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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
CHECK ONE
X Annual report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the fiscal year ended February 1, 1997 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.)
1801 MCCORMICK DRIVE, LARGO, MARYLAND 20774
(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
----- -----
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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 8, 1997.)
$59,438,741
Indicate the number of shares outstanding of each of the registrant's classes
of Common Stock, as of April 8, 1997
32,540,874 shares of Class A Common Stock, $.10 par value
9,671,874 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 1, 1997 as indicated herein; and (2)
portions of Registrant's 1997 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 117 stores under the
Hechinger ("Hechinger"), Home Quarters Warehouse ("Home Quarters") and Better
Spaces ("Better Spaces") names. The 64 Hechinger stores are primarily located
in the Mid-Atlantic region; the 52 Home Quarters stores are primarily located
in the Southeastern, Northeastern and Midwestern parts of the United States;
the one Better Spaces store is located in Albany, New York.
The following table sets forth the number of stores operated by the Company and
the aggregate amount of square feet of store space under roof for the specified
periods:
<TABLE>
<CAPTION>
STORE
NUMBER SQUARE FOOTAGE
OF STORES (IN THOUSANDS)
--------- ----------------
<S> <C> <C>
As of January 29, 1994 125 9,640
1994 openings 12 1,497
1994 closings (4) (295)
As of January 28, 1995 133 10,842
1995 openings 10 1,134
1995 closings (25) (2,081)
As of February 3, 1996 118 9,895
1996 openings 2 185
1996 closings (3) (190)
As of February 2, 1997 117 9,890
</TABLE>
In 1996, the Company relocated two of its stores to new, larger facilities and
sold and closed one Company owned store. Subsequent to year-end, the Company
reopened its Home Quarters store located in Albany, New York under the name,
"Better Spaces". See Marketing section below for further discussion. 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.
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.
The following table sets forth the percentage of sales accounted for by
merchandise category:
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<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEB. 1, 1997 FEB. 3, 1996 JAN. 28, 1995
- ----------------- ------------ ------------ -------------
<S> <C> <C> <C>
Lumber and building materials 29% 28% 27%
Garden supplies and furniture 20 19 18
Hardware and tools 12 13 12
Electrical supplies and small
appliances 7 10 11
Plumbing supplies 18 16 16
Paint 8 8 9
Home Decor and housewares 6 6 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 1995, the Company decided 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 has increased
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.
In 1996, as a part of the vendor consolidation program, the Company completed
over 150 resets of merchandise assortment, including major remodeling of the
Kitchen and Bath and Flooring departments. Additionally, in the fall of 1996,
the Company initiated its new customer program, "Customer First" in one market.
This program guarantees the store will be in-stock on 37,000 items and
guarantees fast check out. The program also promotes the Company's "no hassle"
return policy and its frequent buyer "Project Rewards" program. The Company
plans to expand this program to approximately 50% of its stores in 1997.
In February 1997, the Company reopened its Home Quarters store located in
Albany, New York under the name "Better Spaces". This store has been designed
for customers interested in refurbishing, enhancing, organizing, modernizing
and maintaining their home, both inside and outside. Further expansion of
"Better Spaces" to other markets is pending the results of this pilot store.
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The Company employs a multi-media marketing strategy using television, radio,
newspaper, direct mail and a "catabook", which is compact enough to carry along
as a shopping reference and serves as an "idea" book. 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 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 1, 1997 credit card sales
accounted for 49% 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,
merchandise selection, pricing, advertising and store size, location and
condition. The Company believes that its ability to devote capital resources
to the operation of its business during fiscal 1997 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
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Company generated 30% of its sales in the second quarter of 1996.
EMPLOYEES
The Company currently has approximately 16,000 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.
ITEM 2. PROPERTIES.
The Home Quarters stores currently average approximately 101,000 square feet
under roof and an additional 33,000 square feet of outdoor selling and storage
space. Hechinger stores currently average approximately 71,000 square feet
under roof and an additional 23,000 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 1999
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 Largo, 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, results of operations or liquidity.
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 1997:
<TABLE>
<CAPTION>
YEAR FIRST JOINED
NAME AND AGE POSITION WITH THE COMPANY THE COMPANY
- ------------ ------------------------- -----------------
<S> <C> <C> <C>
John W. Hechinger, Jr. (47) 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 (55) 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
W. Clark McClelland (58) 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
1, 1997.
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 1, 1997.
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 1,
1997.
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 1,
1997.
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 1, 1997:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Operations - Years ended
February 1, 1997, February 3, 1996 and January 28, 1995 8
Consolidated Balance Sheets - As of February 1, 1997
and February 3, 1996 9
Consolidated Statements of Cash Flows - Years ended
February 1, 1997, February 3, 1996 and January 28, 1995 10
Consolidated Statements of Stockholders' Equity -
Years ended February 1, 1997, February 3, 1996 and
January 28, 1995 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); as amended by
Supplemental Indenture dated January 31, 1997 between the Company and First
Union National Bank of North Carolina
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); as amended by Supplemental Indenture dated January 31, 1997 between
the Company and First Union National Bank of North Carolina
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); as amended by Supplemental Indenture dated January 31, 1997 between
the Company and First Union National Bank of North Carolina
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 (incorporated by reference to Exhibit
99 to Registration Statement on Form 8-K, File No. 0-7214)
10(g) Form of Severance Agreement
10(h) Form of Supplemental Executive Retirement Agreement; form of
amendments between the Company and 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 1, 1997, 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.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HECHINGER COMPANY
-----------------
(Registrant)
Date: April 28, 1997 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 April 28, 1997
- ------------------------- and Chief Executive Officer
John W. Hechinger, Jr. (Principal Executive Officer)
/S/ KENNETH J. CORT President and Chief Operating Officer April 28, 1997
- ------------------- and Director
Kenneth J. Cort
/S/ JOHN W. HECHINGER Chairman of the Executive Committee April 28, 1997
- --------------------- of the Board of Directors
John W. Hechinger
/S/ S. ROSS HECHINGER Senior Vice President- April 28, 1997
- --------------------- Corporate Administration
S. Ross Hechinger and Director
/S/ ANN D. JORDAN Director April 28, 1997
- -----------------
Ann D. Jordan
/S/ W. CLARK MCCLELLAND Executive Vice President and April 28, 1997
- ----------------------- Chief Financial Officer
W. Clark McClelland (Principal Financial and Accounting Officer)
and Director
/S/ ROBERT S. PARKER Director April 28, 1997
- ----------------------------
Robert S. Parker
/S/ MELVIN A. WILMORE Director April 28, 1997
- ---------------------
Melvin A. Wilmore
/S/ ALAN J. ZAKON Director April 28, 1997
- -----------------
Alan J. Zakon
</TABLE>
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HECHINGER COMPANY AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
YEAR ENDED FEBRUARY 1, 1997
INDEX TO
SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
DESCRIPTION
----------- SEQUENTIALLY
NUMBERED PAGE
-------------
<S> <C> <C>
Exhibit 4(a) - Supplemental Indenture dated January 31, 1997 between the
Company and First Union National Bank of North Carolina
Exhibit 4(b) and (c) - Supplemental Indenture dated January 31, 1997 between
the Company and First Union National Bank of North Carolina
Exhibit 10(g) - Form of Severance Agreement
Exhibit 10(h) - Form of Supplemental Executive Retirement Agreement
and form of amendments between the Company
and the named executive officers
Exhibit 11 - Statement Regarding Computation of Earnings Per Share
Exhibit 13 - Annual Report to Stockholders of the Company for the
year ended February 1, 1997
Exhibit 21 - Subsidiaries of the Registrant
Exhibit 23 - Consent of Independent Auditors
Exhibit 27 - Financial Data Schedule
</TABLE>
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EXHIBIT 4(a)
================================================================================
HECHINGER COMPANY
and
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA, Trustee
----------
FIRST SUPPLEMENTAL TRUST INDENTURE
Dated as of January 31, 1997
----------
Amending and Supplementing the
Trust Indenture
Dated as of March 15, 1987
$132,000,000
5 1/2% Debentures Due 2012
================================================================================
<PAGE> 2
FIRST SUPPLEMENTAL TRUST INDENTURE
THIS FIRST SUPPLEMENTAL TRUST INDENTURE dated as of January
31, 1997 (the "First Supplemental Indenture"), by and between HECHINGER COMPANY
(the "Company"), a Delaware corporation, and FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, a national banking association duly incorporated and existing under
the laws of the United States of America (the "Trustee"), the trustee under the
Trust Indenture dated as of March 15, 1987 (the "Original Indenture") between
the Company and the Trustee, amends and supplements the Original Indenture.
Terms used and not defined herein have the same meanings as in
the Original Indenture.
Recitals
A. Section 2.05 of the Original Indenture reads in its
entirety as follows:
SECTION 2.05. Exchange and Registration of Transfer of
Debentures. Debentures may be exchanged for a like aggregate
principal amount of Debentures of other authorized denominations.
Debentures to be exchanged shall be surrendered at the office or
agency to be maintained by the Trustee in the City of Charlotte, North
Carolina, and the Company shall execute and register and the Trustee
shall authenticate and deliver in exchange therefor the Debenture or
Debentures which the Debentureholder making the exchange shall be
entitled to receive.
The Company shall cause to be kept at said office of
the Trustee in the City of Charlotte, North Carolina, register [sic]
in which, subject to such reasonable regulations as it may prescribe,
Debentures shall be registered and the transfer of Debentures shall be
registered as in this Article Two provided. Such register shall be in
written form or in any other form capable of being converted into
written form within a reasonable time. At all reasonable times such
register shall be open for inspection by the Trustee. Upon due
presentment for registration of transfer of any Debenture at such
office or agency maintained by the Trustee in the
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City of Charlotte, North Carolina, the Company shall execute and
register and the Trustee shall authenticate and deliver in the name of
the transferee or transferees a new Debenture or Debentures for an
equal aggregate principal amount.
All Debentures presented for registration of transfer
or for exchange, redemption, conversion or payment shall (if so
required by the Company or the Trustee) be duly endorsed by, or be
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company and the Trustee duly executed by, the
holder or his attorney duly authorized in writing.
No service charge shall be made for any exchange or
registration of transfer of Debentures, but the Company may require
payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
The Company shall not be required to exchange or
register a transfer of (a) any Debentures for a period of 15 days next
preceding any selection of Debentures to be redeemed, (b) any
Debentures or portions thereof selected or called for redemption or
(c) any Debentures surrendered for conversion.
B. Section 5.02 of the Original Indenture reads in its
entirety as follows:
SECTION 5.02. Offices for Notices and Payments, etc.
So long as any of the Debentures remain outstanding, the Company will
maintain in the City of Charlotte, North Carolina, an office or agency
where the Debentures may be presented for payment, and an office or
agency where the Debentures may be presented for registration of
transfer and for exchange and conversion as in this Indenture provided
and an office or agency where notices and demands to or upon the
Company in respect of the Debentures or of this Indenture may be
served. The Company will give to the Trustee written notice of the
location of each such office or agency and of any change
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of location thereof. If the Company shall fail to maintain any such
office or agency or shall fail to give such notice of the location or
of any change in the location thereof, presentations and demands may
be made and notices may be served at the principal offices of the
Trustee in the City of Charlotte, North Carolina, and the Company
hereby appoints the Trustee at the principal office of the Trustee in
the City of Charlotte, North Carolina, its agent to receive all such
presentations, demands and notices.
