<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
CHECK ONE
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the thirteen weeks ended November 2, 1996 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.)
</TABLE>
1801 MCCORMICK DRIVE, LARGO, MARYLAND 20774
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 341-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------------- -----------
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of December 6, 1996.
31,239,421 shares of Class A Common Stock, $.10 par value
10,986,395 shares of Class B Common Stock, $.10 par value
1 of 15
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C> <C>
Part I. Financial Information:
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3 - 5
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 6
Index to Exhibits 8
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
The information called for by this item is hereby incorporated by reference
from Exhibits 99(a) - 99(e) of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth the sales reported by the Company (in millions):
<TABLE>
<CAPTION>
TOTAL TOTAL TOTAL COMPARABLE
SALES SALES SALES STORE SALES
PERIOD NOV. 2, 1996 OCT. 28, 1995 CHANGE CHANGE
- ------ ------------ ------------- ------ ------------
<S> <C> <C> <C> <C>
Thirteen weeks $533.3 $549.2 (3)% (5)%
Thirty-nine weeks $1,760.5 $1,751.0 1 % (3)%
</TABLE>
For the thirteen weeks ended November 2, 1996, the total sales and comparable
store sales decreases were due primarily to increased competition and
disruption in the Company's stores caused by remerchandising and remodeling
programs.
The following table sets forth the number of stores operated by the Company:
As of July 29, 1995 114
Third quarter 1995 openings 5
Third quarter 1995 closings (1)
As of October 28, 1995 118
Fourth quarter 1995 openings -
Fourth quarter 1995 closings -
As of February 3, 1996 118
First quarter 1996 openings 1
First quarter 1996 closings (1)
As of May 4, 1996 118
Second quarter 1996 openings 1
Second quarter 1996 closings (2)
As of August 3, 1996 117
Third quarter 1996 openings -
Third quarter 1996 closings -
---
As of November 2, 1996 117
===
For the thirteen weeks ended November 2, 1996, cost of sales was 79.6% of sales
compared to 81.1% of sales for the corresponding period last year. For the
thirty-nine weeks ended November 2, 1996 and October 28, 1995, cost of sales
was 79.3% of sales. Distribution, buying and occupancy expenses are included
in cost of sales and are comprised substantially of fixed costs. The decrease
in cost of sales during the thirteen weeks ended November 2, 1996 compared to
the same period last year is due primarily to improvement in the merchandise
margin resulting from the Company's vendor consolidation program.
3
<PAGE> 4
For the thirteen weeks ended November 2, 1996, selling, general and
administrative expenses were 20.5% of sales compared to 19.4% of sales for the
corresponding period last year. For the thirty-nine weeks ended November 2,
1996, selling, general and administrative expenses were 19.3% of sales compared
to 19.1% of sales for the corresponding period last year. The increases for
the thirteen and thirty-nine weeks ended November 2, 1996 were due primarily to
additional store payroll expenses incurred to support customer service
initiatives.
For the thirteen weeks ended November 2, 1996, interest expense was $10.0
million, 1.9% of sales, compared to $8.2 million, 1.5% of sales, for the
corresponding period last year. For the thirty-nine weeks ended November 2,
1996, interest expense was $29.6 million, 1.7% of sales, compared to $23.3
million, 1.3% of sales for the corresponding period last year. The increases
were due primarily to interest on borrowings under the revolving credit
facility and lower interest capitalized on construction-in-progress as a result
of fewer stores under construction.
For the thirteen weeks and thirty-nine weeks ended November 2, 1996, the
effective tax rates were 0% compared to 37.0% for the corresponding periods
last year. The decreases in the effective tax rates were due to tax loss
carryforwards. No tax benefits have been recorded as all potential benefits
have been recorded in prior periods.
For the thirteen weeks ended November 2, 1996, the net loss was $10.0 million,
$.24 per share, compared to a net loss of $6.4 million, $.15 per share, for the
corresponding period last year. For the thirty-nine weeks ended November 2,
1996, the net loss was $3.7 million, $.09 per share, compared to net earnings
of $3.9 million, $.09 per share, for the corresponding period last year.
