<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 29, 1998
---------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission File Number 0-19269
-------
SUN TELEVISION AND APPLIANCES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
OHIO 31-1178151
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6600 PORT ROAD, GROVEPORT, OH 43125
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 492-5600
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 19, 1998
----- -------------------------------
Common shares, $.01 par value 17,439,202 shares
<PAGE> 2
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
TABLE OF CONTENTS
PAGE NO.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Operations
for the quarters ended
August 29, 1998 and August 30, 1997 3
Statement of Operations
for the six months ended
August 29, 1998 and August 30, 1997 4
Balance Sheet
August 29, 1998 and February 28, 1998 5
Statement of Stockholders' Equity
for the six months ended August 29, 1998 6
Statement of Cash Flows
for the six months ended
August 29, 1998 and August 30, 1997 7
Notes to Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Part II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote
of Security Holders 18
Item 5. Other 19
Item 6. Exhibits and Reports of Form 8-K 19
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
STATEMENT OF OPERATIONS
For the quarters ended August 29, 1998 and August 30, 1997
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
Net sales and service revenues $121,652 $110,441
Cost of sales 96,958 83,520
-------- --------
Gross profit 24,694 26,921
Selling, general and administrative 37,604 32,530
Impairment of long-lived assets 47,395 --
Amortization of intangibles 123 123
-------- --------
Loss from operations (60,428) (5,732)
Other income (expenses):
Interest income 11 --
Interest expense (3,061) (927)
Gain (loss) on sale of property 1 (88)
-------- --------
(3,049) (1,015)
-------- --------
Loss before income taxes (63,477) (6,747)
Income tax benefit -- --
-------- --------
Net loss $(63,477) $ (6,747)
======== ========
Net loss per share - basic and diluted $ (3.64) $ (.39)
======== ========
Weighted average shares outstanding - basic
and diluted 17,439 17,439
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
<TABLE>
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
STATEMENT OF OPERATIONS
For the six months ended August 29, 1998 and August 30, 1997
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
Net sales and service revenues $231,183 $215,437
Cost of sales 179,630 165,434
-------- --------
Gross profit 51,553 50,003
Selling, general and administrative 72,485 64,652
Impairment of long-lived assets 47,395 --
Amortization of intangibles 247 247
-------- --------
Loss from operations (68,574) (14,896)
Other income (expenses):
Interest income 11 26
Interest expense (5,841) (2,055)
Gain on sale of property 10 24
-------- --------
(5,820) (2,005)
-------- --------
Loss before income taxes (74,394) (16,901)
Income tax benefit -- --
-------- --------
Net loss $(74,394) $(16,901)
======== ========
Net loss per share - basic and diluted $ (4.27) $ (.97)
======== ========
Weighted average shares outstanding - basic
and diluted 17,439 17,439
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
<TABLE>
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
BALANCE SHEET
August 29, 1998 and February 28, 1998
(In thousands, except per share amounts)
<CAPTION>
(Unaudited)
August 29, February 28,
1998 1998
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,074 --
Trade accounts receivable net of allowance
for doubtful accounts of $1,975 and $475 13,084 $ 18,186
Merchandise inventory 110,500 92,053
Prepaid expenses and other 1,212 2,867
Income taxes refundable -- 10,338
-------- --------
Total current assets 130,870 123,444
Property and equipment, net 41,920 74,136
Assets held for sale 4,344 4,646
Other noncurrent assets 4,509 6,069
Intangible assets, net -- 14,060
-------- --------
Total assets $181,643 $222,355
======== ========
LIABILITIES
Current liabilities:
Trade accounts payable $ 42,029 $ 25,221
Accrued liabilities 20,264 20,629
Current portion of deferred revenue 11,951 12,514
Long-term debt classified as current 76,859 --
-------- --------
Total current liabilities 151,103 58,364
Capital lease obligations 13,634 13,895
Deferred revenue, noncurrent 13,347 13,259
Long-term debt -- 58,971
Other liabilities 2,725 2,725
-------- --------
Total liabilities 180,809 147,214
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
500 shares authorized - none issued -- --
Common stock, $.01 par value, 30,000 shares authorized
17,439 shares issued and outstanding 174 174
Additional paid-in capital 89,176 89,089
Retained deficit (88,516) (14,122)
-------- --------
Total stockholders' equity 834 75,141
-------- --------
Total liabilities and stockholders' equity $181,643 $222,355
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
<TABLE>
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended August 29, 1998
(In thousands)
(Unaudited)
<CAPTION>
Additional
Number of Common Paid-In Retained
Shares Stock Capital Deficit
--------- ------ ---------- --------
<S> <C> <C> <C> <C>
Balance, February 28, 1998 17,439 $174 $89,089 $(14,122)
Issuance of warrants and
stock option expense -- -- 87 --
Net loss -- -- -- (74,394)
------ ---- ------- --------
Balance, August 29, 1998 17,439 $174 $89,176 $(88,516)
====== ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
<TABLE>
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
STATEMENT OF CASH FLOWS
For the six months ended August 29, 1998 and August 30, 1997
(In thousands)
(Unaudited)
<CAPTION>
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(74,394) $(16,901)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 7,064 4,976
