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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
CHECK ONE
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- ------
Act of 1934 for the fiscal year ended January 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK, $.10 PAR VALUE
CLASS B COMMON STOCK, $.10 PAR VALUE
5-1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
6.95% SENIOR NOTES DUE 2003
9.45% SENIOR DEBENTURES DUE 2012
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 by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
X
-----
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. (The aggregate market value is computed by reference to the
last sale price of such stock as of April 13, 1995.)
$340,108,586
Indicate the number of shares outstanding of each of the registrant's classes
of Common Stock, as of April 13, 1995
30,827,070 shares of Class A Common Stock, $.10 par value
11,494,528 shares of Class B Common Stock, $.10 par value
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are hereby incorporated by reference into Parts II, III
and IV of this Form 10-K: (1) Portions of Registrant's Annual Report to
Stockholders for the year ended January 28, 1995, as indicated herein. (2)
Portions of Registrant's 1995 Proxy Statement to be filed pursuant to
Regulation 14A, as indicated herein.
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PART I
ITEM 1. BUSINESS
Hechinger Company (the "Company") is the successor to a business started in
1911 by Sidney L. Hechinger. The Company is a leading specialty retailer
providing products and services for the care, repair, remodeling and
maintenance of the home and garden. The Company serves the home improvement
industry through two operating subsidiaries: Home Quarters Warehouse, Inc.,
operating 49 stores primarily in the eastern and central parts of the United
States; and, Hechinger Stores Company, operating 70 stores primarily in the
mid-Atlantic region (store counts as of May 1995).
EXPANSION STRATEGY
The Company is rapidly expanding its Home Quarters Warehouse subsidiary. Home
Quarters stores, with their large-scale merchandise presentation, operate under
the warehouse format, producing high sales volume by emphasizing low pricing
and superior levels of service. Home Quarters stores offer a wide assortment
of building materials and home improvement merchandise to do-it- yourselfers
and professional contractors in brightly lit, uncluttered facilities
containing, on average, approximately 95,000 square feet under roof.
The Company opened a new 115,000 square foot store in Chesapeake, Virginia in
July 1993. This store incorporates many new features which the Company
believes allows it to increase productivity. New features in a "Chesapeake
class" store include: a greenhouse and garden center; design centers staffed
with experienced professionals; merchandise installation services; and, a
dedicated classroom called "HQ University" for how-to clinics. The "Chesapeake
class" store also has a dedicated contractor's desk to handle the special needs
of professional contractors and commercial property owners, including its own
entrance and loading facility. In addition, the "Chesapeake class" store
offers "Kids Quarters", a supervised on-site child care facility for children
ages three to eight. As compared to earlier Home Quarters units, a "Chesapeake
class" store has approximately 25% more square footage and carries
approximately 33% more SKUs . Since July 1993, the Company has opened 19 new
"Chesapeake class" stores.
The Company has been converting its Hechinger stores to the Home Project Center
format since 1991. The Home Project Center format was developed to capitalize
on the traditional strengths of Hechinger Stores Company, which the Company
considers to be: strong name awareness among consumers, convenient store
locations, and home decor merchandising. This merchandising strength is best
exemplified in the Hechinger Home Project Center store located in Laurel,
Maryland, which opened in June 1994. Highlights of this store include a large
kitchen and bath presentation located in the front of the store and a
comprehensive offering of lighting, flooring, wall coverings, paint and other
home decor items. In addition, the store offers extensive design services
including kitchen, bath and landscaping.
The following tables set forth the number of stores operated by the Company and
the aggregate amount of square feet of store space in such stores for the
specified periods (excluding the six Triangle Building Center stores which the
Company closed in fiscal 1993):
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<TABLE>
<CAPTION>
HECHINGER HOME
NUMBER OF STORES: STORES QUARTERS
---------------- ---------- --------
<S> <C> <C>
As of February 1, 1992 76 30
1992 openings 3 14
1992 closings (4) (1)
As of January 30, 1993 75 43
1993 openings 3 11
1993 closings (6) (1)
As of January 29, 1994 72 53
1994 openings 2 10
1994 closings (2) (2)
As of January 28, 1995 72 61
<CAPTION>
STORE SQUARE FOOTAGE HECHINGER HOME
(IN THOUSANDS): STORES QUARTERS
-------------------- --------- --------
<S> <C> <C>
As of February 1, 1992 4,814 2,563
1992 openings 351 1,226
1992 closings (234) (32)
As of January 30, 1993 4,931 3,757
1993 openings 270 1,122
1993 closings (355) (85)
As of January 29, 1994 4,846 4,794
1994 openings 307 1,190
1994 closings (109) (186)
As of January 28, 1995 5,044 5,798
</TABLE>
As announced in January 1995, the Company plans to close 14 Home Quarters
stores in the first quarter of 1995 and close eight Hechinger stores in 1995,
two of which closed subsequent to January 28, 1995. See Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations for further discussion.
In 1995, the Company plans to open approximately 9 new "Chesapeake class" Home
Quarters stores, including two relocations, and plans to begin construction on
three new Hechinger Home Project Centers which will replace older, smaller
units. The precise number will depend upon, among other things, the
availability of suitable locations and prevailing economic conditions. In
addition, approximately 18 Home Quarters stores and approximately six Hechinger
stores are intended to be remodeled.
In August 1994, the Company announced its intention to expand into Mexico. Due
to the significant economic crisis in Mexico, the Company has postponed those
plans.
PRODUCTS
All of the Company's stores offer for sale a large selection of lumber,
building materials, hardware and tools, paint, garden supplies, electrical and
plumbing supplies and other items related to the home improvement market.
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The following table sets forth the percentage of sales accounted for by
merchandise category:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JAN. 28, 1995 JAN. 29, 1994 JAN. 30, 1993
- ----------------- ------------- ------------- -------------
<S> <C> <C> <C>
Lumber and building materials 27% 29% 28%
Garden supplies and furniture 18 18 15
Hardware and tools 12 13 12
Electrical supplies and small
appliances 11 12 14
Plumbing supplies 16 12 14
Paint 9 9 10
Housewares 7 7 7
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
Many of the items sold in the Company's stores are nationally advertised, brand
name products. The Company also offers some private label items such as garden
equipment and supplies, and paint. The Company may add private label items to
its merchandise in other areas where there are no major national brands or
where management deems it an effective way to meet price competition in a
particular product line. The Company believes it has good relationships with
its suppliers and does not consider itself dependent upon any single source for
its merchandise.
MARKETING
The majority of the Company's sales are to individuals. Employees are trained
to help the do-it-yourself customer make his or her purchases and solve
technical problems related to home repair, maintenance and improvement work.
The Company employs an advertising program through the regular use of newspaper
and direct mail pieces. A " catabook ", which is compact enough to carry along
as a shopping reference and serves as an "idea" book with an index and large
type prices, is heavily utilized. Advertisements feature the stores' wide
selection and values. The Company also employs television and radio
advertising where deemed effective. The Company emphasizes competitive pricing
with its policy being to meet or beat the regular or sale prices of all major
competitors. In addition, the Company offers its customers a liberal return
policy.
The Company hosts how-to clinics throughout the year at various stores. At
these clinics, trained employees, manufacturers' representatives and, at times,
nationally recognized experts, demonstrate products and conduct classes on
major home improvement projects.
The Company offers a private label credit card program pursuant to which credit
is extended to its customers by a third party financial institution. The
Company also accepts Visa, MasterCard and Discover in all stores and American
Express in its Home Quarters stores. For the fiscal year ended January 28,
1995 credit card sales accounted for 48% of the Company's total sales.
COMPETITION
The business of the Company is highly competitive. The Company competes in
each of its market areas with other home center chains, national chains of
general merchandise stores and local hardware stores, some of which have
greater financial resources than the Company.
The extent of the Company's competition varies by geographic area. New
competitors have entered several of the Company's existing markets and markets
targeted for future development, and established competitors are expanding in
certain of those markets, which may, in each case, adversely effect the
Company's sales. In addition, the Company's strategy to maintain competitive
pricing in each of its markets may result in lower gross margins as competition
intensifies. There can be no assurance that the Company's financial results
will not be impacted
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negatively by existing competition, by the further expansion of competitors
into the Company's markets or by the Company's expansion into competitors'
markets. See Management's Discussion and Analysis of Financial Condition and
Results of Operations for discussion of store closings in certain markets.
The Company believes that it is in a strong competitive position in the
majority of its established market areas, reflecting the quality of its trained
personnel, breadth and depth of merchandising, pricing, advertising policies
and store size, location and condition. The Company believes that its ability
to devote substantial capital resources to the operation and expansion of its
business will enable it to remain competitive in the industry.
EMPLOYEES
The Company has approximately 20,000 employees, approximately half of whom are
employed on a part-time basis. The Company conducts comprehensive employee
training programs. These training programs have enabled the Company to promote
from within many current store managers and merchandisers. In addition, the
Company supplements its work force by recruiting from outside sources. The
Company believes its employee relations are satisfactory.
ITEM 2. PROPERTIES
The Home Quarters Warehouse stores currently average approximately 95,000
square feet under roof and an additional 30,000 square feet of outdoor selling
and storage space. More recent Home Quarters Warehouse stores have typically
ranged from 109,000 to 118,000 square feet under roof. Hechinger stores
currently average approximately 70,000 square feet under roof and an additional
22,000 square feet of outdoor selling and storage space.
The Company currently owns 14 stores and leases the remaining stores. The
Company believes that all of its facilities, both owned and leased, are in good
condition and well maintained. Expiration dates of the leases range from 1995
to 2023. Almost all leases contain renewal clauses or continue on a
year-to-year basis after their respective expiration dates. Eleven of the
store sites are leased from an affiliate.
Hechinger stores are serviced, in part, from the Company's modern warehouse and
distribution facility in Landover, Maryland, which has approximately 640,000
square feet under roof. In addition, Hechinger has approximately 177,000
square feet of office space in Landover, Maryland. Home Quarters Warehouse
stores receive their merchandise directly from their suppliers. Home Quarters
Warehouse has approximately 71,000 square feet of office space in Virginia
Beach, Virginia.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are parties to numerous pending legal
proceedings and claims arising in the ordinary course of business, including
several suits alleging wrongful employment practices. This includes the
following two cases:
1. Robert Miller et al. v. Hechinger Co. et al., U.S. District Court for the
District of Md., PJM -94-613, filed March 27, 1994. This case alleges causes
of action for discriminatory termination of employment under the Age
Discrimination in Employment Act, 29 U.S.C. 621 et seg . (" ADEA ") on behalf
of five named plaintiffs. In this action the plaintiffs have also named John
W. Hechinger, Jr. and Gary Mercer as defendants. The five plaintiffs seek to
notify other allegedly "similarly situated" former employees of their ability
to file consents to join as parties to this litigation under 29 U.S.C. 216(b),
incorporated into the ADEA by 29 U.S.C. 626(b). To date, the plaintiffs are
seeking unspecified back pay, compensatory damages, reinstatement and front
pay, liquidated damages, costs and attorneys' fees. Some 20 to 40 additional
former employees are alleged to have filed consents to become parties to this
action and discovery regarding these alleged consents is being conducted.
Trial of this case is set to occur within the period September 1996 - November
1996. The Company believes it has meritorious defenses to these
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claims and will defend itself vigorously.
