<PAGE> 1
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 February 3, 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.)
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 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
----- -----
1 of 49
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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 11, 1996.)
$113,407,329
Indicate the number of shares outstanding of each of the registrant's classes
of Common Stock, as of April 11, 1996
31,084,293 shares of Class A Common Stock, $.10 par value
11,186,395 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 February 3, 1996 as indicated herein. (2)
Portions of Registrant's 1996 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 operates 118 stores under the
Hechinger ("Hechinger") and Home Quarters Warehouse ("Home Quarters") names.
The 64 Hechinger stores are primarily located in the Mid-Atlantic region; and
the 54 Home Quarters stores are primarily located in the Southeastern,
Northeastern and Midwestern parts of the United States.
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 101,000 square feet under
roof. The Company opened a 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 and to maintain and improve its
competitive position within the industry. Since July 1993, the Company has
opened 27 new "Chesapeake class" stores.
A "Chesapeake class" store incorporates, among other things, 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. As compared to earlier Home Quarters stores, a "Chesapeake
class" store has approximately 25% more square footage.
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, 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.
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The following tables set forth the number of stores operated by the Company and
the aggregate amount of square feet of store space under roof in such stores
for the specified periods (excluding the six Triangle Building Center stores
which the Company closed in fiscal 1993):
<TABLE>
<CAPTION>
HECHINGER HOME
NUMBER OF STORES: STORES QUARTERS
---------------- ----------- --------
<S> <C> <C>
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
1995 openings 1 9
1995 closings (9) (16)
As of February 3, 1996 64 54
</TABLE>
<TABLE>
<CAPTION>
STORE SQUARE FOOTAGE HECHINGER HOME
(IN THOUSANDS): STORES QUARTERS
--------------------- ----------- --------
<S> <C> <C>
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
1995 openings 102 1,032
1995 closings (688) (1,393)
As of February 3, 1996 4,458 5,437
</TABLE>
See Notes to Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
discussion of stores closed in 1995. In 1996, the Company plans to relocate
two of its Hechinger stores to new, larger facilities.
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 FEB. 3, 1996 JAN. 28, 1995 JAN. 29, 1994
- ----------------- ------------ ------------- -------------
<S> <C> <C> <C>
Lumber and building materials 28% 27% 29%
Garden supplies and furniture 19 18 18
Hardware and tools 13 12 13
Electrical supplies and small
appliances 10 11 12
Plumbing supplies 16 16 12
Paint 8 9 9
Home Decor and housewares 6 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.
In the fourth quarter of 1995, the Company announced its decision to combine
its Hechinger and Home Quarters operations under one management team. By
merging the merchandise acquisition function of Hechinger and Home Quarters,
the Company believes it will increase its purchasing power with its vendors.
The Company also believes it has good relationships with its suppliers and does
not consider itself dependent upon any single source for its merchandise. See
Notes to Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
discussion.
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 offers its customers a liberal return policy.
The Company employs a multi-media marketing strategy using newspapers,
television, radio, direct mail and 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. The Company's advertisements focus on the stores' wide
selection and values, featuring recognizable brand names and emphasizing the
Company's commitment to meeting or beating competitors' prices. The Company's
use of recognizable brand names enables it to share advertising costs
co-operatively with its suppliers.
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
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to its customers by a third party financial institution. The Company also
accepts Visa, MasterCard, Discover and American Express in all of its stores.
For the fiscal year ended February 3, 1996 credit card sales accounted for 50%
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 national and regional home center chains,
national chains of general merchandise stores and local hardware stores, some
of which have greater financial resources than the Company or have been
operating longer in particular geographic areas than the Company.
The extent of the Company's competition varies by geographic area. Competitors
have entered several of the Company's existing markets and established
competitors are expanding in certain of these 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 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 competitive position in the majority of
its established market areas, reflecting the quality of its trained personnel,
breadth and depth of merchandising, pricing, advertising and store size,
location and condition. The Company believes that its ability to devote
capital resources to the operation of its business will enable it to remain
competitive in the industry.
SEASONALITY
The Company's business is seasonal and its annual results of operations depends
to a significant extent on the results of operations for the second quarter of
the fiscal year. The Company generated 29% of its sales in the second quarter
of 1995.
EMPLOYEES
The Company currently has approximately 17,000 employees, approximately half of
whom are employed on a part-time basis. The Company conducts comprehensive
employee training programs which have enabled the Company to promote from
within many current store managers and merchants. In addition, the Company
supplements its work force by recruiting from outside sources. The Company
believes its employee relations are satisfactory.
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ITEM 2. PROPERTIES
The Home Quarters stores currently average approximately 101,000 square feet
under roof and an additional 32,000 square feet of outdoor selling and storage
space. More recent Home Quarters 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 22 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 1996
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.
The Company's 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, the Company has approximately
177,000 square feet of office space in Landover, Maryland and 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 legal proceedings and claims
arising in the ordinary course of business. 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 1996:
<TABLE>
<CAPTION>
YEAR FIRST JOINED
NAME AND AGE POSITION WITH THE COMPANY THE COMPANY
- ------------ ------------------------- ---------------
<S> <C> <C> <C>
John W. Hechinger, Jr. (46) Chairman of the Board of Directors and Chief Executive 1972
Officer since 1995; prior thereto, President and Chief
Executive Officer since 1990
Kenneth J. Cort (54) President and Chief Operating Officer since 1995; prior 1993
thereto, President and Chief Executive Officer of Hechinger Stores
Company since 1993; prior thereto, Chief Operating Officer
for Ames Department Stores, Inc. since 1991; prior thereto,
General Merchandising Manager for Sears Roebuck & Company
since 1989
W. Clark McClelland (57) Executive Vice President and Chief Financial Officer 1975
since 1993; prior thereto, Senior Vice President-Finance and
Chief Financial Officer since 1986
</TABLE>
There is no family relationship between any of the foregoing persons.
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.
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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 the inside back cover of
the Company's Annual Report to Stockholders for the fiscal year ended February
3, 1996.
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 4 of the Company's
Annual Report to Stockholders for the fiscal year ended February 3, 1996.
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 5 through 7 of the
Company's Annual Report to Stockholders for the fiscal year ended February 3,
1996.
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 8 through 16 of the
Company's Annual Report to Stockholders for the fiscal year ended February 3,
1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
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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.
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.
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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 February 3, 1996:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations - Years ended
February 3, 1996, January 28, 1995 and January 29, 1994 8
Consolidated Balance Sheets - As of February 3, 1996
and January 28, 1995 9
Consolidated Statements of Cash Flows - Years ended
February 3, 1996, January 28, 1995 and January 29, 1994 10
Consolidated Statements of Stockholders' Equity -
Years ended February 3, 1996, January 28, 1995 and
January 29, 1994 11
Notes to Consolidated Financial Statements 12 - 16
</TABLE>
2. Financial Statement Schedules. Schedules 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.
EXHIBIT NUMBER DOCUMENT
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)
10(f) Revolving Credit Agreement dated as of February 20, 1996 among
Hechinger Stores Company and Hechinger Stores East Coast Company, as borrowers,
the financial institutions from time to time party thereto, as Lenders, and The
CIT Group/Business Credit, Inc., as Agent (incorporate by reference to Exhibit
99 to Registration Statement on Form 8-K, File No. 0-7214)
10(g) Form of Severance Agreement with the named executive officers
11 Statement Regarding Computation of Earnings Per Share
13 Annual Report to Stockholders of the Company for the fiscal year ended
February 3, 1996, certain portions of which are incorporated by reference
herein
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) Reports on Form 8-K.
A Current Report on Form 8-K dated February 22, 1996 was to file a
copy of the Revolving Credit Agreement dated as of February 20, 1996
among Hechinger Stores Company and Hechinger Stores East Coast
Company, as borrowers, the financial institutions from time to time
party thereto, as Lenders, and The CIT Group/Business Credit, Inc., as
Agent.
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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: May 3, 1996 By /S/ JOHN W. HECHINGER, JR.
--------------------------
John W. Hechinger, Jr.
Chairman of the Board of Directors
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, JR Chairman of the Board of Directors May 3, 1996
- ------------------------- and Chief Executive Officer
John W. Hechinger, Jr. (Principal Executive Officer)
/S/ HERBERT J. BRONER Director May 3, 1996
- ---------------------
Herbert J. Broner
/S/ KENNETH J. CORT President and Chief Operating Officer and May 3, 1996
- ------------------- Director
Kenneth J. Cort
/S/ JOHN W. HECHINGER Chairman of the Executive Committee May 3, 1996
- --------------------- of the Board of Directors
John W. Hechinger
/S/ S. ROSS HECHINGER Senior Vice President- May 3, 1996
- --------------------- Corporate Administration
S. Ross Hechinger and Director
/S/ ANN D. JORDAN Director May 3, 1996
- -----------------
Ann D. Jordan
/S/ DAVID O. MAXWELL Director May 3, 1996
- --------------------
David O. Maxwell
/S/ W. CLARK MCCLELLAND Executive Vice President and May 3, 1996
- ----------------------- Chief Financial Officer
W. Clark McClelland (Principal Financial and Accounting Officer)
and Director
/S/ MELVIN A. WILMORE Director May 3, 1996
- ---------------------
Melvin A. Wilmore
/S/ ALAN J. ZAKON Director May 3, 1996
- -----------------
Alan J. Zakon
</TABLE>
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HECHINGER COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
YEAR ENDED FEBRUARY 3, 1996
INDEX TO
SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
DESCRIPTION SEQUENTIALLY
----------- NUMBERED PAGE
-------------
<S> <C>
Exhibit 10(g) - Form of Severance Agreement with the named
executive officers
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Exhibit 13 - Annual Report to Stockholders for fiscal year ended
February 3, 1996
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 23 - Consent of Independent Auditors
Exhibit 27 - Financial Data Schedule
</TABLE>
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EXHIBIT 10(g)
SEVERANCE AGREEMENT
AGREEMENT, made this ___ day of _______, 199_ by and between
[ ] (the "Executive") and HECHINGER COMPANY, a Delaware corporation
(the "Company").