Deferred revenue (475) (5,267)
Impairment of long-lived assets 47,395 --
Gain on sale of property and equipment (10) (24)
Stock options expense 87 --
Changes in items affecting operations:
Trade accounts receivable 5,102 (2,833)
Merchandise inventory (18,447) 2,507
Prepaid expenses and other 1,810 (1,404)
Trade accounts payable 18,896 (6,247)
Accrued liabilities (269) (3,195)
Income taxes refundable 10,338 15,567
-------- --------
Net cash used by operating activities (2,903) (12,821)
-------- --------
Cash flows from financing activities:
Cash overdraft (2,088) --
Additional borrowings (repayments) 17,805 (9,337)
Reduction of capital lease obligations (261) (40)
Issuance of common stock under stock options -- 4
-------- --------
Net cash provided by (used in) financing activities 15,456 (9,373)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (7,881) (2,182)
Proceeds from sale/leaseback -- 19,937
Proceeds from disposal of property and equipment 1,402 5,373
-------- --------
Net cash provided by (used in) investing activities (6,479) 23,128
-------- --------
Increase in cash and cash equivalents 6,074 934
Cash and cash equivalents, beginning of year -- 1,828
-------- --------
Cash and cash equivalents, end of period $ 6,074 $ 2,762
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,645 $ 2,055
Income taxes -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PETITION FOR REORGANIZATION UNDER CHAPTER 11
--------------------------------------------
On September 16, 1998 (the "Petition Date"), Sun Television and
Appliances, Inc. and its wholly-owned subsidiary, Sun TV and
Appliances, Inc., (collectively referred to as "the Company") filed
voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). The Company is presently
operating its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The Chapter 11 cases are being
jointly administered for procedural purposes by the Bankruptcy Court.
As a debtor-in-possession, the Company is authorized to operate its
business, but may not engage in transactions outside of the normal
course of business without approval, after notice and hearing, of the
Bankruptcy Court. A creditors' committee was formed on October 1, 1998,
which has the right to review and object to business transactions
outside the ordinary course and participate in any plan or plans of
reorganization.
As of the Petition Date, actions to collect pre-petition indebtedness
are stayed and other contractual obligations may not be enforced
against the Company. In addition, the Company may reject executory
contracts and lease obligations, and parties affected by these
rejections may file claims with the Bankruptcy Court in accordance with
the reorganization process. Substantially all liabilities as of the
Petition Date are subject to compromise under a plan of reorganization
to be voted upon by certain impaired classes of creditors ultimately
confirmed by the Bankruptcy Court.
As of the date of this quarterly filing and based on an analysis of the
current assets and liabilities of the Company, management has
determined that it is extremely unlikely that holders of the Company's
common stock will receive or retain any property under a plan of
reorganization or otherwise. The Company is exploring all options to
maximize value for all constituencies of the Company, including without
limitation, a sale of some or all of the assets of the Company or a
stand-alone reorganization plan. For a stand-alone reorganization plan
to be viable, however, vendor support and trade credit are critical.
Currently, the Company is receiving little or no vendor support or
trade credit, and some vendors have chosen not to sell product to the
Company post-petition.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Chapter 11 filings, such
realization of assets and liquidation of liabilities is subject to
significant uncertainty. Accordingly, the financial statements do not
purport to show (a) the realizable value of assets on a liquidation
basis or their availability to satisfy liabilities; (b) the ultimate
pre-petition liability amounts that may be allowed for claims or
contingencies or the status or priority thereof; (c) the effect of any
changes that may be made to the capitalization of the Company; or (d)
the effect of any changes that may be made in the Company's business
operations. The outcome of these matters is not presently determinable.
While under the protection of Chapter 11, the Company may sell or
otherwise dispose of assets, and liquidate or settle liabilities for
amounts other than those reflected in the financial statements.
Further, Bankruptcy Court actions could materially change the amounts
reported in the financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of liabilities
that might be necessary as a consequence of these matters. The
appropriateness of using the going concern basis is also dependent
upon, among other things, confirmation of a plan of reorganization,
future successful operations and the ability to generate sufficient
cash from operations and financing sources to meet obligations, all of
which cannot be guaranteed.
8
<PAGE> 9
Schedules and financial statements will be filed with the Bankruptcy
Court setting forth the assets and liabilities of the Company as of the
Petition Date as shown by the Company's accounting records. Differences
between the amounts shown by the Company on the schedules and the
claims filed by creditors will be investigated, reconciled and resolved
through compromise or litigation. The ultimate amount and settlement
terms for such liabilities are subject to a plan of reorganization, and
accordingly, are not presently determinable.