2. Hudie Fleming et al. v. Hechinger Co. et al., United States District
Court for the District of Md., Case No. PJM -94-2967. In this case, 14 named
plaintiffs, in a Complaint filed November 11, 1994, seek to represent a class
under Federal Rule of Civil Procedure 23 purportedly consisting of all black
employees of Hechinger Company from January 1, 1991 through July 1, 1994. The
plaintiffs allege race discrimination in violation of 42 U.S.C. 1981 and 1983
and the Thirteenth Amendment. The Complaint also includes a cause of action
for intentional infliction of emotional distress. Plaintiffs have named John
W. Hechinger, Jr. and Gary Mercer as individual defendants. The plaintiffs
seek back pay, prejudgment interest, compensatory damages, $150 million in
punitive damages, costs and attorneys' fees. Discovery relating to whether or
not any class should be certified is proceeding, and determinations on these
class issues are due to be decided in late Fall 1995. Trial is set to occur
within the period September 1996 - November 1996. The Company believes it has
meritorious defenses to these claims and will defend itself vigorously.
Although the outcome of such proceedings and claims cannot be determined with
certainty, based upon evaluation by legal counsel, management believes that the
outcome of such proceedings and claims will not have a material adverse effect
on the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in its entirety in the Proxy Statement.
The following table sets forth certain information regarding the Company's
executive officers as of March 1995:
<TABLE>
<CAPTION>
YEAR FIRST JOINED
NAME AND AGE POSITION WITH THE COMPANY THE COMPANY
- ------------ ------------------------- -----------------
<S> <C> <C> <C>
John W. Hechinger, Jr. (45) President and Chief Executive Officer since 1990; prior 1972
thereto, President and Chief Operating Officer since 1986
W. Clark McClelland (56) Executive Vice President and Chief Financial Officer 1975
since 1993; Senior Vice President-Finance and Chief
Financial Officer since 1986
Kenneth J. Cort (53) President and Chief Executive Officer of Hechinger Stores 1993
Company since 1993; prior thereto, Chief Operating Officer
for Ames Department Stores, Inc. since 1991; prior thereto,
Merchandising General Manager for Sears Roebuck & Company
since 1989; prior thereto, Chairman for Alberts Hosiery since
1988
Frank C. Doczi (57) President and Chief Executive Officer of Home Quarters 1988
Warehouse, Inc. since acquired by the Company in 1988
S. Ross Hechinger (43) Senior Vice President-Corporate Administration in 1994; 1974
prior thereto, Senior Vice President-Information Systems and
Logistics of Hechinger Stores Company since 1990
Roger K. Wright (47) Senior Vice President-Real Estate and Development since 1979
1988
</TABLE>
John W. Hechinger Jr. and S. Ross Hechinger are brothers and the sons of John
W. Hechinger, Chairman of the Board of the Company.
Executive officers are elected by the board of directors of the Company at its
first meeting held after each Annual Meeting of Stockholders to serve until
their successors are chosen and qualified, or as otherwise provided in the
Company's By-laws.
7
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Pursuant to General Instruction G(2) of Form 10-K, the information called for
by this item is hereby incorporated by reference from page 23 of the Company's
Annual Report to Stockholders for the fiscal year ended January 28, 1995.
ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction G(2) of Form 10-K, the information called for
by this item is hereby incorporated by reference from page 1 of the Company's
Annual Report to Stockholders for the fiscal year ended January 28, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Pursuant to General Instruction G(2) of Form 10-K, the information called for
by this item is hereby incorporated by reference from pages 9 through 11 of the
Company's Annual Report to Stockholders for the fiscal year ended January 28,
1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pursuant to General Instruction G(2) of Form 10-K, the information called for
by this item is hereby incorporated by reference from pages 12 through 22 of
the Company's Annual Report to Stockholders for the fiscal year ended January
28, 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) of Form 10-K, the information called for
by this item regarding directors is hereby incorporated by reference from the
Company's definitive proxy statement to be filed pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
Information regarding the Company's executive officers is set forth above in
the unnumbered Item following Item 4 of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of Form 10-K, the information called for
by this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of Form 10-K, the information called for
by this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of Form 10-K, the information called for
by this item is hereby incorporated by reference from the Company's definitive
proxy statement to be filed pursuant to Regulation 14A not later than 120 days
after the end of the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. Financial Statements. The following Consolidated Financial
Statements of Hechinger Company and subsidiaries are incorporated by reference
to the pages indicated in Annual Report to Stockholders for the fiscal year
ended January 28, 1995:
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Consolidated Statements of Operations - Years ended
January 28, 1995, January 29, 1994 and January 30, 1993 12
Consolidated Balance Sheets - As of January 28, 1995
and January 29, 1994 13
Consolidated Statements of Cash Flows - Years ended
January 28, 1995, January 29, 1994 and January 30, 1993 14
Consolidated Statements of Stockholders' Equity -
Years ended January 28, 1995, January 29, 1994 and
January 30, 1993 15
Notes to Consolidated Financial Statements 16-22
</TABLE>
2. Financial Statement Schedules. The following consolidated
financial statement schedule of Hechinger Company and subsidiaries for the year
ended January 28, 1995, January 29, 1994 and January 30, 1993 is filed as a
part of this Report and should be read in conjunction with the Consolidated
Financial Statements of Hechinger Company:
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required
to be set forth therein is included in the Consolidated Financial Statements or
Notes thereto.
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3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DOCUMENT
- -------------- --------
<S> <C>
3(a) Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-27134)
3(b) By-Laws, as amended (incorporated by reference to Exhibit 3(b) to Annual
Report on Form 10-K for the fiscal year ended February 3, 1990, File No. 0-7214)
4(a) Indenture, dated as of March 15, 1987, between the Company and First
Union National Bank of North Carolina, relating to 5-1/2% Convertible
Subordinated Debentures Due 2011 (incorporated by reference to Exhibit
4(d) to Registration Statement on Form S-3, File No. 33-12649)
4(b) Indenture, dated as of October 1, 1992, between the Company and First
Union National Bank of North Carolina, and the Prospectus Supplement
dated November 12, 1992 relating to 9.45% Senior Debentures due 2012
(incorporated by reference to Exhibit 4 to Registration Statement on
Form S-3, File No. 33-52960)
4(c) Indenture, dated as of October 1, 1992, between the Company and First
Union National Bank of North Carolina, and the Prospectus Supplement
dated October 21, 1993 relating to 6.95% Senior Notes due 2003
(incorporated by reference to Exhibit 4 to Registration Statement on
Form S-3, File No. 33-52960)
10(a) Form of Deferred Compensation Agreement between the Company and
John W. Hechinger and Richard England, respectively (incorporated
by reference to Exhibit 10 to Registration Statement on Form S-3,
File No. 2-98155)
10(b) Hechinger Company 1982 Stock Option Plan, as amended (incorporated
by reference to Exhibit 4.3 to Registration Statement on Form S-8,
File No. 33-27134)
10(c) Hechinger Company Performance Share Plan (incorporated by reference
to Exhibit 10(e) to Annual Report on Form 10-K for the fiscal year
ended February 3, 1990, File No. 0-7214)
10(d) Stockholders' Agreement, dated as of August 23, 1989, by and between
members of the England Family, members of the Hechinger Family and the
Company (incorporated by reference to Exhibit 28 (a) to Registration
Statement on Form S-4, as filed on October 26, 1989)
10(e) Hechinger Company 1991 Stock Incentive Plan (incorporated by reference
to Exhibit 4(a) to Registration Statement on Form S-8, File No. 33-27134)
11 Statement Regarding Computation of Earnings Per Share
13 Annual Report to Stockholders of the Company for the fiscal year ended
January 28, 1995, certain portions of which are incorporated by reference herein
18 Letter Regarding Change in Accounting Principle
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
</TABLE>
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(b) Reports on Form 8-K.
Two Current Reports on Form 8-K: the first dated October 6, 1994 to
file a copy of the Company's press release announcing September 1994
sales information; and, the second dated January 11, 1995 to file a
copy of the Company's press release announcing the Company's plans to
close its stores in certain markets.
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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.
HECHINGER COMPANY
(Registrant)
Date: April 28 , 1995 By /S/ JOHN W. HECHINGER, JR.
--------------------------
John W. Hechinger, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ JOHN W. HECHINGER Chairman of the Board April 28, 1995
- --------------------- of Directors
John W. Hechinger
/S/ HERBERT J. BRONER Director April 28, 1995
- ---------------------
Herbert J. Broner
/S/ JOHN W. HECHINGER, JR. President and Chief Executive April 28, 1995
- -------------------------- Officer (Principal Executive
John W. Hechinger, Jr. Officer) and Director
/S/ S. ROSS HECHINGER Senior Vice President- April 28, 1995
- --------------------- Corporate Administration
S. Ross Hechinger and Director
/S/ ANN D. JORDAN Director April 28, 1995
- -----------------
Ann D. Jordan
/S/ DAVID O. MAXWELL Director April 28, 1995
- --------------------
David O. Maxwell
/S/ W. CLARK MCCLELLAND Executive Vice President and April 28, 1995
- ----------------------- Chief Financial Officer
W. Clark McClelland (Principal Financial Officer)
and Director
/S/ ALAN J. ZAKON Director April 28, 1995
- -----------------
Alan J. Zakon
/S/ RICHARD S. GROSS Vice President and Corporate Controller April 28, 1995
- -------------------- (Principal Accounting Officer)
Richard S. Gross
</TABLE>
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HECHINGER COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JANUARY 28, 1995
INDEX TO
SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
DESCRIPTION SEQUENTIALLY
----------- NUMBERED PAGE
-------------
<S> <C> <C>
Schedule II - Valuation and Qualifying Accounts 14
Exhibit 11 - Statement Regarding Computation of Earnings Per Share 15
Exhibit 13 - Annual Report to Stockholders for fiscal year ended 16 - 43
January 28, 1995
Exhibit 18 - Letter Regarding Change in Accounting Principle 44
Exhibit 21 - Subsidiaries of the Registrant 45
Exhibit 23 - Consent of Independent Auditors 46
</TABLE>
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SCHEDULE II
HECHINGER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
DESCRIPTION BALANCE AT ADDITIONS - BALANCE AT
BEGINNING OF CHARGED TO DEDUCTIONS - END OF PERIOD
PERIOD COSTS AND WRITE-OFFS
EXPENSES
- -------------------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
Year ended January 30, 1993
Allowance for doubtful accounts $2,753 $2,297 $4,669 $381
Year ended January 29, 1994
Allowance for doubtful accounts 381 1,008 1,212 177
Year ended January 28, 1995
Allowance for doubtful accounts $177 $1,499 $1,346 $330
</TABLE>
(a) In 1992, the Company sold the entire Hechinger Stores' accounts receivable.
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HECHINGER COMPANY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 28, JANUARY 29, JANUARY 30, FEBRUARY 1, FEBRUARY 2,
1995 1994 1993 1992 1991
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net (loss) earnings $(9,911,000) $24,760,000 $(26,272,000) $26,055,000 $23,259,000
Interest on 5-1/2% convertible debentures,
net of tax benefit -- -- -- -- --
------------ ------------ ------------- ------------ ------------
Net (loss) earnings for primary and fully
diluted (loss) earnings per share $(9,911,000) $24,760,000 $(26,272,000) $26,055,000 $23,259,000
============ ============ ============= ============ ============
Weighted average shares outstanding 42,011,252 41,743,852 41,694,182 39,496,710 35,944,153
Dilutive effect of stock options,
restricted stock and performance
share awards after application of
the treasury stock method -- 198,075 -- 228,509 56,912
Additional shares issuable assuming full
conversion of the 5-1/2% debentures
into Class A common stock -- -- -- -- --
------------ ------------ ------------- ------------ ------------
Common and common equivalent shares
outstanding for primary (loss)
earnings per share 42,011,252 41,941,927 41,694,182 39,725,219 36,001,065
Additional dilution from stock options,
restricted stock and performance share
awards after application of the treasury
stock method -- 33,011 -- 51,836 --
------------ ------------ ------------- ------------ ------------
Common and common equivalent shares
outstanding for fully diluted (loss)
earnings per share 42,011,252 41,974,938 41,694,182 39,777,055 36,001,065
============ ============ ============= ============ ============
Primary (loss) earnings per common share $ (0.24) $ 0.59 $ (0.63) $ 0.66 $ 0.65
============ ============ ============= ============ ============
Fully diluted (loss) earnings per
common share $ (0.24) $ 0.59 $ (0.63) $ 0.66 $ 0.65
============ ============ ============= ============ ============
</TABLE>
15
<PAGE> 1
ANNUAL REPORT YEAR ENDED JANUARY 28, 1995
HECHINGER COMPANY
[HOME QUARTERS WAREHOUSE LOGO]
[HECHINGER LOGO]
[FIGURE 1]
<PAGE> 2
[HOME QUARTERS WAREHOUSE LOGO]
[HECHINGER LOGO]
<PAGE> 3
Hechinger Company is a leading specialty retailer providing products and
services for the care, repair, remodeling and maintenance of the home and
garden. The Company serves the growing home improvement industry through two
operating subsidiaries: Home Quarters Warehouse, Inc., operating stores
primarily in the southern, northeastern and midwestern parts of the United
States, and Hechinger Stores Company, operating stores primarily in the
mid-Atlantic region of the United States.