WHEREAS the parties hereto intend that the Executive's rights
to severance compensation be governed by the terms of this Agreement rather
than the terms of the Company's Severance Policy outlined in the Company's 1996
Employee Handbook, any supplements or successors thereto or any severance
policy substituted for such policy (the "Severance Policy");
WHEREAS the Executive is aware of the existence of the
Severance Policy and the value of the benefits provided for in the Severance
Policy;
WHEREAS in consideration for the arrangements provided for in
this Agreement, the Executive knowingly and voluntarily waives his rights,
including his rights to any benefits, under the Severance Policy; and
WHEREAS the parties hereto also intend that, in addition to
the severance compensation provided for in this Agreement, the Executive shall
be entitled to receive any other compensation or benefits payable to the
Executive under the terms of any other compensation or benefit programs or
arrangements maintained by the Company other than the Severance Policy;
NOW, THEREFORE, in consideration of the foregoing and the
respective agreements hereinafter set forth, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. Termination. Upon the termination of the employment of
the Executive, the Executive shall be entitled to the benefits provided in
Paragraph 2(c) hereof unless such termination is (i) due to his death,
retirement or Disability (as defined herein), (ii) by the Company for Cause, or
(iii) by the Executive.
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(a) Death. The Executive's employment with the
Company shall terminate upon the Executive's death.
(b) Disability. The Executive's employment may be
terminated for "Disability," which term shall mean permanent and total
disability within the meaning of Section 22(e)(3) of the Internal Revenue Code
of 1986, as amended (without regard to the furnishing of proof to the Secretary
of the Treasury).
(c) Cause. Termination by the Company of the
employment of the Executive for "Cause" shall mean (i) nonfeasance, which shall
mean only the willful and continued failure by the Executive to substantially
perform the Executive's duties with the Company (other than either any such
failure resulting from the Executive's incapacity due to physical or mental
illness), after a written demand for substantial performance is delivered to
the Executive by the Board, which demand specifically identifies the manner in
which the Board believes that the Executive has not substantially performed the
Executive's duties, or (ii) malfeasance, which shall mean only the willful
engaging by the Executive in conduct that is demonstrably and materially
injurious to the Company, monetarily or otherwise. For purposes of this
Paragraph, no act, or failure to act, on the Executive's part shall be deemed
"willful" unless done, or omitted to be done, by the Executive not in good
faith and without reasonable belief that the Executive's act or failure to act,
was in the best interest of the Company.
(d) Notice of Termination. Any purported
termination of the Executive's employment by the Company shall be communicated
by written Notice of Termination to the Executive in accordance with Paragraph
9 hereof. For purposes of the Agreement, a "Notice of Termination" shall mean
a notice that shall indicate the specific termination provision in the
Agreement relied upon, if any, and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(e) Date of Termination. Except as otherwise
determined pursuant to Paragraph 2(a), the "Date of Termination" for purposes
of determining the
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Executive's right to compensation hereunder shall mean the date set forth in
the Notice of Termination which date, in the event the Executive's employment
is terminated by the Company other than for Cause, shall be no less than
fifteen (15) days after Notice of Termination is given, unless such Notice of
Termination provides for a different period that is mutually agreed to, in
writing, by the Company and the Executive. Nothing in this Paragraph shall be
deemed to diminish the Company's right to cause the Executive to cease
performing his duties and responsibilities as an executive and employee of the
Company at any time.
2. Compensation Upon Termination. Upon termination of the
Executive's employment, and in lieu of any other severance benefit otherwise
payable to the Executive under the terms of the Severance Policy, the Executive
shall be entitled to the following benefits:
(a) If the Executive's employment is terminated by
his death or Disability, or if the Executive retires in accordance with the
Company's retirement policies, the Date of Termination shall be deemed to be
the date of such death or termination for Disability, pursuant to Paragraph 1
hereof, or date of retirement. In such event, the Company shall pay the
Executive his base salary, through the Date of Termination or retirement (and
any bonus which otherwise would have been paid prior to the Date of Termination
or retirement, as the case may be). Thereafter, the Executive or, in the event
of his death, his estate shall receive those benefits to which he or his estate
may be entitled under the relevant Company benefit and retirement plans or
arrangements.
(b) If the Executive's employment shall be
terminated by the Company for Cause or by the Executive, and is not due to the
Executive's death or Disability, the Company shall pay him his full base salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is or properly should have been given, and the Company shall have
no further obligations to the Executive under this Agreement.
(c) If the Executive's employment shall be
terminated by the Company, other than for any of those reasons specified in
clauses (i), (ii) and (iii) of paragraph 1 of this letter, then he shall be
entitled, in
17
<PAGE> 4
addition to his full base salary through the Date of Termination at the rate in
effect at the time the Notice of Termination is or properly should have been
given (and any bonus which otherwise would have been paid prior to the Date of
Termination), to the benefits provided below:
(i) The Company shall pay the Executive his
full base salary, together with compensation and benefits payable to
the Executive under the terms of any compensation or benefit program
or arrangement maintained by the Company other than the Severance
Policy, at the rate in effect at the time Notice of Termination is
given or properly should have been given, for a period (the "Payment
Period") of twelve months from the Date of Termination (such payment,
the "Basic Severance Benefit"); provided, however, that in the event
that the Executive executes a general release substantially in the
form attached hereto as Exhibit A, then in consideration of the
execution of such general release the Company shall extend the Payment
Period for an additional two months (such additional two-month period,
the "Additional Severance Benefit"). Such payments shall be made on
the same schedule as the Executive's base salary was paid. During the
Payment Period the Executive will not accrue vacation time. The
Executive will be paid for any unused, accrued vacation time existing
at the Date of Termination at the time of the first payment of
benefits under this Agreement.
(ii) The Company also shall pay to the
Executive a sum equal to the average of the last three annual bonuses
(or such lesser number if the Executive has received a lesser number
of bonuses) paid by the Company to the Executive. Such payment may be
made as a lump sum or on a pro rata basis over the Payment Period, at
the Company's discretion.
(iii) During the Payment Period, the Company
shall arrange to provide the Executive with coverage under the
medical, dental and life insurance programs in which the Executive was
enrolled immediately prior to the Date of Termination (or
18
<PAGE> 5
substantially similar programs), so long as the Executive continues to
pay any employee premiums due under such programs. At the end of the
Payment Period, the Executive will have the right to extend his
medical and dental coverage under the provisions of COBRA. Benefits
under the Company's Profit Sharing Plan and Thrift and Savings/401(k)
Plan will be governed by the terms of those Plans.
(iv) The Executive will be entitled to a
merchandise discount through the Payment Period in accordance with
Company policy for employee merchandise discounts as may be in effect
from time to time during that Period. The Executive also shall
receive, through the Payment Period, a monthly automobile allowance in
an amount equal to the allowance such Executive received immediately
prior to the Date of Termination. The Company shall make available to
the Executive during the Payment Period those outplacement services
that the Company is then providing to terminated employees generally.
(v) The Company also shall pay to the
Executive all reasonable legal fees and expenses incurred by him in
seeking to obtain or enforce any right or benefit to which the
Executive is entitled under the Agreement, provided that the Executive
prevails in any legal proceeding connected therewith. Such payments
shall be made, following the conclusion of such legal proceeding,
within five (5) days after the Executive delivers to the Company a
written request for payment accompanied by such evidence of fees and
expenses incurred as the Company reasonably may require.
3. Confidential Information. The Executive acknowledges that
as an executive of the Company, he has had, and may continue to have, access to
confidential information which relates to the business of the Company. The
Executive accordingly agrees that he will not, without the prior written
consent of the Chief Executive Officer of the Company or any other executive
officer that the Board may, in its discretion, designate (a) use for his
benefit or disclose to any person any information obtained or developed by him
while in the employ of the Company with respect to any aspect of the Company's
19
<PAGE> 6
business including, without limitation, information with respect to any trade
secrets, customers, credit relationships, suppliers, sources of supply,
employees (including information relating to their compensation and career
paths) financial affairs, computer systems (including software programs and
data), marketing strategies and/or plans, the volume of business generated,
gross and net profits or advertising and promotion plans or methods of design,
distribution, procurement or production, of the Company, or any of its
subsidiaries or affiliates or any other confidential matter ("Confidential
Information"), except information that at the time is available to others in
the business or generally known to the public other than as a result of
disclosure by him not permitted hereunder, or lawfully acquired from a third
party who is not obligated to the Company or any of its subsidiaries to
maintain such information in confidence or (b) take with him upon leaving the
Company's employ, any document or paper relating to any Confidential
Information or any property of the Company (or any of its subsidiaries or
affiliates).
4. Specific Performance. The Executive acknowledges that a
violation on his part of any of the covenants contained in Paragraph 3 hereof
would cause immeasurable and irreparable damage to the Company. The Executive
accordingly agrees and hereby grants his consent that, without limiting the
remedies available to the Company, any actual or threatened violation of such
covenants may be enforced by injunctive relief or by other equitable remedies
issued or ordered by any court of competent jurisdiction.
5. Employment. Nothing in this Agreement shall be
construed as conferring upon the Executive any right to continued employment
with the Company nor shall it interfere in any way with the right of the
Company to terminate the Executive's employment at any time.
6. Successors; Binding Agreement. This Agreement and all
rights of the Executive hereunder shall inure to the benefit of, and shall be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts remain payable to him hereunder, all
such amounts
20
<PAGE> 7
shall be paid to the Executive's designee or, if there be no such designee, to
the Executive's estate.
The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform the Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
7. Term. This Agreement shall commence on the date
hereof and shall continue in effect through December 31, 1998; provided,
however, that commencing on January 1, 1997 and each January 1 thereafter, the
term of this Agreement shall automatically be extended for one additional year
unless, not later than September 30 of the preceding year, the Company or the
Executive shall have given notice not to extend this Agreement.
8. Mitigation. The Executive shall be under no
obligation to mitigate the amount of any payment provided for herein by seeking
other employment or otherwise nor shall such amount be offset by any
compensation which the Executive may receive from future employment or
otherwise.
