. Lynch (Principal Accounting Officer
and Principal Financial Officer)
Macy T. Block* Director
- -------------------------------
Macy T. Block
Ned L. Sherwood* Director
- -------------------------------
Ned L. Sherwood
Thomas Epstein* Director
- -------------------------------
Thomas Epstein
Paul D. Bauer* Director
- -------------------------------
Paul D. Bauer
Brady J. Churches* Director
- -------------------------------
Brady J. Churches
*By: /s/ JOHN J. LYNCH
-------------------------------
John J. Lynch, Attorney-in-fact
42
<PAGE> 1
EXHIBIT 10(q)
FIRST AMENDMENT AGREEMENT
FIRST AMENDMENT AGREEMENT, dated as of January 28, 1997, (the "Amendment"),
between Sun Television and Appliances, Inc. (the "Borrower"), The CIT
Group/Business Credit, Inc., as Administrative Agent and National City
Commercial Finance, Inc., as Co-Agent and IBJ Schroder Bank & Trust Company (the
"Lenders").
WHEREAS, the Borrower, the Administrative Agent and the Co-Agent are
parties to that certain Revolving Credit Agreement dated as of December 19,
1996, as amended (the "Loan Agreement"); and
WHEREAS, the Administrative Agent has requested that each Lender and
Borrower agree to amend the provision of the Loan Agreement relating to
assignments of a Lender's interest.
NOW, THEREFORE, the parties hereto agree as follows:
Section 10.13(a)(i) shall be amended to read as follows:
(i) each such assignment shall be in a principal amount of not less than
$10,000,000 and in multiples of $1,000,000 in excess thereof (or the
remainder of such Lender's Revolving Credit Commitment)."
This Amendment may be executed by the parties hereto individually or in
combination, in one or more counterparts, each of which shall be an original and
all of which shall constitute one and the same agreement.
THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAWS PRINCIPLES THEREOF.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
SUN TELEVISION AND APPLIANCES, INC.
By: /s/ Steven A. Martin
----------------------------------
Name: Steven A. Martin
Title: EVP/CFO
THE CIT GROUP/BUSINESS CREDIT, INC.
individually and as Administrative Agent
By: /s/ Susan George
-----------------------------------
Name: Susan George
Title: Vice President
NATIONAL CITY COMMERCIAL FINANCE
INC., individually and as Co-Agent
By: /s/ Joseph L. White
------------------------------------
Name: Joseph L. White
Title: Vice President
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Wing C. Louie
------------------------------------
Name: Wing C. Louie
Title: Vice President
<PAGE> 1
EXHIBIT 10(r)
SECOND AMENDMENT AGREEMENT
SECOND AMENDMENT AGREEMENT, dated as of March 10, 1997, (the
"Amendment"), between Sun Television and Appliances, Inc. (the "Borrower"), The
CIT Group/Business Credit, Inc., as Administrative Agent, and a Lender,
National City Commercial Finance, Inc., as Co-Agent and a Lender, IBJ Schroder
Bank & Trust Company (collectively, the "Lenders").
WHEREAS, the Borrower, the Administrative Agent and the Co-Agent are
parties to that certain Revolving Credit Agreement dated as of December 19,
1996, as amended (the "Loan Agreement"); and
WHEREAS, Borrower and Lender have agreed to clarify the definition of
"Borrowing Base" to make it consistent with the Borrowing Base Certificate
required to be delivered by the Borrower under the Loan Agreement, to clarify
the manner in which the Letter of Credit Fee is calculated.
NOW, THEREFORE, the parties hereto agree as follows:
1. The definition of "Borrowing Base" shall be amended in its entirety:
"Borrowing Base" shall mean an amount equal to the difference between
(A) the sum of (i) eighty-five percent (85%) of Eligible Receivables, (ii) for
the period from January 1 through October 31 of each year, fifty-five percent
(55%) of the Book Value of Eligible Inventory and (iii) for the period from
November 1 through December 31 of each year, sixty percent (60%) of the Book
Value of Eligible Inventory and, (B) the sum of (i) Unreimbursed Draws and
Undrawn Letter of Credit Availability (in each case in the aggregate with
respect to all such unreimbursed or undrawn letters of credit) and (ii) such
reserves as the Administrative Agent, in its sole discretion, exercised
reasonably may deem appropriate.