Hechinger Company common stock has been traded publicly since 1972 on The
Nasdaq Stock Market under the symbols HECHA and HECHB. Corporate headquarters
are located in Landover, Maryland.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993 Feb. 1, 1992 Feb. 2, 1991
- ---------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $2,449,554 $2,094,968 $1,869,349 $1,607,727 $1,392,198
Cost of sales 1,908,874 1,632,702 1,432,340 1,201,536 1,037,834
Interest expense 29,793 23,063 14,121 11,906 10,475
Income tax (benefit) expense (5,545) 10,611 (15,429) 10,133 9,593
Net (loss) earnings (9,911) 24,760 (26,272) 26,055 23,259
Net (loss) earnings
per common share $(.24) $.59 $(.63) $.66 $.65
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE
Class A common $.16 $.16 $.16 $.16 $.16
Class B common .06 .06 .06 .06 .06
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $1,261,229 $1,229,242 $1,075,749 $936,774 $792,752
Long-term debt and capital
lease obligations 403,377 407,873 305,974 207,485 189,152
Total stockholders' equity 481,273 493,867 473,924 505,185 417,899
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: In the fourth quarter of 1994, the Company recorded a charge of $61.9
million primarily related to its decision to close its stores in certain
markets. In 1992, the Company recorded a charge of $83 million to establish a
Strategic Reserve to cover estimated costs associated with the repositioning of
Hechinger Stores Company. In 1991, the Company recorded charges totaling $8
million which were primarily comprised of costs associated with the closing of
eight Hechinger stores, one-time costs associated with the sale of Hechinger
Stores' accounts receivable and costs related to Home Quarters' adoption of the
LIFO inventory method. In 1994, the Company changed its method of calculating
LIFO inventories. See Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. All years presented were 52 weeks.
1
<PAGE> 4
SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------------------
(in thousands except per square foot data)
<S> <C> <C> <C>
NET SALES
Hechinger Stores Company $1,090,911 $1,056,876 $1,044,971
Home Quarters Warehouse, Inc. 1,358,643 995,267 743,681
Triangle Building Centers -- 42,825 80,697
- ----------------------------------------------------------------------------------------------------
Total net sales $2,449,554 $2,094,968 $1,869,349
OPERATING INCOME
Hechinger Stores Company $ 30,934 $ 24,897 $ 31,580
Home Quarters Warehouse, Inc. 62,461 45,131 33,954
Triangle Building Centers -- -- 1,023
- ----------------------------------------------------------------------------------------------------
Total operating income 93,395 70,028 66,557
Pre-opening expenses 8,858 12,972 9,631
Amortization of goodwill 1,679 1,679 1,679
Corporate expenses 6,336 4,190 4,600
Non-operating properties 4,844 510 800
Interest expense, net of other income 25,284 15,306 8,548
Unusual charges 61,850 -- 83,000
- ----------------------------------------------------------------------------------------------------
(Loss) income before income taxes $ (15,456) $ 35,371 $ (41,701)
IDENTIFIABLE ASSETS
Hechinger Stores Company $ 434,378 $ 471,016 $ 416,865
Home Quarters Warehouse, Inc. 655,202 533,395 363,016
Triangle Building Centers -- -- 27,155
Hechinger Corporate 171,649 224,831 268,713
- ----------------------------------------------------------------------------------------------------
Total identifiable assets $1,261,229 $1,229,242 $1,075,749
DEPRECIATION AND AMORTIZATION
Hechinger Stores Company $ 26,758 $ 26,994 $ 25,274
Home Quarters Warehouse, Inc. 24,531 16,502 12,625
Triangle Building Centers -- 843 1,517
Hechinger Corporate 1,979 1,350 831
- ----------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 53,268 $ 45,689 $ 40,247
EXPENDITURES FOR PP&E
AND OTHER ASSETS, NET OF DISPOSALS
Hechinger Stores Company $ 37,021 $ 45,310 $ 47,538
Home Quarters Warehouse, Inc. 131,791 118,898 87,289
Triangle Building Centers -- (2,541) 2,195
Hechinger Corporate 2,216 919 646
- ----------------------------------------------------------------------------------------------------
Total expenditures, net of disposals $ 171,028 $ 162,586 $ 137,668
SALES PER WEIGHTED AVERAGE SQUARE FOOT(1)
Hechinger Stores Company $230 $220 $210
Home Quarters Warehouse, Inc. 282 239 233
- ----------------------------------------------------------------------------------------------------
Total sales per weighted average square foot $256 $229 $220
</TABLE>
(1) Sales per weighted average square foot for the year ended January 28, 1995
excludes the 14 Home Quarters stores and eight Hechinger stores to be closed
during fiscal 1995 as a part of the store closing charge recorded in the fourth
quarter of fiscal 1994.
2
<PAGE> 5
DEAR STOCKHOLDERS:
In 1994, we continued to affirm our market leadership in the areas where we
bring home improvement products and services to consumers. The results of our
efforts are encouraging.
Total sales increased 17% to $2.4 billion. Before the $41 million after-tax
store closing charge, net earnings were $30.9 million or $.73 per share, an
increase of 25% over last year. After the impact of the store closing charge,
we reported a net loss of $9.9 million or $.24 per share.
At our Home Quarters Warehouse subsidiary, the "Chesapeake Class" stores
continue to receive strong customer acceptance. We expect average sales for
these stores to approximate $35 million, an increase of 66% over the previous
generation of Home Quarters Warehouse stores. Rapid growth and the success of
this new generation of stores led Home Quarters to report increases of more
than 36% in its sales and operating income in 1994.
Hechinger Stores Company was successful in protecting market share against
heavy competitive incursions. We reported an increase of 24% in operating
profits on a sales increase of 3%. This is Hechinger Stores' first increase in
operating profits in five years.
In the fourth quarter of 1994, we announced plans to strengthen the Company's
competitive position by closing fourteen Home Quarters Warehouse stores,
primarily in the North and South Carolina markets, and closing four older
Hechinger stores. In addition, we plan to convert the Columbus, Ohio market to
Home Quarters Warehouse stores from Hechinger stores. We recorded a store
closing charge of $41 million after-tax to account for the costs associated
with these decisions.
In 1994, my father, John W. Hechinger, Sr., celebrated his forty-ninth
anniversary with the Company. Recently, he expressed his desire to relinquish
his responsibilities as an officer of the Company while continuing to serve as
chairman of the board of directors. His vision, inspiration and wisdom led to
the development and success of Hechinger Company. We look forward to his
continued guidance.
To assure our position as a major player in the home improvement industry, we
continue to take actions to improve the operating performance of the Company.
We value the tremendous support we receive from our customers, employees,
vendors and stockholders. Each is vital to our success.
Sincerely,
/S/ JOHN W. HECHINGER, JR.
- --------------------------
John W. Hechinger, Jr.
President and Chief Executive Officer
[FIGURE 2]
"We are dedicated to serving the needs of our home improvement customers."
John W. Hechinger, Jr.
President and Chief Executive Officer
3
<PAGE> 6
HOME QUARTERS WAREHOUSE, INC.
[FIGURE 3]
In 1993, we unveiled the first "Chesapeake Class" Home Quarters Warehouse store
to customer and industry acclaim. This store format combines Home Quarters'
great prices and customer service with new and improved services and a broader
merchandise selection. This enables us to offer do-it-yourselfers and
professional contractors the best in home improvement warehouse stores.
"Chesapeake Class" features include comprehensive planning and professional
design services, installation services, a greenhouse and a contractor's desk to
handle the special needs of professional contractors. Available to customers
with children ages three through eight is the unique "Kids Quarters," an
on-site child care service that makes Home Quarters a family shopping
experience. Other features include "HQ University" for do-it-yourself classroom
clinics and the "HQ Food Express" snack bar.
In the fourth quarter of 1994, we made the difficult decision to vacate the
underperforming markets in North and South Carolina. The Home Quarters stores
in these markets
4
<PAGE> 7
[FIGURE 3]
DIFFERENTIATING ADVANTAGES
were older and smaller units, many of which were in need of remodeling or
relocation to be competitive. We believed our resources, both capital and
human, would be better used in markets where we could build from a position of
strength.
So far, we have successfully opened "Chesapeake Class" stores in the Tidewater,
Virginia area, Detroit, Kansas City, Albany and other markets. Our 1995
expansion plans call for the opening of nine new Home Quarters Warehouse
"Chesapeake Class" stores. To further strengthen Home Quarters, all of these
new stores will be in existing Home Quarters markets of Detroit, New England,
Ohio and Tidewater, Virginia.
In addition to these expansion plans, we plan to remodel approximately eighteen
Home Quarters stores to incorporate key aspects of the "Chesapeake Class"
format. By the end of 1995, we intend to have about 95% of all Home Quarters
stores reflect elements of the "Chesapeake Class" format.
5
<PAGE> 8
HECHINGER STORES COMPANY
[FIGURE 4]
BUILDING ON THE DIFFERENCE
6
<PAGE> 9
[FIGURE 4]
Over the past five years, Hechinger Stores Company has been on a mission to
reposition itself to compete more effectively. We have lowered our prices,
increased our average sales per store and reduced our operating costs. At the
core of all this has been the development of the Home Project Center store
format.
We developed the Home Project Center to reflect our customers' needs and to
capitalize on Hechinger's many strengths, which include strong name recognition
among consumers in our core markets, conveniently located stores and
merchandising focused on home decor.
Pictured here is our newest Home Project Center in Laurel, Maryland. This
94,000 square foot store opened in June 1994. In this Home Project Center, we
have created a bright, spacious store with well located customer service areas
and many other strong features, making this our best Home Project Center yet.
In 1995, we plan to include features of this newest Home Project Center in a
number of our Hechinger stores. In order to continue to provide superior
quality and customer service to home improvement consumers, we will continue to
expand and enhance our Home Project Center format in the years ahead. By doing
so, we believe we will maintain leadership in our markets.
7
<PAGE> 10
HECHINGER COMPANY MARKETS
[FIGURE 5]
<TABLE>
<S> <C> <C>
* HECHINGER STORES 64
* HOME QUARTERS
WAREHOUSE STORES 54
- ---------------------------------------------
TOTAL STORES 118
(Planned as of September 1995)
</TABLE>
8
<PAGE> 11
Hechinger Company
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATIONS. The following table sets forth the sales reported by the Company
(in billions):
<TABLE>
<CAPTION>
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2.45 $2.09 $1.87
Net sales increase 17% 12% 16%
Comparable store
sales increase 2% 3% 7%
</TABLE>
The sales increases were due primarily to sales from stores in
operation for less than one year.
