<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
CHECK ONE
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934for the thirteen weeks ended October 28, 1995 or
- ---- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 0-7214
HECHINGER COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1001530
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
3500 PENNSY DRIVE, LANDOVER, MARYLAND 20785
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (301) 341-1000
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 of each of the registrant's
classes of Common Stock, as of December 4, 1995.
30,867,748 shares of Class A Common Stock, $.10 par value
11,456,762 shares of Class B Common Stock, $.10 par value
1 of 15
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
THIRTEEN WEEKS ENDED OCTOBER 28, 1995
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3 - 5
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 6
Index to Exhibits 8
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
The information called for by this item is hereby incorporated by reference
from Exhibits 99(a) - 99(e) of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth the sales reported by the Company (in millions):
<TABLE>
<CAPTION>
TOTAL TOTAL TOTAL COMPARABLE
SALES SALES SALES STORE SALES
PERIOD OCT. 28, 1995 OCT. 29, 1994 CHANGE CHANGE
- ------ ------------- ------------- ------ ------------
<S> <C> <C> <C> <C>
Thirteen weeks $549.2 $633.9 (13)% (13)%
Thirty-nine weeks $1,751.0 $1,917.0 (9)% (8)%
</TABLE>
The sales decreases for the thirteen weeks and thirty-nine weeks ended October
28, 1995 were due primarily to 14 Home Quarters stores and eight Hechinger
stores that have closed as a part of the store closing plan announced in the
fourth quarter of 1994. In addition, weak sales of existing homes,
unseasonable weather in the Company's markets, declines in lumber prices and
increased competition have adversely impacted sales during the periods.
The following table sets forth the number of stores operated by the Company:
<TABLE>
<CAPTION>
HECHINGER HOME
STORES QUARTERS TOTAL
------ -------- -----
<S> <C> <C> <C>
As of October 29, 1994 72 61 133
Fourth quarter 1994 openings - - -
Fourth quarter 1994 closings - - -
As of January 28, 1995 72 61 133
First quarter 1995 openings - 3 3
First quarter 1995 closings (2) (15) (17)
As of April 29, 1995 70 49 119
Second quarter 1995 openings - 2 2
Second quarter 1995 closings (6) (1) (7)
As of July 29, 1995 64 50 114
Third quarter 1995 openings 1 4 5
Third quarter 1995 closings (1) - (1)
--- --- ---
As of October 28, 1995 64 54 118
== == ===
</TABLE>
For the thirteen weeks ended October 28, 1995, cost of sales was 81.1% of sales
compared to 78.9% of sales for the corresponding period last year. For the
thirty-nine weeks ended October 28, 1995, cost of sales was 79.3% compared to
78.1% for the corresponding period last year. Distribution, buying and
occupancy expenses are included in cost of sales and are comprised
substantially of fixed costs. The increases in cost of sales are due primarily
to higher distribution, buying and occupancy expenses as a percent to sales,
which was caused by lower sales this year compared to last year.
3
<PAGE> 4
For the thirteen weeks ended October 28, 1995, selling, general and
administrative expenses were 19.4% of sales compared to 19.3% of sales for the
corresponding period last year. These figures include preopening expenses of
$2.3 million for the thirteen weeks ended October 28, 1995, compared to $3.4
million for the corresponding period last year. Excluding these expenses,
selling, general and administrative expenses for the thirteen weeks ended
October 28, 1995 were 19.0% of sales, as compared to 18.8% of sales for the
corresponding period last year. For the thirty-nine weeks ended October 28,
1995, selling, general and administrative expenses were 19.1% compared to 18.6%
for the corresponding period last year. These figures include preopening
expenses of $7.5 million for the thirty-nine weeks ended October 28, 1995,
compared to $8.4 million for the corresponding period last year. Excluding
these expenses, selling, general and administrative expenses for the
thirty-nine weeks ended October 28, 1995 were 18.7% of sales, as compared to
18.2% of sales for the corresponding period last year. The increases,
excluding preopening expenses, were due primarily to less leverage of selling,
general and administrative expenses as a result of lower sales this year
compared to last year.
For the thirteen weeks ended October 28, 1995, interest expense was $8.2
million, 1.5% of sales, compared to $7.4 million, 1.2% of sales, for the
corresponding period last year. For the thirty-nine weeks ended October 28,
1995, interest expense was $23.3 million, 1.3% of sales, compared to $22.2
million, 1.2% of sales, for the corresponding period last year. The increases
were due primarily to lower interest capitalized on construction-in-progress.