C. Section 8.09 of the Original Indenture reads in its
entirety as follows:
SECTION 8.09. Eligibility of Trustee. The Trustee
hereunder shall at all times be a corporation organized and doing
business under the laws of the United States or any State or Territory
thereof or of the District of Columbia authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus
of at least five million dollars, subject to supervision or
examination by Federal, State, Territorial or District of Columbia
authority and having its principal office and place of business in the
City of Charlotte, North Carolina. If such corporation publishes
reports of condition at least annually, pursuant to law or to the
requirements of the aforesaid supervising or examining authority, then
for the purposes of this Section 8.09, the combined capital and
surplus of such corporation shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so
published. In case at any time the Trustee shall cease to be eligible
in accordance with the provisions of this Section 8.09, the Trustee
shall resign immediately in the manner and with the effect specified
in Section 8.10.
D. Section 16.03 of the Original Indenture reads in its
entirety as follows:
SECTION 16.03. Addresses for Notices, etc. Any
notice or demand which by any provision of this Indenture is required
or permitted to be given or served
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by the Trustee or by the holders of Debentures on the Company may be
given or served by being deposited postage prepaid by registered or
certified mail in a post office letter box addressed (until another
address is filed by the Company with the Trustee) to Hechinger
Company, 3500 Pennsy Drive, Landover, Maryland 20785 Attention:
Secretary. Any notice, direction, request or demand by any
Debentureholder to or upon the Trustee shall be deemed to have been
sufficiently given or made, for all purposes, if given or made in
writing at the principal corporate trust office of the Trustee, 1200
First Union Plaza, Charlotte, North Carolina 28288.
E. Section 16.06 of the Original Indenture reads in its
entirety as follows:
SECTION 16.06. Legal Holidays. In any case where
the date of maturity of interest on or principal of the Debentures or
the date fixed for redemption of any Debenture will be in the City of
Charlotte, North Carolina, a legal holiday or a day on which banking
institutions are authorized by law or executive order to close ("Legal
Holidays"), then payment of such interest on or principal of the
Debentures need not be made on such date but may be made on the next
succeeding day not a Legal Holiday with the same force and effect as
if made on the date of maturity or the date fixed for redemption and
no interest shall accrue for the period from and after such date.
F. Section 11.01 of the Original Indenture provides,
among other things, that the Company and the Trustee may from time to time and
at any time, without the consent of the holders of any of the Debentures at the
time outstanding, enter into indentures supplemental to the Original Indenture
to make such other provisions in regard to matters or questions arising under
the Original Indenture which shall not adversely affect the interests of the
holders of the Debentures. Section 11.05 of the Original Indenture provides
that the Trustee may rely upon an Officers' Certificate and an Opinion of
Counsel as conclusive evidence that any such supplemental indenture complies
with the foregoing conditions and provisions of the Original Indenture.
5
<PAGE> 6
G. The Company desires to enter into this First
Supplemental Indenture to expand the number of corporations potentially
eligible to be Trustee by amending Sections 2.05, 5.02, 8.09, 16.03 and 16.06
of the Original Indenture as hereinafter provided.
H. By its execution and delivery of this First
Supplemental Indenture, the Trustee acknowledges its receipt of and reliance
upon the Officers' Certificate and Opinion of Counsel attached hereto, which
Officers' Certificate and Opinion of Counsel are acceptable to the Trustee, to
the effect that this First Supplemental Indenture complies with the conditions
and provisions of Section 11.01 of the Original Indenture.
NOW, THEREFORE, in consideration of the premises, the Company
and the Trustee agree as follows:
1. Amendment of Section 2.05 of Original Indenture. Section 2.05
of the Original Indenture is hereby amended to read in its entirety as follows:
SECTION 2.05. Exchange and Registration of Transfer
of Debentures. Debentures may be exchanged for a like aggregate
principal amount of Debentures of other authorized denominations.
Debentures to be exchanged shall be surrendered at the office or
agency to be maintained by the Trustee at the Principal Office of the
Trustee, and the Company shall execute and register and the Trustee
shall authenticate and deliver in exchange therefor the Debenture or
Debentures which the Debentureholder making the exchange shall be
entitled to receive.
The Company shall cause to be kept at the Principal
Office of the Trustee, a register in which, subject to such reasonable
regulations as it may prescribe, Debentures shall be registered and
the transfer of Debentures shall be registered as in this Article Two
provided. Such register shall be in written form or in any other form
capable of being converted into written form within a reasonable time.
At all reasonable times such register shall be open for inspection by
the Trustee. Upon due presentment for registration of transfer of any
Debenture at the Principal Office of the
6
<PAGE> 7
Trustee, the Company shall execute and register and the Trustee shall
authenticate and deliver in the name of the transferee or transferees
a new Debenture or Debentures for an equal aggregate principal amount.
All Debentures presented for registration of transfer
or for exchange, redemption, conversion or payment shall (if so
required by the Company or the Trustee) be duly endorsed by, or be
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company and the Trustee duly executed by, the
holder or his attorney duly authorized in writing.
No service charge shall be made for any exchange or
registration of transfer of Debentures, but the Company may require
payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
The Company shall not be required to exchange or
register a transfer of (a) any Debentures for a period of 15 days next
preceding any selection of Debentures to be redeemed, (b) any
Debentures or portions thereof selected or called for redemption or
(c) any Debentures surrendered for conversion.
2. Amendment of Section 5.02 of Original Indenture. Section 5.02
of the Original Indenture is hereby amended to read in its entirety as follows:
SECTION 5.02. Offices for Notices and Payments, etc.
So long as any of the Debentures remain outstanding, the Company will
maintain an office or agency where the Debentures may be presented for
payment, and an office or agency where the Debentures may be presented
for registration of transfer and for exchange and conversion as in
this Indenture provided and an office or agency where notices and
demands to or upon the Company in respect of the Debentures or of this
Indenture may be served. The Company will give to the Trustee written
notice of the location of each such office or agency and of any change
of location thereof. If the
7
<PAGE> 8
Company shall fail to maintain any such office or agency or shall fail
to give such notice of the location or of any change in the location
thereof, presentations and demands may be made and notices may be
served at the Principal Office of the Trustee, and the Company hereby
appoints the Trustee at the Principal Office of the Trustee, its agent
to receive all such presentations, demands and notices.
3. Amendment of Section 8.09 of Original Indenture. Section 8.09
of the Original Indenture is hereby amended to read in its entirety as follows:
SECTION 8.09. Eligibility of Trustee. The Trustee
hereunder shall at all times be a corporation organized and doing
business under the laws of the United States or any State or Territory
thereof or of the District of Columbia authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus
of at least five million dollars, and subject to supervision or
examination by Federal, State, Territorial or District of Columbia
authority. If such corporation publishes reports of condition at
least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of
this Section 8.09, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section 8.09, the Trustee shall resign
immediately in the manner and with the effect specified in Section
8.10.
4. Amendment of Section 16.03 of Original Indenture. Section
16.03 of the Original Indenture is hereby amended to read in its entirety as
follows:
SECTION 16.03. Addresses for Notices, etc. Any
notice or demand which by any provision of this Indenture is required
or permitted to be given or served by the Trustee or by the holders of
Debentures on the Company may be given or served by being deposited
postage
8
<PAGE> 9
prepaid by registered or certified mail in a post office letter box
addressed (until another address is filed by the Company with the
Trustee) to Hechinger Company, 3500 Pennsy Drive, Landover, Maryland
20785 Attention: Secretary. Any notice, direction, request or demand
by any Debentureholder or the Company to or upon the Trustee shall be
deemed to have been sufficiently given or made, for all purposes, if
given or made in writing and deposited postage prepaid by registered
or certified mail in a post office letter box addressed (until another
address is filed by the Trustee with the Company) to First Union
National Bank of North Carolina, 230 South Tryon Street, Charlotte,
North Carolina 28288-1179 Attention: Corporate Trust Department.
5. Amendment of Section 16.06 of Original Indenture. Section
16.06 of the Original Indenture is hereby amended to read in its entirety as
follows:
SECTION 16.06. Legal Holidays. In any case where
the date of maturity of interest on or principal of the Debentures or
the date fixed for redemption of any Debenture will be in the city of
the Principal Office of the Trustee a legal holiday or a day on which
banking institutions are authorized by law or executive order to close
("Legal Holidays"), then payment of such interest on or principal of
the Debentures need not be made on such date but may be made on the
next succeeding day not a Legal Holiday with the same force and effect
as if made on the date of maturity or the date fixed for redemption
and no interest shall accrue for the period from and after such date.
6. Indenture to Remain in Effect. Except as amended by this
First Supplemental Indenture, the Original Indenture shall remain in full force
and effect in accordance with its terms.
IN WITNESS WHEREOF, the Company and the Trustee have executed
and delivered this First Supplemental Indenture as of the date first above
written.
9
<PAGE> 10
HECHINGER COMPANY
Attest:
/S/ Mark R. Adams By: /S/ W. Clark McClelland
- ----------------------------- ---------------------------------
Name: Mark R. Adams Name: W. Clark McClelland
------------------------ ----------------------------
Title: Senior Vice President, Title: Executive Vice President
----------------------- ---------------------------
Treasurer and Secretary and Chief Financial Officer
----------------------- ---------------------------
(Seal)
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, Trustee
Attest:
/S/ Marion Stratakos By: /S/ Shannon Stahel
- ------------------------- ------------------------------
Name: Marion Stratakos Name: Shannon Stahel
-------------------- -------------------------
Title: Vice President Title: Trust Officer
------------------- ------------------------
(Seal)
10
<PAGE> 11
Acknowledgements
STATE OF Maryland )
----------------- ) SS:
COUNTY OF Prince Georges )
----------------
On this 30th day of January, 1997, before me, the undersigned
Notary Public, personally appeared W. Clark McClelland, who acknowledged
himself to be the Executive Vice President and Chief Financial Officer of
Hechinger Company, a Delaware corporation and that he as such officer, being
authorized to do so, executed the foregoing First Supplemental Trust Indenture
for the purposes therein contained by signing the name of said corporation by
himself as such officer.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/S/ Lauri A. Rice
------------------------------------
Notary Public
(SEAL) My commission expires: 9-4-98
--------------
STATE OF North Carolina )
---------------- ) SS:
COUNTY OF Mecklenburg )
---------------
On this 30th day of January, 1997, before me, the
undersigned Notary Public, personally appeared Shannon Stahel, who
acknowledged herself to be a Trust Officer of First Union National
Bank of North Carolina and that she as such officer, being authorized to do
so, executed the foregoing First Supplemental Trust Indenture for the purposes
therein contained by signing the name of said bank by herself as such
officer.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/S/ Lisa L. Starnes
------------------------------------
Notary Public
My Commission expires: 7-3-2001
--------------
(SEAL)
11
<PAGE> 1
EXHIBIT 4(b) & 4(c)
================================================================================
HECHINGER COMPANY
and
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA, Trustee
----------
FIRST SUPPLEMENTAL TRUST INDENTURE
Dated as of January 31, 1997
----------
Amending and Supplementing the
Trust Indenture
Dated as of October 1, 1992
================================================================================
<PAGE> 2
FIRST SUPPLEMENTAL TRUST INDENTURE
THIS FIRST SUPPLEMENTAL TRUST INDENTURE dated as of January
31, 1997 (the "First Supplemental Indenture"), by and between HECHINGER COMPANY
(the "Company"), a Delaware corporation, and FIRST UNION NATIONAL BANK OF NORTH
CAROLINA, a national banking association duly incorporated and existing under
the laws of the United States of America (the "Trustee"), the trustee under the
Trust Indenture dated as of October 1, 1992 (the "Original Indenture") between
the Company and the Trustee, amends and supplements the Original Indenture.