The following table sets forth the number of stores operated by the
Company (excluding the six Triangle Building Center stores which the Company
closed in fiscal 1993):
<TABLE>
<CAPTION>
Hechinger Home
Stores Quarters
- ---------------------------------------------------------------------------
<S> <C> <C>
As of February 1, 1992 76 30
1992 openings 3 14
1992 closings (4) (1)
As of January 30, 1993 75 43
1993 openings 3 11
1993 closings (6) (1)
As of January 29, 1994 72 53
1994 OPENINGS 2 10
1994 CLOSINGS (2) (2)
AS OF JANUARY 28, 1995 72 61
</TABLE>
The Company has been rapidly expanding its Home Quarters Warehouse
subsidiary. Since opening a new 115,000 square foot Home Quarters store in
Chesapeake, Virginia in July 1993, the Company has been opening new Home
Quarters stores incorporating many features from this store, including: a
greenhouse and garden center, design centers staffed with experienced
professionals, merchandise installation services and a dedicated classroom
called "HQ University" for how-to clinics. The "Chesapeake Class" store also
has a dedicated contractor's desk to handle the special needs of professional
contractors and commercial property owners, including its own entrance and
loading facility. In addition, the "Chesapeake Class" store offers "Kids
Quarters," a supervised on-site child care facility for children ages three to
eight. As compared to earlier Home Quarters units, a "Chesapeake Class" store
has approximately 25% more square footage and carries approximately 33% more
SKUs. The Company is planning to implement these new features in all of its new
Home Quarters stores to be opened in 1995 and incorporate a number of these new
features in its existing Home Quarters stores where possible. As of January
1995, 19 of the Home Quarters stores were in the "Chesapeake Class" format.
Other income, which consists primarily of interest income, was $4.4
million, $7.8 million and $5.6 million in 1994, 1993 and 1992, respectively.
The decrease in 1994 was due primarily to a decrease in funds available for
investment. The increase in 1993 was due primarily to gains on the disposal of
property, furniture and equipment.
Cost of sales was 77.9% of sales for both 1994 and 1993 compared to
76.6% of sales for 1992. Distribution and buying and occupancy expenses are
included in cost of sales. As a percent of sales, the increases in 1994 and
1993 compared to 1992 were due primarily to the lowering of retail prices in
the major markets of Hechinger Stores Company and the growing effect of Home
Quarters, which operates with lower gross margins. In 1994, the Company changed
its method of calculating LIFO inventories to provide for a better matching of
costs and revenues, more closely conform the LIFO methods used to the method
used for the majority of its inventories, provide for a LIFO adjustment more
representative of the Company's actual inflation on its inventories and reduce
the likelihood of LIFO layer liquidations during periods of overall growth in
inventories. The cumulative effect of the change in method and the pro forma
effects of the change on prior years' results of operations are not
determinable. The effect of the change on results of operations for 1994 was to
reduce the net loss by $6.2 million or $.15 per share. Cost of sales included
LIFO charges of $1.9 million in 1994 and $5.0 million in 1993, compared to a
LIFO credit of $.8 million in 1992. LIFO, inventory acquisition costs and other
inventory adjustments decreased fourth quarter cost of sales by $2.4 million in
1994 and $1.2 million in 1992, compared to an increase of $.2 million in 1993.
Selling, general and administrative expenses were 19.1%, 19.6% and
20.7% of sales for 1994, 1993 and 1992, respectively. The decreases in 1994
and 1993 were due to the cost reduction efforts at Hechinger Stores Company and
the growing effect of Home Quarters which operates with a lower cost structure.
The decrease in 1994 was also due to a decrease in pre-opening expenses.
Pre-opening expenses of $8.9 million, $13.0 million and $9.6 million are
included in selling, general and administrative expenses for 1994, 1993 and
1992, respectively.
Interest expense, net of capitalized interest, was $29.8 million,
$23.1 million and $14.1 million for 1994, 1993 and 1992, respectively. The
increases in 1994 and 1993 were due primarily to the issuances of the Senior
Notes in 1993 and the Senior Debentures in 1992.
In the fourth quarter of 1994, the Company recorded a charge of $61.9
million primarily related to the Company's decision to close its stores in
certain markets. The specific actions include:
9
<PAGE> 12
closing 14 Home Quarters stores, primarily in North and South Carolina; and
closing eight Hechinger stores, including four in Columbus, OH, two in
Rochester, NY and one each in Roanoke, VA and Ft. Washington, MD.
The Home Quarters stores being closed are typically older units, which
average approximately 87,000 square feet and do not contain elements of the
newer, larger Home Quarters "Chesapeake Class" stores. Recently, competition
has intensified in these markets, adversely affecting performance in these
stores.
During the period from 1992 to 1994, these 14 Home Quarters stores saw
their average annual sales per store decline from approximately $16 million to
approximately $12 million. Operating profit as a percent of sales dropped from
slightly below Home Quarters' average in 1992 to break-even in 1994. Based on
this trend and the limited potential for long-term profitability in these
markets, management decided to exit these markets.
During the period from 1992 to 1994, the eight Hechinger stores being
closed generated average annual sales per store of approximately $10 million,
substantially below the 1994 average of $16 million for the remaining 64
Hechinger stores. During this same period, the stores being closed, as a group,
had operating losses. Given the historical performance of these stores, the
limited potential for long-term profitability, and increasing competitive
incursions in these markets, management decided to close these stores.
Subsequent to the closing and disposition of the assets of the four Hechinger
stores in the Columbus, OH market, the Company's Home Quarters subsidiary will
open three "Chesapeake Class" stores in this market which, management believes,
will perform better than the Hechinger stores.
The main components of this charge are:
1) estimated write-down of inventories in these stores to its net
realizable value, including estimated costs to liquidate the
inventories, of approximately $19 million;
2) estimated write-down to net realizable value of furniture,
fixtures, equipment and other assets to be disposed of
approximately $19 million;
3) estimated cash expenditures for carrying costs of the stores
being vacated, including estimated rents, utilities and other
expenses subsequent to the store being closed, until estimated
disposition of approximately $20 million; and
4) estimated cash expenditures for employee termination costs of
approximately $4 million, including severance pay and related
benefits. Approximately 1,400 employees will have their
employment terminated in 1995 as a result of these decisions.
Substantially all of these employees are based in the affected
stores.
Management anticipates that 16 of the 22 stores will be closed by the
end of the first quarter of fiscal 1995. The remaining six stores are expected
to be closed by the end of the third quarter of fiscal 1995. The duration of
the closing process for each store is expected to be approximately three
months. At January 28, 1995, no amounts have been recorded against the $61.9
million accrued. Of the total accrual, $53.7 million has been recorded as a
current liability.
The store closing charge is based on certain estimates. The actual
amount could vary from these estimates, due primarily to the Company's ability
to sublease, assign or otherwise dispose of, on favorable terms, the lease
obligations related to the stores being closed.
In 1992, the Company recorded a charge of $83 million to establish a
Strategic Reserve to cover estimated costs associated with the repositioning of
Hechinger Stores Company. The reserve was comprised primarily of estimated
costs related to the conversion of traditional Hechinger stores to the Home
Project Center format. In the past three years, the Company has made
substantial progress in its plan to reposition Hechinger Stores Company. Due to
this plan, the Hechinger stores' average sales per store have increased to $16
million from $12 million and operating expenses have been significantly
reduced. Since 1992, approximately $48 million of the charges to the Strategic
Reserve have been cash expenditures and approximately $33 million have been
non-cash charges. As of January 28, 1995, the original repositioning plan and
its related accrual were substantially complete.
The effective income tax benefit rates for 1994 and 1992 were 35.9%
and 37.0%, respectively, of the loss before income taxes, compared to an
effective income tax rate for 1993 of 30.0% of earnings before income taxes.
The effective tax rates for 1994, 1993 and 1992 differed from the statutory
rate due primarily to tax-free earnings on funds available for investment and
Targeted Jobs Tax Credits. In 1993, year-end adjustments to the effective tax
rate were primarily the result of Targeted Jobs Tax Credits as well as lower
than anticipated earnings. In 1992, year-end adjustments to the effective tax
rate were primarily the result of higher than anticipated tax-free earnings on
investments and Targeted Jobs Tax Credits. These adjustments resulted in an
effective fourth quarter tax rate of 3.6% for 1993 compared to an effective tax
benefit rate of 139.7% in 1992. At January 28, 1995, the Company has a net
deferred tax asset of $19.3 million. Management believes it is likely that the
deferred tax asset will be realized due primarily to taxable income and
alternative minimum tax credits in prior carryback years totaling $14.4 million
and the remainder based on management's expectation of future taxable income. A
substantial portion of the deferred tax asset
10
<PAGE> 13
relates to the store closing accrual and other items expected to reverse in
1995.
The net loss was 0.4% of sales for 1994, compared to net earnings of
1.2% of sales for 1993, compared to a net loss of 1.4% of sales for 1992.
Certain accruals and estimates considered necessary for a fair
statement of the results of operations are made for interim periods. In some
cases, the determination of actual expenses can be made only at the end of each
year. Accordingly, adjustments to these accruals and estimates occur in and
flow through the fourth quarter. (See discussion of cost of sales and income
taxes above.)
INVESTMENTS IN DEBT AND EQUITY SECURITIES. The investment portfolio at
January 28, 1995 consists primarily of debt issues of state and local
governments and their agencies having maturities of less than one year.
In May 1993, Statement of Financial Accounting Standards No. 115
("SFAS 115"), Accounting for Certain Investments in Debt and Equity Securities,
was issued. The Company adopted this statement as of the first quarter of 1994
and is classifying its investments in marketable securities as
available-for-sale. Under this classification, marketable securities are
carried at fair value, with unrealized gains and losses reported in
stockholders' equity until realized. In accordance with SFAS 115, prior period
financial statements have not been restated to reflect the change in accounting
principle. The cumulative effect of adopting SFAS 115 in the first quarter of
1994, as well as the effect as of January 28, 1995, on stockholders' equity was
not material.
OTHER POSTEMPLOYMENT BENEFITS. In November 1992, Statement of Financial
Accounting Standards No. 112 ("SFAS 112"), Employer's Accounting for
Postemployment Benefits, was issued. SFAS 112 requires that accrual accounting
be used to value the cost of benefits provided to former or inactive employees
who have yet to reach retirement age. The Company adopted this statement in
1994. The effect of adopting this statement was not material to the Company's
financial position or results of operations.
COMMITMENTS. In 1995, the Company intends to open approximately nine Home
Quarters stores, including two relocations. Additionally, approximately
18 Home Quarters stores and approximately six Hechinger stores are intended to
be remodeled. As of January 28, 1995, the Company had commitments for stores
under construction of approximately $15.0 million.
LIQUIDITY AND CAPITAL RESOURCES. Net cash provided from operations was
$3.5 million, $27.4 million and $34.4 million in 1994, 1993 and 1992,
respectively. The decrease between 1994 and 1993 was due primarily to a
decrease in accounts payable and accrued expenses compared to an increase in
inventory levels as a result of new store openings. The decrease between 1993
and 1992 was due primarily to increases in inventory levels as a result of new
store openings. Cash and cash equivalents and marketable securities were $95.2
million, $170.7 million and $214.6 million at January 28, 1995, January 29,
1994 and January 30, 1993, respectively. Net expenditures for property,
furniture and equipment and other assets were $171.0 million, $162.6 million
and $137.7 million in 1994, 1993 and 1992, respectively. These expenditures are
related primarily to the Company's ongoing store expansion and remodeling
programs.
The Company has entered into several financing and other transactions
over the past three years in order to generate the funds necessary for its
store expansion and remodeling programs.
In August 1994, the Company sold 13 stores for $99.3 million, net of
expenses, and concurrently leased the properties back for an initial term of 25
years. In 1992, the Company sold six stores for $40.5 million, net of expenses,
and concurrently leased the properties back for an initial term of 22 years.
