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.
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.
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
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(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.
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
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.
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.
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."
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.
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:
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(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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
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.
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.
ITEM 6.
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)
(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.
ITEM 7.
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:
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
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.
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
$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.
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
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of the financial statements.
BALANCE SHEET (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of the financial statements.
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)
The accompanying notes are an integral part of the financial statements.
STATEMENT OF CASH FLOWS (AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of the financial statements.
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.
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):
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
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.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following (in thousands):
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.
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
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.
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):
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):
NOTE 6 - INCOME TAXES
The (benefit) provisions for income taxes are as follows (in thousands):
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:
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):
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.
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:
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:
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."
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:
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:
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
(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.
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
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):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
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.
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.
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.
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.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
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.
(3) Exhibits:
* 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.
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)
- ------------- (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).
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
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: May 29, 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