Terms used and not defined herein have the same meanings as in
the Original Indenture.
Recitals
A. The definition of "Corporate Trust Office" set forth
in Section 1.1 of the Original Indenture reads in its entirety as follows:
"Corporate Trust Office" means the office of the
Trustee at which the corporate trust business of the Trustee shall, at
any particular time, be principally administered, which office is, at
the date as of which this Indenture is dated, located in the City of
Charlotte, North Carolina.
B. Section 3.2 of the Original Indenture reads in its
entirety as follows:
SECTION 3.2 Offices for Payments, etc. So long
as any Registered Securities are authorized for issuance pursuant to
this Indenture or are outstanding hereunder, the Issuer will maintain
in the City of Charlotte, North Carolina and/or the Borough of
Manhattan, City of New York, an office or agency where the Registered
Securities of each series may be presented for payment, where the
Securities of each series may be presented for exchange as is provided
in this Indenture and, if applicable, pursuant to Section 2.3 and
where the Registered Securities of each series may be presented for
registration of transfer as in this Indenture provided.
2
<PAGE> 3
If any Unregistered Securities are to be issued
hereunder, the Issuer will maintain one or more offices or agencies in
a city or cities located outside the United States (including any city
in which such an agency is required to be maintained under the rules
of any stock exchange on which the Securities of such series are
listed) where the Unregistered Securities, if any, of each series and
Coupons, if any, appertaining thereto may be presented for payment.
No payment on any Unregistered Security or Coupon will be made upon
presentation of such Unregistered Security or coupon at an agency of
the Issuer within the United States nor will any payment be made by
transfer to an account in, or by mail to an address in, the United
States unless pursuant to applicable United States laws and
regulations then in effect such payment can be made without adverse
tax consequences to the Issuer. Notwithstanding the foregoing,
payments in Dollars of Unregistered Securities of any series and
Coupons appertaining thereto which are payable in Dollars may be made
at an agency of the Issuer maintained in the City of Charlotte, North
Carolina and/or the Borough of Manhattan, City of New York, if such
payment in Dollars at each agency maintained by the Issuer outside the
United States for payment on such Unregistered Securities is illegal
or effectively precluded by exchange controls or other similar
restrictions.
The Issuer will maintain in the City of Charlotte,
North Carolina and/or the Borough of Manhattan, City of New York, an
office or agency where notices and demands to or upon the Issuer in
respect of the Securities of any series, the Coupons appertaining
thereto or this Indenture may be served.
The Issuer will give to the Trustee written notice of
the location of each such office or agency and of any change of
location thereof. In case the Issuer shall fail to maintain any
agency required by this Section to be located in the City of
Charlotte, North Carolina and/or Borough of Manhattan, City of New
York, or shall fail to give such notice of the location or of any
change in the location of any of the above agencies, presentations and
demands may be made and notices may be served at the Corporate Trust
Office of the Trustee and the Issuer hereby appoints the Trustee at
its Corporate Trust Office to receive all such presentations, demands
and notices.
3
<PAGE> 4
The Issuer may from time to time designate one or
more additional offices or agencies where the Securities of a series
and any Coupons appertaining thereto may be presented for payment,
where the Securities of that series may be presented for exchange as
provided in this Indenture and pursuant to Section 2.3 and where the
Registered Securities of that series may be presented for registration
of transfer as in this Indenture provided, and the Issuer may from
time to time rescind any such designation, as the Issuer may deem
desirable or expedient; provided, however, that no such designation or
rescission shall in any manner relieve the Issuer of its obligation to
maintain the agencies provided for in this Section. The Issuer will
give to the Trustee prompt written notice of any such designation or
rescission thereof.
C. Section 6.9 of the Original Indenture reads in its
entirety as follows:
SECTION 6.9 Persons Eligible for Appointment as
Trustee. The Trustee for each series of Securities hereunder shall at
all times be a corporation organized and doing business under the laws
of the United States of America or of any State or the District of
Columbia having a combined capital and surplus of at least $5,000,000,
and which is authorized under such laws to exercise corporate trust
powers and is subject to supervision or examination by Federal, State
or District of Columbia authority. Such corporation shall have its
principal place of business in the City of Charlotte, North Carolina
or the Borough of Manhattan, The City of New York if there be such a
corporation in such location willing to act upon reasonable and
customary terms and conditions. If such corporation publishes reports
of condition at least annually, pursuant to law or to the requirements
of the aforesaid supervising or examining authority, then for the
purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section, the Trustee shall resign
immediately in the manner and with the effect specified in Section
6.10.
4
<PAGE> 5
The provisions of this Section 6.9 are in furtherance
of and subject to Section 310(a) of the Trust Indenture Act of 1939.
D. Section 8.1 of the Original Indenture provides, among
other things, that the Company and the Trustee may from time to time and at any
time, without the consent of the holders of any of the Debentures at the time
outstanding, enter into indentures supplemental to the Original Indenture to
make any other provisions as the Company may deem necessary or desirable if
such actions shall not adversely affect the interests of the Holders of the
Securities or Coupons. Section 8.4 of the Original Indenture provides that the
Trustee may rely upon an Officer's Certificate and an Opinion of Counsel as
conclusive evidence that any such supplemental indenture complies with the
provisions of the Original Indenture.
E. The Company desires to enter into this First
Supplemental Indenture to expand the number of corporations potentially
eligible to be Trustee by amending Sections 1.1, 3.2 and 6.9 of the Original
Indenture as hereinafter provided.
F. By its execution and delivery of this First
Supplemental Indenture, the Trustee acknowledges its receipt of and reliance
upon the Officer's Certificate and Opinion of Counsel attached hereto, which
Officer's Certificate and Opinion of Counsel are acceptable to the Trustee, to
the effect that this First Supplemental Indenture complies with the provisions
of the Original Indenture.
NOW, THEREFORE, in consideration of the premises, the Company
and the Trustee agree as follows:
1. Amendment of Section 1.1 of Original Indenture. The
definition of "Corporate Trust Office" in Section 1.1 of the Original Indenture
is hereby amended to read in its entirety as follows:
"Corporate Trust Office" means the office of the
Trustee at which the corporate trust business of the Trustee shall, at
any particular time, be principally administered.
5
<PAGE> 6
2. Amendment of Section 3.2 of Original Indenture. Section 3.2
of the Original Indenture is hereby amended to read in its entirety as follows:
SECTION 3.2 Offices for Payments, etc. So long
as any Registered Securities are authorized for issuance pursuant to
this Indenture or are outstanding hereunder, the Issuer will maintain
in a city located inside the United States, an office or agency where
the Registered Securities of each series may be presented for payment,
where the Securities of each series may be presented for exchange as
is provided in this Indenture and, if applicable, pursuant to Section
2.3 and where the Registered Securities of each series may be
presented for registration of transfer as in this Indenture provided.
If any Unregistered Securities are to be issued
hereunder, the Issuer will maintain one or more offices or agencies in
a city or cities located outside the United States (including any city
in which such an agency is required to be maintained under the rules
of any stock exchange on which the Securities of such series are
listed) where the Unregistered Securities, if any, of each series and
Coupons, if any, appertaining thereto may be presented for payment.
No payment on any Unregistered Security or Coupon will be made upon
presentation of such Unregistered Security or coupon at an agency of
the Issuer within the United States nor will any payment be made by
transfer to an account in, or by mail to an address in, the United
States unless pursuant to applicable United States laws and
regulations then in effect such payment can be made without adverse
tax consequences to the Issuer. Notwithstanding the foregoing,
payments in Dollars of Unregistered Securities of any series and
Coupons appertaining thereto which are payable in Dollars may be made
at an agency of the Issuer maintained in a city located inside the
United States, if such payment in Dollars at each agency maintained by
the Issuer outside the United States for payment on such Unregistered
Securities is illegal or effectively precluded by exchange controls or
other similar restrictions.
The Issuer will maintain in a city located inside the
United States, an office or agency where notices and demands to or
upon the Issuer in respect of the Securities of
6
<PAGE> 7
any series, the Coupons appertaining thereto or this Indenture may be
served.
The Issuer will give to the Trustee written notice of
the location of each such office or agency and of any change of
location thereof. In case the Issuer shall fail to maintain any
agency required by this Section, or shall fail to give such notice of
the location or of any change in the location of any of the above
agencies, presentations and demands may be made and notices may be
served at the Corporate Trust Office of the Trustee and the Issuer
hereby appoints the Trustee at its Corporate Trust Office to receive
all such presentations, demands and notices.
The Issuer may from time to time designate one or
more additional offices or agencies where the Securities of a series
and any Coupons appertaining thereto may be presented for payment,
where the Securities of that series may be presented for exchange as
provided in this Indenture and pursuant to Section 2.3 and where the
Registered Securities of that series may be presented for registration
of transfer as in this Indenture provided, and the Issuer may from
time to time rescind any such designation, as the Issuer may deem
desirable or expedient; provided, however, that no such designation or
rescission shall in any manner relieve the Issuer of its obligation to
maintain the agencies provided for in this Section. The Issuer will
give to the Trustee prompt written notice of any such designation or
rescission thereof.
3. Amendment of Section 6.9 of Original Indenture. Section 6.9
of the Original Indenture is hereby amended to read in its entirety as follows:
SECTION 6.9 Persons Eligible for Appointment as
Trustee. The Trustee for each series of Securities hereunder shall at
all times be a corporation organized and doing business under the laws
of the United States of America or of any State or the District of
Columbia having a combined capital and surplus of at least $5,000,000,
and which is authorized under such laws to exercise corporate trust
powers and is subject to supervision or examination by Federal, State
or District of Columbia authority. If such corporation publishes
reports of condition at least annually, pursuant to
7
<PAGE> 8
law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section, the combined capital
and surplus of such corporation shall be deemed to be its combined
capital and surplus as set forth in its most recent report of
condition so published. In case at any time the Trustee shall cease
to be eligible in accordance with the provisions of this Section, the
Trustee shall resign immediately in the manner and with the effect
specified in Section 6.10.
The provisions of this Section 6.9 are in furtherance
of and subject to Section 310(a) of the Trust Indenture Act of 1939.
4. Indenture to Remain in Effect. Except as amended by this
First Supplemental Indenture, the Original Indenture shall remain in full force
and effect in accordance with its terms.
IN WITNESS WHEREOF, the Company and the Trustee have executed
and delivered this First Supplemental Indenture as of the date first above
written.