9. Notice. All notices of termination and other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered by hand or mailed by United
States registered mail, return receipt requested, addressed as follows:
If to the Executive:
[Executive]
--------------------
--------------------
--------------------
21
<PAGE> 8
If to the Company:
Hechinger Company
3500 Pennsy Drive
Landover, Maryland 20785
Attention: Senior Vice President,
Treasurer and Secretary
or to such other address as any party may have furnished to the other party in
writing in accordance herewith.
10. Miscellaneous. No provision of the Agreement may be
waived, modified or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by (a) the Executive and (b) the Chief
Executive Officer of the Company or such executive officer as may be
specifically designated by the Board. No waiver by any party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of the Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. The validity, interpretation,
construction and performance of the Agreement shall be governed by the laws of
the State of Delaware, without giving effect to its conflict of law rules. Any
payments provided for hereunder shall be paid net of any applicable withholding
required under federal, state or local law.
11. Validity. The invalidity or unenforceability of any
provision of the Agreement shall not affect the validity or enforceability of
any other provision of the Agreement, which shall otherwise remain in full
force and effect.
12. Counterparts. The Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
13. Entire Agreement. The Agreement and Exhibit A hereto, if
executed, set forth the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein, and supersedes all
prior agreements, promises, covenants, arrangements, communications,
representations or warran-
22
<PAGE> 9
ties, whether oral or written, by any officer, employee or representative of
either party in respect of said subject matter; provided, however, that nothing
in this Agreement shall replace or reduce any compensation or benefits payable
to the Executive under the terms of any compensation or benefit program or
arrangement maintained by the Company other than the Severance Policy.
IN WITNESS WHEREOF, the parties hereto have executed the
Agreement as of the day and year first above written.
-------------------------------
[Executive]
HECHINGER COMPANY
By:
---------------------------
23
<PAGE> 10
EXHIBIT A
FORMS OF GENERAL RELEASE
[Letterhead of Hechinger]
_______, 199__
- -------------------------
- -------------------------
- -------------------------
Dear Mr./Ms. ______:
As you have been advised, your employment by [Hechinger](the
"Company") terminated effective [DATE]. In order to assist you in your
transition, the Company is willing to provide you with an additional severance
payment, which the Company is offering to make in its sole discretion. This
additional severance payment will be provided subject to the terms contained in
this letter, and the terms of the Severance Agreement (the "Severance
Agreement") to which this General Release is an Exhibit. If you wish to
receive the additional severance payment, please sign the last page of this
letter and return the signed letter to the Company.
1. Upon execution of this letter in accordance with the
terms hereof, the Company agrees to pay you, after payment of the Basic
Severance Benefit, as defined in Paragraph 2(c)(i) of the Severance Agreement,
the Additional Severance Benefit, as defined in Paragraph 2(c)(i) of the
Severance Agreement and in accordance with the terms of that Agreement and this
letter
2. In consideration of the payment of the Additional
Severance Benefit, you voluntarily, knowingly and willingly release and forever
discharge the Company, its parents, subsidiaries and affiliates, together with
their respective officers, directors, partners, shareholders, employees and
agents, and each of their predecessors, successors and assigns, from any and
all charges, complaints, claims, promises, agreements, controversies, causes of
action and demands of any nature whatsoever which against them you or your
executors, adminis-
24
<PAGE> 11
trators, successors or assigns ever had, now have or hereafter can, shall or
may have by reason of any matter, cause or thing whatsoever arising to the time
you sign this agreement. This release includes, but is not limited to, any
rights or claims relating in any way to your employment relationship with the
Company, or the termination thereof, or under any statute, including the
federal Age Discrimination in Employment Act, Title VII of the Civil Rights
Act, the Americans with Disabilities Act, or any other federal, state or local
law. In addition, you agree that (i) you will not, in any context, make
disparaging remarks about the Company, its affiliates and subsidiaries, its
officers, directors, employees and owners and agents, or the Company's
products, services and facilities, and (ii) absent a binding court order or
similar decree, you will not voluntarily cooperate with, or facilitate,
litigation or other legal actions against the Company, its affiliates and
subsidiaries, its officers, directors, employees, owners and agents.
3. The Company advises you to consult with an attorney of
your choosing prior to signing this agreement. You understand and agree that
you have the right and have been given the opportunity to review this agreement
and, specifically, the release in paragraph 2, with an attorney of your choice
should you so desire. You also understand and agree that the Company is under
no obligation to offer you the Additional Severance Benefit, and that you are
under no obligation to consent to the release set forth in paragraph 2 and that
you have entered into this agreement freely and voluntarily.
4. You have at least twenty-one days to consider the terms of
this agreement, although you may sign and return it sooner if you wish.
Furthermore, once you have signed this agreement, you have seven additional
days from the date you sign it to revoke your consent. The agreement will not
become effective until seven days after the date you have signed it.
5. The Company's offer to you of this agreement and the
payment set forth herein is not intended to, and shall not be construed as, any
admission of liability by the Company to you or of any improper conduct on the
Company's part, all of which the Company specifically denies.
25
<PAGE> 12
6. The terms described in this letter and the Severance
Agreement constitute the entire agreement between us and may not be altered or
modified other than in a writing signed by you and the Company. The agreement
will be governed by the law of Delaware, without reference to its choice of law
rules.
If the above sets forth our agreement as you understand it and
consent to it, please so signify by executing the enclosed copy of this letter
and return it to the undersigned.
Very truly yours,
---------------------------
Agreed to and Accepted:
- ----------------------------
Dated: _____________, 199_
26
<PAGE> 1
EXHIBIT 11
HECHINGER COMPANY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Fiscal Year Ended February 1, February 3, January 28, January 29, January 30,
1992 1996 1995 1994 1993
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net (loss) earnings ($77,636,000) ($9,911,000) $24,760,000 ($26,272,000) $26,055,000
Interest on 5-1/2% convertible debentures, net
of tax benefit - - - - -
------------ ----------- ----------- ------------ -----------
Net (loss) earnings for primary and fully diluted
(loss) earnings per share ($77,636,000) ($9,911,000) $24,760,000 ($26,272,000) $26,055,000
============ =========== =========== ============ ===========
Weighted average shares outstanding 42,118,459 42,011,252 41,743,852 41,694,182 39,496,710
Dilutive effect of stock options, restricted stock
and performance share awards after
application of the treasury stock method - - 198,075 - 228,509
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 42,118,459 42,011,252 41,941,927 41,694,182 39,725,219
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 42,118,459 42,011,252 41,974,938 41,694,182 39,777,055
============ =========== =========== ============ ===========
Primary (loss) earnings per common share $ (1.84) $ (0.24) $ 0.59 $ (0.63) $ 0.66
============ =========== =========== ============ ===========
Fully diluted (loss) earnings per common share $ (1.84) $ (0.24) $ 0.59 $ (0.63) $ 0.66
============ =========== =========== ============ ===========
</TABLE>
27
<PAGE> 1
HECHINGER COMPANY
Annual Report
year ended
February 3, 1996
[FIGURE 1]
ONE COMPANY, ONE AIM...
<PAGE> 2
Hechinger Company is a 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 its Hechinger and
Home Quarters Warehouse stores operating primarily in the Mid-Atlantic,
Southern, Northeastern and Midwestern regions of the United States.
Hechinger Company common stock has been traded publicly since 1972 and trades
on The Nasdaq Stock Market under the symbols HECHA and HECHB. Corporate
headquarters are located in Landover, Maryland.
Hechinger Company Markets
[PHOTO]
JOHN W. HECHINGER, JR.
Chairman and Chief Executive Officer
[FIGURE 2]
<PAGE> 3
FOCUSED ON THE BASICS OF OUR BUSINESS
DEAR STOCKHOLDERS:
The economic challenges of slow housing turnover and softer consumer spending,
along with heightened competition and severe winter weather took a heavy toll
on the home center industry in 1995, and Hechinger certainly did not escape
this unfriendly environment.
While we have been very pleased with the progress we have made in
merging our Hechinger Stores and Home Quarters Warehouse operations, I must
admit that the herculean task of planning for and implementing the merger of
our two store groups in the second half of 1995 did much to distract us from
our focus on running the business. As a result of all this, our comparable
store sales for the year were down 8 percent, with a corresponding drop in
total sales to $2.25 billion.
For the year, we reported a net loss of $77.6 million. This is
comprised of three parts: (a) a pre-tax loss from operations of $25.3 million;
(b) a non-cash, pre-tax charge of $30.3 million related to the early adoption
of a new financial accounting standard (SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"); and
(c) a pre-tax charge of $25.0 million associated with the merger of Hechinger
Stores and Home Quarters.
We're disappointed with our performance in 1995 but we've learned a
lot during this difficult period. We are executing a strategy designed to
regain positive momentum and drive our business forward. We have slowly but
surely seen some signals of the success of those efforts and more recently of a
friendlier economic environment. In fact, we have already begun to see the
benefits of the merger. A unified and strengthened management team is in place
and we are on track to achieve annual cost savings of approximately $20
million.
Going forward, we have three initiatives that we are focused on:
- - increased emphasis on customer service that includes targeted
merchandising efforts and more associates on the floor helping
customers;
- - a vendor consolidation program; and
- - aggressive marketing and advertising campaigns.
We're going back to the basics of our business success. We will
continue to be dedicated to serving the needs of our home improvement
customers. And our merchandising efforts will reflect this. We've traditionally
been strong in home decor -- the fashion side of the business -- and we will
place increased emphasis on improving presentation and improving marketing in
this area, as well as in the kitchen, bath and lawn and garden areas.
We're returning to the basics, too, in terms of customer service --
that will be the operations watch-phrase as we move forward. We are putting
more associates on the sales floor, assisting and encouraging our customers. At
the same time, we will reduce the number of administrative personnel so that
our improvements in customer service are achieved without an increase in
operating costs.
Our vendor consolidation program is a direct result of the merger of
Hechinger Stores and Home Quarters. By taking advantage of the purchasing power
of operating as a single $2 billion company, we are reducing the number of
vendors whose products we carry, which will lower our cost of acquiring
merchandise. This strengthens our ability to continue offering a wide
assortment of high quality merchandise at competitive prices. We have been very
encouraged by our vendors' support for this program and believe it will make us
a stronger competitive force as the future unfolds.