For the thirteen weeks and thirty-nine weeks ended October 28, 1995, the
effective tax rate was 37.0% compared to 34.0% for the corresponding periods
last year. The effective tax rate increase was due primarily to an increase in
state taxes and expiration of the Targeted Jobs Tax Credit program as of
December 1994. The effective tax rates differ from the statutory Federal tax
rate due primarily to the effect of tax credits, tax-free earnings on funds
available for investment and state taxes.
For the thirteen weeks ended October 28, 1995, the net loss was $6.4 million,
$.15 per share, compared to net earnings of $3.3 million, $.08 per share, for
the corresponding period last year. For the thirty-nine weeks ended October
28, 1995, net earnings were $3.9 million, $.09 per share, compared to $29.3
million, $.69 per share, for the corresponding period last year.
As of October 28, 1995, 14 Home Quarters stores and eight Hechinger stores have
been closed as a part of the store closing plan announced in the fourth quarter
of 1994. As of October 28, 1995, $32.9 million has been recorded against the
$61.9 million store closing reserve. The main components of the charges were
as follows:
1) losses on liquidation of inventories totaling $13.0 million;
2) losses on disposal of furniture, fixtures, equipment and other assets
totaling $11.4 million;
3) cash expenditures for carrying costs of the stores vacated,
including rents, utilities and other expenses subsequent to the store closing of
$6.1 million; and
4) cash expenditures for employee termination costs of $2.4 million, including
severance pay and related benefits.
Management believes that the remaining reserve is adequate to cover future
losses and cash expenditures in completing this store closing plan. Of the
total remaining accrual of $29.0 million, $20.8 million has been recorded as a
current liability as of October 28, 1995.
Cash and cash equivalents and marketable securities were $62.0 million as of
October 28, 1995, compared to $95.2 million as of January 28, 1995. The
increase in merchandise inventory is due to increased inventory levels at
existing stores in addition to new store openings. The increase in accounts
payable and accrued expenses was due to the increase in inventory and an
unusually low accounts payable balance at January 28, 1995. Net expenditures
for property, furniture and equipment and other assets were $88.5 million for
the thirty-nine weeks ended October 28, 1995 and $128.2 million for the
corresponding period last year. These expenditures are related primarily to
the Company's store expansion and remodeling programs.
4
<PAGE> 5
The Company is a party to legal proceedings and claims arising in the ordinary
course of business. Although the outcome of such proceedings and claims cannot
be determined with certainty, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position.
5
<PAGE> 6
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------ --------
<S> <C>
11 Statement Regarding Computation of Earnings Per Share
99(a) Consolidated Statements of Operations
99(b) Consolidated Balance Sheets
99(c) Consolidated Statements of Cash Flows
99(d) Consolidated Statement of Stockholders' Equity
99(e) Notes to Consolidated Financial Statements
</TABLE>
(B) REPORTS ON FORM 8-K
none.
6
<PAGE> 7
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.
<TABLE>
<S> <C> <C>
Date: December 12, 1995 HECHINGER COMPANY
-----------------
Registrant
/s/W. CLARK McCLELLAND
----------------------
W. Clark McClelland
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
</TABLE>
7
<PAGE> 8
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- ----------- ----
<S> <C> <C>
11 Statement Regarding Computation of Earnings Per Share 9
99(a) Consolidated Statements of Operations 10
99(b) Consolidated Balance Sheets 11
99(c) Consolidated Statements of Cash Flows 12
99(d) Consolidated Statements of Stockholders' Equity 13
99(e) Notes to Consolidated Financial Statements 14 - 15
</TABLE>
8
<PAGE> 1
Exhibit 11
HECHINGER COMPANY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
OCT 28, 1995 OCT 29, 1994 OCT 28, 1995 OCT 29, 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net (loss)/earnings $ (6,406,000) $ 3,268,000 $ 3,901,000 $29,283,000
Interest on 5-1/2% convertible debentures, net of - - - -
tax benefit (1) ------------- ----------- ----------- -----------
Net (loss)/earnings for primary and fully diluted
earnings per share $ (6,406,000) $ 3,268,000 $ 3,901,000 $29,283,000
============= =========== =========== ===========
Weighted average shares outstanding 42,117,066 42,060,574 42,109,721 41,985,847
Dilutive effect of stock options and restricted
stock and performance share awards after
application of the treasury stock method (1) - 438,810 105,754 457,256
Additional shares issuable assuming full conversion
of the 5-1/2% debentures into Class A common
stock (1) - - - -
------------- ----------- ----------- -----------
Common and common equivalent shares outstanding
for primary earnings per share 42,117,066 42,499,384 42,215,475 42,443,103
Additional dilution from stock options and
restricted stock and performance share awards
after application of the treasury stock method (1) - 188 - 62,068
------------ ----------- ----------- -----------
Common and common eqivalent shares outstanding
for fully diluted earnings per share 42,117,066 42,499,572 42,215,475 42,505,171
============ =========== =========== ===========
Primary (loss)/earnings per common share ($0.15) $0.08 $0.09 $0.69
============= =========== =========== ===========
Fully diluted (loss)/earnings per common share ($0.15) $0.08 $0.09 $0.69
============= =========== =========== ===========
</TABLE>
(1) The 5-1/2% Convertible Subordinated Debentures, stock options, restricted
stock and performance share awards were antidilutive for the 13 weeks
ended October 28, 1995. The 5-1/2% Convertible Subordinated Debentures
were antidilutive for the 39 weeks ended October 28, 1995 and the 13
weeks and 39 weeks ended October 29, 1994.