2. The first two sentences of Section 2.08(f) shall be deleted and
replaced by the following sentence to read in its entirety as follows:
"(f) From and after the Closing Date until the Termination Date,
the Borrower shall pay to the Administrative Agent, a letter of credit
fee (the "Letter of Credit Fee") at a rate equal to one and one-half
percent (1 1/2%) per annum on the average daily outstanding balance of
issued and outstanding Letters of Credit for the immediately preceding
month payable in arrears and outstanding Letters of Credit for the
immediately preceding month payable in arrears on the first day of each
succeeding month."
<PAGE> 2
3. This Amendment may be executed by the parties hereto individually or
in combination, in one or more counterparts, each of which shall be an original
and all of which shall constitute one and the same agreement.
4. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
SUN TELEVISION AND APPLIANCES, INC.
By: /s/ Steven A. Martin
--------------------------------
Name: Steven A. Martin
Title: Executive Vice President/
Chief Financial Officer
THE CIT GROUP/BUSINESS CREDIT, INC.,
individually and as Administrative Agent
By: /s/ Cyril A. Prince
--------------------------------
Name: Cyril A. Prince
Title: Vice President
NATIONAL CITY COMMERCIAL FINANCE,
INC., individually and as Co-Agent
By: /s/ John P. Dunn
--------------------------------
Name: John P. Dunn
Title: Vice President
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Wing C. Louie
--------------------------------
Name: Wing C. Louie
Title: Vice President
<PAGE> 3
NATIONAL BANK OF CANADA
By: /s/ Douglas K. Wingart
-----------------------------------
Name: Douglas K. Wingart
Title: Vice President
SIGNET BANK
By: /s/ John D. Scott
-----------------------------------
Name: John D. Scott
Title: Vice President
BANKAMERICA BUSINESS CREDIT
By: /s/ Lisa Palmieri
-----------------------------------
Name: Lisa Palmieri
Title: Senior Account Executive
<PAGE> 1
EXHIBIT 10(s)
THIRD AMENDMENT AGREEMENT
THIRD AMENDMENT AGREEMENT (the "Agreement") dated as of April 3, 1997
to the Revolving Credit Agreement dated as of December 19, 1996 (as amended,
and as the same may be further amended, supplemented, modified or restated
from time to time in accordance with its terms, the "Loan Agreement") among Sun
Television and Appliances, Inc. (the "Borrower"), the financial institutions
party thereto (the "Lenders"), The CIT Group/Business Credit, Inc. ("CIT") as a
Lender and as Administrative Agent for the Lenders (in such capacity the
"Administrative Agent") and National City Commercial Finance, Inc. as a Lender
and as Co-Agent for the Lenders (in such capacity the "Co-Agent"). Capitalized
terms used herein and not otherwise defined herein shall have the meanings
attributed thereto in the Loan Agreement as amended hereby.
WHEREAS, the Borrower has requested that the Administrative Agent agree
to make certain advances to the Borrower in excess of its current Borrowing
Base Availability and the Administrative Agent has agreed to do so, so long as
the Borrower provides additional collateral to the Lenders in the form of a
mortgage on the Borrower's distribution facility in Grovesport Ohio, agrees to
confirm certain matters related to an anticipated tax refund and agrees to make
certain changes to the Loan Agreement.