Under both transactions, the leases are renewable at the Company's option for
nine additional terms of five years each and the Company has a right of first
refusal to repurchase the properties.
In October 1993, the Company issued $100 million of Senior Notes, due
in 2003, bearing an interest rate of 6.95%. The net proceeds were $98.8
million. In November 1992, the Company issued $100 million of Senior
Debentures, due in 2012, bearing an interest rate of 9.45%. The net proceeds
were $98.5 million.
In 1992, the Company sold to an affiliate of General Electric Capital
Corporation ("GECC") the entire Hechinger Stores' accounts receivable. The net
proceeds were $79.6 million. Concurrent with the sale, GECC entered into a
program agreement to provide for the ongoing operation of the Company's credit
program.
The Company currently has available a revolving credit facility for
$50 million and letter of credit facilities totaling $76 million, which are
used primarily in conjunction with the purchase of imported merchandise.
Management believes that cash and cash equivalents, marketable securities, cash
generated from operations and its available credit facilities are adequate to
meet the Company's working capital needs and planned capital expenditures for
fiscal 1995.
IMPACT OF INFLATION AND CHANGING PRICES. The Company does not measure precisely
the effect of inflation on its operations; however, it does not believe
inflation had a material effect on sales or results of operations.
11
<PAGE> 14
Hechinger Company
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
REVENUES
Net sales $2,449,554 $2,094,968 $1,869,349
Other (principally interest) 4,405 7,757 5,573
---------- ---------- ----------
Total Revenues 2,453,959 2,102,725 1,874,922
COSTS AND EXPENSES
Cost of sales 1,908,874 1,632,702 1,432,340
Selling, general and administrative expenses 468,898 411,589 387,162
Interest expense 29,793 23,063 14,121
Unusual charges 61,850 -- 83,000
---------- ---------- ----------
Total Costs and Expenses 2,469,415 2,067,354 1,916,623
---------- ---------- ----------
(LOSS) EARNINGS BEFORE INCOME TAXES (15,456) 35,371 (41,701)
INCOME TAX (BENEFIT) EXPENSE (5,545) 10,611 (15,429)
---------- ---------- ----------
NET (LOSS) EARNINGS $ (9,911) $ 24,760 $ (26,272)
========== ========== ==========
NET (LOSS) EARNINGS PER COMMON SHARE $(.24) $.59 $(.63)
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 15
Hechinger Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JAN. 28, 1995 Jan. 29, 1994
- ---------------------------------------------------------------------------------------------------------------
(in thousands except share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 26,252 $ 19,675
Marketable securities 68,911 150,989
Merchandise inventories 453,529 400,366
Other current assets 66,742 50,200
---------- ----------
TOTAL CURRENT ASSETS 615,434 621,230
PROPERTY, FURNITURE AND EQUIPMENT, net 504,132 482,503
COST IN EXCESS OF NET ASSETS ACQUIRED, net 55,421 57,098
LEASEHOLD ACQUISITION COSTS, net 52,541 54,812
OTHER ASSETS 33,701 13,599
---------- ----------
TOTAL ASSETS $1,261,229 $1,229,242
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 327,587 $ 291,182
Income taxes payable 10,493 --
Current portion of long-term debt and
capital lease obligations 3,453 3,068
---------- ----------
TOTAL CURRENT LIABILITIES 341,533 294,250
LONG-TERM DEBT 384,969 386,116
CAPITAL LEASE OBLIGATIONS 18,408 21,757
DEFERRED RENT 26,846 28,493
DEFERRED INCOME TAXES -- 4,759
OTHER LONG-TERM LIABILITIES 8,200 --
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value; authorized
50,000,000 shares; issued 30,797,512 and 28,812,090 3,080 2,881
Class B common stock, $.10 par value; authorized
30,000,000 shares; issued 11,518,729 and 13,312,356 1,152 1,331
Additional paid-in capital 238,182 236,543
Retained earnings 240,919 256,836
Unearned compensation (1,553) (2,201)
Less treasury stock at cost,
17,213 and 92,769 Class A common shares
and 14,497 Class B common shares (507) (1,523)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 481,273 493,867
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,261,229 $1,229,242
========== ==========
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 16
Hechinger Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net (loss) earnings $ (9,911) $ 24,760 $ (26,272)
Adjustments to reconcile net (loss) earnings to net cash
from operating activities:
Unusual charges 55,871 (21,662) 62,519
Depreciation and amortization 53,268 45,689 40,247
Deferred income taxes (24,085) 8,309 (15,313)
Deferred rent expense (1,122) 844 55
---------- --------- ----------
74,021 57,940 61,236
---------- --------- ----------
Changes In Operating Assets and Liabilities:
Merchandise inventories (53,817) (85,722) (47,087)
Other current assets (17,006) (12,722) (8,588)
Accounts payable and accrued expenses (10,678) 68,108 33,606
Income taxes payable 10,957 (221) (4,738)
---------- --------- ----------
(70,544) (30,557) (26,807)
---------- --------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES 3,477 27,383 34,429
---------- --------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Expenditures for property, furniture, equipment
and other assets, net of disposals (171,028) (162,586) (137,668)
Sale of accounts receivable -- -- 79,558
Marketable securities:
Purchases (206,870) (175,837) (413,089)
Proceeds from sales 288,948 227,117 307,007
---------- --------- ----------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (88,950) (111,306) (164,192)
---------- --------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net proceeds from sale and leaseback transactions 99,295 -- 40,516
Net proceeds from long-term borrowings -- 98,799 98,545
Dividends paid to stockholders (5,635) (5,441) (5,430)
Stock options exercised 2,312 -- --
Other (3,922) (2,101) 459
---------- --------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 92,050 91,257 134,090
---------- --------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 6,577 7,334 4,327
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 19,675 12,341 8,014
---------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,252 $ 19,675 $ 12,341
========== ========= ==========
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 8,814 $ 6,094 $ 4,620
Cash payments for interest, net of amount capitalized $ 29,005 $ 26,591 $ 16,970
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 17
Hechinger Company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Class B Additional
Common Common Paid-in Retained Unearned Treasury
Stock Stock Capital Earnings Compensation Stock Total
- ---------------------------------------------------------------------------------------------------------------------------------
(in thousands except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Feb. 1, 1992 $ 2,818 $ 1,388 $ 236,640 $ 269,219 $ (3,119) $(1,761) $ 505,185
Restricted stock awards, 195,000 Class A
common shares 19 -- 1,847 -- (1,779) -- 87
Restricted stock awards earned -- -- -- -- 531 -- 531
Exercise of stock options including income
tax benefit
(3,337 Class A common shares and 8,235
Class B common shares were issued from
the treasury) -- -- (131) -- -- 200 69
Conversions from Class B to Class A common
stock 40 (40) -- -- -- -- --
Purchase of treasury stock (24,852 Class A
common shares) -- -- -- -- -- (246) (246)
Cash dividends on common stock:
Class A - $.16 per share -- -- -- (4,566) -- -- (4,566)
Class B - $.06 per share -- -- -- (864) -- -- (864)
Net loss -- -- -- (26,272) -- -- (26,272)
------- ------- --------- --------- -------- ------- ---------
Balance, Jan. 30, 1993 2,877 1,348 238,356 237,517 (4,367) (1,807) 473,924
Restricted stock awards, 20,000 Class A
common shares 2 -- 178 -- (172) -- 8
Restricted stock awards earned, net of
forfeitures (15) -- (1,811) -- 2,338 -- 512
Exercise of stock options including
income tax benefit (32,519 Class A
common shares were issued from the
treasury) -- -- (180) -- -- 361 181
Conversions from Class B to Class A
common stock 17 (17) -- -- -- -- --
Purchase of treasury stock (18,938 Class A
common shares and 1 Class B common share) -- -- -- -- -- (77) (77)
Cash dividends on common stock:
Class A - $.16 per share -- -- -- (4,587) -- -- (4,587)
Class B - $.06 per share -- -- -- (854) -- -- (854)
Net earnings -- -- -- 24,760 -- -- 24,760
------- ------- --------- --------- -------- ------- ---------
Balance, Jan. 29, 1994 2,881 1,331 236,543 256,836 (2,201) (1,523) 493,867
RESTRICTED STOCK AWARDS EARNED -- -- -- -- 648 -- 648
PERFORMANCE STOCK AWARDS EARNED
AND ISSUED 5 -- 577 -- -- -- 582
EXERCISE OF STOCK OPTIONS INCLUDING INCOME
TAX BENEFIT (92,670 CLASS A COMMON
SHARES WERE ISSUED FROM THE TREASURY) 15 -- 1,037 -- -- 1,260 2,312
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 -- -- -- 25
PURCHASE OF TREASURY STOCK (17,114
CLASS A COMMON SHARES) -- -- -- -- -- (244) (244)
ADJUSTMENT TO FAIR VALUE OF
MARKETABLE SECURITIES -- -- -- (371) -- -- (371)
CASH DIVIDENDS ON COMMON STOCK:
CLASS A - $.16 PER SHARE -- -- -- (4,883) -- -- (4,883)
CLASS B - $.06 PER SHARE -- -- -- (752) -- -- (752)
NET LOSS -- -- -- (9,911) -- -- (9,911)
------- ------- --------- --------- -------- ------- ---------
BALANCE, JAN. 28, 1995 $ 3,080 $ 1,152 $ 238,182 $ 240,919 $ (1,553) $ (507) $ 481,273
======= ======= ========= ========= ======== ======= =========
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 18
Hechinger Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended January 28, 1995, January 29, 1994 and January 30, 1993.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The Company operates a chain of
specialty retail home center stores, which is the Company's only line of
business, through two operating subsidiaries: Hechinger Stores Company
("Hechinger Stores") and Home Quarters Warehouse, Inc. ("Home Quarters").
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
FISCAL YEAR. The Company's fiscal year ends on the Saturday closest to January
31. The fiscal years ended January 28, 1995 ("1994"), January 29, 1994 ("1993")
and January 30, 1993 ("1992") were each 52 weeks.
MERCHANDISE INVENTORIES. Inventories are stated at the lower of cost, last-in,
first-out method ("LIFO"), or market. If inventories were valued under the FIFO
method, which approximates replacement cost, inventories would have been $18.9
million and $17.0 million higher than reported at January 28, 1995 and January
29, 1994, respectively. Distribution and buying and occupancy expenses are
included in cost of sales.
CHANGE IN ACCOUNTING PRINCIPLE. In 1994, the Company changed its method of
calculating LIFO inventories to provide for a better matching of costs and
revenues, more closely conform the LIFO methods used to the method used for the
majority of its inventories, provide for a LIFO adjustment more representative
of the Company's actual inflation on its inventories and reduce the likelihood
of LIFO layer liquidations during periods of overall growth in inventories. The
change in method consisted of adopting consolidated cost-based inflation
indices applied to inventories grouped into two pools on a consolidated basis.
Prior to the current year, the Company calculated its LIFO inventories using a
combination of retail and cost-based indices applied to inventories grouped
into six pools. The underlying methods of computing FIFO inventory values have
not changed, only the method of adjusting inventories for the impact of
inflation. The cumulative effect of the change in method and the pro forma
effects of the change on prior years' results of operations are not
determinable. The effect of the change on results of operations for 1994 was to
reduce the net loss by $6.2 million or $.15 per share.
PROPERTY, FURNITURE AND EQUIPMENT. Depreciation is computed using the
straight-line method over the estimated useful lives of various classes of
assets. Capital leases for stores are being amortized on a straight-line basis
over the terms of the respective leases. Property, furniture and equipment are
stated at cost plus capitalized interest. Capitalized interest amounted to $3.6
million, $5.4 million and $3.8 million for the years 1994, 1993 and 1992,
respectively.
CASH EQUIVALENTS. The Company considers all investments with a maturity of
three months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES. The investment portfolio at January 28, 1995 consists
primarily of debt issues of state and local governments and their agencies
having maturities of less than one year. There are no major concentrations with
any single issuer. In May 1993, Statement of Financial Accounting Standards No.