HECHINGER COMPANY
Attest:
/S/ Mark R. Adams By: /S/ W. Clark McClelland
- ----------------------------- -----------------------------------
Name: Mark R. Adams Name: W. Clark McClelland
------------------------ ------------------------------
Title: Senior Vice President, Title: Executive Vice President and
----------------------- -----------------------------
Treasurer and Secretary Chief Financial Officer
----------------------- ----------------------------
(Seal)
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, Trustee
Attest:
/S/ Marion Stratakos By: /S/ Shannon Stahel
- ------------------------- ------------------------------
Name: Marion Stratakos Name: Shannon Stahel
-------------------- -------------------------
Title: Vice President Title: Trust Officer
------------------- ------------------------
(Seal)
8
<PAGE> 9
Acknowledgements
STATE OF Maryland )
----------------- ) SS:
COUNTY OF Prince Georges )
----------------
On this 30th day of January, 1997, before me, the undersigned
Notary Public, personally appeared W. Clark McClelland, who acknowledged
himself to be the Executive Vice President and Chief Financial Officer of
Hechinger Company, a Delaware corporation and that he as such officer, being
authorized to do so, executed the foregoing First Supplemental Trust Indenture
for the purposes therein contained by signing the name of said corporation by
himself as such officer.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/S/ Lauri A. Rice
------------------------------------
Notary Public
(SEAL) My commission expires: 9-4-98
--------------
STATE OF North Carolina )
---------------- ) SS:
COUNTY OF Mecklenburg )
---------------
On this 30th day of January, 1997, before me, the undersigned
Notary Public, personally appeared Shannon Stahel who acknowledged herself to
be a Trust Officer of First Union National Bank of North Carolina and that she
as such officer, being authorized to do so, executed the foregoing First
Supplemental Trust Indenture for the purposes therein contained by signing the
name of said bank by herself as such officer.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/S/ Lisa L. Starnes
------------------------------------
Notary Public
My Commission expires: 7-3-2001
--------------
(SEAL)
9
<PAGE> 1
EXHIBIT 10(g)
SEVERANCE AGREEMENT
AGREEMENT, made this ___ day of _______, 1997 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 Severance Agreement between the Executive and the Company
dated April, 1996 and 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 (together, the "Severance Arrangements");
WHEREAS the Executive is aware of the existence of the
Severance Arrangements and the value of the benefits provided for in the
Severance Arrangements;
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 Arrangements; 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 Arrangements;
<PAGE> 2
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. Subject to the provisions of Paragraph
3 hereof, 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.
(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 (the "Code") (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
2
<PAGE> 3
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
11 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 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.
3
<PAGE> 4
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
Arrangements, 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 addition to his full base salary through the Date of Termination
at the rate in effect at the time the Notice
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<PAGE> 5
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 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 [twelve][six] months (such
additional [twelve][six]-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 substantially simi-
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<PAGE> 6
lar 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, 401(k) Plan and
Stock Incentive Plans will be governed by the terms of those Plans.
(iv) The Executive shall 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. Compensation Upon Termination Following a Change in
Control. In the event of the termination of the Executive's employment by the
Company within two years following a Change in Control (as defined herein),
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<PAGE> 7
in lieu of any other severance benefit otherwise payable to the Executive under
the terms of the Severance Arrangements and in lieu of any payments pursuant to
Paragraph 2 hereof, the Executive shall be entitled to the benefits set forth
below unless such termination is (i) due to his death, retirement or
Disability, (ii) by the Company for Cause, or (iii) by the Executive without
Good Reason (as defined herein).
(a) The Company shall pay to the Executive a lump sum payment
within fifteen days of the Date of Termination equal to [3.0][1.5] multiplied
by the sum of (i) the Executive's annual full base salary at the rate in effect
at the time Notice of Termination is given or properly should have been given,
and (ii) 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.
(b) For a period of [thirty six][eighteen] months from the
Date of Termination (the "Coverage 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 substantially similar programs), so long as the
Executive continues to pay any employee premiums due under such programs (which
premiums shall not be at a rate or in an amount greater than the rate or amount
of employee premiums due immediately prior to the Date of Termination). At the
end of the Coverage 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, 401(k) Plan and Stock Incentive Plans will be
governed by the terms of those Plans.
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<PAGE> 8
(c) The Executive shall be entitled to a merchandise discount
through the Coverage Period in accordance with Company policy for employee
merchandise discounts as may be in effect from time to time during that
Coverage Period. The Executive also shall receive, through the Coverage
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 Coverage Period those
outplacement services that the Company is then providing to terminated
employees generally.
(d) 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.
(e) In the event that all or any portion of the payments and
benefits pursuant to the Agreement become subject to the Excise Tax (as defined
below) (such payments and benefits that are subject to the Excise Tax are for
purposes of this Paragraph 3(e) referred to as the "Parachute Severance
Payments"), the Company shall pay to the Executive an additional amount (the
"Gross-Up Payment") such that the net benefit provided to the Executive with
respect to the Parachute Severance Payments, after deduction of the Excise Tax
imposed with respect to the Parachute Severance Payments (but not any federal,
state or local income taxes) and any Excise Tax
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<PAGE> 9
(but not any federal, state, or local income taxes) imposed on the payment
provided for by this Paragraph 3(e), shall be equal to the Parachute Severance
Payments.
For purposes of determining whether any part of the benefits
provided under the Agreement will be subject to the Excise Tax and the amount
of such Excise Tax, (i) no portion of the Total Benefits (as defined below) the
receipt or enjoyment of which the Executive shall have effectively waived in
writing shall be taken into account, (ii) any other payments or benefits
received or to be received by the Executive in connection with a Change in
Control or the Executive's termination of employment (pursuant to the terms of
any plan, arrangement or agreement with the Company, any Person whose actions
result in a Change in Control or any Person affiliated with the Company or such
Person) shall be treated as "parachute payments" within the meaning of section
28OG(b)(2) of the Code, and all "excess parachute payments" within the meaning
of section 28OG(b)(1) of the Code shall be treated as subject to the Excise
Tax, unless in the opinion of tax counsel reasonably selected by the Company's
independent auditors (which were, immediately prior to the Change in Control,
the Company's independent auditors), such other payments or benefits (in whole
or in part) do not constitute parachute payments, including by reason of
section 28OG(b)(4)(A) of the Code, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services actually rendered,
within the meaning of section 28OG(b)(4)(B) of the Code, in excess of the Base
Amount allocable to such reasonable compensation, or are otherwise not subject
to the Excise Tax, (iii) the amount of benefits under this Agreement that shall
be treated as subject to the Excise Tax (and therefore as Parachute Severance
Payments) shall be equal to the lesser of (A) the portion of the benefits under
the Agreement treated as a parachute payment within the
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<PAGE> 10
meaning of section 28OG(b)(2) of the Code or (B) the amount of excess parachute
payments within the meaning of section 28OG(b)(1) of the Code (after applying
clause (i) above), and (iv) the value of any noncash benefits or any deferred
payment or benefit shall be determined by the Company's independent auditors in
accordance with the principles of sections 28OG(d)(3) and (4) of the Code.
In the event that the Excise Tax is subsequently determined to
be less than the amount taken into account hereunder at the time of termination
of the Executive's employment, the Executive shall repay to the Company, at the
time that the amount of such reduction in Excise Tax is finally determined, the
portion (if any) of the Gross-Up Payment attributable to such reduction
(determined in accordance with the foregoing provisions of this Paragraph 3(e))
plus interest on the amount of such repayment at the rate provided in section
1274(b)(2)(B) of the Code.
In the event that the Excise Tax attributable to the benefits
under the Agreement is determined to exceed the amount taken into account
hereunder at the time of the termination of the Executive's employment
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall make an
additional Gross-Up Payment in respect of such excess (plus any interest,
penalties or additions, but not any federal, state, or local income taxes,
payable by the Executive with respect to such excess) at the time that the
amount of such excess is finally determined. The Company shall provide the
Executive with its calculation of the amounts referred to in this Paragraph
3(e), and such supporting materials as are reasonably necessary for the
Executive to evaluate the Company's calculations. The Executive
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<PAGE> 11
and the Company shall each reasonably cooperate with the other in connection
with any administrative or judicial proceedings concerning the existence or
amount of liability for Excise Tax with respect to the payments and benefits
pursuant to the Agreement.
Notwithstanding the foregoing provisions of this Paragraph
3(e), in the event that any payment or benefit received or to be received by
the Executive in connection with a Change in Control or the termination of the
Executive's employment (whether pursuant to the terms of the Agreement or any
other plan, arrangement or agreement with the Company, any Person whose actions
result in a Change in Control or any Person affiliated with the Company or such
Person) (all such payments and benefits, including payments and benefits
pursuant to the Agreement, being hereinafter called "Total Benefits") would be
subject (in whole or part), to the Excise Tax, then the amount of benefits
payable pursuant to the Agreement and the corresponding Gross-Up Payment shall
be reduced to the extent necessary so that no portion of such benefits is
subject to the Excise Tax if (A) the net amount of the Total Benefits, as so
reduced, (and after deduction of the net amount of federal, state and local
income tax on such reduced Total Benefits) is greater than (B) the excess of
(i) the net amount of such Total Benefits, without reduction (but after
deduction of federal, state and local income tax on such Total Benefits), over
(ii) the amount of Excise Tax to which the Executive would be subject in
respect of such Total Benefits.
(f) For purposes of this Paragraph 3, the following terms
shall have the meanings set forth below:
(i) "Base Amount" shall have the meaning prescribed
by Section 280G(b)(3) of the Code.
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<PAGE> 12
(ii) "Beneficial Owner" shall have the meaning
prescribed by Rule 13d-3 under the Exchange Act.
(iii) "Change in Control" shall mean a change in
control of the Company, which shall be deemed to have occurred only if (A) any
Person (as hereinafter defined) is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing twenty percent (20%) or
more of the combined voting power of the Company's then outstanding securities
at a time at which the members of the H Group (as hereinafter defined) are
collectively the Beneficial Owners of Company securities representing a
percentage of the combined voting power of the Company's then outstanding
securities which is less than the percentage of such voting power owned by such
Person or (B) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board and any new director (other than
a director designated by a Person who has entered into an agreement with the
Company to effect a transaction described in clause (A) of this paragraph)
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof. The term
"Person," as used in this Paragraph 3, shall not include (i) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company,
(ii) the H Group or (iii) a corporation owned, directly or indirectly, by the
stockholders of the Company in Substantially the same proportions as their
ownership of stock of the Company.
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<PAGE> 13
(iv) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(v) "Excise Tax" means any excise tax imposed under
Section 4999 of the Code.
(vi) "Good Reason" for termination by the Executive
of the Executive's employment with the Company shall mean the occurrence
(without the Executive's express written consent) of any one of the following
acts by the Company, or failures by the Company to act, unless, in the case of
any act or failure to act described in paragraphs (A), (B), (C), (D) or (E)
below, such act or failure to act is corrected within ten (10) days after the
Executive has notified the Board of the occurrence of any such act or failure
to act:
(A) the assignment to the Executive of any duties
substantially inconsistent with the Executive's status in the position
and title the Executive held immediately prior to the Change in
Control or a substantial adverse alteration in the nature or status of
the Executive's responsibilities from those in effect immediately
prior to the Change in Control;
(B) a reduction by the Company in the Executive's
annual base salary or a material reduction in the amount of bonus that
the Executive has the opportunity to earn, as in effect on the date
hereof or as the same may be increased from time to time;
(C) the failure of the Company to obtain a
satisfactory agreement from any successor to assume and agree to
perform this Agreement;
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<PAGE> 14
(D) any adverse change in the moral or ethical
standards under which the business is conducted; or
(E) the relocation without the Executive's
consent of the Executive or the Company's executive offices to a
location that is more than 15 miles from the location as of the date
hereof.
The Executive's right to terminate his employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
(vii) "Gross-Up Payment" shall have the meaning set
forth in Paragraph 3(e) hereof.
(viii) "H Group" shall mean John W. Hechinger, Sr.
Richard England, their respective heirs and members of their respective
families, and Persons controlled by John W. Hechinger, Sr., Richard England,
their respective heirs and members of their respective families.
(ix) "Person" shall have the same meaning as it does
in Section 13(d) and 14(d) of the Exchange Act.
(x) "Total Payments" shall mean those payments so
described in Paragraph 3(e) hereof.
4. Withholding. Any payments provided for under this
Agreement shall be paid net of any applicable withholding required under
federal, state or local law
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<PAGE> 15
and any additional withholding to which the Executive has agreed.
5. 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 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).
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<PAGE> 16
6. Specific Performance. The Executive acknowledges
that a violation on his part of any of the covenants contained in Paragraph 5
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.