WHEREAS, in accordance therewith the Lenders, the Administrative Agent,
the Co-Agent and the Borrower have agreed to certain amendments to the Loan
Agreement.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, and subject to the fulfillment of the
conditions set forth below, the parties hereto agree as follows:
SECTION 1. CONDITIONS PRECEDENT
Upon the execution and delivery hereof by the parties listed below and
the fulfillment of the following conditions (the date of such execution and
delivery and fulfillment referred to herein as the "Amendment Closing Date"),
this Agreement shall be deemed to have become effective:
1.1 The Lenders, the Administrative Agent and the Co-Agent shall have
received and deemed to be in form and substance satisfactory to the
Administrative Agent and its counsel:
(a)(i) A certificate of the Secretary of the Borrower, dated as of a
recent date and certifying (A) that attached thereto is a true and complete
copy of a resolution adopted by its Board of Directors authorizing the
execution, delivery and performance of this Agreement,
<PAGE> 2
including the granting of a mortgage on the Grovesport distribution center and
that such resolution has not been modified, rescinded or amended and is in full
force and effect, and (B) as to the incumbency and specimen signature of each of
its officers executing this Agreement; and (ii) a certificate of another of its
officers as to the incumbency and signature of its Secretary;
(b) A "no default" certificate from the Chief Financial Officer of the
Borrower;
(c) A mortgage on the Grovesport, Ohio distribution center in form and
substance satisfactory to the Administrative Agent (such mortgage to provide
that it shall be released if the Bridge Facility is paid in full and there is
no Default or Event of Default under the Loan Agreement);
(d) A letter from the R. Carter Pate on behalf of the Borrower in the
form attached as Exhibit A; and
(e) A payment of a $50,000 amendment fee in connection with this
Agreement (the Borrower's execution hereof shall authorize the Administrative
Agent to charge the Borrower's account therefor on the Amendment Closing Date).
SECTION 2. AMENDMENTS TO THE LOAN AGREEMENT
Section 2.1 The following defined terms shall be added in the proper
alphabetical order in the Loan Agreement:
"Amendment Closing Date" shall mean the date of the execution by all
parties listed below of the Third Amendment Agreement to the Revolving Credit
Agreement and the fulfillment of the conditions set forth herein.
"Bridge Facility" shall mean the temporary increase in the Borrowing
Base in the amount of $5,000,000 pursuant to the terms and conditions, and for
the time specified, in the Third Amendment Agreement to the Revolving Credit
Agreement.
"Mortgage" shall mean that certain fee Mortgage and Security Agreement
and Assignment of Leases and Rents by the Borrower dated as of the date hereof
covering the Premises consisting of the Borrower's distribution facility in
Grovesport, Ohio in favor of the Administrative Agent on behalf of the Lenders.
"Premises" shall mean the property described as subject to the Mortgage.
2
<PAGE> 3
"Tax Refund" shall mean that certain federal tax refund
requested by the Borrower in the approximate amount of $9,000,000 pursuant to
tax returns and related materials prepared by Coopers & Lybrand.
Section 2.2 Section 2.04(b)(ii) of the Loan Agreement shall be amended
to add a sentence at the end thereof as follows:
"The Borrower shall be required to make a mandatory prepayment
of the Bridge Facility from the proceeds of the Tax Refund immediately
upon receipt thereof. Subject to the provisions of Section 7.19 hereof,
any proceeds of the sale of the Premises, refinancing of the Mortgage
or any proceeds emanating from the disposition of the Premises in any
form, shall be applied as a mandatory prepayment of the Bridge Facility
and any excess proceeds shall be applied in accordance with Section
8.04(b)(iv) hereof."
Notwithstanding anything herein to the contrary, the Bridge Facility shall be
paid from proceeds of the Tax Refund or the sale, refinancing or other
disposition of the Premises (in each case as specified herein) and not (without
the express prior written consent of the Lenders) from the proceeds of any
other Collateral (including, without limitation, Accounts), unless the Borrower
has maintained on each day for thirty (30) consecutive days Availability in an
amount for such 30-day period of not less than $5,000,000.
Section 2.3 A new Section 2.04(b)(iii) of the Loan Agreement shall be
added as follows:
The Bridge Facility shall be payable in full and shall
terminate on the earlier of (i) ninety (90) days from the Amendment
Closing Date, (ii) the receipt by the Borrower or any person on behalf
of the Borrower of the Tax Refund or (iii) sale, refinancing or other
disposition of the Premises.
Section 2.4 Section 2.04(e) of the Loan Agreement shall have added to
the end thereof, a sentence stating as follows:
"There shall be no early termination fee payable in connection
with the Bridge Facility."
Section 2.5 Section 2.05(b) of the Loan Agreement shall be amended to
replace the language "plus 3%" with the language "plus 3.25%".
Section 2.6 (a) The definition of the Loan Agreement of "Borrowing
Base" shall be amended to add a sentence at the end thereof as follows:
3
<PAGE> 4
"To the extent still in effect, the Bridge Facility shall be
added to the Borrowing Base."