Under the Bankruptcy Code, the Company may elect to assume or reject
certain pre-petition real estate leases, employment contracts, personal
property leases, service contracts and other unexpired executory
pre-petition contracts and leases, all subject to Bankruptcy Court
approval. The Company cannot presently determine or reasonably estimate
the ultimate liability that may result from the filing of claims for
all executory contracts and unexpired leases that may be rejected. The
Chapter 11 filing, the uncertainty regarding the eventual outcome of
the reorganization case and the effect of other unknown adverse factors
could threaten the Company's existence as a going concern.
2. BASIS OF PRESENTATION
---------------------
The financial statements as of and for the periods ended August 29,
1998 and August 30, 1997, of the Company are unaudited, and are
presented pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, these financial statements should be
read in conjunction with the financial statements and notes thereto
contained in the Company's 1998 Annual Report on Form 10-K. In the
opinion of management, the accompanying unaudited financial statements
reflect all adjustments (which are of a normal recurring nature)
necessary to present fairly the financial position and results of
operations and cash flows for the interim periods presented.
Because of the seasonal nature of the retail industry in general, the
results of operations for the quarters and six months ended August 29,
1998 and August 30, 1997 (which do not include the fall holiday selling
season) are not indicative of the Company's results for the entire
fiscal year.
During the first quarter of fiscal 1999, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting
and display of comprehensive income and its components. For all periods
presented, comprehensive income is equivalent to net income.
3. IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
During fiscal 1997, the Company adopted SFAS No. 121 - "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" ("SFAS 121"). Under the provisions of SFAS 121, due to
certain adverse circumstances arising in the quarter ended August 29,
1998, the Company has evaluated its long-lived assets for impairment.
Such circumstances included poor comparable store sales in the quarter,
slower than expected sales growth from the new rural market stores and
declining gross margins, with resultant pressure on the overall
liquidity of the Company.
The Company has evaluated the recoverability of long-lived assets to be
held and used, including goodwill related to a 1986 acquisition, by
measuring the carrying value of the assets against the estimated
undiscounted future cash flows associated with the assets. This
evaluation indicated that the undiscounted future cash flows of
substantially all of the Company's long-lived assets are not sufficient
to recover the carrying value of such assets. Accordingly, such assets
have been adjusted to fair value, determined as the amount at which the
assets could be bought or sold in a current transaction between willing
parties.
During the second quarter of fiscal 1999, the Company recorded non-cash
charges of approximately $33.3 million and $13.8 million for
write-downs of property and equipment and goodwill, respectively. The
non-cash SFAS 121 charge recorded during the second quarter will result
in depreciation and amortization expense related to these assets
decreasing in future periods.
9
<PAGE> 10
The Company evaluates the recoverability of long-lived assets held for
sale by comparing the asset's carrying value with its fair value less
costs to sell. During the second quarter of fiscal 1999, the Company
recorded a non-cash charge of $0.3 million as a result of its decision
to dispose of certain properties no longer used in its on-going
operations. The Company will not depreciate any of the long-lived
assets while they are held for sale.
4. LIABILITIES SUBJECT TO COMPROMISE
---------------------------------
In November 1990, the American Institute of Certified Public
Accountants issued Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The
Company will adopt the provisions of SOP 90-7 for all future financial
reporting subsequent to the Petition Date. The most significant impact
on the Company's balance sheet will be the segregation of the Company's
pre-petition liabilities subject to compromise from all other
liabilities. The other liabilities will include those liabilities of
the Company, which are not subject to compromise, and post-petition
liabilities of the Company. SOP 90-7 defines liabilities not subject to
compromise as those that will not be impaired under the plan of
reorganization, such as claims where the value of the security interest
is greater than the claim. All pre-petition liabilities, including
those that become known after the Petition Date, will be reflected in
the financial statements based on the expected amount of the allowed
claims in accordance with SFAS No. 5, "Accounting For Contingencies",
as opposed to the amounts for which those claims may ultimately be
settled.
The Company has not yet formulated a plan of reorganization and it is
uncertain as to whether, or the extent to which, certain claims will or
can be impaired under a plan, particularly with regard to whether
certain claims will be treated as priority or administrative claims
under the Bankruptcy Code. The Company is still in the process of
accumulating and analyzing information regarding the amount and nature
of all claims.
The August 29, 1998 classification as to current or long-term
obligations has been based upon the contractual terms, without regard
to the potential impact of the bankruptcy proceedings, because of the
uncertainties surrounding the nature, amount and treatment of the
claims, except for long-term debt obligations as explained in Note 5.
5. LONG-TERM DEBT
--------------
As of August 29, 1998, the Company had outstanding borrowings of $53.4
million against its revolving credit facility. The interest rate
effective at August 29, 1998 was 9.0%. The Company also had outstanding
borrowings of $23.5 million under its term loan facility with an
effective interest rate of 14.5%. As a result of the continued
deterioration of the Company's operating performance, the Company was
in breach of the EBITDA covenant under the loan facilities as of August
29, 1998. Therefore, the Company was in default and the entire debt
balance became immediately due and payable. As such, the Company's
entire debt balance is reflected in the balance sheet as a current
liability as of August 29, 1998.