1
<PAGE> 4
COMMITTED TO SERVICE
[FIGURE 3]
Finally, we must improve the consumers' top-of-mind awareness of our
stores as THE place to buy products for the care and repair of their homes and
gardens. This is particularly true in newer markets. We are refocusing and
invigorating our marketing and advertising programs to steer more consumers
back to our stores.
To position ourselves with the financial strength and flexibility to
implement our strategies and remain a major player in the home improvement
industry, we completed an agreement for a three-year, $200 million senior
secured revolving credit facility shortly after the close of fiscal 1995.
Also, after much consideration and as a result of our recent
performance, the Board of Directors decided to suspend future cash dividends.
This prudent decision will allow us to reinvest these funds in the business.
In December 1995, we further strengthened our Board of Directors with
the addition of Melvin A. Wilmore and Kenneth J. Cort. Mr. Wilmore is
President and Chief Operating Officer of Ross Stores, Inc. and Mr. Cort is
President and Chief Operating Officer of Hechinger Company. Together, they
bring over 50 years of retail experience in merchandising, marketing and store
operations to our Board. Also, David O. Maxwell, who has served on our Board
since 1988, has decided to retire from our Board and not stand for re-election
this year. We thank David for his dedicated service to Hechinger and wish him
well.
Given the support of our Board, our strong management team, the
focused plan described above and our financial flexibility, we have every
confidence in Hechinger and the challenges ahead. We are buoyed by the
continued and loyal efforts of our dedicated associates and the support of our
customers, vendors and stockholders. We will continue to work hard to justify
your trust.
Sincerely,
/s/ JOHN W. HECHINGER, JR.
John W. Hechinger, Jr.
Chairman and Chief Executive Officer
April 23, 1996
2
<PAGE> 5
[FIGURE 4]
<PAGE> 6
CONTENTS
5 Management's Discussion and Analysis of Financial Condition
and Results of Operations
7 Quarterly Results (unaudited)
8 Consolidated Statements of Operations
9 Consolidated Balance Sheets
10 Consolidated Statements of Cash Flows
11 Consolidated Statements of Stockholders' Equity
12 Notes to Consolidated Financial Statements
Hechinger Company
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year ended FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994 Jan. 30, 1993 Feb. 1, 1992
- ---------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $2,252,780 $2,449,554 $2,094,968 $1,869,349 $1,607,727
Gross profit 455,932 540,680 462,266 437,009 406,191
Interest expense 31,341 29,793 23,063 14,121 11,906
Income tax (benefit) expense (3,000) (5,545) 10,611 (15,429) 10,133
Net (loss) earnings (77,636) (9,911) 24,760 (26,272) 26,055
Net (loss) earnings
per common share $(1.84) $(.24) $.59 $(.63) $.66
- ---------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE
Class A common $.16 $.16 $.16 $.16 $.16
Class B common .06 .06 .06 .06 .06
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $1,150,421 $1,261,229 $1,229,242 $1,075,749 $936,774
Current portion of long-term debt
and capital lease obligations 3,806 3,453 3,068 1,544 1,408
Long-term debt and capital
lease obligations 399,530 403,377 407,873 305,974 207,485
Total stockholders' equity 399,039 481,273 493,867 473,924 505,185
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: In the fourth quarter of 1995, the Company recorded a charge of $25
million related to its decision to combine its Hechinger Stores and Home
Quarters Warehouse operations under one management team and a non-cash charge
of $30.3 million related to the early adoption of SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of." In 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 cover estimated costs associated with the
repositioning of Hechinger Stores Company. In 1994, the Company changed its
method of calculating LIFO inventories. In February 1996, the Company announced
its plans to suspend future dividends. 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 except for the year
ended February 3, 1996, which was 53 weeks.
4
<PAGE> 7
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 FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
==================================================================================
<S> <C> <C> <C>
Net sales $2.25 $2.45 $2.09
Net sales (decrease)
increase (8%) 17% 12%
Comparable store sales
(decrease) increase (8%) 2% 3%
</TABLE>
The sales decrease for 1995 compared to 1994 was due to 14 Home
Quarters Warehouse stores and eight Hechinger stores that were closed as a part
of the store closing plan announced in the fourth quarter of 1994 and a
decrease in sales from stores in operation for more than one year. Sales were
impacted adversely by increased competition, unseasonable weather, weak sales
of existing homes and declines in lumber prices during 1995. The sales increase
for 1994 compared to 1993 was due primarily to sales from stores in operation
for less than one year. Competition is expected to continue to expand in the
Company's markets and could have an adverse impact on the Company's sales.
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 1993):
<TABLE>
<CAPTION>
Hechinger Home
Stores Quarters
======================================================
<S> <C> <C>
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
1995 OPENINGS 1 9
1995 CLOSINGS (9) (16)
AS OF FEBRUARY 3, 1996 64 54
</TABLE>
Other income, which consists primarily of interest income, was $2.9
million, $4.4 million and $7.8 million in 1995, 1994 and 1993, respectively.
The decreases in 1995 and 1994 were due primarily to decreases in funds
available for investment. The decrease in 1994 was also due to gains on the
disposal of property, furniture and equipment in 1993.
Cost of sales was 79.8% of sales for 1995 compared to 77.9% of sales
for both 1994 and 1993. Distribution, buying and occupancy expenses, which are
primarily fixed costs, are included in cost of sales. As a percent of sales,
over one-half of the increase in 1995 was due primarily to less leverage of
distribution, buying and occupancy expenses as a result of lower sales this
year compared to last year. The remaining amount of the increase is
attributable to the impact of competitive pricing in certain markets, among
other factors.
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 $2.6
million, $1.9 million and $5.0 million in 1995, 1994 and 1993, respectively.
LIFO, inventory acquisition costs and other inventory adjustments decreased
fourth quarter cost of sales by $2.0 million in 1995 and $2.4 million in 1994,
compared to an increase of $.2 million in 1993.
Selling, general and administrative expenses were 20.1%, 19.1% and
19.6% of sales for 1995, 1994 and 1993, respectively. The increase in 1995 was
due primarily to less leverage of selling, general and administrative expenses
as a result of lower sales this year compared to last year. In addition,
approximately $6 million was recorded in the fourth quarter of 1995 for costs
related to the merger of Hechinger Stores and Home Quarters Warehouse,
including relocation and professional service fees. The decrease in 1994 was
due to cost reduction efforts at Hechinger Stores and the growing effect of
Home Quarters Warehouse which operated with a lower cost structure. Cost
reduction efforts included the implementation of improved information systems
applications in the stores, distribution center and administrative offices
which allowed the Company to improve productivity and reduce administrative
costs. The decrease in 1994 was also due to a decrease in pre-opening expenses.
Pre-opening expenses of $7.6 million, $8.9 million and $13.0 million are
included in selling, general and administrative expenses for 1995, 1994 and
1993, respectively.
Interest expense, net of capitalized interest, was $31.3 million,
$29.8 million and $23.1 million for 1995, 1994 and 1993, respectively. The
increase in 1995 was due primarily to less interest capitalized on
construction-in-progress compared to last year. The increase in 1994 was due
primarily to the issuance of the Senior Notes in 1993. Capitalized interest
amounted to $2.4 million, $3.6 million and $5.4 million for the years 1995,
1994 and 1993, respectively.
In the fourth quarter of 1995, the Company recorded a charge of $25
million related primarily to the Company's decision to combine its Hechinger
Stores and Home Quarters Warehouse operations under one management team. By
merging the management, purchasing and administrative functions of its two
operating subsidiaries, the Company believes it will be in a better competitive
position as it will operate a more efficient organization and have increased
purchasing power with its vendors. In addition, the Company estimates that it
will reduce its annual general and administrative costs by approximately $20
million primarily from the elimination of duplicate information systems and
management and administrative functions. This anticipated cost savings is a
forward looking statement and the actual savings, which may differ from the
current estimate, will primarily depend on the successful completion of
integrating information systems. See the Notes to the Consolidated Financial
Statements under the caption "Unusual Charges" for more detail.
In 1994, the Company recorded a charge of $61.9 million primarily
related to the Company's decision to close 22 stores in certain markets. The
specific actions included: 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.
As a group, these 22 stores were older, smaller units and had not been
updated to reflect elements of newer or remodeled stores. In addition,
competition had intensified in these markets which adversely affected
5
<PAGE> 8
the performance of these stores. Based on the recent performance and limited
potential for long term profitability of these stores, management decided to
close them.
The revenue and operating profit/(loss) for these 22 stores for the
periods presented were as follows:
<TABLE>
<CAPTION>
(in millions) 1995 1994 1993
=================================================================
<S> <C> <C> <C>
Net sales $15 $257 $289
Operating (loss) profit -- (14) 7
</TABLE>
The main components of this store closing charge were:
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
vacated, including estimated rents, utilities and other
expenses subsequent to the stores 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 were terminated in
1995 as a result of these decisions. Substantially all of
these employees were based in the affected stores.
See the Notes to the Consolidated Financial Statements under the
caption "Unusual Charges" for more detail.
The effective income tax benefit rates for 1995 and 1994 were 3.7% and
35.9%, 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 rate for 1995 differs from the statutory rate as a result of the
effect of a valuation allowance established on the Company's net deferred tax
asset generated from unusual charges recorded during the fourth quarter of
1995. The effective tax rates for 1994 and 1993 differed from the statutory
rate due primarily to tax-free earnings on funds available for investment and
various tax credits. At February 3, 1996, the Company had a net deferred tax
asset of $36.9 million. Due to uncertainties related to the realization of the
asset in future periods, a valuation allowance of $27.8 million has been
established. The Company's tax operating loss and general business credit
carryforwards (which have been fully reserved) will expire in 2010 and between
2006 and 2010, respectively.
The net losses were 3.4% of sales for 1995 and 0.4% of sales for 1994,
compared to net earnings of 1.2% of sales for 1993.
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.)