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> JAN-29-1995
<PERIOD-END> OCT-28-1995
<CASH> 24,791
<SECURITIES> 37,206
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 473,090
<CURRENT-ASSETS> 603,962
<PP&E> 542,131<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,281,749
<CURRENT-LIABILITIES> 362,580
<BONDS> 384,217
<COMMON> 4,233
0
0
<OTHER-SE> 477,719
<TOTAL-LIABILITY-AND-EQUITY> 1,281,749
<SALES> 1,751,012
<TOTAL-REVENUES> 1,753,524
<CGS> 1,388,984
<TOTAL-COSTS> 1,724,062
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,269
<INCOME-PRETAX> 6,193
<INCOME-TAX> 2,292
<INCOME-CONTINUING> 3,901
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,901
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<FN>
<F1>Property, furniture and equipment, net of accumulated depreciation
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
OCT 28, 1995 OCT 29, 1994 OCT 28, 1995 OCT 29, 1994
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 549,189 $ 633,870 $ 1,751,012 $ 1,917,045
Other (principally interest) 564 1,272 2,512 2,941
-------------- -------------- ------------- --------------
Total Revenues 549,753 635,142 1,753,524 1,919,986
COSTS AND EXPENSES
Cost of sales 445,240 500,248 1,388,984 1,496,322
Selling, general and administrative expenses 106,518 122,503 335,078 357,101
Interest expense 8,163 7,440 23,269 22,197
-------------- -------------- ------------- --------------
Total Costs and Expenses 559,921 630,191 1,747,331 1,875,620
-------------- -------------- ------------- --------------
(LOSS)/EARNINGS BEFORE INCOME TAXES (10,168) 4,951 6,193 44,366
INCOME TAX (BENEFIT)/EXPENSE (3,762) 1,683 2,292 15,083
-------------- -------------- ------------- --------------
NET (LOSS)/EARNINGS $ (6,406) $ 3,268 $ 3,901 $ 29,283
============== ============== ============= ==============
PRIMARY AND FULLY DILUTED (LOSS)/EARNINGS
PER COMMON SHARE ($0.15) $0.08 $0.09 $0.69
============== ============== ============= ==============
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 42,117 42,499 42,215 42,443
Fully diluted 42,117 42,500 42,215 42,505
DIVIDENDS PER SHARE:
Class A common stock $0.04 $0.04 $0.12 $0.12
Class B common stock $0.02 $0.02 $0.05 $0.05
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 1
EXHIBIT 99(b)
HECHINGER COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
(unaudited)
OCT 28, 1995 JAN 28, 1995
---------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24,791 $ 26,252
Marketable securities at fair value 37,206 68,911
Merchandise inventories 473,090 453,529
Other current assets 68,875 66,742
---------------- ---------------
Total Current Assets 603,962 615,434
PROPERTY, FURNITURE and EQUIPMENT, net 542,131 504,132
COST IN EXCESS OF NET ASSETS ACQUIRED, net 54,162 55,421
LEASEHOLD ACQUISITION COSTS, net 49,684 52,541
OTHER ASSETS 31,810 33,701
---------------- ---------------
TOTAL ASSETS $ 1,281,749 $ 1,261,229
================ ===============
</TABLE>
<TABLE>
<CAPTION>
(unaudited)
OCT 28, 1995 JAN 28, 1995
-------------- ---------------
<S> <C> <C>
LIABILITIES and STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 351,048 $ 327,587
Income taxes payable 7,851 10,493
Current portion of long-term debt and capital lease
obligations 3,681 3,453
-------------- ---------------
Total Current Liabilities 362,580 341,533
LONG-TERM DEBT 384,217 384,969
CAPITAL LEASE OBLIGATIONS 16,468 18,408
DEFERRED RENT 28,332 26,846
OTHER LONG-TERM LIABILITIES 8,200 8,200
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value; authorized
50,000,000 shares; issued 30,867,748 and
30,797,512 3,087 3,080
Class B common stock, $.10 par value, authorized
30,000,000 shares; issued 11,456,762 and
11,518,729 1,146 1,152
Additional paid-in capital 238,248 238,182
Retained earnings 241,007 240,919
Unearned compensation (911) (1,553)
Less treasury stock at cost, 29,249 and 17,213 Class A
common shares and 14,497 and 14,497 Class B
common shares (625) (507)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 481,952 481,273
-------------- ---------------
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY $ 1,281,749 $ 1,261,229