115 ("SFAS 115"), Accounting for Certain Investments in Debt and Equity
Securities, was issued. The Company adopted this statement as of the first
quarter of 1994 and is classifying its investments in marketable securities as
available-for-sale. Under this classification, marketable securities are
carried at fair value, with unrealized gains and losses reported in
stockholders' equity until realized. In accordance with SFAS 115, prior period
financial statements have not been restated to reflect the change in accounting
principle. The cumulative effect of adopting SFAS 115 in the first quarter of
1994, as well as the effect as of January 28, 1995, on stockholders' equity was
not material.
DEFERRED RENT. Deferred rent represents the difference between rents paid and
the amounts expensed for operating leases.
PRE-OPENING EXPENSES. Costs related to new store openings are expensed as
incurred and are included in selling, general and administrative expenses.
Pre-opening expenses amounted to $8.9 million, $13.0 million and $9.6 million
for the years 1994, 1993 and 1992, respectively.
EARNINGS PER COMMON SHARE. Earnings per common share is calculated by dividing
net earnings, as adjusted where appropriate, by the weighted average shares
outstanding and equivalent shares from Convertible Subordinated Debentures,
performance shares, restricted stocks and stock options, except when
antidilutive. Fully diluted earnings per share is not presented as additional
dilution is less than 3% of primary earnings per share or is antidilutive in
the three years presented.
16
<PAGE> 19
The number of shares used to compute earnings per common share were
42.0 million, 41.9 million and 41.7 million for the years 1994, 1993 and 1992,
respectively.
AMORTIZATION. Cost in excess of net assets acquired relates principally to the
purchase of Home Quarters. This cost is being amortized using the straight-line
method over a period of 40 years. Accumulated amortization related to cost in
excess of net assets acquired was $11.8 million and $10.1 million as of January
28, 1995 and January 29, 1994, respectively.
Leasehold acquisition costs relate to the purchase of lease rights to
certain stores. The costs for these leases are being amortized using the
straight-line method over the lives of the various leases, ranging up to 30
years. Accumulated amortization related to leasehold acquisition costs was
$13.1 million and $10.8 million as of January 28, 1995 and January 29, 1994,
respectively.
UNUSUAL CHARGES. Prior to 1994, it was the Company's policy to recognize
repositioning, exit and related costs when they were reasonably estimable,
probable to be incurred and management and the board of directors approved a
formal plan of action. At that time, estimated incremental costs associated
with the plan were charged to operations and accrued. In 1994, repositioning,
exit and related costs have been recognized in accordance with Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity.
In the fourth quarter of 1994, the Company recorded a charge of $61.9
million related primarily to the Company's decision to close its stores in
certain markets. The specific actions include: closing 14 Home Quarters stores,
primarily in North and South Carolina; and closing eight Hechinger stores,
including four in Columbus, OH, two in Rochester, NY and one each in Roanoke,
VA and Ft. Washington, MD.
The main components of this charge are:
1) estimated write-down of inventories in these stores to its net
realizable value, including estimated costs to liquidate the
inventories, of approximately $19 million;
2) estimated write-down to net realizable value of furniture,
fixtures, equipment and other assets to be disposed of
approximately $19 million;
3) estimated cash expenditures for carrying costs of the stores
being vacated, including estimated rents, utilities and other
expenses subsequent to the store being closed, until estimated
disposition of approximately $20 million; and
(4) estimated cash expenditures for employee termination costs of
approximately $4 million, including severance pay and related
benefits. Approximately 1,400 employees will have their
employment terminated in 1995 as a result of these decisions.
Substantially all of these employees are based in the affected
stores.
Management anticipates that 16 of the 22 stores will be closed by the
end of the first quarter of fiscal 1995. The remaining six stores are expected
to be closed by the end of the third quarter of fiscal 1995. The duration of
the closing process for each store is expected to be approximately three
months. As of January 28, 1995, no amounts have been recorded against the $61.9
million accrued. Of the total accrual, $53.7 million has been recorded as a
current liability.
The store closing charge is based on certain estimates. The actual
amount could vary from these estimates, due primarily to the Company's ability
to sublease, assign or otherwise dispose of, on favorable terms, the lease
obligations related to the stores being closed.
In 1992, the Company recorded a charge of $83 million to establish a
Strategic Reserve to cover estimated costs associated with the repositioning of
Hechinger Stores Company. The reserve was comprised primarily of charges
related to the conversion of traditional Hechinger stores to the Home Project
Center format. Since 1992, approximately $48 million of the charges to the
Strategic Reserve have been cash expenditures and approximately $33 million
have been non-cash charges. As of January 28, 1995, the original repositioning
plan and its related accrual were substantially complete.
PROPERTY, FURNITURE AND EQUIPMENT. The Company's investments in property,
furniture and equipment consist of the following:
<TABLE>
<CAPTION>
(in thousands) JAN. 28, 1995 Jan. 29, 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 82,159 $ 90,069
Buildings 152,860 147,144
Leasehold improvements 128,360 99,974
Furniture, fixtures and equipment 245,290 202,000
Capital leases 32,432 33,750
Construction-in-progress 54,583 64,423
--------- ---------
695,684 637,360
Less accumulated depreciation
and amortization (191,552) (154,857)
--------- ---------
$ 504,132 $ 482,503
========= =========
</TABLE>
17
<PAGE> 20
Accumulated amortization on capital leases was $15.4 million and $14.3
million as of January 28, 1995 and January 29, 1994, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES. Accounts payable and accrued expenses
consist of the following:
<TABLE>
<CAPTION>
(in thousands) JAN. 28, 1995 Jan. 29, 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Accounts payable $165,303 $189,041
Accrued expenses and other 123,149 66,620
Accrued compensation and benefits 39,135 35,521
-------- --------
$327,587 $291,182
======== ========
</TABLE>
Accrued expenses and other at January 28, 1995 includes $53.7 million
for the current portion of the store closing reserve. Accrued expenses and
other at January 29, 1994 includes $8.7 million for the Strategic Reserve.
LONG-TERM DEBT AND OTHER CREDIT ARRANGEMENTS.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(in thousands) JAN. 28, 1995 Jan. 29, 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
6.95% Senior Notes $100,000 $100,000
9.45% Senior Debentures 100,000 100,000
5 1/2% Convertible Subordinated Debentures 123,050 123,075
Mortgage loans 44,054 44,403
Other long-term debt 18,986 19,579
-------- --------
386,090 387,057
Less current portion (1,121) (941)
-------- --------
$384,969 $386,116
======== ========
</TABLE>
In October 1993, the Company issued $100 million of Senior Notes, due
in 2003, bearing an interest rate of 6.95%. The net proceeds were $98.8
million. In November 1992, the Company issued $100 million of Senior
Debentures, due in 2012, bearing an interest rate of 9.45%. The net proceeds
were $98.5 million. The agreements contain covenants that, in certain
circumstances, restrict the pledging of the Company's assets and entering into
sale and leaseback transactions.
The 5 1/2% Convertible Subordinated Debentures are convertible into
Class A common stock of the Company by the holders at any time at a conversion
price of $27.84 per share, subject to adjustments in certain events. The
Convertible Subordinated Debentures are redeemable by the Company at any time.
Mandatory sinking fund payments, each sufficient to retire 5% of the aggregate
principal amount of Convertible Subordinated Debentures issued, will be made
annually, commencing April 1, 1998 to and including April 1, 2011.
The mortgage loans bear interest rates, on average, of approximately
10% and are due in varying monthly and semiannual installments of principal and
interest through 2016. These mortgages are collateralized by properties with a
total net book value of $42.4 million.
Aggregate principal maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal year (in thousands)
- -------------------------------------------------------------
<S> <C>
1995 $ 1,121
1996 1,226
1997 1,338
1998 8,055
1999 9,780
Remainder 364,570
--------
$386,090
========
</TABLE>
The Company has a credit facility which permits borrowings of up to
$50 million on a revolving basis. If not extended as provided for under its
terms, this facility will expire in 1999. Under the terms of this facility, the
Company agrees to maintain certain capitalization and coverage ratios. Interest
rates on borrowings under this facility will fluctuate but will be generally at
or below the prime interest rate. The Company has not utilized its credit
facilities in the last three years.
The Company also has arranged letter of credit facilities with a
number of banks, which total $76 million and are used primarily in conjunction
with the purchase of imported merchandise. Approximately $42 million of these
facilities was unused as of January 28, 1995.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The following methods and assumptions
were used by the Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximated its fair value.
Marketable securities: The carrying amounts reported in the balance sheet for
marketable securities are stated at fair values based on quoted and third party
estimates of market prices.
Long-term debt: The fair values of the Company's long-term debt that is traded
publicly are based on quoted and third party estimates of market prices. The
fair values of the privately held debt are estimated using a discounted cash
flow analysis, based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements.
18
<PAGE> 21
The carrying amounts and fair values of the Company's financial instruments at
January 28, 1995 are as follows:
<TABLE>
<CAPTION>
Carrying Market
(in thousands) Values Values
- -----------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 26,252 $ 26,252
Marketable securities at fair value 68,911 68,911
Long-term debt:
Publicly traded debt 323,050 253,563
Privately held debt 61,919 55,939
-------- --------
Total long-term debt $384,969 $309,502
======== ========
</TABLE>
INCOME TAXES. The income tax (benefit) provisions are summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 18,540 $ 2,302 $ (116)
Deferred (24,085) 8,309 (15,313)
-------- ------- ---------
$ (5,545) $10,611 $ (15,429)
======== ======= =========
</TABLE>
Significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
(in thousands) JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ 9,020 $18,626 $21,476
Inventories 12,442 10,887 7,454
Other 3,061 1,219 1,282
------- ------- -------
Total deferred tax liabilities 24,523 30,732 30,212
------- ------- -------
Deferred tax assets:
Accrued expenses for unusual charges 23,269 3,045 16,369
Alternative minimum tax and
other tax credit carryforwards 10,620 7,688 4,200
Accrued compensation and benefits 6,536 6,563 6,877
Other 3,424 8,677 6,334
------- ------- -------
Total deferred tax assets 43,849 25,973 33,780
Valuation allowance -- -- --
------- ------- -------
Net deferred tax assets 43,849 25,973 33,780
------- ------- -------
Net deferred tax assets (liabilities) $19,326 $(4,759) $ 3,568
======= ======= =======
</TABLE>
Reconciliations of the Federal statutory rate to the Company's
effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (35.0)% 35.0% (34.0)%
Federal tax credits (5.3) (3.0) (1.3)
Federal tax-exempt
investment income (4.7) (6.0) (5.3)
Amortization of goodwill 4.9 1.6 1.4
Other 4.2 2.4 2.2
--- --- ---
(35.9)% 30.0% (37.0)%
==== ==== ====
</TABLE>
LEASES AND OTHER COMMITMENTS. The Company leases certain stores and equipment
from both an affiliated entity, controlled by the Hechinger and England
families, and nonaffiliated entities. Certain leases require excess rentals
based on a percentage of sales, certain increments in real estate taxes and
rent increases as determined by formulas set forth in the leases. In addition,
the Company pays all other ownership and operating costs related to the leased
properties. Most of the leases provide for renewals for various periods up to
30 years.
In August 1994, the Company sold 13 stores for $99.3 million, net of
expenses, and concurrently leased the properties back for an initial term of 25
years. In 1992, the Company sold six stores for $40.5 million, net of expenses,
and concurrently leased the properties back for an initial term of 22 years.
Under both transactions, the leases are renewable at the Company's option for
nine additional terms of five years each. The Company has recorded both
transactions as operating leases.