IMPAIRMENT OF LONG-LIVED ASSETS. Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" was issued in March 1995. The
statement requires companies to review long-lived assets and certain intangible
assets in certain circumstances, and if the value of the assets is impaired, to
record an impairment loss. In the fourth quarter of 1995, the Company elected
the early adoption of this statement and recorded a non-cash charge of $30.3
million described as follows:
1. the Company has a number of real estate properties which were
acquired for future store expansion. As a result of the
Company's decision to slow down its expansion plans and not to
pursue development of these properties, the Company plans to
dispose of these properties. These properties have a carrying
value of $24 million and have an estimated sales value, net of
related costs to sell, of approximately $9 million.
Accordingly, the Company recorded an impairment loss of
approximately $15 million; and
2. the Company has reviewed its property, furniture, fixtures and
equipment and evaluated how these assets will continue to be
used in its operations. Based on this evaluation, the Company
has determined that certain assets with a carrying value of
$33 million were impaired and have fair values totaling
approximately $18 million. Fair values were based on estimated
market values. Accordingly, the Company recorded an impairment
loss of approximately $15 million.
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting and Disclosure of Stock-Based Compensation" was
issued in October 1995 and will be effective for the Company's fiscal year
1996. The statement relates to the measurement of compensation of stock options
issued to employees and requires either expense recognition based on the fair
value method or the continued application of APB 25, "Accounting for Stock
Issued to Employees" and disclosing the pro forma net income as if the
recognition and measurement provisions of SFAS 123 had been adopted.
The Company currently accounts for its stock compensation arrangements
under the provisions of APB 25 and intends to continue to do so. The Company
plans to comply with the disclosure requirements of SFAS 123 beginning in 1996.
COMMITMENTS. In 1996, the Company plans to relocate two of its stores to new
larger facilities. As of February 3, 1996, the Company had commitments for
stores under construction of approximately $3 million.
LIQUIDITY AND CAPITAL RESOURCES. Net cash provided from operations was $47.1
million, $3.5 million and $27.4 million in 1995, 1994 and 1993, respectively.
The increase between 1995 and 1994 was due primarily to a decrease in inventory
levels and an increase in accounts payable and accrued expenses. This was due
primarily to the closing of 22 stores as part of the store closing reserve. The
decrease in 1994 was due primarily to a decrease in accounts payable and
accrued expenses and an increase in inventory levels as a result of new store
openings. Cash and cash equivalents and marketable securities were $35.8
million, $95.2 million and $170.7 million at February 3, 1996, January 28, 1995
and January 29, 1994, respectively. Net expenditures for property, furniture
and equipment and other assets were $98.6 million, $171.0 million and $162.6
million in 1995, 1994 and 1993, respectively. These expenditures were related
primarily to the Company's 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 for its store
expansion, remodeling programs and seasonal working capital requirements.
6
<PAGE> 9
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 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. The lease is 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.
At the end of fiscal 1995, the Company had available a revolving
credit facility for $50 million. The Company did not utilize this facility in
the last three years. The Company also had letter of credit facilities with a
number of banks, which totaled $61 million. Approximately $40 million of these
facilities were unused as of February 3, 1996.
Subsequent to February 3, 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 replaces the existing revolving
credit facility and all letter of credit facilities. This new facility is
secured by merchandise inventories and expires in February 1999. Interest on
borrowings under this facility will be at prime plus 1% or LIBOR plus 2.75% at
the option of management. Upon entering into this agreement, the Company
borrowed $50 million under this facility.
The Company anticipates that capital expenditures for fiscal 1996 will
be approximately $60 million. Management believes that cash and cash
equivalents, cash generated from operations and its available credit facility
are adequate to meet the Company's working capital needs and planned capital
expenditures for fiscal 1996.
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.
Hechinger Company
QUARTERLY RESULTS (UNAUDITED)
(in thousands except per share data)
The following table sets forth summarized unaudited quarterly results for the
years ended February 3, 1996 and January 28, 1995:
<TABLE>
<CAPTION>
QUARTER ENDED APR. 29, 1995 JUL. 29, 1995 OCT. 28, 1995 FEB. 3, 1996
====================================================================================================================
<S> <C> <C> <C> <C>
NET SALES $553,174 $648,649 $549,189 $501,768
GROSS PROFIT 119,548 138,531 103,949 93,904
INCOME TAX EXPENSE (BENEFIT) 686 5,368 (3,762) (5,292)
NET EARNINGS (LOSS) 1,167 9,139 (6,406) (81,536)
NET EARNINGS (LOSS) PER COMMON SHARE $.03 $.22 $(.15) $(1.93)
</TABLE>
<TABLE>
<CAPTION>
Quarter ended Apr. 30, 1994 Jul. 30, 1994 Oct. 29, 1994 Jan. 28, 1995
====================================================================================================================
<S> <C> <C> <C> <C>
Net sales $574,301 $708,874 $633,870 $532,509
Gross profit 126,150 160,951 133,622 119,957
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>
Final LIFO valuation and inventory acquisition cost adjustments impacted the
fourth quarters of 1995 and 1994. In the fourth quarter of 1995, the Company
recorded a charge of $25 million related to its decision to combine its
Hechinger Stores and Home Quarters Warehouse operations under one management
team and a non-cash charge of $30.3 million related to the early adoption of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of." In 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.
7
<PAGE> 10
Hechinger Company
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
==========================================================================================================
(in thousands except per share data)
<S> <C> <C> <C>
REVENUES
Net sales $2,252,780 $2,449,554 $2,094,968
Other (principally interest) 2,869 4,405 7,757
---------- ---------- ----------
Total Revenues 2,255,649 2,453,959 2,102,725
COSTS AND EXPENSES
Cost of sales 1,796,848 1,908,874 1,632,702
Selling, general and administrative expenses 452,796 468,898 411,589
Interest expense 31,341 29,793 23,063
Unusual charges 25,000 61,850 --
Impairment of long-lived assets 30,300 -- --
---------- ---------- ----------
Total Costs and Expenses 2,336,285 2,469,415 2,067,354
---------- ---------- ----------
(LOSS) EARNINGS BEFORE INCOME TAXES (80,636) (15,456) 35,371
INCOME TAX (BENEFIT) EXPENSE (3,000) (5,545) 10,611
---------- ---------- ----------
NET (LOSS) EARNINGS $ (77,636) $ (9,911) $ 24,760
========== ========== ==========
NET (LOSS) EARNINGS PER COMMON SHARE $(1.84) $(.24) $.59
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE> 11
Hechinger Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEB. 3, 1996 Jan. 28, 1995
==========================================================================================================
(in thousands except share data)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 35,785 $ 26,252
Marketable securities -- 68,911
Merchandise inventories 414,974 453,529
Other current assets 79,533 66,742
---------- ----------
TOTAL CURRENT ASSETS 530,292 615,434
PROPERTY, FURNITURE AND EQUIPMENT, NET 497,577 504,132
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 53,743 55,421
LEASEHOLD ACQUISITION COSTS, NET 49,128 52,541
OTHER ASSETS 19,681 33,701
---------- ----------
TOTAL ASSETS $1,150,421 $1,261,229
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 313,067 $ 327,587
Current portion of long-term debt and capital lease obligations 3,806 3,453
Income taxes payable -- 10,493
---------- ----------
TOTAL CURRENT LIABILITIES 316,873 341,533
LONG-TERM DEBT 383,709 384,969
CAPITAL LEASE OBLIGATIONS 15,821 18,408
DEFERRED RENT 26,779 26,846
OTHER LONG-TERM LIABILITIES 8,200 8,200
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value; authorized
50,000,000 shares; issued 30,892,581 and 30,797,512 3,089 3,080
Class B common stock, $.10 par value; authorized
30,000,000 shares; issued 11,431,929 and 11,518,729 1,143 1,152
Additional paid-in capital 238,248 238,182
Retained earnings 157,990 240,919
Unearned compensation (759) (1,553)
Less treasury stock at cost,
39,325 and 17,213 Class A common shares
and 14,497 Class B common shares (672) (507)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 399,039 481,273
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,150,421 $1,261,229
========== ==========
</TABLE>
See notes to consolidated financial statements.
9
<PAGE> 12
Hechinger Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
==========================================================================================================================
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net (loss) earnings $ (77,636) $ (9,911) $ 24,760
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Unusual charges 24,700 55,871 (21,662)
Depreciation and amortization 58,535 53,268 45,689
Deferred income taxes 10,249 (24,085) 8,309
Deferred rent (559) (1,122) 844
Changes in operating assets and liabilities:
Merchandise inventories 38,170 (53,817) (85,722)
Other current assets 2,363 (17,006) (12,722)
Accounts payable and accrued expenses 7,875 (10,678) 68,108
Income taxes payable (16,570) 10,957 (221)
--------- ---------- ---------
NET CASH FLOWS PROVIDED FROM OPERATIONS 47,127 3,477 27,383
--------- ---------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Expenditures for property, furniture, equipment
and other assets, net of disposals (98,608) (171,028) (162,586)
Marketable securities:
Purchases (192,101) (206,870) (175,837)
Proceeds from sales 261,012 288,948 227,117
--------- ---------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (29,697) (88,950) (111,306)
--------- ---------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net proceeds from sale and leaseback transactions -- 99,295 --
Net proceeds from long-term borrowings -- -- 98,799
Dividends paid to stockholders (5,664) (5,635) (5,441)
Stock options exercised 132 2,312 --
OTHER (2,365) (3,922) (2,101)
--------- ---------- ---------
NET CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES (7,897) 92,050 91,257
--------- ---------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 9,533 6,577 7,334
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 26,252 19,675 12,341
--------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 35,785 $ 26,252 $ 19,675
========= ========== =========
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 3,428 $ 8,814 $ 6,094
Cash payments for interest, net of amount capitalized $ 30,949 $ 29,005 $ 26,591
</TABLE>
See notes to consolidated financial statements.