The following table reflects the activities recorded during the thirty-nine
weeks ended November 2, 1996 for the $25 million reserve recorded in 1995
related to the Company's decision to combine its Hechinger Stores and Home
Quarters operations:
<TABLE>
<CAPTION>
($ in millions) Balance Balance
Remaining Utilized in 1996 Remaining
Feb. 3, 1996 Cash Non-cash Nov. 2, 1996
------------ ---- -------- ------------
<S> <C> <C> <C> <C>
Employee termination costs $11.0 $ 7.7 - $3.3
Pension termination and other 7.1 6.2 - 0.9
Disposal of furniture, fixtures and
equipment and other assets 2.0 - $1.4 0.6
----- ----- ---- ----
$20.1 $13.9 $1.4 $4.8
===== ===== ==== ====
</TABLE>
The remaining balance of $4.8 million has been recorded as a current liability
as of November 2, 1996. Management anticipates that the combination will be
substantially completed by the end of fiscal 1996. The Company believes that
the balance remaining in the reserve is adequate to cover future expenses
related to the cost of combining its Hechinger Stores and Home Quarters
operations.
For the thirty-nine weeks ended November 2, 1996, expenditures for carrying
costs of closed stores associated with the store closing reserve recorded in
1994 totaled $8.6 million. Of the $13.5 million remaining, $5.3 million has
been recorded as a current liability. The Company believes that the balance
remaining in the store closing reserve is adequate to cover future expenses
related to the carrying costs of the closed stores.
In February 1996, the Company's operating subsidiaries entered into a new
senior secured revolving credit facility, which permits borrowings of up to
$200 million, with preauthorization from the lender to utilize the last $25
million. This facility replaced the existing revolving credit facility and all
letter of credit facilities. This facility is secured by merchandise
inventories and expires in February 1999. Interest on borrowings under this
facility is at prime plus 1% or LIBOR plus 2.75% at the option of management.
As of November 2, 1996, the Company had outstanding loans of $82.1 million
under this facility. In addition, the Company had issued and outstanding
letters of credit of $20.8 million under this facility.
Cash and cash equivalents were $69.9 million as of November 2, 1996 compared to
$35.8 million as of February 3, 1996. The increase in merchandise inventories
from year-end was due primarily to a lower than expected sales level.
4
<PAGE> 5
Accounts payable and accrued expenses are higher due to higher inventories.
Expenditures for property, furniture and equipment and other assets, net of
disposal of a company-owned store and other asset disposals, were $21.7 million
for the thirty-nine weeks ended November 2, 1996. These expenditures are
related primarily to the Company's store relocation and remodeling programs.
The Company is a party to legal proceedings and claims arising in the ordinary
course of business. Although the outcome of such proceedings and claims cannot
be determined with certainty, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
Forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995.
There are various factors that could cause results to differ materially from
those anticipated by some statements made above. Investors are cautioned that
all forward-looking statements involve risks and uncertainty. Factors that
could cause actual results to differ materially include the following: general
economic conditions, housing turnover, interest rates, weather, impact on sales
and margins from both existing and new competition, product mix, lumber prices,
LIFO and inventory shortage and other risks described from time to time in the
Company's SEC filings.
5
<PAGE> 6
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------ --------
<S> <C>
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule
99(a) Consolidated Statements of Operations
99(b) Consolidated Balance Sheets
99(c) Consolidated Statements of Cash Flows
99(d) Consolidated Statements of Stockholders' Equity
99(e) Notes to Consolidated Financial Statements
</TABLE>
(b) REPORTS ON FORM 8-K
None.