Under the terms of the sale and leaseback transactions completed in
1992, the Company is restricted from taking certain actions that would result
in its net worth falling below $200 million. Under the terms of a sale and
leaseback transaction completed in 1990, the Company is restricted from taking
certain actions that would result in its senior credit rating falling below
investment grade, or its net worth, less goodwill, falling below $175 million.
Under the 1994, 1992 and 1990 sale and leaseback transactions, the Company has
a right of first refusal to repurchase the properties.
19
<PAGE> 22
At January 28, 1995, the minimum fixed rental commitments related to
all noncancelable leases together with the present value of the net minimum
lease payments for capital leases were as follows:
<TABLE>
<CAPTION>
Operating Leases
(in thousands)
Fiscal year Total Affiliated Nonaffiliated
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 $ 73,279 $ 1,571 $ 71,708
1996 75,241 1,360 73,881
1997 75,610 1,360 74,250
1998 76,004 1,360 74,644
1999 75,351 1,360 73,991
Remainder 991,413 8,461 982,952
---------- ------- ----------
Total minimum lease payments 1,366,898 15,472 1,351,426
Minimum sublease rentals due
to the Company 158,174 -- 158,174
---------- ------- ----------
Total minimum lease
payments, net $1,208,724 $15,472 $1,193,252
========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Capital Leases
(in thousands)
Fiscal year Total Affiliated Nonaffiliated
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 $ 4,669 $ 1,091 $ 3,578
1996 4,669 1,091 3,578
1997 4,030 1,091 2,939
1998 3,328 1,091 2,237
1999 2,856 1,091 1,765
Remainder 17,595 4,802 12,793
--------- -------- ---------
Total minimum lease payments 37,147 10,257 26,890
Less imputed interest (16,407) (3,762) (12,645)
--------- -------- ---------
Present value of net minimum
lease payments (including
current portion of $2,332) $ 20,740 $ 6,495 $ 14,245
========= ======== =========
</TABLE>
Capital lease obligations bear imputed interest at rates ranging from
7.0% to 17.3%. Amortization of assets recorded under capital lease obligations
is included in depreciation and amortization expense.
Net rent expense charged to operations was as follows:
<TABLE>
<CAPTION>
(in thousands)
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum operating
lease rentals $ 62,794 $51,822 $46,090
Excess rentals:
Capital leases 1,352 1,480 1,746
Operating leases 591 1,566 1,554
-------- ------- -------
64,737 54,868 49,390
Less sublease income (13,192) (8,051) (2,500)
-------- ------- -------
Net rent expense $ 51,545 $46,817 $46,890
======== ======= =======
Net rent expense paid
to affiliates $ 3,840 $ 4,554 $ 4,819
======== ======= =======
</TABLE>
At January 28, 1995, the outstanding commitments on contracts relating
to the purchase of real estate, construction of various new stores and
remodeling of various existing stores amounted to approximately $15.0 million.
CONTINGENCIES. The Company and its subsidiaries are parties to numerous legal
proceedings and claims arising in the ordinary course of business, including
several suits alleging wrongful employment practices. Although the outcome of
such proceedings and claims cannot be determined with certainty, based upon
evaluation by legal counsel, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position.
STOCKHOLDERS' EQUITY. The Company has two classes of common stock, designated
as Class A and Class B. The Company also has authorized 20 million shares of
$1.00 par value preferred stock, none of which has been issued.
Class A and B shares are identical in all respects except that (1)
Class A stockholders receive preference as to cash dividends; and (2) Class A
stockholders have one vote per share, whereas Class B stockholders have ten
votes per share. Class B shares are convertible to Class A shares on a
share-for-share basis at any time at no cost to the stockholder.
EMPLOYEE BENEFIT PLANS AND RETIREMENT AGREEMENTS. The Company maintains a
profit sharing plan for all qualified employees. The Company also maintains a
thrift and savings plan and a defined benefit pension plan for qualified
employees at Hechinger Stores Company.
20
<PAGE> 23
The profit sharing plan allows for discretionary annual contributions
as determined by the board of directors. The thrift and savings plan allows for
employee contributions of up to 16% of the employee's salary and a matching
contribution of 50% from the Company on employee contributions of up to 6%. The
pension plan does not require employee contributions. The funding policy is to
contribute an amount not less than the minimum required contribution, nor
greater than the maximum tax deductible contribution each year. The assets of
the pension plan are comprised primarily of equity and fixed income securities.
The Company also has a nonqualified supplemental retirement plan which
covers certain key employees and pays benefits, which supplement any benefits
paid under the above plans. The projected benefit obligation under this plan
was $3.1 million and $2.4 million at January 28, 1995 and January 29, 1994,
respectively. The Company has purchased life insurance policies which it
intends to use to satisfy estimated future obligations under the plan. The
prepaid pension contribution recognized in the financial statements was $.3
million at January 28, 1995 compared to an accrued pension liability of $2.2
million at January 29, 1994.
Net defined benefit pension costs, including the nonqualified
supplemental retirement plan, consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for the period $ 2,050 $ 2,176 $2,071
Interest cost on projected
benefit obligation 1,357 1,086 1,029
Actual return on plan assets 220 (1,481) (945)
Net amortization and deferral (2,102) (186) (528)
------- ------- ------
Total pension expense $ 1,525 $ 1,595 $1,627
======= ======= ======
</TABLE>
The following table sets forth the status of the pension plan:
<TABLE>
<CAPTION>
(in thousands) JAN. 28, 1995 Jan. 29, 1994
- ---------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 15,446 $ 11,944
======== ========
Accumulated benefit obligation $ 16,136 $ 13,218
======== ========
Projected benefit obligation $ 17,228 $ 13,827
Plan assets at fair value (20,124) (18,393)
-------- --------
Plan assets over benefit obligation (2,896) (4,566)
Unrecognized prior service credit 3,265 3,590
Unrecognized net (loss) gain (1,565) 1,242
Unrecognized net asset existing
at the beginning of the year 956 1,112
-------- --------
(Prepaid pension asset) accrued
pension liability recognized in the
financial statements $ (240) $ 1,378
======== ========
</TABLE>
Assumptions used in calculating the status of the pension plan were as
follows:
<TABLE>
<CAPTION>
Year ended JAN. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 8.0% 8.0% 8.5%
Rate of increase in
compensation levels 4.8% 4.8% 5.5%
Expected long-term rate
of return on assets 9.0% 9.0% 9.0%
</TABLE>
In December 1990, Statement of Financial Accounting Standards No. 106
("SFAS 106"), Employers' Accounting for Postretirement Benefits Other Than
Pensions, was issued. SFAS 106 requires that postretirement benefits paid by
the employer be accounted for during the years of the retirees' active
employment. The Company adopted the statement in 1993 and is recognizing the
transition obligation prospectively over future periods as a component of the
annual benefit plans and retirement expense. The effect of adopting this
statement was not material to the Company's financial position or results of
operations.
Total expenses related to all of the above plans amounted to $6.3
million, $5.2 million and $5.3 million, for the years 1994, 1993 and 1992,
respectively.
STOCK COMPENSATION PLANS. In 1991, stockholders approved the Hechinger Company
1991 Stock Incentive Plan (the "Incentive Plan"). The Incentive Plan authorizes
the issuance of Class A common stock as incentive and nonqualified stock
options and as restricted stock to eligible employees of the Company.
Such grants can be made at any time through June 2001. At January 28, 1995, 1.3
million shares were available for future grants.
Incentive stock options granted must be at the fair market value on
the date of the grant. Nonqualified stock options may be granted at a price not
less than 40% of the fair market value at the date of the grant. Options
granted under the plan are exercisable beginning two years after the date of
the grant and over the succeeding eight years, after which time they expire.
In each of the last three fiscal years ended January 28, 1995, nonqualified
options were granted. At January 28, 1995, options to purchase 1.5 million
shares were exercisable.
21
<PAGE> 24
A summary of shares issuable under stock options outstanding is as
follows:
<TABLE>
<CAPTION>
Shares Weighted Average
(in thousands) Price per Share
- ----------------------------------------------------------------------
<S> <C> <C>
Balance, Feb. 1, 1992 2,376 $ 13.34
Granted 597 12.93
Canceled (342) 13.77
Exercised (13) 5.32
Balance, Jan. 30, 1993 2,618 13.23
Granted 980 9.02
Canceled (510) 13.08
Exercised (32) 8.62
Balance, Jan. 29, 1994 3,056 11.96
GRANTED 717 12.91
CANCELED (221) 12.51
EXERCISED (238) 9.71
BALANCE, JAN. 28, 1995 3,314 $12.30
</TABLE>
The Company awarded 20,000 and 195,000 shares of Class A common stock,
on a restricted basis, to certain key executives of the Company in 1993 and
1992, respectively. Under the terms of the awards, the stock will vest over a
period not to exceed five years.
In 1990, the Company established a performance share plan to award
officers and key employees of the Company rights to earn shares of Class A
common stock at no cost if certain performance goals are met. In 1994, the
Company reserved 17,000 shares for distribution under the plan. At January 28,
1995, 711,000 shares were available for future awards.
Total charges to earnings for these plans amounted to $1.0 million,
$.8 million and $.9 million for the years 1994, 1993 and 1992, respectively.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Hechinger Company
We have audited the accompanying consolidated balance sheets of Hechinger
Company and subsidiaries as of January 28, 1995 and January 29, 1994 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 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 consolidated financial position of Hechinger Company
and subsidiaries at January 28, 1995 and January 29, 1994 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended January 28, 1995 in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements, in the
fiscal year ended January 28, 1995, the Company changed its method of
calculating LIFO inventories.
/s/ ERNST & YOUNG LLP
- ---------------------
Washington, D.C.
February 22, 1995
22
<PAGE> 25
Hechinger Company
PRICE RANGE OF COMMON STOCK
Hechinger Company common stock trades on the Nasdaq Stock Market's National
Market under the symbols HECHA and HECHB. The following table sets forth high
and low prices on the Company's stock, as reported by Nasdaq for the periods
designated. The Company currently has approximately 3,332 Class A and 1,186
Class B stockholders of record.
The Company has declared cash dividends of $.04 per share on the Class A common
and $.016 per share on the Class B common in each of the quarters presented.
<TABLE>
<CAPTION>
1994 1993
------------- -------------
PERIOD HIGH LOW Period High Low
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1ST QUARTER 1st Quarter
CLASS A $15 1/4 $10 Class A $10 1/2 $8 1/8
CLASS B 15 1/2 10 1/4 Class B 10 1/2 8
2ND QUARTER 2nd Quarter
CLASS A 16 1/2 11 Class A 10 3/8 9
CLASS B 16 1/4 11 3/8 Class B 10 3/4 8 3/4
3RD QUARTER 3rd Quarter
CLASS A 15 3/4 11 Class A 12 1/8 8 1/8
CLASS B 15 3/4 11 Class B 12 1/4 8 1/4
4TH QUARTER 4th Quarter
CLASS A 12 9 Class A 11 3/8 9 1/8
CLASS B 11 3/4 9 Class B 11 1/2 9
</TABLE>
QUARTERLY RESULTS (UNAUDITED)
(in thousands except per share data)
The following table sets forth summarized unaudited quarterly results for the
years ended January 28, 1995 and January 29, 1994:
<TABLE>
<CAPTION>
QUARTER ENDED APRIL 30, 1994 JULY 30, 1994 OCT. 29, 1994 JAN. 28, 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $574,301 $708,874 $633,870 $532,509
COST OF SALES 448,151 547,923 500,248 412,552
INCOME TAX EXPENSE (BENEFIT) 2,392 11,008 1,683 (20,628)
NET EARNINGS (LOSS) 4,645 21,368 3,268 (39,193)
NET EARNINGS (LOSS) PER COMMON SHARE $.11 $.48 $.08 $(.93)
</TABLE>
<TABLE>
<CAPTION>
Quarter ended May 1, 1993 July 31, 1993 Oct. 30, 1993 Jan. 29, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $479,144 $609,233 $524,264 $482,327
Cost of sales 371,289 471,854 412,732 376,827
Income tax expense 1,450 8,037 1,077 47
Net earnings 3,228 17,894 2,395 1,243
Net earnings per common share $.08 $.41 $.06 $.03
</TABLE>
Final LIFO valuation and inventory acquisition cost adjustments impacted the
fourth quarters of 1994 and 1993. The Targeted Jobs Tax Credits as well as
lower than anticipated earnings impacted the effective tax rate for the fourth
quarter of 1993. In the fourth quarter of 1994, the Company recorded a charge
of $61.9 million primarily related to its decision to close its stores in
certain markets. See Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
23
<PAGE> 26
DIRECTORS AND OFFICERS
DIRECTORS
JOHN W. HECHINGER
Chairman of the Board
HERBERT J. BRONER
Retired Chairman, President
and Chief Executive Officer,
Mohasco Corporation
JOHN W. HECHINGER, JR.