(b) The definition in the Loan Agreement of "Loan" or
"Loans" shall be amended to remove the period at the end thereof and insert the
following:
", including, without limitation, the Bridge Facility".
(c) The definition of "Related Documents" and "Loan
Documents" shall be amended to add after the words "the Security Documents,"
the words "the Mortgage",
Section 2.7. A new Section 6.37 to the Loan Agreement shall be added to
Article VI as follows:
Section 6.37. Tax Refund. The Borrower hereby agrees to file
no later than April 15, 1997 its tax return for its 1996 taxable year
and it shall contain a request for the Tax Refund. There are no current
claims, of which the Borrower or its accountants are aware, as to which
the Tax Refund may be offset. The Borrower has been advised by Coopers &
Lybrand that it is anticipated that the Tax Refund should be payable on
an expedited basis on approximately May 15, 1997.
Section 2.8 Section 7.01(e) of the Loan Agreement shall be amended so
that the words "within five (5) Business Days" are replaced with the words
"within three (3) Business Days."
Section 2.9. A new Section 7.18 to the Loan Agreement shall be added
to Article VII as follows:
Section 7.18 Real Estate Matters.
(a) Environmental Report. Within thirty (30) days of the
Amendment Closing Date, the Administrative Agent shall have received
environmental audit reports on (i) the Premises described in the Mortgage
and (ii) the waste disposal practices of the Borrower related to such
Premises. The reports must (x) not disclose or indicate the presence of
Hazardous Materials violating any local, state or federal laws or
regulations where such violation would reasonably be expected to have a
Material Adverse Effect, or any liability (existing or potential) stemming
from the Borrower's Premises, its operations, its waste disposal practices
or waste disposal sites used by the Borrower which liability would
reasonably be expected to have a Material Adverse Effect, and (y) be
satisfactory to the Administrative Agent;
(b) Surveys. Within thirty (30) days of the Amendment Closing
Date, the Administrative Agent and the title insurance company issuing the
title policy referred
4
<PAGE> 5
to in paragraph (c) of this Section 7.18 (the "Title Insurance Company") shall
have received the metes and bounds of a perimeter or boundary survey of the
site of the Premises prepared by an independent professional licensed land
surveyor satisfactory to the Administrative Agent and the Title Insurance
Company, which maps or plats and the surveys on which they are based shall be
made in accordance with the Minimum Standard Detail Requirements for Land Title
Surveys jointly established and adopted by the American Land Title Association
and the American Congress on Surveying and Mapping in form reasonably
acceptable to the Administrative Agent. The survey shall (x) be certified to
the Lenders and the Title Insurance Company in a form reasonably acceptable
to the Administrative Agent and the Title Insurance Company and (y) contain a
legend reciting as to whether or not any site is located in a flood zone;
(c) Title Insurance. Within thirty (30) days of the Amendment
Closing Date, the Administrative Agent shall have received, in respect of each
Mortgage, an ALTA mortgagee's title policy or marked-up unconditional binder
for such insurance in form and substance reasonably satisfactory to the
Administrative Agent from a title insurance company reasonably satisfactory to
the Administrative Agent. The Administrative Agent shall also have received
evidence that all premiums in respect of such policy has have been paid and
that all charges for mortgage recording taxes, if any, shall have been paid;
(d) Opinion. Within ten (10) days of the Amendment Closing Date, an
opinion with respect to the Mortgage of Ohio real estate counsel for the
Borrower, in form and substance reasonably satisfactory to the Administrative
Agent;
(e) Title, Liens. Except for Permitted Liens, the Premises shall be
free and clear of all liens and encumbrances and the Borrower shall have good
and marketable title to the Premises;
(f) Certain Expenditures. The Borrower will advise the
Administrative Agent in writing of: (i) all expenditures (actual or
anticipated) in excess of $250,000 for (A) environmental clean-up, (B)
environmental compliance or (C) environmental testing and the impact of said
expenses on the Borrower's working capital; and (ii) any written notices the
Borrower receives involving potential or actual liability in excess of $250,000
from any local, state or federal authority or any notice from any other third
party advising the Borrower of any environmental liability (real or potential)
stemming from the Borrower's operations, its premises, its waste disposal
practices, or waste disposal sites used by the Borrower; and
(g) Further Acts. At its sole cost and expense, the Borrower shall
do all acts and execute, acknowledge and deliver all information reports,
returns and withholding of monies as shall be necessary or appropriate to
comply fully, or to cause compliance in all
5
<PAGE> 6
material respects, with applicable law in respect of the Premises and all
transactions related to the Premises.