On September 16, 1998, the Bankruptcy Court entered an interim order
approving the Company's Debtor-In-Possession Loan and Security
Agreement (the "DIP Loan Agreement") for a $75 million revolving credit
facility. The interim order concerning the DIP Loan Agreement also
included a Stipulation by and between the Company and BankBoston for
Adequate Protection. The $75 million DIP Loan Agreement replaced the
Company's previous $100 million revolving credit facility with Bank
Boston.
After continued negotiations, a final order concerning the DIP Loan
Agreement was entered on October 15, 1998. The $75 million DIP Loan
Agreement was reduced to $60 million with acceptable borrowings under
the facility being determined by advance rates on eligible inventory
and accounts receivable. Advance rates under the DIP Loan Agreement for
inventory and accounts receivable are more favorable than the Company's
previous $100 million credit facility. The DIP Loan Agreement has an
effective interest rate of prime +.25% or LIBOR +2.75%, whichever is
greater. The Company paid a $600,000 commitment fee to Bank Boston upon
the closing of the DIP Loan Agreement. The DIP Loan Agreement includes
four financial performance covenants: (1) minimum average inventory per
store, (2) minimum EBITDAR, (3) maximum capital expenditures, and (4)
minimum purchases of inventory.
10
<PAGE> 11
Borrowings under the DIP Loan Agreement are secured by substantially
all of the assets of the Company. The daily cash receipts of the
Company will pay down the line of credit, while daily disbursements
become draws on the line of credit. The DIP Loan Agreement matures on
the earliest of (a) September 15, 2000, (b) notice by BankBoston to the
Company as a result of the occurrence of any event of default, or (c)
the confirmation of a plan of reorganization in the bankruptcy
proceedings.
6. RESTRUCTURING ACCRUAL
---------------------
During fiscal 1997, the Company recorded restructuring charges of $16.7
million to provide for the closing of nine stores and the restructuring
of management, buying, logistics, store and field operations. As of
February 28, 1998, there was a remaining balance of $2.2 million, which
was included in accrued liabilities on the balance sheet. During the
first six months of fiscal 1999, the Company charged $1.4 million to
the restructuring accrual primarily for lease payments on stores closed
as part of the restructuring.
7. 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. As a result of
the Chapter 11 filing, there is an automatic stay placed on all legal
proceedings against the Company.
8. RECLASSIFICATION
----------------
Certain prior year amounts have been reclassified to conform to current
year presentation.
11
<PAGE> 12
Item 2.
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reorganization
- --------------
On September 16, 1998 (the "Petition Date"), Sun Television and Appliances, Inc.
and its wholly-owned subsidiary, Sun TV and Appliances, Inc. (collectively
referred to as the "Company"), filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). The
Company is presently operating its business as a debtor-in-possession subject to
the jurisdiction of the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The Chapter 11 cases are being jointly
administered for procedural purposes by the Bankruptcy Court.
As of the date of this quarterly filing and based on an analysis of the current
assets and liabilities of the Company, management has determined that it is
extremely unlikely that holders of the Company's common stock will receive or
retain any property under a plan of reorganization or otherwise. The Company is
exploring all options to maximize value for all constituencies of the Company,
including without limitation, a sale of some or all of the assets of the Company
or a stand-alone reorganization plan. For a stand-alone reorganization plan to
be viable, however, vendor support and trade credit are critical. Currently, the
Company is receiving little or no vendor support or trade credit, and some
vendors have chosen not to sell product to the Company post-petition.
There were a number of factors that led to the Company's decision to seek
protection through the Chapter 11 filing, not the least of which was the
Company's lack of liquidity. Cash flow was particularly strained while operating
during one of the seasonally weaker sales quarters, and was further impacted by
some vendors restricting the Company's terms and credit lines. As part of the
bankruptcy proceedings, the Company has received approval from the Bankruptcy
Court to close 29 stores in six states, while continuing to operate the
remaining 30 stores.
The bankruptcy proceedings are more fully described in Note 1 to the financial
statements and herein under the "Liquidity and Capital Resources" caption. The
effect of the filing and other associated factors on future results of
operations of the Company is unknown. As such, the results of operations for the
quarter and six months ending August 29, 1998 may not be indicative of the
remainder of fiscal 1999 or future years. The discussion that follows compares
the financial condition and results of operations for the quarter and six months
ending August 29, 1998 to August 30, 1997 for informational purposes, without
regard to any discussion of the Chapter 11 filing or other associated factors
since the effects of these matters are not known.
General Comments
- ----------------
The Company recorded a net loss of $63,477,000, or $3.64 per share, for the
second quarter ended August 29, 1998, compared to a net loss of $6,747,000, or
$.39 per share, for the quarter ended August 30, 1997. The loss reported for the
second quarter of fiscal 1999 includes a non-cash charge of $47.4 million, or
$2.72 per share, related to the impairment of long-lived assets. Total sales
increased $11.2 million to $121.7 million for the second quarter this year.