President and Chief Executive
Officer, Hechinger Company
S. ROSS HECHINGER
Senior Vice President,
Corporate Administration,
Hechinger Company
ANN D. JORDAN
Former Associate Fieldwork
Professor, SSA
University of Chicago,
Consultant
DAVID O. MAXWELL
Retired Chairman and
Chief Executive Officer,
Federal National Mortgage
Association
W. CLARK MCCLELLAND
Executive Vice President and
Chief Financial Officer,
Hechinger Company
ALAN J. ZAKON
Vice Chairman,
Autotote Corporation
CORPORATE OFFICERS
JOHN W. HECHINGER, JR.
President and Chief Executive
Officer
W. CLARK MCCLELLAND
Executive Vice President and
Chief Financial Officer
MARK R. ADAMS
Senior Vice President,
Treasurer and Secretary
S. ROSS HECHINGER
Senior Vice President,
Corporate Administration
ROGER K. WRIGHT
Senior Vice President,
Real Estate and Development
CARY G. ADAMS
Vice President, Real Estate
THOMAS C. BARBUTI
Vice President,
Real Estate Counsel
RICHARD S. GROSS
Vice President,
Corporate Controller
OFFICERS
Hechinger Stores Company
KENNETH J. CORT
President and Chief Executive
Officer
JOANNE M. BARRETT
Senior Vice President,
International Expansion
J. WAYNE COLLEY
Senior Vice President,
Merchandise Presentation
SALLY A. COURTNEY
Senior Vice President, General
Merchandise Manager
C. SCOTT LITTEN
Senior Vice President, Finance
ANN B. MCCLENAHAN
Senior Vice President,
Marketing and Advertising
GARY E. MERCER
Senior Vice President,
Store Operations
CAROL A. STEVENS
Senior Vice President,
Human Resources
JAMES F. IAMPIERI
Vice President,
Merchandise Administration
G. MICHAEL KING
Vice President,
Regional Manager
PETER J. OLLE
Vice President,
Information Technology
RICHARD A. POVLAK
Vice President,
Loss Prevention and
Distribution
GARY G. RHEA
Vice President,
Regional Manager
MAX S. ROBUCK
Vice President, Divisional
Merchandise Manager
OFFICERS
Home Quarters Warehouse, Inc.
FRANK DOCZI
President and Chief Executive
Officer
HAROLD R. HALL
Senior Vice President, Finance
ALAN B. NOEL
Senior Vice President,
Human Resources
J. MICHAEL PASTORE
Senior Vice President, General
Merchandise Manager
MONTY E. REESE
Senior Vice President,
Marketing
WILLIAM VAN NOTE
Senior Vice President,
Operations
MICHAEL P. GOOD
Vice President and Controller
NOEL H. GOULSTON
Vice President,
Strategic Development
FREDRIC W. HIRCHERT
Vice President,
Loss Prevention and Safety
JOHN T. LEWIS
Vice President, Construction
CELIA A. WING
Vice President, Real Estate
RICHARD M. DOW
Regional Vice President,
Operations
J. MICHAEL OWEN
Regional Vice President,
Operations
24
<PAGE> 27
CORPORATE INFORMATION
GENERAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
INDEPENDENT AUDITORS
Ernst & Young LLP
1225 Connecticut Avenue, N.W.
Washington, D.C. 20036
STOCK TRANSFER AGENT
First Union National Bank
Shareholder Services Group
230 South Tryon Street
Charlotte, North Carolina 28288
Information contact:
Frances Beam
1-800-829-8432
CORPORATE MAILING ADDRESS
Hechinger Company
3500 Pennsy Drive
Landover, Maryland 20785
(301) 341-1000
SUBSIDIARY MAILING ADDRESSES
Hechinger Stores Company
1801 McCormick Drive
Landover, Maryland 20785
(301) 341-1000
Home Quarters Warehouse, Inc.
575 Lynnhaven Parkway
Virginia Beach, Virginia 23450
(804) 498-7100
STOCK LISTING
The Nasdaq Stock Market's National Market
TRADING SYMBOLS
HECHA and HECHB
FORM 10-K
Copies of the Company's Annual Report on Form 10-K Report as filed with the
Securities and Exchange Commission will be sent to stockholders upon request in
writing to:
Hechinger Company
Investor Relations
3500 Pennsy Drive
Landover, Maryland 20785
Design: Financial Communications, Inc., Bethesda, MD
[RECYCLE LOGO]
Printed entirely on recycled paper.
At Hechinger, we believe saving and protecting the environment is everyone's
business.
<PAGE> 28
[HOME QUARTERS LOGO]
[HECHINGER LOGO]
HECHINGER COMPANY
3500 PENNSY DRIVE
LANDOVER, MARYLAND 20785
(301) 341-1000
<PAGE> 29
EDGAR APPENDIX
<TABLE>
<CAPTION>
DESCRIPTION OF PHOTOGRAPH PAGE
- ------------------------- ----
<S> <C>
Pictured on the front cover of Hechinger Company's Front Cover [FIGURE 1]
Fiscal 1994 Annual Report is a family of four. They
are in their living room preparing to paint the room.
Supplies for accomplishing their task are included in
the photograph. Home Quarters Warehouse, Inc.
and Hechinger Stores Company logos are super
imposed on the photograph and appear in the upper
right and lower left, respectively.
Home Quarters Warehouse, Inc. and Inside Front Cover
Hechinger Stores Company logos.
Photograph of John W. Hechinger, Jr., President 3 [FIGURE 2]
and Chief Executive Officer, in front of a Hechinger
store's garden center display.
Picture of the interior of a Home Quarters Warehouse 4-5 [FIGURE 3]
"Chesapeake Class" store.
Picture of the interior of a Hechinger Stores Company 6-7 [FIGURE 4]
Home Project Center store.
Map drawing of Hechinger Company markets denoting 8 [FIGURE 5]
store counts for Home Quarters Warehouse, Inc. and
Hechinger Stores Company planned as of September
1995.
Home Quarters Warehouse, Inc. and Outside Back Cover
Hechinger Stores Company logos.
</TABLE>
<PAGE> 1
EXHIBIT 18
HECHINGER COMPANY
LETTER REGARDING CHANGE IN ACCOUNTING PRINCIPLE
February 22, 1995
Mr. W. Clark McClelland
Executive Vice President and
Chief Financial Officer
Hechinger Company
Landover, Maryland
The Notes to the Consolidated Financial Statements of Hechinger Company
incorporated by reference in its Form 10-K for the year ended January 28, 1995
describe a change in the method of calculating LIFO inventories by adopting
consolidated cost-based inflation indices applied to inventories grouped into
two pools on a consolidated basis. In prior years, the Company calculated its
LIFO inventories using a combination of retail and cost-based indices applied
to inventories grouped into six pools. You have advised us that you believe
the change is to a preferable method because the new method provides for a
better matching of costs and revenues, conforms the LIFO methods used to the
method used for the majority of its inventories, provides for a LIFO adjustment
more representative of the Company's actual inflation on its inventories, and
reduces the likelihood of LIFO layer liquidations during periods of overall
growth in inventories.
There are no authoritative criteria for determining a preferable method of
calculating LIFO inventories based on the particular circumstances; however, we
conclude that the change in the method of calculating LIFO inventories is to an
acceptable alternative method which, based on your business judgment to make
this change for the reasons cited above, is preferable in your circumstances.
Very truly yours,
ERNST & YOUNG LLP
44
<PAGE> 1
EXHIBIT 21
HECHINGER COMPANY
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME INCORPORATION
- ---- -------------
Hechinger Company of Connecticut Delaware
Hechinger Company of Delaware Delaware
Hechinger Company of Maryland Delaware
Hechinger Company of Massachusetts Delaware
Hechinger Company of New Jersey Delaware
Hechinger Company of New York Delaware
Hechinger Company of Ohio Delaware
Hechinger Company of Pennsylvania Delaware
Hechinger Investment Company of Delaware, Inc. Delaware
Hechinger Properties Company Delaware
Hechinger Stores Company Delaware
Hechinger Towers Company Delaware
Hechinger Finance Company Delaware
HCSC, Inc. Delaware
HS Square, Inc. Delaware
HQ Investment Company of Delaware, Inc. Delaware
HQ of Livonia Delaware
HQ of Massachusetts, Inc. Delaware
HQ of Michigan, Inc. Delaware
HQ of New Hampshire, Inc. Delaware
HQ of Roseville, Inc. Delaware
Home Quarters Realty, Inc. Virginia
Home Quarters Warehouse, Inc. Delaware
Pennsy, Inc. Delaware
Trisett Company Delaware
Bucksprop Holding Company Pennsylvania
EP Holdings, Inc. Delaware
HProp, Inc. Delaware
Lynnhaven Offices, Inc. Delaware
Manprop Holding Company Virginia
Philprop Holding Company Pennsylvania
RemProp, Inc. Delaware
SuperMass Holdings, Inc. Delaware
Ventory, Inc. Delaware
45
<PAGE> 1
EXHIBIT 23
HECHINGER COMPANY
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Hechinger Company of our report dated February 22, 1995, included in the
Annual Report to Stockholders of Hechinger Company for the year ended January
28, 1995.
Our audits also included the financial statement schedule of Hechinger Company
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
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 set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-3182 and Form S-8 No. 33-27134) pertaining to the
stock option plans of Hechinger Company, and in the Registration Statement
(Form S-4 No. 33-31668) pertaining to the merger with HECO, Inc., and in the
Registration Statement (Form S-8 No. 33-46847) pertaining to the 1991 Stock
Incentive Plan of Hechinger Company, with respect to the consolidated financial
statements incorporated herein by reference and our report included in the
preceding paragraph with respect to the financial statement schedule included
in this Annual Report (Form 10-K) of Hechinger Company.
ERNST & YOUNG LLP
Washington, DC
April 28, 1995
46
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-28-1995
<PERIOD-START> JAN-30-1994
<PERIOD-END> JAN-28-1995
<CASH> 26,252
<SECURITIES> 68,911
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 453,529
<CURRENT-ASSETS> 615,434
<PP&E> 504,132<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,261,229
<CURRENT-LIABILITIES> 341,533
<BONDS> 384,969
<COMMON> 4,232
0
0
<OTHER-SE> 477,041
<TOTAL-LIABILITY-AND-EQUITY> 1,261,229
<SALES> 2,449,554
<TOTAL-REVENUES> 2,453,959
<CGS> 1,908,874
<TOTAL-COSTS> 2,377,772
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,793
<INCOME-PRETAX> (15,456)
<INCOME-TAX> (5,545)
<INCOME-CONTINUING> (9,911)
<DISCONTINUED> 61,850
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,911)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
<FN>
<F1>Property, furniture and equipment, net of accumulated depreciation
</FN>
</TABLE>