7. 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.
8. 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 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.
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<PAGE> 17
9. Term. This Agreement shall commence on the date
hereof and shall continue in effect through December 31, 1999; provided,
however, that commencing on January 1, 1998 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.
10. 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.
11. 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:
-----------------------
-----------------------
-----------------------
17
<PAGE> 18
If to the Company:
Hechinger Company
1801 McCormick Drive
Largo, Maryland 20774
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.
12. 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 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.
13. 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.
14. Counterparts. The Agreement may be executed in one or
more counterparts, each of which shall be
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<PAGE> 19
deemed to be an original but all of which together shall constitute one and the
same instrument.
15. 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 (including, without limitation, the Severance Agreement
between the Executive and the Company dated April, 1996), promises, covenants,
arrangements, communications, representations or warranties, 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 Arrangements.
IN WITNESS WHEREOF, the parties hereto have executed the
Agreement as of the day and year first above written.
----------------------------
HECHINGER COMPANY
By:
-----------------------
19
<PAGE> 20
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
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<PAGE> 21
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, administrators, 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
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<PAGE> 22
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.
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.
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<PAGE> 23
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
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23
<PAGE> 1
EXHIBIT 10(h)
HECHINGER COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
<PAGE> 2
HECHINGER COMPANY
SUPPLEMENT EXECUTIVE RETIREMENT AGREEMENT
THIS AGREEMENT is made and entered into at Landover, Maryland, this
24th day of October, 1995, by and between HECHINGER COMPANY (the "Company") and
______________________ (the "Executive").
WHEREAS, the Executive is presently employed by the Company or its
subsidiaries as a key management employee; and
WHEREAS, in consideration of the valuable services rendered by the
Executive and to induce the Executive to continue to render such services to
the Company, the Executive has been selected by the Company for a supplemental
retirement benefit and a preretirement death benefit on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the foregoing, and the mutual
provisions contained herein, the parties do hereby agree as follows:
I. Effective Date; Purpose; Termination
of Prior Agreements
1.1 Effective Date. The Company and the Executive agree that this
Agreement shall become effective as of the date first above written.
1.2 Purpose. This Agreement, together with other designated
supplemental executive retirement agreements between other executives and the
Company and its Affiliated Companies (as defined in Article II hereof), is
intended to constitute a single non qualified, unfunded deferred compensation
plan for a "select group of management or highly compensated employees", within
the meaning of section 201(2) of ERISA (as defined in Article II hereof). This
plan shall be known as the Hechinger Supplemental Executive Retirement Plan
(the "Plan") and shall be effective as of August 16, 1995. The Plan is
designed and intended to be exempt from the participation, vesting, funding,
and fiduciary requirements of Title I of ERISA.
1.3 Termination of Prior Agreements. In consideration of the
benefits described herein, the Executive irrevocably and
<PAGE> 3
unconditionally agrees to relinquish all rights to any and all retirement
benefits, death benefits, and all other rights and entitlements the Executive
may have had under the terms of the Hechinger Supplemental Executive Retirement
Program and all predecessor programs thereto and agreements thereunder
(hereinafter collectively referred to as the "Hechinger Supplemental Executive
Retirement Program"). The Executive hereby irrevocably and unconditionally
releases the Company, the Affiliated Companies, their owners, stockholders,
officers, directors, employees, representatives, and agents, and their
respective successors, and assigns, from any and all manner of actions, causes
of action, and claims that the Executive ever had, now has, or hereafter may
have, or that the Executive's heirs, next of kin, distributees, executors, or
administrators ever had, now have, or hereafter may have, by reason of any
matter, state of facts, or occurrence with regard to the Hechinger Supplemental
Executive Retirement Program.
II. Definitions
Whenever used in this Agreement, the following terms shall have the
meanings set forth below, unless otherwise expressly provided. When the
defined meaning is intended, the term is capitalized. The definition of any
term in the singular shall also include the plural.
2.1 "Affiliated Companies" shall mean any corporations, associations,
joint ventures, proprietorships, or partnerships while they are connected with
the Company through either stock ownership or common control, or while they are
members of an affiliated service group, within the meaning of Code section
414(b), (c), (m) or (o).
2.2 "Board" shall mean the Board of Directors of the Company.
2.3 "Cause" shall mean, with respect to termination by the Company of
the Executive's employment, (a) 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 any such failure resulting from the
Executive's incapacity due to physical or mental illness, or any such actual or
anticipated failure after the Executive gives notice of termination of
employment for Good Reason) after a written demand for substantial performance
is delivered to the
<PAGE> 4
Executive by the Board, which demand specifically identifies the manner in
which the Board believes that the Executive has no substantially performed the
Executive's duties, or (b) 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 clauses (a)
and (b) of this definition, 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.
2.4 "Code" shall mean the Internal Revenue Code of 1986 as amended
from time to time. A reference to a particular Code section shall also be
deemed to refer to the regulations and regulatory guidance under that section.
2.5 "Committee" shall mean the Compensation Committee of the Board,
or such other committee the Board shall designate.
2.6 "Company" shall mean the Hechinger Company.
2.7 "Compensation" shall mean the Executive's total wages and other
compensation reported on the Executive's W-2 income tax statement as adjusted
below. Compensation shall not include: reimbursements or other expense
allowances (including automobile allowances), cash and non-cash fringe benefits
(including income attributable to restricted stock, performance shares or from
the exercise of stock options), moving expenses (including any tax
reimbursement attributable to such moving expense), deferred compensation
(including distributions under the Hechinger Supplemental Executive Retirement
Program), welfare benefits (including severance pay and the cost of group term
life insurance) or other extraordinary items. Compensation shall also include
elective contributions that are made by the Company on behalf of its employees
that are not includible in gross income under pre-tax medical, flexible
spending or the Hechinger/HQ 401K Plans.
2.8 "Disability" shall mean permanent and total disability within the
meaning of Section 22(e) of the Code.
2.9 "Early Retirement" shall mean Termination of Service on or after
age 55 and before age 65, with the written consent of the Committee.
<PAGE> 5
2.10 "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time. A reference to a particular section of
ERISA shall also be deemed to refer to the regulations and regulatory guidance
under that section.
2.11 "Good Reason" shall mean, with respect to termination by the
Executive of the Executive's employment with the Company, the occurrence
(without the Executive's express written consent) of any one of the following
acts by the Company, or failures by the company to act, unless, in the case of
any act or failure to act described in paragraphs (a), (b), (c) or (d) below,
such act or failure to act is corrected within ten (10) days after the
Executive has notified the Board of the occurrence of any such act or failure
to act:
(a) the assignment to the Executive of any duties substantially
inconsistent with the Executive's status in the position and title the
Executive held immediately prior to such assignment or a substantial
adverse alteration in the nature or status of the Executive's
responsibilities from those in effect immediately prior to such
alteration;
(b) a reduction by the Company in the Executive's annual base salary
or a material reduction in the amount of annual bonus that the
Executive has the opportunity to earn, as in effect on the date hereof
or as the same may be increased from time to time;
(c) the failure of the Company to obtain a satisfactory agreement from
any successor the assume and agree to perform this Agreement; or
(d) any adverse change in the moral or ethical standards under which
the business is conducted.
2.12 "The Hechinger Pension Plan" shall mean The Hechinger Pension
Plan, or any successor thereto, qualified under Code section 401(a).
2.13 "The Hechinger Profit Sharing Plan" shall mean The Hechinger
Profit Sharing Plan, or any successor thereto, qualified under Code section
401(a).
<PAGE> 6
2.14 "The Hechinger/HQ 401 (k) Plan" shall mean The Hechinger/HQ
401(k) Plan, or any successor thereto, qualified under Code section 401(a).
2.15 "Plan" shall mean the Hechinger Supplemental Executive
Retirement Plan.
2.16 "Plan Year" shall mean the calendar year.
2.17 "Primary Social Security Benefit" shall mean the annual primary
insurance amount to which the Executive is entitled, commencing at the later of
(a) age 65 or (b) the Executive's Termination of Service under Title II of the
Social Security Act in effect on the date of the Executive's Termination of
Service. The amount of the Executive's primary insurance amount shall be
estimated. In determining this estimated amount, it shall be assumed that the
Executive will make proper application for the benefit and will fulfill all
other conditions of the entitlement. If the Executive incurs a Termination of
Service before age 65, it shall be assumed that the Executive has no annual
earnings for the period from the Termination of Service to the attainment of
age 65. In estimating the Executive's Social Security Administration wage
history, it shall be assumed that the Executive's earnings were always equal
to, or in excess of , the maximum amount of earnings taken into account for
Social Security benefits.
2.18 "Retirement" shall mean the Executive's termination of
employment on or after attaining age 65.
2.19 "Supplemental Retirement Benefit" shall mean the benefit payable
in accordance with section 3.2 or 3.3 of the Plan.
2.20 "Termination of Service" shall mean the last day on which the
Executive performs duties, or for which the Executive is compensated, as an
employee of the Company or the Affiliated Companies.
III. Retirement Benefits
3.1 Retirement Benefit. If the Executive incurs a Termination of
Service (a) by the Company by reason other than for Cause, or (b) by the
Executive for Good Reason or by reason of Retirement, Early Retirement or
Disability, then the Executive
<PAGE> 7
shall be entitled to a Supplemental Retirement Benefit, which is a vested
accrued benefit payable pursuant to the terms of this Agreement. The total
retirement benefit, payable at age 65, shall equal the sum of the amounts
determined under sections 3.2 and 3.4 and, in the case of payment commencing
prior to age 65, shall be adjusted as prescribed in section 3.3.
3.2 Amount of Full Supplemental Retirement Benefit. Following
Termination of Service as described in section 3.1, the annual Supplemental
Retirement Benefit payable to an Executive at or subsequent to age 65 shall
equal (a) less the sum of (b), (c), (d) and (e), where--
(a) is 65 percent of the Executive's average annual Compensation for
the highest five calendar years out of the last ten full calendar
years ending on or preceding the Executive's Termination of Service,
multiplied by a fraction, the numerator of which is the number of
months of the Executive's employment with the Company and the
Affiliated Companies not in excess of 360 and the denominator of which
is 360;
(b) is the annual benefit payable (taking into account any applicable
adjustments or limitations required by the Code, ERISA or any other
provision of applicable law) to the Executive at age 65 or Termination
of Service, if later, on a single life annuity basis under The
Hechinger Pension Plan;
(c) is the Executive's Primary Social Security Benefit;
(d) is the annual benefit payable to the Executive (taking into
account any applicable adjustments or limitations required by the
Code, ERISA or any other provision of applicable law), at age 65 or
Termination of Service, if later, on a single life annuity basis from
the amount credited to the Executive's account, at the Executive's
Termination of Service, in The Hechinger Profit Sharing Plan. In
determining this annual amount, The Hechinger Profit Sharing Plan
balance shall be converted to an annuity-certain for a period equal to
the Executive's life expectancy, using the 1971 TPF&C Forecast
Mortality Table (set back two years) and an 8 percent interest rate;
and
<PAGE> 8
(e) is the annual benefit payable to the Executive (taking into
account any applicable adjustments or limitations required by the
Code, ERISA or any other provision of applicable law), at age 65 or
Termination of Service, if later, on a single life annuity basis from
the amount credited to the Executive's account, at the Executive's
Termination of Service, in The Hechinger/HQ 401(k) Plan that is
attributable to Company matching contributions, plus accumulated
interest and earnings thereon. In determining this annual amount,
this balance shall be converted to an annuity-certain for a period
equal to the Executive's life expectancy, using the 1971 TPF&C
Forecast Mortality Table (set back two years) and an 8 percent
interest rate; and
For purposes of determining the Executive's employment with the Company and the
Affiliated Companies under subsection (a), all service with the Company and the
Affiliated Companies shall be taken into account. For purposes of determining
the amounts described under subsections (b), (d) and (e) above, all
distributions and payments made, whether due to a termination of the referenced
plan or otherwise, shall be included in the calculation of annuities referenced
therein.