6
<PAGE> 7
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 17, 1996 HECHINGER COMPANY
-----------------
Registrant
/S/W. CLARK McCLELLAND
----------------------
W. Clark McClelland
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
7
<PAGE> 8
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- ----------- ----
<S> <C>
11 Statement Regarding Computation of Earnings Per Share
27 Financial Data Schedule
99(a) Consolidated Statements of Operations
99(b) Consolidated Balance Sheets
99(c) Consolidated Statements of Cash Flows
99(d) Consolidated Statements of Stockholders' Equity
99(e) Notes to Consolidated Financial Statements
</TABLE>
8
<PAGE> 1
EXHIBIT 11
HECHINGER COMPANY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
NOV. 2, 1996 OCT. 28, 1995 NOV. 2, 1996 OCT.28,1995
--------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net (loss) earnings $ (9,965,000) $ (6,406,000) $ (3,739,000) $3,901,000
Interest on 5-1/2% convertible debentures, net of tax
benefit (1) - - - -
--------------- --------------- -------------- -------------
Net (loss) earnings for primary and fully diluted
earnings per share $ (9,965,000) $ (6,406,000) $ (3,739,000) $3,901,000
=============== =============== ============== =============
Weighted average shares outstanding 42,158,556 42,117,066 42,161,820 42,109,721
Dilutive effect of stock options and restricted stock and
performance share awards after application of the - - - 105,754
treasury stock method
Additional shares issuable assuming full conversion of
the 5-1/2% debentures into Class A common stock (1) - - - -
--------------- --------------- -------------- -------------
Common and common equivalent shares outstanding for
primary earnings per share 42,158,556 42,117,066 42,161,820 42,215,475
Additional dilution from stock options and restricted
stock and performance share awards after application of
the treasury stock method - - - -
--------------- --------------- -------------- -------------
Common and common equivalent shares outstanding for fully
diluted earnings per share 42,158,556 42,117,066 42,161,820 42,215,475
=============== =============== ============== =============
Primary (loss) earnings per common share ($0.24) ($0.15) ($0.09) $0.09
=============== =============== ============== =============
Fully diluted (loss) earnings per common share ($0.24) ($0.15) ($0.09) $0.09
=============== =============== ============== =============
</TABLE>
(1) The 5-1/2% Convertible Subordinated Debentures, stock options, restricted
stock and performance share awards were antidilutive for the 13 weeks and
39 weeks ended November 2, 1996 and 13 weeks ended October 28, 1995. The
5-1/2% Convertible Subordinated Debentures were antidilutive for the 39
weeks ended October 28, 1995.
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> NOV-02-1996
<CASH> 69,859
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 493,153
<CURRENT-ASSETS> 649,409
<PP&E> 468,639<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,248,506
<CURRENT-LIABILITIES> 422,397
<BONDS> 381,514
0
0
<COMMON> 4,232
<OTHER-SE> 391,264
<TOTAL-LIABILITY-AND-EQUITY> 1,248,506
<SALES> 1,760,495
<TOTAL-REVENUES> 1,762,404
<CGS> 1,396,080
<TOTAL-COSTS> 1,736,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,586
<INCOME-PRETAX> (3,739)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,739)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,739)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
<FN>
<F1>Property furniture and equipment, net of accumulated depreciation
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
NOV. 2, 1996 OCT. 28, 1995 NOV. 2, 1996 OCT. 28, 1995
--------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Net sales $533,276 $549,189 $1,760,495 $1,751,012
Other (principally interest) 549 564 1,909 2,512
--------------- ---------------- ----------------- -----------------
Total Revenues 533,825 549,753 1,762,404 1,753,524
COSTS AND EXPENSES
Cost of sales 424,270 445,240 1,396,080 1,388,984
Selling, general and administrative expenses 109,488 106,518 340,477 335,078
Interest expense 10,032 8,163 29,586 23,269
--------------- ---------------- ----------------- -----------------
Total Costs and Expenses 543,790 559,921 1,766,143 1,747,331
--------------- ---------------- ----------------- -----------------
(LOSS) EARNINGS BEFORE INCOME TAXES (9,965) (10,168) (3,739) 6,193
INCOME TAX (BENEFIT) EXPENSE - (3,762) - 2,292
--------------- ---------------- ----------------- -----------------
NET (LOSS) EARNINGS ($9,965) ($6,406) ($3,739) $3,901
=============== ================ ================= =================
PRIMARY AND FULLY DILUTED (LOSS) EARNINGS PER
COMMON SHARE ($0.24) ($0.15) ($0.09) $0.09
=============== ================ ================= =================
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 42,159 42,117 42,162 42,215
Fully diluted 42,159 42,117 42,162 42,215
DIVIDENDS PER SHARE:
Class A common stock $0.00 $0.04 $0.00 $0.12