============== ===============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 1
EXHIBIT 99(c)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
39 WEEKS ENDED
OCT 28, 1995 OCT 29, 1994
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings $ 3,901 $ 29,283
Adjustments to reconcile earnings to net cash provided by
operating activities:
Unusual charges (23,220) (3,949)
Depreciation and amortization 43,115 38,395
Deferred income taxes 1,954 6,274
Deferred rent expense 1,486 (346)
-------------- --------------
27,236 69,657
-------------- --------------
CHANGE IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories (19,946) (111,862)
Other current assets (2,133) (24,415)
Accounts payable and accrued expenses 58,455 89,595
Income taxes payable (2,643) 5,732
-------------- --------------
33,733 (40,950)
-------------- --------------
NET CASH FLOWS PROVIDED FROM OPERATIONS 60,969 28,707
-------------- --------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Expenditures for property, furniture, equipment and other
assets, net of disposals (88,449) (128,220)
Marketable securities:
Purchases (162,628) (203,607)
Proceeds from sales 194,333 215,997
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (56,744) (115,830)
-------------- --------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net proceeds from sale and leaseback transaction - 99,295
Dividends paid to stockholders (4,248) (4,221)
Stock options exercised 74 2,284
Other (1,512) (2,641)
-------------- --------------
NET CASH FROM (USED IN) FINANCING ACTIVITIES (5,686) 94,717
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,461) 7,594
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,252 19,675
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,791 $ 27,269
============== ==============
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 3,082 $ 3,456
Cash payments for interest, net of amount capitalized $ 23,718 $ 19,473
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 1
EXHIBIT 99(d)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN CAPITAL
------------ ------------ ---------------
<S> <C> <C> <C>
BALANCE, JAN. 29, 1994 $2,881 $1,331 $236,543
Restricted stock awards earned - - -
Performance stock awards earned and issued 5 - 577
Exercise of stock options including income tax benefit (92,670
Class A common shares were issued from the treasury) 15 - 1,037
Conversions from Class B to Class A common stock 179 (179) -
Conversion of 5 1/2% Convertible Subordinated Debentures into
shares of Class A common stock) - - 25
Purchase of treasury stock (17,114 Class A common shares) - - -
Adjustment to fair value of marketable securities - - -
Cash dividends, Class A common stock ($.16 per share) - - -
Cash dividends, Class B common stock ($.06 per share) - - -
Net earnings - - -
------------ ------------ ---------------
BALANCE, JAN. 28, 1995 3,080 1,152 238,182
Restricted stock awards earned - - -
Exercise of stock options including income tax benefit 1 - 73
Conversions from Class B to Class A common stock 6 (6) -
Purchase of treasury stock (17,315 Class A common shares) - - (7)
Adjustment to fair value of marketable securities - - -
Cash dividends, Class A common stock ($.12 per share) - - -
Cash dividends, Class B common stock ($.05 per share) - - -
Net earnings - - -
------------ ------------ ---------------
BALANCE, OCTOBER 28, 1995 (UNAUDITED) $3,087 $1,146 $238,248
============ ============ ===============
</TABLE>
<TABLE>
<CAPTION>
RETAINED UNEARNED TREASURY
EARNINGS COMPENSATION STOCK TOTAL
------------ ------------ -------- -------
<S> <C> <C> <C> <C>
BALANCE, JAN. 29, 1994 $256,836 $ (2,201) $(1,523) $493,867
Restricted stock awards earned - 648 - 648
Performance stock awards earned and issued - - - 582
Exercise of stock options including income tax benefit (92,670
Class A common shares were issued from the treasury) - - 1,260 2,312
Conversions from Class B to Class A common stock - - - -
Conversion of 5 1/2% Convertible Subordinated Debentures into
shares of Class A common stock) - - - 25
Purchase of treasury stock (17,114 Class A common shares) - - (244) (244)