10
<PAGE> 13
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 per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, Jan. 30, 1993 $2,877 $1,348 $238,356 $237,517 $(4,367) $(1,807) $473,924
Restricted stock awards 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 -- -- (180) -- -- 361 181
Conversions from Class B to Class A
common stock 17 (17) -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- (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 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 -- -- -- -- -- (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
RESTRICTED STOCK AWARDS EARNED -- -- -- -- 794 -- 794
EXERCISE OF STOCK OPTIONS INCLUDING
INCOME TAX BENEFIT -- -- 66 -- -- 66 132
CONVERSIONS FROM CLASS B TO CLASS A
COMMON STOCK 9 (9) -- -- -- -- --
PURCHASE OF TREASURY STOCK -- -- -- -- -- (231) (231)
ADJUSTMENT TO FAIR VALUE OF
MARKETABLE SECURITIES -- -- -- 371 -- -- 371
CASH DIVIDENDS ON COMMON STOCK:
CLASS A - $.16 PER SHARE -- -- -- (4,931) -- -- (4,931)
CLASS B - $.06 PER SHARE -- -- -- (733) -- -- (733)
NET LOSS -- -- -- (77,636) -- -- (77,636)
------- ------- --------- --------- -------- -------- ---------
BALANCE, FEB. 3, 1996 $3,089 $1,143 $238,248 $157,990 $ (759) $ (672) $399,039
======= ======= ========= ========= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 14
Hechinger Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 3, 1996, January 28, 1995 and January 29, 1994.
BASIS OF PRESENTATION. The Company operates a chain of specialty retail home
center stores under the Hechinger Stores ("Hechinger") and Home Quarters
Warehouse ("Home Quarters") names principally in the Mid-Atlantic, Southern,
Northeastern and Midwestern regions of the United States. The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All material intercompany transactions and balances have been
eliminated.
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.
FISCAL YEAR. The Company's fiscal year ends on the Saturday closest to January
31. The fiscal year ended February 3, 1996 ("1995") was 53 weeks compared to
the fiscal years ended January 28, 1995 ("1994") and January 29, 1994 ("1993")
which were 52 weeks each.
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 $21.5
million and $18.9 million higher than reported at February 3, 1996 and January
28, 1995, respectively. Distribution, buying and occupancy expenses are
included in cost of sales.
CHANGES IN ACCOUNTING PRINCIPLES. As further described under the caption,
"Impairment of Long-Lived Assets," in 1995 the Company elected early adoption
of the provisions of Statement of Financial Accounting Standards No. 121. 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 1994, 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 $2.4
million, $3.6 million and $5.4 million for the years 1995, 1994 and 1993,
respectively.
CASH EQUIVALENTS. The Company considers all investments with a maturity of
three months or less when purchased to be cash equivalents.
DEFERRED RENT. Deferred rent represents the difference between amounts paid and
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 $7.6 million, $8.9 million and $13.0 million
for the years 1995, 1994 and 1993, respectively.
ADVERTISING EXPENSES. The Company expenses advertising costs as they are
incurred. Advertising expenses amounted to $39.7 million, $40.2 million and
$37.9 million for the years 1995, 1994 and 1993, 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.
The number of shares used to compute earnings per common share were
42.2 million, 42.0 million and 41.9 million for the years 1995, 1994 and 1993,
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 $13.4 million and $11.8 million as of
February 3, 1996 and January 28, 1995, 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
$14.0 million and $13.1 million as of February 3, 1996 and January 28, 1995,
respectively.
UNUSUAL CHARGES. 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 1995, the Company recorded a charge of $25
million related primarily to the Company's decision to combine its Hechinger
Stores and Home Quarters Warehouse operations under one management team. The
main components of this charge are:
1. estimated cash expenditures for employee termination costs of
approximately $13.6 million, including severance pay and
related benefits. Approximately 300 employees will have their
employment terminated by the end of 1996 as a result of this
decision. Substantially all of these employees are based in
the Company's administrative offices;
2. estimated cash expenditures of approximately $7.7 million for
costs primarily related to terminating the Company's defined
benefit pension plan as of December 31, 1995 to conform the
retirement plans of its two operating subsidiaries and costs
related to eliminating various computer systems; and
3. estimated write-down to net realizable value of equipment and
other assets to be disposed of approximately $3.7 million.
The following table reflects the activity recorded for the charge in
1995:
<TABLE>
<CAPTION>
Original Utilized in 1995 Amount
(in millions) Estimate Cash Non-cash Remaining
==================================================================================================
<S> <C> <C> <C> <C>
Employee termination costs $13.6 $2.6 -- $11.0
Pension termination and other 7.7 .6 -- 7.1
Disposal of furniture, fixtures
and equipment and
other assets 3.7 -- $1.7 2.0
----- ---- ----- -----
$25.0 $3.2 $1.7 $20.1
===== ==== ====== =====
</TABLE>
The remaining accrual of $20.1 million has been recorded as a current
liability as of February 3, 1996. Management anticipates that the merger will
be substantially completed by the end of fiscal 1996. The merger charge is
based on certain estimates and as a result, the actual amount could vary from
these estimates.
In 1994, the Company recorded a charge of $61.9 million primarily
related to the Company's decision to close 22 stores in certain markets. The
specific actions included: 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 were:
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;
12
<PAGE> 15
3. estimated cash expenditures for carrying costs of the stores
vacated, including estimated rents, utilities and other
expenses subsequent to the stores 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 were terminated in
1995 as a result of these decisions. Substantially all of
these employees were based in the affected stores.
The following table reflects the activity recorded for the 1994 charge in 1995:
<TABLE>
<CAPTION>
Change
Original Utilized in 1995 in Estimate Amount
(in millions) Estimate Cash Non-cash Inc (Dec) Remaining
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Disposal of inventories $18.9 $13.2 $ .4 $(5.3) --
Disposal of furniture,
fixtures and
equipment 19.0 -- 14.7 (4.3) --
Carrying costs 20.0 8.7 -- 10.8 $22.1
Employee termination
costs 4.0 2.8 -- (1.2) --
----- ----- ----- ----- -----
$61.9 $24.7 $15.1 $ -- $22.1
===== ===== ===== ===== =====
</TABLE>
As of February 3, 1996, all 22 stores have been closed and the
disposal of inventories, furniture, fixtures and equipment and the employee
termination costs have been completed. The Company was able to liquidate its
inventories during a shorter period of time with less discounts and realize
more from the disposal of its furniture, fixtures and equipment than had been
originally anticipated. Disposition of the closed stores is accomplished by
subleasing or assigning the property to a new occupant or reverting possession
back to the landlord. It is currently expected that the Company will dispose of
the remaining stores by January 1999, which is longer than originally
anticipated. Accordingly, the Company has increased its estimate of carrying
costs of these properties. Of the $22.1 million remaining, $13.9 million has
been recorded as a current liability. The Company believes that the balance
remaining in the reserve is appropriate to cover future liabilities related to
the carrying costs of the closed stores.
IMPAIRMENT OF LONG-LIVED ASSETS. Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" was issued in March 1995. The
statement requires companies to review long-lived assets and certain intangible
assets in certain circumstances, and if the value of the assets is impaired, to
record an impairment loss. In the fourth quarter of 1995, the Company elected
the early adoption of this statement and recorded a non-cash charge of $30.3
million described as follows:
1. the Company has a number of real estate properties which were
acquired for future store expansion. As a result of the
Company's decision to slow down its expansion plans and not to
pursue development of these properties, the Company plans to
dispose of these properties. These properties have a carrying
value of $24 million and have an estimated sales value, net of
related costs to sell, of approximately $9 million.
Accordingly, the Company recorded an impairment loss of
approximately $15 million; and
2. the Company has reviewed its property, furniture, fixtures and
equipment and evaluated how these assets will continue to be
used in its operations. Based on this evaluation, the Company
has determined that certain assets with a carrying value of
$33 million were impaired and have fair values totaling
approximately $18 million. Fair values were based on estimated
market values. Accordingly, the Company recorded an impairment
loss of approximately $15 million.
Estimates are inherent in the process of projecting future cash flows
for potential impairment of assets and it is possible that changes in estimates
will occur.
PROPERTY, FURNITURE AND EQUIPMENT. The Company's investments in property,
furniture and equipment consist of the following:
<TABLE>
<CAPTION>
(in thousands) FEB. 3, 1996 Jan. 28, 1995
==========================================================================
<S> <C> <C>
Land $ 99,982 $ 82,159
Buildings 191,338 152,860
Leasehold improvements 115,937 128,360
Furniture, fixtures and equipment 232,776 245,290
Capital leases 24,875 32,432
Construction-in-progress 11,719 54,583
--------- ---------
676,627 695,684
Less accumulated depreciation and
amortization (179,050) (191,552)
--------- ---------
$ 497,577 $ 504,132
========= =========
</TABLE>
Accumulated amortization on capital leases was $14.2 million and $15.4
million as of February 3, 1996 and January 28, 1995, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES. Accounts payable and accrued expenses
consist of the following:
<TABLE>
<CAPTION>
(in thousands) FEB. 3, 1996 Jan. 28, 1995
===========================================================================
<S> <C> <C>
Accounts payable $176,643 $165,303
Accrued expenses and other 118,021 123,149
Accrued compensation and benefits 18,403 39,135
-------- --------
$313,067 $327,587
======== ========
</TABLE>
Accrued expenses and other at February 3, 1996 includes $20.1 million
and $13.9 million for the current portions of the merger and store closing
reserve, respectively. Accrued expenses and other at January 28, 1995 includes
$53.7 million for the current portion of the store closing reserve.
LONG-TERM DEBT AND OTHER CREDIT ARRANGEMENTS. Long-term debt consists of the
following:
<TABLE>
<CAPTION>
(in thousands) FEB. 3, 1996 Jan. 28, 1995
===========================================================================
<S> <C> <C>
6.95% Senior Notes, due 2003 $100,000 $100,000
9.45% Senior Debentures, due 2012 100,000 100,000
5 1/2% Convertible Subordinated Debentures 123,050 123,050
Mortgage loans 43,637 44,054
Other long-term debt 18,252 18,986
-------- --------
384,939 386,090
Less current portion (1,230) (1,121)
-------- --------
$383,709 $384,969
======== ========
</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. The agreement contains 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 semi-annual installments of principal
and interest through 2016. These mortgages are collateralized by properties
with a total net book value of $41.4 million.