Comparable store sales declined 9.3% from $108.8 million for the quarter ended
August 30, 1997, to $98.7 million for the quarter ended August 29, 1998. The
gross profit percentage rate decreased from 24.4% last year to 20.3% this year
for the comparable quarter. Selling, general and administrative expenses have
increased $5.1 million and the percentage of expense to sales has increased from
29.5% for the quarter ended August 30, 1997 to 30.9% for the quarter ended
August 29, 1998.
Net Sales and Service Revenues
- ------------------------------
Net sales and service revenues for the second quarter ended August 29, 1998 were
$121,652,000, an increase of $11,211,000, or 10.2%, from $110,441,000 for the
quarter ended August 30, 1997. Net sales and service revenues for the second
quarter ended August 29, 1998 includes sales of $23,173,000 from eighteen stores
that have opened since November 1997. The increase in sales is attributable to
the new stores opened since August 30, 1997 and partially offset by the negative
comparative store sales experienced during this quarter. However,
12
<PAGE> 13
net sales and service revenues for the second quarter of fiscal 1999,
specifically in late July and all of August, fell significantly below the
Company's internal projections.
Retail store sales mix by major product category for the second quarter was as
follows:
<TABLE>
<CAPTION>
Second Quarter Ended
--------------------
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
Television 21.2% 20.6%
Home Office 20.9 20.6
Appliances 28.6 26.6
Audio 10.6 11.1
Video 9.9 10.0
Extended service contracts,
service revenues and
other income 5.7 7.6
Personal convenience 3.1 3.5
----- -----
100.0% 100.0%
===== =====
</TABLE>
Net sales and service revenues for the six months ended August 29, 1998, were
$231,183,000, an increase of $15,746,000, or 7.3%, from $215,437,000 for the six
months ended August 30, 1997. Net sales and service revenues for the six months
ended August 29, 1998 includes sales of $38,255,000 for the eighteen stores
opened since November 1997. The increase in sales is attributable to the new
stores opened since August 30, 1997 and partially offset by the negative
comparative store sales experienced during the first two quarters of fiscal
1999.
The Company's business, consistent with other retailers in general, is seasonal.
Historically, the Company has realized more of its net sales and service
revenues and income from operations during the fall holiday selling season than
during other periods of the year. The net earnings/losses of any interim quarter
are seasonally disproportionate to net sales since administrative and certain
operating expenses remain relatively constant during the year. Therefore,
interim results should not be considered indicative of the results for the
entire fiscal year.
During the quarter, the Company opened one new store location in Aurora, Indiana
for a total of eight new stores opened in the six months ended August 29, 1998.
The Company had 59 stores open as of August 29, 1998, and pending approval by
the Bankruptcy Court, plans to open one new store in the third quarter of fiscal
1999 at the Easton complex in Columbus, Ohio. As discussed previously, the
Company, as part of the bankruptcy proceedings, has been authorized by the
Bankruptcy Court to close 29 stores in six states.
Gross Profit
- ------------
The gross profit percentage for the second quarter ended August 29, 1998 was
20.3%, compared with 24.4% for the quarter ended August 30, 1997. This decrease
in margin rate was primarily attributable to the continued competitive and
highly promotional environment that exists in almost all of the Company's
markets and the volume of service policies sold during the second quarter of
fiscal 1999.
13
<PAGE> 14
The gross profit percentage for the six months ended August 29, 1998 was 22.3%,
compared with 23.2% for the six months ended August 30, 1997. This decrease in
margin rate was primarily attributable to the reduced margin rate experienced in
the second quarter of fiscal 1999 explained above, partially offset by the
increased margin rate experienced in the first quarter of fiscal 1999.
Selling, General and Administrative Expenses
- --------------------------------------------
As a percentage of net sales, selling, general and administrative expenses
increased from 29.5% in the second quarter ended August 30, 1997, to 30.9% for
the quarter ended August 29, 1998. The overall increase in these expenses as a
percent of sales is primarily a result of increased rent and other occupancy
costs as a percent of sales. The overall increase in selling, general and
administrative expenses were primarily a result of payroll costs increasing
approximately $1,100,000 and rent and other occupancy costs increasing
approximately $1,700,000.
As a percentage of net sales, selling, general and administrative expenses
increased from 30.0% in the six months ended August 30, 1997 to 31.4% for the
six months ended August 29, 1998. The overall increase in these expenses as a
percent of sales is primarily a result of increased rent and other occupancy
costs. The biggest contributors to the overall increase in selling, general and
administrative expenses were increased payroll costs of approximately $2,300,000
and increased rent and other occupancy costs of approximately $3,400,000.