Class B common stock $0.00 $0.02 $0.00 $0.05
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 1
EXHBIT 99(b)
HECHINGER COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
(unaudited)
NOV. 2, 1996 FEB. 3, 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 69,859 $ 35,785
Merchandise inventories 493,153 414,974
Other current assets 86,397 79,533
--------------- ---------------
Total Current Assets 649,409 530,292
PROPERTY, FURNITURE AND EQUIPMENT, NET 468,639 497,577
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 52,485 53,743
LEASEHOLD ACQUISITION COSTS, NET 47,444 49,128
OTHER ASSETS 30,529 19,681
--------------- ---------------
TOTAL ASSETS $ 1,248,506 $ 1,150,421
=============== ===============
<CAPTION>
(unaudited)
NOV. 2, 1996 FEB. 3, 1996
------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 82,062 $ -
Accounts payable and accrued expenses 336,498 313,067
Current portion of long-term debt and capital lease
obligations 3,837 3,806
------------- --------------
Total Current Liabilities 422,397 316,873
LONG-TERM DEBT 381,514 383,709
CAPITAL LEASE OBLIGATIONS 14,163 15,821
DEFERRED RENT 26,736 26,779
OTHER LONG-TERM LIABILITIES 8,200 8,200
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value; authorized
50,000,000 shares; issued 31,323,618 and 30,892,581 3,132 3,089
Class B common stock, $.10 par value, authorized
30,000,000 shares; issued 11,000,892 and 11,431,929 1,100 1,143
Additional paid-in capital 238,248 238,248
Retained earnings 154,251 157,990
Unearned compensation (379) (759)
Less treasury stock at cost, 84,197 and 39,325
Class A common shares and 14,497 and 14,497
Class B common shares (856) (672)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 395,496 399,039
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,248,506 $ 1,150,421
============= ==============
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 1
EXHIBIT 99(c)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
39 WEEKS ENDED
NOV. 2, 1996 OCT. 28, 1995
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net (loss) earnings $ (3,739) $ 3,901
Adjustments to reconcile earnings to net cash provided by
operating activities:
Unusual charges (24,009) (23,220)
Depreciation and amortization 42,725 43,115
Deferred income taxes - 1,954
Deferred rent expense (43) 1,486
CHANGES IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories (78,179) (19,946)
Other current assets (18,166) (2,133)
Accounts payable and accrued expenses 47,440 58,455
Income taxes payable 11,302 (2,643)
------------------- -------------------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES (22,669) 60,969
------------------- -------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Property, furniture, equipment and other assets:
Additions (39,824) (88,449)
Disposals 18,131
Marketable securities:
Purchases - (162,628)
Proceeds from sales - 194,333
------------------- -------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (21,693) (56,744)
------------------- -------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 376,437 -
Payments to revolving credit facility (294,375) -
Dividends paid to stockholders - (4,248)
Other (3,626) (1,438)
------------------- -------------------
NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 78,436 (5,686)
------------------- -------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 34,074 (1,461)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 35,785 26,252
------------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 69,859 $ 24,791
=================== ===================
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 1,519 $ 3,082
Cash payments for interest, net of amount capitalized $ 30,401 $ 23,718
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 1
EXHIBIT 99(d)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON ADDITIONAL PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS
--------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
BALANCE, JAN. 28, 1995 $ 3,080 $ 1,152 $ 238,182 $ 240,919
Restricted stock awards earned - - - -
Exercise of stock options including income tax benefit - - 66 -
Conversions from Class B to Class A common stock 9 (9) - -
(86,800 Class A common shares)
Purchase of treasury stock (27,391 Class A common shares) - - - -
Adjustment to fair value of marketable securities - - - 371
Cash dividends on common stock:
Class A - $.16 per share - - - (4,931)
Class B - $.06 per share - - - (733)
Net loss - - - (77,636)
--------------- --------------- ----------------- --------------
BALANCE, FEB. 3, 1996 3,089 1,143 238,248 157,990
Restricted stock awards earned - - - -
Conversions from Class B to Class A common stock 43 (43) - -
(431,037 Class A common shares)
Purchase of treasury stock (44,872 Class A
common shares) - - - -
Net loss - - - (3,739)
--------------- --------------- ----------------- --------------
BALANCE, NOV. 2, 1996 (unaudited) $ 3,132 $ 1,100 $ 238,248 $ 154,251