Section 2.10. A new Section 7.19 to the Loan Agreement shall be added to
Article VII as follows:
Section 7.19. Tax Refund. The Borrower shall, and shall cause
its accountants to, act in accordance with its representation in Section
6.37 hereof and shall notify the Administrative Agent immediately if the
tax return referred to in Section 6.37 is not filed on the timetable
specified in such Section 6.37 or if the representations made are no
longer true and correct. In the event the Bridge Facility is paid in
full from a source other than the Tax Refund or there are proceeds of
the Tax Refund in excess of the amount utilized to repay the Bridge
Facility and any other Obligations then due and owing and no Default or
Event of Default has occurred and is continuing under any Loan Document,
upon receipt of the Tax Refund the Administrative Agent shall permit the
Borrower to use the Tax Refund (or the portion thereof not utilized to
repay the Bridge Facility) for working capital purposes.
Section 2.11. Section 8.04(iii) of the Loan Agreement shall be amended
to read in its entirety as follows:
(iii) the Borrower may sell or refinance the property subject to
the Mortgage so long as net sale proceeds thereof are at least
$5,000,000 in cash plus any unpaid interest on the Bridge Facility.
Section 2.12. Section 8.10 of the Loan Agreement is hereby amended to
read in its entirety as follows:
8.10 Environmental. Except in compliance with applicable
Environmental Laws, or in the event of any noncompliance with applicable
Environmental Laws, only to the extent to which such noncompliance would
not have a Material Adverse Effect, (i) use any of the property of the
Borrower or any portion thereof for the handling, processing, storage or
disposal of Hazardous Material, (ii) cause or permit to be located on
any of the property any underground tank or other underground storage
receptacle for Hazardous Material, (iii) generate any Hazardous Material
on any of the property, (iv) conduct any activity on the property or use
any property in any manner so as to cause a release (i.e., releasing,
spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or dumping) or threatened
release of Hazardous Material on, upon or into the property or (v)
otherwise conduct any activity on the property or use any property in
any manner that would lead to any environmental claim or violate any
Environmental Law or bring such property in violation of any
Environmental Law.
6
<PAGE> 7
SECTION 3. MISCELLANEOUS
3.1 The Borrower represents and warrants that the statements contained
in Section 6.02 of the Loan Agreement as amended by this Agreement are true and
correct on the date hereof. The Borrower represents and warrants (which
representations and warranties shall survive the execution and delivery hereof)
to the Lenders, the Administrative Agent and the Co-Agent that:
(a) The Borrower is a duly organized, validly existing
corporation in good standing under the laws of the State of Ohio and has the
corporate power and authority to execute, deliver and carry out the terms and
provisions of this Agreement and the transactions otherwise contemplated hereby
and has taken or caused to be taken all necessary corporate action to authorize
the execution, delivery and performance of this Agreement;
(b) No consent of any other person, including, without
limitation, shareholders or creditors, other than those which have been
obtained, and no action of, or filing with any governmental or public body or
authority is required to authorize, or is otherwise required in connection
with, the execution, delivery and performance of this Agreement;
(c) This Agreement has been duly executed and delivered by a
duly authorized officer on behalf of the Borrower and constitutes the legal,
valid and binding obligation of the Borrower, enforceable in accordance with
its terms, except as enforcement thereof may be subject to the effect of any
applicable (i) bankruptcy, insolvency, reorganization, moratorium or similar law
affecting creditors' rights generally and (ii) general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law); and
(d) The execution, delivery and performance of this Agreement
will not violate any law, statute or regulation applicable to the Borrower,
or any order or decree of any court or governmental instrumentality applicable
to the Borrower; conflict with, or result in the breach of, or constitute a
default under any contractual obligation of the Borrower.