Impairment of Long-Lived Assets
- -------------------------------
During the second quarter of fiscal 1999, the Company evaluated the
recoverability of the carrying value of long-lived assets, including goodwill,
in accordance with its stated accounting policies and recorded a non-cash charge
of approximately $47.4 million resulting from the asset impairment. The write
down relating to the asset impairment is more fully discussed in Note 3 to the
financial statements.
Other Income/Expenses
- ---------------------
Interest expense for the quarter ended August 29, 1998 increased $2,134,000
compared to the same period in fiscal 1998. The increase is attributable to the
increase in the average outstanding borrowings and higher interest rates this
year versus last year's second quarter.
Interest expense for the six months ended August 29, 1998 increased $3,786,000
compared to the six months ended August 30, 1997. The increase is attributable
to the increase in the average outstanding borrowings and higher interest rates
this year versus last year's six months.
Income Taxes
- ------------
The Company has not reflected any tax benefit for the quarter or six months
ended August 29, 1998. The tax benefits relating to current operating losses
will be available to the Company only on a carry forward basis and will be
recorded when utilized.
Liquidity and Capital Resources
- -------------------------------
The Company's financial condition continues to be impacted by increased
competition in the Company's markets. The current ratio is 0.87 at August 29,
1998 compared to 2.12 at February 28, 1998, with the decrease being primarily
attributable to the Company's long-term debt being classified as a current
liability at August 29, 1998. Trade accounts receivable decreased by $5,102,000
resulting primarily
14
<PAGE> 15
from (a) a reduction in finance contracts receivable due to lower sales in the
second quarter of fiscal 1999 versus sales in the fourth quarter of fiscal 1998,
reflecting the seasonal business of the Company, and (b) the Company increasing
its reserve for vendor trade receivables determined to be uncollectible during
the second quarter. Inventory has increased by $18,447,000 to maintain
in-stocks, and stock the Company's new stores. The Company received the income
taxes refundable of $10,338,000 as of February 28, 1998 in April 1998. The
$16,808,000 increase in trade accounts payable since the end of fiscal 1998 is
attributable to planned and completed store openings and the Company failing to
make timely payments on its accounts payable due to cash flow constraints.
On October 15, 1998, the Bankruptcy Court entered a final order approving the
Company's $60 million Debtor-In-Possession Loan and Security Agreement (the "DIP
Loan Agreement"), which is provided by BankBoston Retail Finance, Inc. The DIP
Loan Agreement matures on the earlier of (a) September 15, 2000, (b) the
occurrence of an event of default or (c) the confirmation of a plan of
reorganization in the bankruptcy proceedings.
On October 8, 1998, the Bankruptcy Court approved Gordon Brothers Retail
Partners, LLC (the "Liquidator") to serve as the liquidators for the inventory
held at the 29 stores to be closed as part of the bankruptcy proceedings. As
part of the inventory liquidation, the Company will be paid 76.4% of the
aggregate cost value of the merchandise to be liquidated (i.e., salable finished
goods in the ordinary course of business that is not defective). The inventory
in the 29 stores to be closed was turned over to the Liquidator on October 9,
1998 and will be sold through going out of business sales for approximately 6 to
8 weeks. The proceeds from the sale of the inventory to the Liquidator will be
used to pay down the DIP Loan Agreement.
Prior to the Chapter 11 filing, the Company was experiencing a liquidity
shortfall caused by a continuing decline in comparative store sales, slower than
expected growth in certain of the rural market stores, vendors restricting terms
and credit lines and a highly leveraged balance sheet. Management of the Company
believes the Company has adequate near-term working capital to fund its normal
operations while operating as a debtor-in-possession.
Capital expenditures for the second quarter ended August 29, 1998 totaled $2.6
million compared to $1.4 million for the second quarter last year, reflecting
planned new store openings. The Company currently estimates that capital
expenditures for the remainder of fiscal 1999 will not exceed $750,000. As a
result of the Chapter 11 filing, the Company does not plan to open any new
stores during the remainder of fiscal 1999, other than the one store scheduled
to be opened (pending Bankruptcy Court approval) at the Easton complex in
Columbus, Ohio during the third quarter of fiscal 1999. Subject to approval by
the Bankruptcy Court, management anticipates that capital expenditures will be
funded through cash flow from operations and additional borrowings.
BRS,LLC, a business turnaround service subsidiary of PricewaterhouseCoopers,
LLP, has been retained by the Company since February 1997 to assist in the
efforts to return the Company to profitability. BRS,LLC has assisted in the
refinancing of the Company's debt structure, the closure of stores in two market
areas, the sale-leaseback of the distribution center, the initiatives to
revitalize markets and the proposals for entering into additional single-store
market areas. For the quarter ended August 29, 1998, the Company paid $505,000
to BRS,LLC. Mr. R. Carter Pate, Chairman and Interim Chief Executive Officer of
the Company, is a partner of PricewaterhouseCoopers, LLP and a principle of BRS,
LLC. BRS,LLC has also been approved by the Bankruptcy Court as the restructuring
consultants to the Company while operating as a debtor-in-possession.