13
<PAGE> 16
Aggregate principal maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal year (in thousands)
==============================================================
<S> <C>
1996 $ 1,230
1997 1,341
1998 8,059
1999 9,784
2000 8,572
Remainder 355,953
--------
$384,939
========
</TABLE>
At the end of fiscal 1995, the Company had available a revolving
credit facility for $50 million. The Company did not utilize this credit
facility in the last three years. The Company also had letter of credit
facilities with a number of banks, which totaled $61 million. Approximately
$40 million of these facilities were unused as of February 3, 1996.
Subsequent to February 3, 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 replaces the existing revolving
credit facility and all letter of credit facilities. This new facility is
secured by merchandise inventories and expires in February 1999. Interest on
borrowings under this facility will be at prime plus 1% or LIBOR plus 2.75% at
the option of management. Upon entering into this agreement, the Company
borrowed $50 million under this facility.
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: In accordance with SFAS 115, 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.
The carrying amounts and fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
FEB. 3, 1996 Jan. 28, 1995
CARRYING MARKET Carrying Market
(in thousands) VALUES VALUES Values Values
====================================================================================================
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 35,785 $ 35,785 $ 26,252 $ 26,252
Marketable securities
at fair value -- -- 68,911 68,911
Long-term debt:
Publicly traded debt 323,050 197,141 323,050 253,563
Privately held debt 60,659 42,863 61,919 55,939
-------- -------- -------- --------
Total long-term debt $383,709 $240,004 $384,969 $309,502
======== ======== ======== ========
</TABLE>
INCOME TAXES. The income tax (benefit)/provisions are summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
Year ended FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
==================================================================================
<S> <C> <C> <C>
Current $(13,249) $ 18,540 $ 2,302
Deferred 10,249 (24,085) 8,309
-------- -------- -------
$ (3,000) $ (5,545) $10,611
======== ======== =======
</TABLE>
Significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
(in thousands) FEB. 3, 1996 Jan. 28, 1995
===================================================================================
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ 4,103 $ 9,020
Inventories 12,078 12,442
Other 2,575 3,061
------- -------
Total deferred tax liabilities 18,756 24,523
------- -------
Deferred tax assets:
Accrued expenses for unusual charges 23,363 23,269
Alternative minimum tax and other tax
credit carryforwards 15,419 10,620
Accrued compensation and benefits 5,515 6,536
Net operating loss carryforward 7,086 --
Other 4,310 3,424
------- -------
Total deferred tax assets 55,693 43,849
Valuation allowance 27,860 --
------- -------
Net deferred tax assets 27,833 43,849
------- -------
Net deferred tax assets $ 9,077 $19,326
======= =======
</TABLE>
Reconciliations of the Federal statutory rate to the Company's
effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year ended FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
===================================================================================
<S> <C> <C> <C>
Statutory rate (35.0)% (35.0)% 35.0%
Effect of asset reserve 34.6 -- --
Federal tax credits -- (5.3) (3.0)
Federal tax-exempt
investment income (1.0) (4.7) (6.0)
Amortization of goodwill .7 4.9 1.6
Other (3.0) 4.2 2.4
---- ----- ----
(3.7)% (35.9)% 30.0%
==== ===== ====
</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. The lease is renewable at the Company's option for nine additional terms
of five years each. The Company has recorded the transaction as an operating
lease.
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.
14
<PAGE> 17
At February 3, 1996, 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>
1996 $ 77,009 $ 1,492 $ 75,517
1997 78,093 1,360 76,733
1998 79,329 1,360 77,969
1999 79,320 1,360 77,960
2000 80,307 1,674 78,633
Remainder 989,182 7,087 982,095
---------- ------- ----------
Total minimum lease payments 1,383,240 14,333 1,368,907
Minimum sublease rentals
due to the Company 177,628 -- 177,628
---------- ------- ----------
Total minimum lease payments, net $1,205,612 $14,333 $1,191,279
========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
Capital Leases
(in thousands)
Fiscal year Total Affiliated Nonaffiliated
=========================================================================================
<S> <C> <C> <C>
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
2000 2,670 1,048 1,622
Remainder 14,927 3,756 11,171
-------- ------- --------
Total minimum lease payments 32,480 9,168 23,312
Less imputed interest (14,083) (3,125) (10,958)
-------- ------- --------
Present value of net minimum
lease payments (including
current portion of $2,576) $ 18,397 $ 6,043 $ 12,354
======== ======= ========
</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 FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
===================================================================================
<S> <C> <C> <C>
Minimum operating lease rentals $ 66,174 $ 62,794 $51,822
Excess rentals:
Capital leases 1,238 1,352 1,480
Operating leases 676 591 1,566
-------- -------- -------
68,088 64,737 54,868
Less sublease income (16,623) (13,192) (8,051)
-------- -------- -------
Net rent expense $ 51,465 $ 51,545 $46,817
-------- -------- -------
Net rent expense paid to affiliates $ 3,811 $ 3,840 $ 4,554
======== ======== =======
</TABLE>
The net rent expense charged to operations does not include
approximately $5.7 million charged to the store closing reserve for 1995, and
$.6 million and $3.5 million charged to the strategic reserve for 1994 and
1993, respectively.
At February 3, 1996, the outstanding commitments on contracts relating
to the construction of new stores amounted to approximately $3 million.
CONTINGENCIES. The Company and its subsidiaries are parties 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,
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 Class 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.
In February 1996, the Company announced its plans to suspend future
dividends on its Class A and Class B common shares.
Class A and Class B common and treasury shares outstanding and related
changes for the three years ended February 3, 1996 were as follows:
<TABLE>
<CAPTION>
Issued Treasury
Class A Class B Class A Class B
============================================================================================================
<S> <C> <C> <C> <C>
Balance, Jan. 30, 1993 28,773,916 13,480,790 (106,350) (14,496)
Restricted stock awards
earned, net of forfeitures (130,260) -- -- --
Exercise of stock options -- -- 32,519 --
Conversions from
Class B to Class A 168,434 (168,434) -- --
Purchase of treasury -- -- (18,938) (1)
---------- ---------- -------- -------
Balance, Jan. 29, 1994 28,812,090 13,312,356 (92,769) (14,497)
Performance stock
awards earned 45,157 -- -- --
Exercise of stock options 145,741 -- 92,670 --
Conversions from
Class B to Class A 1,793,627 (1,793,627) -- --
Conversions of
5 1/2% Convertible
Subordinated Debentures 897 -- -- --
Purchase of treasury -- -- (17,114) --
---------- ---------- -------- -------
BALANCE, JAN. 28, 1995 30,797,512 11,518,729 (17,213) (14,497)
EXERCISE OF STOCK OPTIONS 8,269 -- 5,279 --
CONVERSIONS FROM
CLASS B TO CLASS A 86,800 (86,800) -- --
PURCHASE OF TREASURY -- -- (27,391) --
---------- ---------- -------- -------
BALANCE, FEB. 3, 1996 30,892,581 11,431,929 (39,325) (14,497)
========== ========== ======== =======
</TABLE>
EMPLOYEE BENEFIT PLANS AND RETIREMENT AGREEMENTS. In 1995, the Company amended
The Hechinger Thrift and Savings Plan to incorporate 401(k) features, to
include all qualified employees and changed the plan name to The 401(k) Plan.
Additionally, the Company terminated its defined benefit pension plan as of
December 31, 1995. The estimated costs related to pension curtailment and
benefit settlement of $2.7 million have been accrued as a component of the
merger reserve. (See discussion of Unusual Charges above.) The actual
distribution of the plan assets is expected to occur in 1996.
The Company maintains a profit sharing plan for all qualified
employees. The profit sharing plan allows for discretionary annual
contributions as determined by the Board of Directors. The 401(k) 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 pretax contributions of up to
6%.
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 $3.9 million and $3.1 million at February 3, 1996 and January 28, 1995,
respectively. The prepaid pension contribution recognized in the financial
statements was $1.6 million at February 3, 1996, excluding the costs related to
pension curtailment and benefit settlement, which have been accrued as a
component of the merger reserve. The prepaid pension contribution recognized in
the financial statements at January 28, 1995 was $.3 million.
Net defined benefit pension costs, including the nonqualified
supplemental retirement plan, consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
Year ended FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
==================================================================================
<S> <C> <C> <C>
Service cost for the period $ 1,940 $ 2,050 $ 2,176
Interest cost on projected
benefit obligation 1,588 1,357 1,086
Actual return on plan assets (7,182) 220 (1,481)
Net amortization and deferral 5,045 (2,102) (186)
------- ------- -------
Total pension expense $ 1,391 $ 1,525 $ 1,595
======= ======= =======
</TABLE>
The following table sets forth the status of the pension plan. The
status of the pension plan as of February 3, 1996, reflects the expected basis
15
<PAGE> 18
on which the distribution of the plan assets will be made. It is expected that
a contribution of approximately $.8 million will be required to fully fund the
liability.
<TABLE>
<CAPTION>
(in thousands) FEB. 3, 1996 Jan. 28, 1995
================================================================================
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 27,013 $ 15,446
======== ========
Accumulated benefit obligation $ 27,013 $ 16,136
======== ========
Projected benefit obligation $ 27,013 $ 17,228
Plan assets at fair value (26,252) (20,124)
-------- --------
Plan assets under (over) benefit obligation 761 (2,896)
Unrecognized prior service credit 2,903 3,265
Unrecognized net loss (3,379) (1,565)
Unrecognized net asset existing
at the beginning of the year 801 956
-------- --------
Accrued pension liability (prepaid pension asset)
recognized in the financial statements $ 1,086 $ (240)
======== ========
</TABLE>
Assumptions used in calculating the status of the pension plan were as
follows:
<TABLE>
<CAPTION>
Year ended FEB. 3, 1996 Jan. 28, 1995 Jan. 29, 1994
======================================================================================================
<S> <C> <C> <C>
Discount rate 6.3% 8.0% 8.0%
Rate of increase in compensation
levels NA 4.8% 4.8%
Expected long-term rate of
return on assets 9.0% 9.0% 9.0%
</TABLE>
Total expenses related to all of the above plans amounted to $3.8
million, $6.3 million and $5.2 million, for the years 1995, 1994 and 1993,
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. In 1995, stockholders
approved an amendment to the Incentive Plan authorizing an increase in the
number of shares of the Company's stock authorized for issuance upon exercise
of options. At February 3, 1996, 3.8 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. Generally,
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 February 3, 1996,
nonqualified options were granted. At February 3, 1996, options to purchase 2.1
million shares were exercisable under the Incentive Plan and its predecessor,
The 1982 Stock Option Plan.