3.3 Amount of Early Supplemental Retirement Benefit. The
Executive may elect to receive a benefit payment, following Termination of
Service as described in section 3.1, on or after age 55 and before age 65, with
the written approval of the Committee. Upon such early election, the Executive
shall be entitled to receive a Supplemental Retirement Benefit computed under
section 3.2, except that--
(a) the amounts calculated under subsections (a), (b), and (c) of
section 3.2 shall be actuarial reduced using the actuarial assumptions
provided in The Hechinger Pension Plan to reflect commencement of
benefits before age 65, and
(b) the amounts under subsections (d) and (e) of section 3.2 shall be
determined with the assumption that the annuity would be an
annuity-certain for a period equal to the Executive's life expectancy
at the date benefits under this section commence.
Following Termination of Service as described in section 3.1, the Executive may
elect benefits to commence as of the first day of the month following
attainment of age 55, or the first day of any
<PAGE> 9
month thereafter, but in no event shall benefits commence later than the first
day of the month following the Executive's attainment of age 65.
3.4 Cost of Living Adjustment. The amount of the benefits
described in section 3.2 or 3.3 payable to the Executive on and after age 65
shall be increased to reflect increases in the Consumer Price Index, or any
successor thereto pursuant to this section 3.4. No adjustment shall be made in
a year in which there is a decrease in the Consumer Price Index from the
preceding year. If there is an increase in the Consumer Price Index, the
increase in the benefits payable to the Executive shall be made commencing with
the first calendar year beginning after payment of 12 monthly Supplemental
Retirement Benefit payments have been made. The amount of this increase in
each such calendar year shall equal (a) multiplied by (b), where--
(a) is the lesser of:
(i) 50 percent of the difference between the Consumer Price
Index in the calendar year and the prior calendar year, or
(ii) 2-1/2 percent;
and
(b) is the sum of the following amounts:
(i) the Executive's Supplemental Retirement Benefit under section
3.2 or 3.3,
(ii) the amount computed under subsection (b) of section 3.2 (as
adjusted pursuant to section 3.3, if applicable),
(iii) the amount computed under subsection (d) of section 3.2 (as
adjusted pursuant to section 3.3, if applicable),
(iv) the amount computed under subsection (e) of section 3.2 ( as
adjusted pursuant to section 3.3, if applicable), and
<PAGE> 10
(v) the increase under this section 3.4 for preceding years, if
any.
If no Supplemental Retirement Benefit is payable to the Executive, for any
reason, there shall be no cost of living adjustment under this section.
3.5 Payment of Benefit. Following Termination of Service as
described in section 3.1, the annual retirement benefit shall be paid to the
Executive in equal monthly amounts commencing on the first day of the month
following the Executive's election to receive benefit payments under section
3.2 or 3.3, as the case may be, and ending with the later of the month in which
the Executive dies or the one hundred twentieth monthly payment.
3.6 Termination of Service Other Than Early Retirement, Retirement or
as Otherwise Described in Section 3.1. If the Executive incurs a Termination of
Service by reason of death, no benefits shall be payable to or on account of
the Executive under this Article III. If the Executive incurs a Termination of
Service other than (a) by reason of death or (b) by an reason enumerated in
section 3.1, no benefits shall be payable to or on behalf of the Executive
under this Agreement.
IV. Pre-Retirement Death Benefits
4.1 Pre-Retirement Death Benefit. If the Executive dies while
employed by the Company or any of the Affiliated Companies, the Executive's
name beneficiary shall be entitled to an annual amount equal to 50 percent of
the Executive's Compensation for the calendar year prior to the year of the
Executive's death. If there is no surviving named beneficiary, benefits
hereunder shall be paid to the Executive's estate. This annual amount shall be
payable in equal monthly installments commencing on the first day of the month
after the Executive's death and ending with the later of the month following
the month in which the Executive would have reached age 65 or the one hundred
twentieth monthly payment.
Article V. Financing
5.1 Financing. The benefits under this Agreement and the Plan shall
be paid out of the general assets of the Company. The benefits shall not be
funded in advance of payment in any way.
<PAGE> 11
5.2 No Trust Created. Nothing contained n this Agreement or the
Plan, and no action taken thereunder, shall create a trust of any kind or a
fiduciary relationship between the Company or the Affiliated Companies and the
Executive.
5.3 Unsecured Interest. The Executive shall have no interest
whatsoever in any specific asset of the Company or an of the Affiliated
Companies. To the extent that any person acquires a right to receive payments
under this Agreement or the Plan, such right shall be no greater than the right
of any unsecured general creditor of the Company.
VI. Administration
6.1 Administration. This Agreement and the Plan shall be
administered by the Committee. A majority of the members of the Committee at
the time in office shall constitute a quorum for the transaction of business.
All resolutions and other actions taken by the Committee at any meeting shall
be by a majority vote of those present at the meeting. Upon the unanimous
concurrence in writing of all Committee members, action of the Committee may be
taken other than at a meeting.
The Committee shall have all powers necessary or appropriate to carry
out the provisions of this Agreement and the Plan. It may, from time to time,
establish rules for the administration of this Agreement and the Plan.
The Committee shall have the exclusive right to make any finding of
fact necessary or appropriate for any purpose under this Agreement and the Plan
including, but not limited to, the determination of eligibility for and the
amount of any benefit.
The Committee shall have the exclusive right to interpret the terms
and provisions of this Agreement and the Plan and to determine any and all
questions arising under this Agreement and the Plan or in connection with their
administration, including, without limitation, the right to remedy or resolve
possible ambiguities, inconsistencies, or omissions by general rule or
particular decision, all in its sole and absolute discretion.
The Committee shall have the right to delegate any of its powers and
duties hereunder.
<PAGE> 12
To the fullest extent permitted by law, all findings of fact,
determinations, interpretations, and decisions of the Committee shall be
conclusive and binding upon all persons having or claiming to have any interest
or right under this Agreement or the Plan.
6.2 Appeals from Denial of Claims. If any claim for benefits under
this Agreement and the Plan is wholly or partially denied, the claimant shall
be given notice of the denial. This notice shall be in writing, within a
reasonable period of time after receipt of the claim by the Committee. This
period shall not exceed 90 days after receipt of the claim; however, if special
circumstances require an extension of time, written notice of the extension
shall be furnished to the claimant, and an additional 90 days shall be
considered reasonable.
This notice shall be written in a manner calculated to be understood
by the claimant and shall set forth the following information:
(a) the specific reasons for the denial;
(b) specific reference to the provisions on which the denial is
based;
(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of
why this material or information is necessary;
(d) an explanation that a full and fair review by the Committee
of the decision denying the claim may be requested by the claimant or
an authorized representative by filing with the Committee, within 60
days after the notice has been received, a written request for the
review; and
(e) if this request is so filed, an explanation that the claimant
or an authorized representative may review pertinent documents and
submit issues and comments in writing within the same 60-day period
specified in sub section (d).
The decision of the Committee upon review shall be made promptly, and not later
than 60 days after the Committee's receipt of the request for review, unless
special circumstances require an
<PAGE> 13
extension of time for processing. In this case the claimant shall be so
notified, and a decision shall be rendered as soon as possible, but not later
than 120 days after receipt of the request for review. If the claim is denied,
wholly or in part, the claimant shall be given a copy of the decision promptly.
The decision shall be in writing, shall include specific reasons for the
denial, shall include specific references to the pertinent provisions on which
the denial is based, and shall be written in a manner calculated to be
understood by the claimant.
6.3 Expenses. All expenses incurred in the administration of this
Agreement and the Plan shall be paid by the Company.
6.4 Indemnification. To the extent permitted by law, each employee
of the Company or the Affiliated Companies shall be indemnified by the
Company, and saved harmless against any claims, and the expenses of defending
against such claims, resulting from any action or conduct relating to the
administration of the Plan, except claims arising from gross negligence or
willful misconduct.
VII. Miscellaneous
7.1 No Employment Rights. Nothing herein shall constitute a
contract of continuing employment or in any manner obligate the Company or the
Affiliated Companies to continue the services of the Executive or to obligate
the Executive to continue in the service of the Company or the Affiliated
Companies, and nothing herein shall be construed as fixing or regulating the
compensation paid to the Executive.
7.2 Fiscal Year. The fiscal year of the Plan shall be the Plan Year.
7.3 Severability. If any provision of this Agreement or the Plan is
held illegal or invalid, the illegality or invalidity shall be affect their
remaining parts. This Agreement and the Plan shall be continued and enforced
as if they did not contain the illegal or invalid provision.
7.4 Tax Withholding. The Company may withhold from any payment under
this Agreement any federal, state, or local taxes required by law to be
withheld with respect to the payment and any sum the Company may reasonably
estimate as a necessary to
<PAGE> 14
cover any taxes for which it may be liable and that may be assessed with regard
to the payment.
7.5 Amendment and Termination. Except as expressly limited in this
Agreement, the Company hereby reserves the right to amend, modify, or terminate
this Agreement or the Plan at any time, and for any reason, by action of the
Board. However, no amendment or termination shall adversely affect the vested
accrued benefits to which the Executive would have been entitled had the
Executive incurred a Termination of Service for reasons described in section
3.1, as of the date of the amendment or termination.
7.6 Successors. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators and legatees. If the Executive should die while any amount
would still be payable to the Executive had the Executive continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement, to the Executive's named beneficiary, or if
there is no such surviving named beneficiary, to the Executive's estate.
7.7 Beneficiaries. The Executive may designate one or more persons
or entities as the primary and/or contingent beneficiary of any benefits to be
paid under this Agreement. Such designation must be in the form of a signed
writing acceptable to the Committee. The Executive may make or change such
designation at any time.
7.8 Applicable Law. Except to the extent preempted by applicable
federal law, this Agreement shall be governed and construed in accordance with
the laws of the State of Delaware.
*****
IN WITNESS WHEREOF, parties have executed this Agreement as of the day
and year first above written.
<PAGE> 15
HECHINGER COMPANY
By:
----------------------------
Mark R. Adams
Title: Sr. Vice President,
Treasurer and Secretary
EXECUTIVE
-----------------------------------------
<PAGE> 16
AMENDMENT TO THE
HECHINGER COMPANY
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
THIS AMENDMENT to the Supplemental Executive Retirement Agreement (the
"Agreement"), is made and entered into at Largo, Maryland, this 16th day of
October, 1996, by and between HECHINGER COMPANY (the "Company") and
______________________ (the "Executive").
WHEREAS, the Company has entered into the Agreement with the Executive
as of October 24, 1995, to provide supplemental retirement benefits and
preretirement death benefits on the terms and conditions set forth in the
Agreement;
WHEREAS, pursuant to Section 7.5 of the Agreement, and in
consideration of the valuable services rendered by the Executive and to induce
the Executive to continue to render such services to the Company, the Company
desires to amend the Agreement to enable the Company to distribute to the
Executive certain benefits under the Agreement;
NOW THEREFORE, in consideration of the foregoing, and the mutual
provisions contained herein, the parties do hereby agree as follows:
Effective as of October 16, 1996, Article V of the Agreement is hereby
amended and restated in its entirety to read as follows:
"Article V. Financing; Annuity Purchase; Change of Control
5.1 Financing. The benefits under this Agreement and the Plan may
be paid out of the general assets of the Company, or in the Company's sole
discretion, may be funded in advance of payment at such time, and in such
manner, as the Company, in its discretion, deems appropriate.