15
<PAGE> 16
Year 2000 Conversion
- --------------------
The Company is in the process of completing a comprehensive review of its
information systems and is involved in a program to update computer systems and
applications in preparation for the Year 2000. The Year 2000 plan will extend
beyond just the information technology infrastructure to include all areas
potentially affected that are critical to the ongoing business operations. The
comprehensive review of information systems will address the following
categories in an effort to lessen the potential exposure from a Year 2000
disruption: (a) all software applications; (b) all information technology
infrastructures; (c) all imbedded technology; (d) all interfaces with third
parties; and (e) vendor and supplier compliance.
The Company will incur internal staff costs as well as outside consulting and
other expenditures related to this initiative. Total expenditures related to
remediation, testing, conversion, replacement and upgrading system applications
are expected to range from $1.4 million to $1.9 million from fiscal 1999 through
fiscal 2000. Of the total, approximately $0.85 million to $1.2 million will be
capital expenditures related to acquisition and implementation of new package
systems. The balance, approximately $0.55 million to $0.7 million, will be
expenses associated with remediation and testing of existing systems. Total
incremental expenses, including depreciation and amortization of new package
systems, modifications to bring current systems into compliance and writing off
legacy systems are not expected to have a material impact on the Company's
financial condition in any year during the conversion process in fiscal 1999 and
2000. As of August 29, 1998, the Company has incurred expenses of approximately
$0.15 million relating to the Company's Year 2000 initiatives.
The Company is in the process of contacting vendors and others on whom it relies
to assure that their systems will be Year 2000 compliant. However, there can be
no assurance that the systems of other companies on which the Company relies
will be timely converted or that any such failure to convert by another company
would not have an adverse effect on the Company's systems.
The Company does not currently have a contingency plan in place to address a
Year 2000 disruption, but intends to create a plan outlining how to address the
most reasonably likely worst case scenarios. Furthermore, no assurance can be
given that any or all of the Company's systems are or will be Year 2000
compliant, or that the ultimate costs required to address the Year 2000 issue or
the impact of any failure to achieve substantial Year 2000 compliance will not
have a material adverse effect on the Company's financial condition.
New Financial Accounting Standards
- ----------------------------------
On April 13, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
(SOP 98-5). SOP 98-5 requires that costs incurred during start-up activities be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. Adoption of this statement is not expected to have a material
impact on the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for hedging
activities. The statement requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Adoption of this statement is not expected to
have a material impact on the Company's financial position or results of
operations.
16
<PAGE> 17
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) including, but
not limited to, statements regarding the bankruptcy proceedings, future capital
expenditures, store closings and openings, and the amount of working capital
needed to fund operations contained in this report, or made by management of the
Company, involves 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 1999
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; ability to
find suitable new store sites; and volatility of stock price. Actual results may
differ materially from management expectations.
17
<PAGE> 18
PART II. - OTHER INFORMATION
In accordance with the instruction to Part II, the other specified items in this
part have been omitted because they are not applicable or the information has
been previously reported.
Item 3. Defaults Upon Senior Securities
At August 29, 1998, the Company was in default of its $100.0
million revolving credit agreement and its $25.0 million term
loan, as it failed to meet certain of its debt covenants. Both
the revolving credit agreement and the term loan were due
February 28, 2000. The debt has been classified as current in
the accompanying financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on June
30, 1998. The following matters were voted on:
1. Election of Board of Directors.
2. Ratification of the appointment of KPMG Peat Marwick LLP
to serve as independent public accountants for the Company
for fiscal 1999.
All nominees to the Board of Directors were elected, and all
other matters were approved. The votes cast were as follows:
1. Election of Board of Directors
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD TOTAL
------- --- -------- -----
<S> <C> <C> <C>
Macy T. Block 13,419,456 876,661 14,296,117
R. Carter Pate 13,474,323 824,794 14,299,117
Ned L. Sherwood 13,669,003 630,114 14,299,117
Thomas Epstein 13,669,906 629,211 14,299,117
Paul D. Bauer 13,402,006 897,111 14,299,117
Brady J. Churches 13,691,061 608,056 14,299,117
Dennis L. May 13,704,426 594,691 14,299,117
</TABLE>
2. Ratification of Appointment of Independent Public
Accountants:
For 13,552,491
Against 672,050
Abstentions 74,576
Total 14,299,117
18
<PAGE> 19
Item 5. Other
Any shareholder proposal submitted outside the processes of
Rule 14a-8 under the Securities Exchange Act of 1934 for
presentation to the Company's 1999 Annual Meeting of
Shareholders will be considered untimely for purposes of Rules
14a-4 and 14a-5 if notice thereof is received by the Company
after April 14, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of Net Loss per Common Share
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<PAGE> 20
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUN TELEVISION AND APPLIANCES, INC.