=============== =============== ================= ==============
<CAPTION>
UNEARNED TREASURY
COMPENSATION STOCK TOTAL
-------------- -------------- ---------------
<S> <C> <C> <C>
BALANCE, JAN. 28, 1995 $ (1,553) $ (507) $ 481,273
Restricted stock awards earned 794 - 794
Exercise of stock options including income tax benefit - 66 132
Conversions from Class B to Class A common stock - - -
(86,800 Class A common shares)
Purchase of treasury stock (27,391 Class A common
shares) - (231) (231)
Adjustment to fair value of marketable securities - - 371
Cash dividends on common stock:
Class A - $.16 per share - - (4,931)
Class B - $.06 per share - - (733)
Net loss - - (77,636)
-------------- -------------- ---------------
BALANCE, FEB. 3, 1996 (759) (672) 399,039
Restricted stock awards earned 380 - 380
Conversions from Class B to Class A common stock - - -
(431,037 Class A common shares)
Purchase of treasury stock (44,872 Class A
common shares) - (184) (184)
Net loss - - (3,739)
-------------- -------------- ---------------
BALANCE, NOV. 2, 1996 (unaudited) $ (379) $ (856) $ 395,496
============== ============== ===============
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 1
EXHIBIT 99(e)
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
(unaudited)
A. BASIS OF PRESENTATION
In the opinion of the management of Hechinger Company (the "Company"), the
accompanying unaudited consolidated financial statements include all
adjustments (which consist of normal recurring accruals) considered necessary
for a fair statement of the results for the interim periods presented. The
operating results for the thirteen weeks and thirty-nine weeks ended November
2, 1996 are not necessarily indicative of the results to be expected for the
fiscal year ending February 1, 1997.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. The financial
statements presented herein should be read in conjunction with the financial
statements incorporated by reference in the Company's Annual Report on Form
10-K for the year ended February 3, 1996.
B. MERCHANDISE INVENTORY
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Interim results are subject to
the final year-end LIFO inventory valuation.
All inventories reported at November 2, 1996 and February 3, 1996 were valued
using the LIFO inventory valuation method. If all inventories had been valued
under the FIFO method, which approximates replacement cost, inventories would
have been $24.4 million and $21.5 million higher than reported at November 2,
1996 and February 3, 1996, respectively.
C. TAXES ON INCOME
For the thirteen weeks and thirty-nine weeks ended November 2, 1996, the
effective tax rates were 0% compared to 37.0% for the corresponding periods
last year. The decreases in the effective tax rates were due to tax loss
carryforwards. No tax benefits have been recorded as all potential benefits
have been recorded in prior periods.
D. UNUSUAL CHARGEs
For the thirty-nine weeks ended November 2, 1996, the Company utilized
approximately $15.3 million of the reserve recorded in 1995 related to the
Company's decision to combine its Hechinger Stores and Home Quarters
operations. The remaining balance of $4.8 million has been recorded as a
current liability as of November 2, 1996. Management anticipates that the
combination will be substantially completed by the end of fiscal 1996. The
Company believes that the balance remaining in the reserve is adequate to cover
future expenses related to the cost of combining its Hechinger Stores and Home
Quarters operations.
For the thirty-nine weeks ended November 2, 1996, expenditures for carrying
costs of closed stores associated with the store closing reserve recorded in
1994 totaled $8.6 million. Of the $13.5 million remaining, $5.3 million has
been recorded as a current liability. The Company believes that the balance
remaining in the store closing reserve is adequate
14
<PAGE> 2
to cover future expenses related to the carrying costs of the closed stores.
E. REVOLVING CREDIT FACILITY
In February 1996, the Company's operating subsidiaries entered into a new
senior secured revolving credit facility, which permits borrowings of up to
$200 million, with preauthorization from the lender to utilize the last $25
million. This facility replaced the existing revolving credit facility and all
letter of credit facilities. This facility is secured by merchandise
inventories and expires in February 1999. Interest on borrowings under this
facility is at prime plus 1% or LIBOR plus 2.75% at the option of management.
As of November 2, 1996, the Company had outstanding loans of $82.1 million
under this facility. In addition, the Company had issued and outstanding
letters of credit of $20.8 million under this facility.
F. CONTINGENCIES
The Company is a party to legal proceedings and claims arising in the ordinary
course of business. Although the outcome of such proceedings and claims cannot
be determined with certainty, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
15