3.2 Without limiting any provision of the Loan Agreement, the Borrower
hereby agrees to pay all Out-of-Pocket Expenses incurred by the Administrative
Agent in connection with the transactions contemplated by this Agreement and
the Mortgage, including but not limited to the reasonable fees and expenses of
Messrs. Kaye, Scholer, Fierman, Hays & Handler, LLP, counsel to CIT as
Administrative Agent and as a Lender.
3.3 The Loan Agreement and the other Loan Documents, as amended hereby,
are each ratified and confirmed in all respects and shall remain in full force
and effect in accordance with their respective terms.
7
<PAGE> 8
3.4 All references to the Loan Agreement in the Loan Agreement or any
other Loan Document shall mean such agreement as amended hereby and as it may
in the future be amended, restated, supplemented or modified from time to time.
3.5 This Agreement may be executed by the parties hereto individually
or in combination, in one or more counterparts, each of which shall be an
original and all of which shall constitute one and the same agreement. The
Administrative Agent may rely on a facsimile copy of an execution page of this
Agreement as an original.
3.6 THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
SUN TELEVISION AND APPLIANCES, INC.
By: /s/ Steven A. Martin
----------------------------------
Name: Steven A. Martin
Title: Executive Vice President/
Chief Financial Officer
THE CIT GROUP/BUSINESS CREDIT, INC.,
individually and as Administrative Agent
By: /s/ Cyril A. Prince
----------------------------------
Name: Cyril A. Prince
Title: Vice President
NATIONAL CITY COMMERCIAL FINANCE,
INC., individually and as Co-Agent
By: /s/ John P. Dunn
----------------------------------
Name: John P. Dunn
Title: Vice President
8
<PAGE> 9
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ James M. Steff
--------------------------------
Name: James M. Steff
Title: Vice President
NATIONAL BANK OF CANADA
By: /s/ Douglas K. Wingart
--------------------------------
Name: Douglas K. Wingart
Title: Vice President
SIGNET BANK
By: /s/ John D. Scott
--------------------------------
Name: John D. Scott
Title: Vice President
BANKAMERICA BUSINESS CREDIT
By: /s/ Lisa Palmieri
--------------------------------
Name: Lisa Palmieri
Title: Senior Account Executive
9
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Sun Television and Appliances, Inc. on Form S-8 (File Nos. 33-44932 and
33-82744) of our report dated May 5, 1997 on our audits of the financial
statements of Sun Television and Appliances, Inc. as of March 1, 1997 and March
2, 1996 and for the years ended March 1, 1997, March 2, 1996 and February 28,
1995, which report is included in this Annual Report on Form 10-K.
We also consent to the incorporation by reference in the registration statement
of Sun Television and Appliances, Inc. on Form S-8 (File Nos. 33-44932 and
33-82744) of our report dated May 5, 1997 on our audits of the financial
statement schedule of Sun Television and Appliances, Inc. for the years ended
March 1, 1997, March 2, 1996 and February 28, 1995, which report is included in
this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Columbus, Ohio
June 2, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUN
TELEVISION AND APPLIANCES, INC.'S ANNUAL REPORT OF FORM 10-K FOR THE YEAR
ENDED MARCH 1, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-1-1997
<PERIOD-START> MAR-3-1996
<PERIOD-END> MAR-1-1997
<CASH> 1,827
<SECURITIES> 0
<RECEIVABLES> 11,597
<ALLOWANCES> 0
<INVENTORY> 97,368
<CURRENT-ASSETS> 139,779
<PP&E> 100,267
<DEPRECIATION> 0
<TOTAL-ASSETS> 257,713
<CURRENT-LIABILITIES> 76,244
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 107,909
<TOTAL-LIABILITY-AND-EQUITY> 257,713
<SALES> 683,386
<TOTAL-REVENUES> 683,386
<CGS> 533,672
<TOTAL-COSTS> 533,672
<OTHER-EXPENSES> 197,443
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,537)
<INCOME-PRETAX> (54,885)
<INCOME-TAX> (9,544)
<INCOME-CONTINUING> (43,722)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,619)
<CHANGES> 0
<NET-INCOME> (45,341)
<EPS-PRIMARY> (2.60)
<EPS-DILUTED> (2.60)
</TABLE>