(Registrant)
By /s/ Beth A. Savage
-------------------------------------------
Beth A. Savage, Chief Financial Officer and
Treasurer
Date: October 19, 1998
- --------------
* Ms. Savage is the principal financial officer and has been duly authorized to
sign on behalf of the Registrant.
20
<PAGE> 1
Exhibit 11
<TABLE>
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
COMPUTATION OF NET LOSS PER COMMON SHARE
For the quarters ended August 29, 1998 and August 30, 1997
(In thousands, except per share amounts)
<CAPTION>
For the
Quarter Ended
---------------------------
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
Net loss $(63,477) $(6,747)
======== =======
Common shares outstanding:
Weighted average 17,439 17,439
Dilutive effect of stock options and warrants -- --
-------- -------
Weighted average shares used to calculate
diluted loss per share 17,439 17,439
======== =======
Net loss per share:
Assuming basic $ (3.64) $ (.39)
======== =======
Assuming diluted $ (3.64) $ (.39)
======== =======
</TABLE>
21
<PAGE> 2
Exhibit 11 (continued)
<TABLE>
SUN TELEVISION AND APPLIANCES, INC.
(DEBTOR-IN-POSSESSION EFFECTIVE SEPTEMBER 16, 1998)
COMPUTATION OF NET LOSS PER COMMON SHARE
For the six months ended August 29, 1998 and August 30, 1997
(Amounts in thousands, except per share amounts)
<CAPTION>
For the
Six Months Ended
---------------------------
August 29, August 30,
1998 1997
---------- ----------
<S> <C> <C>
Net loss $(74,394) $(16,901)
======== ========
Common shares outstanding:
Weighted average 17,439 17,439
Dilutive effect of stock options and warrants -- --
-------- --------
Weighted average shares used to calculate
diluted loss per share 17,439 17,439
======== ========
Net loss per share:
Assuming basic $ (4.27) $ (.97)
======== ========
Assuming diluted $ (4.27) $ (.97)
======== ========
</TABLE>
22
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000874690
<NAME> SUN TELEVISION AND APPLIANCES, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-29-1998
<EXCHANGE-RATE> 1
<CASH> 6,074
<SECURITIES> 0
<RECEIVABLES> 13,084<F1>
<ALLOWANCES> 0
<INVENTORY> 110,500
<CURRENT-ASSETS> 130,870
<PP&E> 41,920
<DEPRECIATION> 0
<TOTAL-ASSETS> 181,643<F2>
<CURRENT-LIABILITIES> 151,103
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 660
<TOTAL-LIABILITY-AND-EQUITY> 181,643
<SALES> 231,183
<TOTAL-REVENUES> 231,183
<CGS> 179,630
<TOTAL-COSTS> 179,630
<OTHER-EXPENSES> 120,106
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,841
<INCOME-PRETAX> (74,394)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,394)
<EPS-PRIMARY> (4.27)
<EPS-DILUTED> (4.27)
<FN>
<F1>Trade accounts receivable net allowance for doubtful accounts of $1,975.
<F2>Includes assets held for sale of $4,344 and other noncurrent assets of $4,509.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000874690
<NAME> SUN TELEVISION AND APPLIANCES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-30-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,345<F1>
<ALLOWANCES> 0
<INVENTORY> 109,950
<CURRENT-ASSETS> 126,520
<PP&E> 75,483
<DEPRECIATION> 0
<TOTAL-ASSETS> 225,913<F2>
<CURRENT-LIABILITIES> 65,527
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 64,079
<TOTAL-LIABILITY-AND-EQUITY> 225,913
<SALES> 109,531
<TOTAL-REVENUES> 109,531
<CGS> 82,672
<TOTAL-COSTS> 82,672
<OTHER-EXPENSES> 34,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,780
<INCOME-PRETAX> (10,917)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,917)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
<FN>
<F1>Trade accounts receivable net allowance for doubtful accounts of $475.
<F2>Includes assets held for sale of $4,629 and other noncurrent assets of
$5,344.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000874690
<NAME> SUN TELEVISION AND APPLIANCES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-02-1997
<PERIOD-END> FEB-28-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 18,186<F1>
<ALLOWANCES> 0
<INVENTORY> 92,053
<CURRENT-ASSETS> 123,444
<PP&E> 74,136
<DEPRECIATION> 0
<TOTAL-ASSETS> 222,355<F2>
<CURRENT-LIABILITIES> 58,364
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 74,967
<TOTAL-LIABILITY-AND-EQUITY> 222,355
<SALES> 508,065
<TOTAL-REVENUES> 508,065
<CGS> 390,140
<TOTAL-COSTS> 390,140
<OTHER-EXPENSES> 144,221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,598
<INCOME-PRETAX> (31,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,657)<F3>
<CHANGES> 0
<NET-INCOME> (33,551)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
<FN>
<F1>Trade accounts receivable net allowance for doubtful accounts of $475.
<F2>Includes assets held for sale of $4,646 and other noncurrent assets of
$6,069.
<F3>Net of income tax benefit.
</FN>
</TABLE>