Adjustment to fair value of marketable securities (371) - - (371)
Cash dividends, Class A common stock ($.16 per share) (4,883) - - (4,883)
Cash dividends, Class B common stock ($.06 per share) (752) - - (752)
Net earnings (9,911) - - (9,911)
------------ ------------ -------- -------
BALANCE, JAN. 28, 1995 240,919 (1,553) (507) 481,273
Restricted stock awards earned - 642 - 642
Exercise of stock options including income tax benefit - - - 74
Conversions from Class B to Class A common stock - - - -
Purchase of treasury stock (17,315 Class A common shares) - - (118) (125)
Adjustment to fair value of marketable securities 435 - - 435
Cash dividends, Class A common stock ($.12 per share) (3,698) - - (3,698)
Cash dividends, Class B common stock ($.05 per share) (550) - - (550)
Net earnings 3,901 - - 3,901
------------ ------------ -------- -------
BALANCE, OCTOBER 28, 1995 (UNAUDITED) $241,007 $ (911) $ (625) $481,952
============ ============ ======== ========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 1
EXHIBIT 99(E)
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995
(unaudited)
A. BASIS OF PRESENTATION
In the opinion of the management of Hechinger Company (the "Company"), the
accompanying unaudited consolidated financial statements include all
adjustments (which consist of normal recurring accruals) considered necessary
for a fair statement of the results for the interim periods presented. The
operating results for the thirty-nine weeks ended October 28, 1995 are not
necessarily indicative of the results to be expected for the fiscal year ending
February 3, 1996.
The financial statements presented herein should be read in conjunction with
the financial statements incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended January 28, 1995.
B. MERCHANDISE INVENTORY
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Interim results are subject to
the final year-end LIFO inventory valuation.
All inventories reported at October 28, 1995 and January 28, 1995 were valued
using the LIFO inventory valuation method. If all inventories had been valued
under the FIFO method, which approximates replacement cost, inventories would
have been $23.4 million and $18.9 million higher than reported at October 28,
1995 and January 28, 1995, respectively.
C. TAXES ON INCOME
For the thirteen weeks and thirty-nine weeks ended October 28, 1995, the
effective tax rate was 37.0% compared to 34.0% for the corresponding periods
last year. The effective tax rate increase was due primarily to an increase in
state taxes and expiration of the Targeted Jobs Tax Credit program as of
December 1994. The effective tax rates differ from the statutory Federal tax
rate due primarily to the effect of tax credits, tax-free earnings on funds
available for investment and state taxes.
D. UNUSUAL CHARGE
As of October 28, 1995, 14 Home Quarters stores and eight Hechinger stores have
been closed as a part of the store closing plan announced in the fourth quarter
of 1994. As of October 28, 1995, $32.9 million has been recorded against the
$61.9 million store closing reserve. The main components of the charges were
as follows:
1) losses on liquidation of inventories totaling $13.0 million;
2) losses on disposal of furniture, fixtures, equipment and other assets
totaling $11.4 million;
3) cash expenditures for carrying costs of the stores vacated, including
rents, utilities and other expenses subsequent to the store closing of $6.1
million; and
4) cash expenditures for employee termination costs of $2.4 million, including
severance pay and related benefits.
14
<PAGE> 2
Management believes that the remaining reserve is adequate to cover future
losses and cash expenditures in completing this store closing plan. Of the
total remaining accrual of $29.0 million, $20.8 million has been recorded as a
current liability as of October 28, 1995.
E. CONTINGENCIES
The Company is a party to legal proceedings and claims arising in the ordinary
course of business. Although the outcome of such proceedings and claims cannot
be determined with certainty, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position.
15