5.2 Trust. Nothing contained in this Agreement or the Plan, and
no action taken thereunder, shall require
<PAGE> 17
the creation of a trust of any kind or the establishment of a fiduciary
relationship between the Company or the Affiliated Companies and the Executive.
Notwithstanding the foregoing, the Company, in its discretion, may establish a
trust, including a grantor or "rabbi trust," for the funding of any current or
future liabilities under the Agreement, including the benefits described in
section 5.6.
5.3 Unsecured Interest; Annuity Purchase. Except as provided
below or as otherwise determined by the Company, the Executive shall have no
interest whatsoever in any specific asset of the Company or any of the
Affiliated Companies, and to the extent that any person acquires a right to
receive payments under this Agreement or the Plan, such right shall be no
greater than the right of any unsecured general creditor of the Company.
Notwithstanding any other provision in this Agreement or the Plan to
the contrary, as soon as practicable following October 16, 1996, the Company
shall pay to the Executive, in the form of an employee-owned annuity,
$_________ (the "Initial Funded Benefit"), which represents the estimated
present value of the Executive's Supplemental Retirement Benefit (a) assuming
that the Executive was entitled to receive a Supplemental Retirement Benefit as
of December 31, 1995, and (b) based on the Executive's months of employment
with the Company and the Affiliated Companies (not in excess of 360) as of
December 31, 1995.
In the event that the Executive has not incurred a Termination of
Service as of December 31, 1996, then, as soon as practicable following April
1, 1997, the Company shall pay to the Executive, in the form of an
employee-owned annuity, $_______ (the "1996 Funded Benefit"), which represents
the estimated present value of the increase in the Executive's Supplemental
Retirement Benefit between December 31, 1995 and December 31, 1996 (a) assuming
that the Executive was entitled to receive a Supplemental Retirement Benefit as
of December 31, 1996, and (b) based on the Executive's months of employment
with the Company and the Affiliated Companies (not in excess of 360) as of
<PAGE> 18
December 31, 1996; provided, however, that in the event that the Committee, in
its sole discretion, at its February, 1997 meeting authorizes a reduction in
the amount of the estimated cost of living adjustment (provided pursuant to
section 3.4 hereof) funded (pursuant to this section 5.3), then the 1996 Funded
Benefit paid to the Executive pursuant to this paragraph shall reflect such
lower amount.
In the event that the Executive has not incurred a Termination of
Service as of December 31, 1997, then, as soon as practicable following April
1, 1998, the Company shall pay to the Executive, in the form of an
employee-owned annuity, $________ (the "1997 Funded Benefit"), which represents
the estimated present value of the increase in the Executive's Supplemental
Retirement Benefit between December 31, 1996 and December 31, 1997 (a) assuming
that the Executive was entitled to receive a Supplemental Retirement Benefit as
of December 31, 1997, and (b) based on the Executive's months of employment
with the Company and the Affiliated Companies (not in excess of 360) as of
December 31, 1997; provided, however, that in the event that the Committee, in
its sole discretion, at its February, 1997 meeting authorizes a reduction in
the amount of the estimated cost of living adjustment (provided pursuant to
section 3.4 hereof) funded (pursuant to this section 5.3), then the 1997 Funded
Benefit paid to the Executive pursuant to this paragraph shall reflect such
lower amount.
The total benefit paid to the Executive under this section 5.3 shall
hereinafter be referred to as the "Total Funded Benefit."
5.4 Adjustment of Future Supplemental Retirement Benefits.
Effective as of January 1, 1998, unless otherwise determined by the Company,
the Executive shall be entitled to receive the value of the undistributed
Supplemental Executive Retirement Benefit computed under the Agreement, but
only to the extent that the Executive would be entitled to such benefit upon
Termination of Service pursuant to section 3.1. The value of the Supplemental
Retirement Benefit otherwise due to the Executive under the terms of this
Agreement (taking into account any increased service
<PAGE> 19
credit determined pursuant to section 5.6 below, to the extent applicable)
shall be appropriately reduced (but not below zero) by the annual accrued
benefit equivalent of the value of the Total Funded Benefit as of the date
hereof. In this regard, the Committee, in is discretion, shall determine an
equitable adjustment to the benefits payable to the Executive under the
Agreement to ensure that the aggregate value of distributed benefits do not
exceed the value of benefits the Executive would have been entitled to receive
had no distributions been made prior to such Executive's Termination of
Service.
5.5 Gross-Up Payments. With respect to the Initial Funded
Benefit, the 1996 Funded Benefit and the 1997 Funded Benefit, in each case only
to the extent paid to the Executive, the Company shall also pay to or on behalf
of the Executive (in the form of withholding to the appropriate governmental
taxing authority or authorities) an additional payment or payments (the
"Gross-Up Payments") in the amount or amounts of $_______, $_______ and
$_______, respectively; provided, however, that in the event that the cost of
living adjustment is reduced pursuant to section 5.3 hereof, then the Gross-Up
Payments will be reduced accordingly.
5.6 Change in Control. As soon as possible, but in no event later
than ten days following the occurrence of a Change in Control (as defined
below), the Company shall make an irrevocable contribution to a grantor trust
established for this purpose (the "Rabbi Trust"), in an amount sufficient to
pay the present value of the Supplemental Retirement Benefit (the "Change in
Control Supplemental Retirement Benefit") to which the Executive would be
entitled under the terms of the Agreement, calculated by Hewitt Associates, or
any other nationally recognized actuarial or consulting firm, in accordance
with section 3.2 of the Agreement, and based on a methodology that is
substantially comparable to, and consistent with, such methodology used by
Hewitt Associates for its calculation of the Total Funded Benefit, but adjusted
by adding to the numerator of the fraction described in section 3.2(a) the
lesser of (a) 120, and (b) the number of months between the occurrence of the
Change in Control and the month in which the Executive attains age 65;
provided,
<PAGE> 20
however, that in no event shall the total number of months taken into account
for purposes of the numerator of the fraction set forth in section 3.2(a)
exceed 360. Such Supplemental Retirement Benefit shall be reduced, if
applicable, pursuant to the provisions of section 5.4 hereof. At the same
time, the Company shall also make an irrevocable contribution to the Rabbi
Trust (the "Change in Control Gross-Up Amount") in an amount sufficient to
compensate the Executive, on an after-tax basis, for all federal, state and
local income tax due with respect to the amount contributed on behalf of the
Executive pursuant to the foregoing sentence.
If, within two years following the occurrence of a Change in Control,
the Executive incurs a Termination of Service (a) by the Company by reason
other than for Cause, or (b) by the Executive for Good Reason, then, as soon as
practicable following such Termination of Service, the trustee of the Rabbi
Trust (the "Trustee") shall pay to the Executive, in the form of an
employee-owned annuity with respect to the Change in Control Supplemental
Retirement Benefit, and in cash with respect to the Change in Control Gross-up
Amount, the proceeds in the Rabbi Trust that have been contributed on behalf of
the Executive pursuant to the foregoing paragraph.
If a Change in Control occurs prior to the payment to the Executive of
the Total Funded Benefit, then, in addition to the annuity that may be payable
to the Executive pursuant to the foregoing provisions of this section 5.6, but
in lieu of any further payments pursuant to sections 5.3 and 5.5 hereof, the
Trustee, at such time or times as the unpaid portion or portions of the Total
Funded Benefit would otherwise be paid to the Executive pursuant to section 5.3
hereof, shall pay to the Executive, in the form of an employee-owned annuity or
annuities, such unpaid portion or portions of the Total Funded Benefit, and
shall also pay to or on behalf of the Executive, the Gross-Up Payments with
respect thereto, determined pursuant to section 5.5.
For purposes of this Agreement, "Change in Control" shall mean a
change in control of the Company,
<PAGE> 21
which shall be deemed to have occurred only if (A) any Person (as hereinafter
defined) is or becomes the Beneficial Owner (as hereinafter defined), directly
or indirectly, of securities of the Company representing twenty percent (20%)
or more of the combined voting power of the Company's then outstanding
securities at a time at which the members of the H Group(as hereinafter
defined) are collectively the Beneficial Owners of Company securities
representing a percentage of the combined voting power of the Company's then
outstanding securities which is less than the percentage of such voting power
owed by such Person or (B) during any period of two consecutive years (not
including any period prior to October 16, 1996), individuals who at the
beginning of such period constitute the Board of Directors and any new director
(other than a director designated by a Person who has entered into an agreement
with the Company to effect a transaction described in clause (A) of this
paragraph) whose election by the Board of Directors or nomination for election
by the Company's stockholders was approved by a vote of at least two-thirds
(2/3) of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute a majority thereof.
For purposes of the Agreement: the term "Person," shall have the same meaning
as it does in Section 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), but shall not included (i) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company,
(ii) the H Group (as defined below) or (iii) a corporation owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company; the term "H Group"
shall mean John W. Hechinger, Sr., Richard England, their respective heirs and
members of their respective families, and Persons controlled by John W.
Hechinger, Sr., Richard England, their respective heirs and members of their
respective families; and the term "Beneficial Owner" shall have the meaning
prescribed by Rule 13d-3 under the Exchange Act."
* * * * *
<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
HECHINGER COMPANY
By:
----------------------
Title:
-------------------
EXECUTIVE
---------------------------
<PAGE> 23
AMENDMENT NUMBER TWO
TO THE HECHINGER COMPANY SUPPLEMENTAL EXECUTIVE
RETIREMENT AGREEMENT
THIS AMENDMENT to the Supplemental Executive Retirement Agreement (the
"Agreement"), is made and entered into at Largo, Maryland, this 10th day of
April, 1997, by and between HECHINGER COMPANY (the "Company") and
_________________ (the "Executive").
WHEREAS, the Company has entered into the Agreement with the Executive
as of October 24, 1995, as amended effective as of October 16, 1996, to provide
supplemental retirement benefits and preretirement death benefits on the terms
and conditions set forth in the Agreement;
WHEREAS, pursuant to Section 7.5 of the Agreement, and in
consideration of the valuable services rendered by the Executive and to induce
the Executive to continue to render such services to the Company, the Company
desires to amend the Agreement to provide a gross-up payment for certain excise
taxes that may be imposed on the Executive in the event of a Change in Control
(as defined in the Agreement) and to conform the Agreement to certain actions
taken by the Committee at its February, 1997 meeting relating to cost of living
adjustments;
NOW THEREFORE, in consideration of the foregoing, and the mutual
provisions contained herein, the parties do hereby agree as follows:
Effective as of March 11, 1997, the Agreement is hereby amended as
provided below.
1. Acknowledgement Relating to Sections 5.3 and 5.5 of the
Agreement.
The Compensating Committee, at its February 1997 meeting, authorized a
reduction in the amounts payable with respect to the 1996 Funded Benefit, the
1997 Funded Benefit, the Gross-Up Payment related to the 1996 Funded Benefit
and the Gross-Up Payment related to the 1997 Funded Benefit. These payments,
as so reduced, shall be in the amounts of $______, $______, $______ and
$______.