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, 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
GRANTED 1,948 7.00
CANCELED (635) 12.75
EXERCISED (9) 8.86
-----
BALANCE, FEB. 3, 1996 4,618 $10.01
=====
</TABLE>
In 1995, the Company awarded rights to earn 260,000 shares of Class A
common stock to certain key executives of the Company if certain performance
goals are met. Under the terms of the award, once the rights are earned, the
stock will vest over a two-year period. In 1993, the Company awarded 20,000
shares of Class A common stock, on a restricted basis, to a certain key
executive of the Company. Under the terms of the award, the stock will vest
over a four-year period.
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 1995, no
shares were reserved for distribution under the plan. At February 3, 1996,
711,000 shares were available for future awards.
Total charges to earnings for these plans amounted to $.8 million,
$1.0 million and $.8 million for the years 1995, 1994 and 1993, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting and Disclosure of Stock-Based Compensation" was issued in October
1995 and will be effective for the Company's fiscal year 1996. The statement
relates to the measurement of compensation of stock options issued to employees
and requires either expense recognition based on the fair value method or the
continued application of APB 25, "Accounting for Stock Issued to Employees" and
disclosing the pro forma net income as if the recognition and measurement
provisions of SFAS 123 had been adopted.
The Company currently accounts for its stock compensation arrangements
under the provisions of APB 25 and intends to continue to do so. The Company
plans to comply with the disclosure requirements of SFAS 123 beginning in 1996.
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 February 3, 1996 and January 28, 1995,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended February 3,
1996. 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 February 3, 1996 and January 28, 1995 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended February 3, 1996 in conformity with
generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements in
the fiscal year ended February 3, 1996, the Company adopted SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," and in the fiscal year ended January 28, 1995, the Company
changed its method of calculating LIFO inventories.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Washington, D.C.
March 1, 1996
16
<PAGE> 19
Hechinger Company
DIRECTORS AND OFFICERS
DIRECTORS
JOHN W. HECHINGER, JR.
Chairman of the Board and
Chief Executive Officer
Hechinger Company
HERBERT J. BRONER
Retired Chairman, President and
Chief Executive Officer
Mohasco Corporation
KENNETH J. CORT
President and
Chief Operating Officer
Hechinger Company
JOHN W. HECHINGER
Chairman of the Executive
Committee of the
Board of Directors
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
MELVIN A. WILMORE
President and
Chief Operating Officer
Ross Stores, Inc.
ALAN J. ZAKON
Vice Chairman
Autotote Corporation
OFFICERS
JOHN W. HECHINGER, JR.
Chairman of the Board and Chief Executive Officer
KENNETH J. CORT
President and Chief
Operating Officer
W. CLARK MCCLELLAND
Executive Vice President and Chief Financial Officer
MARK R. ADAMS
Senior Vice President,
Treasurer and Secretary
JOANNE M. BARRETT
Senior Vice President, International Markets
J. WAYNE COLLEY
Senior Vice President, Merchandise Presentation
SALLY A. COURTNEY
Senior Vice President,
General Merchandise Manager
NOEL H. GOULSTON
Senior Vice President,
Strategic Planning
HAROLD R. HALL
Senior Vice President, Finance
S. ROSS HECHINGER
Senior Vice President,
Corporate Administration
GARY E. MERCER
Senior Vice President,
Store Operations
CAROL A. STEVENS
Senior Vice President,
Human Resources
ROGER K. WRIGHT
Senior Vice President,
Real Estate and Development
MILTON E. ANDREWS
Vice President, Store Operations
SUZANNE G. BEAR
Vice President, Marketing
and Advertising
BETSY A. BLACKMON
Vice President, Divisional
Merchandise Manager
ARTHUR R. BURKE
Vice President, Divisional
Merchandise Manager
RICHARD M. DOW
Vice President, Regional Manager
MICHAEL P. GOOD
Vice President, Finance
RICHARD S. GROSS
Vice President, Controller
RICHARD A. HAYS
Vice President, Divisional
Merchandise Manager
JAMES F. IAMPIERI
Vice President,
Merchandise Administration
G. MICHAEL KING
Vice President, Regional Manager
WARREN L. MARTIN
Vice President, Divisional
Merchandise Manager
J. MICHAEL OWEN
Vice President, Regional Manager
RICHARD A. POVLAK
Vice President, Loss Prevention
and Distribution
GARY G. RHEA
Vice President, Regional Manager
MAX S. ROBUCK
Vice President, Divisional
Merchandise Manager
CELIA A. WING
Vice President, Real Estate
CORPORATE INFORMATION
GENERAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 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, NC 28288
Information contact:
Frances Beam
1-800-829-8432
CORPORATE MAILING ADDRESS
Hechinger Company
3500 Pennsy Drive
Landover, MD 20785
(301) 341-1000
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, MD 20785
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 3,255 Class A and 1,086
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. In February 1996, the Company announced its plans to suspend future
dividends.
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
Period HIGH LOW High Low
===========================================================
<S> <C> <C> <C> <C>
1ST QUARTER
CLASS A $13 1/2 $9 5/8 $15 1/4 $10
CLASS B 13 1/2 9 3/4 15 1/2 10 1/4
2ND QUARTER
CLASS A 9 7/8 6 1/4 16 1/2 11
CLASS B 10 6 1/4 16 1/4 11 3/8
3RD QUARTER
CLASS A 7 1/8 3 3/8 15 3/4 11
CLASS B 7 1/4 3 7/8 15 3/4 11
4TH QUARTER
CLASS A 6 1/8 4 12 9
CLASS B 6 1/8 4 1/8 11 3/4 9
</TABLE>
ASSOCIATE PHOTOGRAPHS
COVER
Barbara McCallister, Department Supervisor
Hechinger store in Glen Burnie, MD
Fred Bozard, Kitchen Design Specialist
Home Quarters Warehouse store in Virginia Beach, VA
PAGE 2
John Nelson, Group Sales Manager
Hechinger store in Rockville, MD
PAGE 3
Louise Johnson, Front End Supervisor
Home Quarters Warehouse store in Montgomery, AL
[RECYCLED LOGO]
Printed entirely on recycled paper.
At Hechinger, we believe saving and
protecting the environment is everyone's business.
Design: Financial Communications, Inc., Bethesda, MD
<PAGE> 20
HECHINGER COMPANY
3500 PENNSY DRIVE
LANDOVER, MARYLAND 20785
(301) 341-1000
ANNUAL REPORT YEAR ENDED FEBRUARY 3, 1996
<PAGE> 21
EDGAR APPENDIX
ANNUAL REPORT YEAR ENDED FERUARY 3, 1996
HECHINGER COMPANY
<TABLE>
<CAPTION>
DESCRIPTION OF PHOTOGRAPH PAGE
- ------------------------- ----
<S> <C>
Pictured on the front cover of Hechinger Company's Front Cover
Fiscal 1995 Annual Report is one Hechinger and
one Home Quarters Warehouse (HQ) associate.
Each associate is wearing his/her store apron,
on which appears the Hechinger and HQ logos.
They are holding a piece of lumber that has
ONE COMPANY, ONE AIM...printed across the
wooden board.
A photograph of John W. Hechinger, Jr., Chairman and Inside Front Cover
Chief Executive Officer appears in the upper right corner.
A map of Hechinger Company Markets is also pictured
at the bottom half of the page. The map includes the
number of stores in each city/state and the total number of
stores in the company's markets.
Photograph of a Hechinger store associate, 2
wearing the store's apron, on which appears the
Hechinger store logo, and holding a rake.
Photograph of a Home Quarters Warehouse store 3
associate, wearing the store's apron, on which appears
the HQ logo, and holding three rolls of wall paper.
</TABLE>
<PAGE> 1
EXHIBIT 21
HECHINGER COMPANY
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
- ---- -------------
<S> <C>
Hechinger Company Delaware
Hechinger Stores Company Delaware
Hechinger Stores East Coast Company Delaware
Hechinger Investment Company of Delaware Delaware
Hechinger Royalty Company Delaware
Hechinger International, Inc. Delaware
Hechinger Property Company Delaware
Hechinger Financial Holdings Company Delaware
Hechinger Finance Inc. Delaware
Pennsy, Inc. Delaware
HS Square, Inc. Delaware
Hechinger Towers Company Delaware
Philprop Holding Company Pennsylvania
Manprop Holding Company Virginia
Bucksprop Holding Company Pennsylvania
HProp, Inc. Delaware
RemProp, Inc. Delaware
</TABLE>
48
<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 March 1, 1996, included in the Annual
Report to Stockholders of Hechinger Company for the year ended February 3,
1996.
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. 33-46867) pertaining to the 1991 Stock
Incentive Plan of Hechinger Company, with respect to the consolidated financial
statements incorporated herein by reference of Hechinger Company in this Annual
Report (Form 10-K) for the year ended February 3, 1996.
ERNST & YOUNG LLP
Washington, DC
May 3, 1996
49
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-START> JAN-29-1995
<PERIOD-END> FEB-03-1996
<CASH> 35,785
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 414,974
<CURRENT-ASSETS> 530,292
<PP&E> 497,577<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,150,421
<CURRENT-LIABILITIES> 316,873
<BONDS> 383,709
0
0
<COMMON> 4,232
<OTHER-SE> 394,807
<TOTAL-LIABILITY-AND-EQUITY> 1,150,421
<SALES> 2,252,780
<TOTAL-REVENUES> 2,255,649
<CGS> 1,796,848
<TOTAL-COSTS> 2,249,644
<OTHER-EXPENSES> 55,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,341
<INCOME-PRETAX> (80,636)
<INCOME-TAX> (3,000)
<INCOME-CONTINUING> (77,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (77,636)
<EPS-PRIMARY> (1.84)
<EPS-DILUTED> (1.84)
<FN>
<F1>Property, furniture and equipment, net of accumulated depreciation
</FN>
</TABLE>