<PAGE> 24
2. Section 5.4 of the Agreement is hereby amended and restated,
reading in its entirety as follows:
5.4 Adjustment of Future Supplemental Retirement
Benefits. Effective as of January 1, 1998, unless otherwise
determined by the Company, the Executive shall be entitled to receive
the value of the undistributed Supplemental Retirement Benefit
computed under the Agreement, but only to the extent that the
Executive would be entitled to such benefit upon Termination of
Service pursuant to section 3.1; provided, however that such
undistributed Supplemental Retirement Benefit shall not include any
cost of living adjustment relating to service in 1996 and 1997, that
might otherwise have been provided pursuant to section 3.4.
The value of the Supplemental Retirement Benefit otherwise due
to the Executive under the terms of this Agreement (taking into
account any increased service credit determined pursuant to section
5.6 below, to the extent applicable, but excluding any cost of living
adjustment relating to service in 1996 and 1997 that might otherwise
have been provided pursuant to section 3.4) shall be appropriately
reduced (but not below zero) by the annual accrued benefit equivalent
of the value of the Total Funded Benefit as of the date hereof. In
this regard, the Committee, in its discretion, shall determine an
equitable adjustment to the benefits payable to the Executive under
the Agreement to ensure that the aggregate value of distributed
benefits do not exceed the value of benefits the Executive would have
been entitled to receive had no distributions been made prior to such
Executive's Termination of Service.
3. Article V of the Agreement is hereby amended by adding a new
section, Section 5.7, at the end thereof, reading in its entirety as follows:
5.7 280G Gross-Up. In the event that all or any portion
of the benefits (including any Gross-Up Payments) pursuant to this
Agreement become subject to any excise tax imposed under section 4999
of the
2
<PAGE> 25
Code (the "Excise Tax") (such payments or benefits that are subject to
the Excise Tax are for purposes of this Section 5.7 referred to as the
"Parachute SERP"), the Company shall pay to the Executive an
additional amount (the "280G Gross-Up Payment") such that the net
benefit provided to the Executive with respect to the Parachute SERP,
after deduction of the Excise Tax imposed with respect to the
Parachute SERP (but not any federal, state or local income taxes) and
any Excise Tax (but not any federal, state, or local income taxes)
imposed on the payment provided for by this Section, shall be equal to
the Parachute SERP.
For purposes of determining whether any part of the benefits provided
under the Agreement will be subject to the Excise Tax and the amount
of such Excise Tax, (i) no portion of the Total Benefits (as defined
below) the receipt or enjoyment of which the Executive shall have
effectively waived in writing shall be taken into account, (ii) any
other payments or benefits received or to be received by the Executive
in connection with a Change in Control (as defined in Section 5.6) or
the Executive's termination of employment (pursuant to the terms of
any plan, arrangement or agreement with the Company, any Person (as
defined in Section 5.6 above) whose actions result in a Change in
Control or any Person affiliated with the Company or such Person)
shall be treated as "parachute payments" within the meaning of section
280G(b) (2) of the Code, and all "excess parachute payments" within
the meaning of section 280G(b) (1) of the Code shall be treated as
subject to the Excise Tax, unless in the opinion of tax counsel
reasonably selected by the Company's independent auditors (which were,
immediately prior to the Change in Control, the Company's independent
auditors), such other payments or benefits (in whole or in part) do
not constitute parachute payments, including by reason of section
280G(b) (4) (A) of the Code, or such excess parachute payments (in
whole or in part) represent reasonable compensation for services
actually rendered, within the meaning of section 280G (b) (4) (B) of
the Code, in excess
3
<PAGE> 26
of the Base Amount, within the meaning of section 280G (b) (3) of the
Code, allocable to such reasonable compensation, or are otherwise not
subject to the Excise Tax, (iii) the amount of benefits under the
Agreement that shall be treated as subject to the Excise Tax (and
therefore as Parachute SERP) shall be equal to the lesser of (A) the
portion of the benefits under the Agreement treated as a parachute
payment within the meaning of section 280G (b) (2) of the Code or (B)
the amount of excess parachute payments within the meaning of section
280G (b) (1) of the Code (after applying clause (i) above), and (iv)
the value of any noncash benefits or any deferred payment or benefit
shall be determined by the Company's independent auditors in
accordance with the principles of sections 280G (d) (3) and (4) of the
Code.
In the event that the Excise Tax is subsequently determined to
be less than the amount taken into account hereunder pursuant to the
foregoing provisions of this Section 5.7, the Executive shall repay to
the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion (if any) of the 280G Gross-Up
Payment attributable to such reduction (determined in accordance with
the foregoing provisions of this Section 5.7) plus interest on the
amount of such repayment at the rate provided in section 1274 (b) (2)
(B) of the Code.
In the event that the Excise Tax attributable to the benefits
under the Agreement is determined to exceed the amount taken into
account hereunder pursuant to the foregoing provisions of this Section
5.7 (including by reason of any payment the existence or amount of
which cannot be determined at the time of the 280G Gross-Up Payment),
the Company shall make an additional 280G Gross-Up Payment in respect
of such excess (plus any interest, penalties or additions, but not any
federal, state, or local income taxes, payable by the Executive with
respect to such excess) at the time that the amount of such excess is
finally
4
<PAGE> 27
determined. The Company shall provide the Executive with its
calculation of the amounts referred to in this Section 5.7, and such
supporting materials as are reasonably necessary for the Executive to
evaluate the Company's calculations. The Executive and the Company
shall each reasonably cooperate with the other in connection with any
administrative or judicial proceedings concerning the existence or
amount of liability for Excise Tax with respect to the benefits under
the Agreement.
The payment provided for in this Section 5.7 shall be made not
later than the seventh day following the date that it is determined
that any or all of the benefits pursuant to this Agreement are or will
be subject to the excise tax (the "Payment Date"); provided, however,
that if the amount of such payment cannot be finally determined on or
before such day, the Company shall pay to the Executive on such day,
an estimate, as determined in good faith by the Company, of the
minimum amount of such payment and shall pay the remainder of such
(together with interest at the rate provided in section 1274 (b) (2)
(B) of the Code) as soon as the amount thereof can be determined, but
in no event later than the forty-fifth day after the Payment Date. In
the event that the amount of the payment made on an estimated basis
exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to the Executive,
payable on the thirtieth day after demand by the Company (together
with interest at the rate provided in section 1274 (b) (2) (B) of the
Code).
Notwithstanding the foregoing provisions of this Sections 5.7,
in the event that any payment or benefit received or to be received by
the Executive in connection with a Change in Control or the
termination of the Executive's employment (whether pursuant to the
terms of the Agreement or any other plan, arrangement or agreement
with the Company, any Person whose actions result in a Change in
Control or any Person affiliated with the Company or such Person) (all
such payments and benefits, including
5
<PAGE> 28
benefits pursuant to the Agreement, being hereinafter called "Total
Benefits") would be subject (in whole or part), to the Excise Tax,
then the amount paid to the Executive pursuant to the Agreement and
the corresponding 280G Gross-Up Payment, if any, shall be reduced to
the extent necessary so that no portion of such amount paid pursuant
to the Agreement is subject to the Excise Tax if (A) the net amount of
the Total Benefits, as so reduced, (and after deduction of the net
amount of federal, state and local income tax on such reduced Total
Benefits) is greater than (B) the excess of (i) the net amount of such
Total Benefits, without reduction (but after deduction of federal,
state and local income tax on such Total Benefits), over (ii) the
amount of Excise Tax to which the Executive would be subject in
respect of such Total Benefits.
* * * * *
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the day and year first above written.
HECHINGER COMPANY
By:
-----------------------
Title:
--------------------
EXECUTIVE
--------------------------
6
<PAGE> 1
EXHIBIT 11
HECHINGER COMPANY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEB. 1, 1997 FEB. 3, 1996 JAN. 28, 1995 JAN. 29, 1994 JAN. 30, 1993
-------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Net (loss) earnings $ (25,076,000) $ (77,636,000) $ (9,911,000) $ 24,760,000 $ (26,272,000)
Interest on 5-1/2% convertible
debentures, net of tax benefit - - - - -
-------------- -------------- ------------- ------------- --------------
Net (loss) earnings for primary and fully
diluted (loss) earnings per share $ (25,076,000) $ (77,636,000) $ (9,911,000) $ 24,760,000 $ (26,272,000)
============== ============== ============= ============= ==============
Weighted average shares outstanding 42,165,976 42,118,459 42,011,252 41,743,852 41,694,182
Dilutive effect of stock options,
restricted stock and performance
share awards after application
of the treasury stock method - - - 198,075 -
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 42,165,976 42,118,459 42,011,252 41,941,927 41,694,182
Additional dilution from stock options,
restricted stock and performance share
awards after application of the
treasury stock method - - - 33,011 -
-------------- -------------- ------------- ------------- --------------
Common and common equivalent shares
outstanding for fully diluted (loss)
earnings per share 42,165,976 42,118,459 42,011,252 41,974,938 41,694,182
============== ============== ============= ============= ==============
Primary (loss) earnings per common share $ (0.59) $ (1.84) $ (0.24) $ 0.59 $ (0.63)
============== ============== ============= ============= ==============
Fully diluted (loss) earnings per common
share $ (0.59) $ (1.84) $ (0.24) $ 0.59 $ (0.63)
============== ============== ============= ============= ==============
</TABLE>
<PAGE> 1
EXHIBIT 13
HECHINGER COMPANY ANNUAL REPORT
-------------------------------
Year ended February 1, 1997
<PAGE> 2
[MAP]
Hechinger Company Markets
Hechinger Stores 64
Home Quarters Warehouse Stores 52
Better Spaces 1
----------------------------------------------
TOTAL STORES 117
Store logos for Hechinger Stores and Home Quarters Warehouse appear above a map
of Hechinger Company's markets. The map includes the number of stores in each
city/state and the total number of stores in the Company's markets.
<PAGE> 3
- --------------------------------------------------------------------------------
HECHINGER COMPANY IS A SPECIALTY RETAILER PROVIDING PRODUCTS AND SERVICES FOR
THE CARE, REPAIR, REMODELING AND MAINTENANCE OF THE HOME AND GARDEN. THE COMPANY
OPERATES UNDER THE STORE NAMES: HECHINGER, HOME QUARTERS WAREHOUSE AND BETTER
SPACES.
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 LARGO, MARYLAND.
To Our Stockholders, Associates and Friends:
Last year I told you that in 1996 we would complete some major elements in our
plans to regain positive momentum and drive our business forward.
I said that we were returning to a clearer focus on the basics of our
business. That focus would include a renewed emphasis on customer service, a
vendor consolidation program intended to lower costs and improve merchandise
presentations, and aggressive marketing and advertising campaigns -- all
designed to bring more customers to our stores. While all of these efforts
unfolded in 1996 and resulted in some major accomplishments for Hechinger,
increased competition and disruptions from some of our iniatitives caused us
to produce less than satisfactory results. For the immediate future, while we
see no let up in competitive pressure, we see ourselves continuing to improve
the way we do business. But I'm jumping ahead --more about this in a moment.
Let's get back to the events of 1996.
We completed the consolidation of our Hechinger Stores and Home Quarters
Warehouse operations in 1996. This merger created significant opportunities for
us to reorganize and create a more efficient operation. First, we implemented a
vendor consolidation program that has lowered our cost of acquiring
merchandise, improved our merchandise assortments and presentations, and
enabled us to provide better service in our stores. In 1996, we completed over
150 merchandise assortment resets, including major remodeling of our Kitchen,
Bath and Flooring departments. The disruption in our stores caused by these
resets hampered our ability to maintain our high level of customer service and
adversely impacted sales. At the same time, we began to see the benefits of our
vendor consolidation program as our gross margins were up sharply in the second
half of 1996 over the previous year. This trend should continue into 1997. The
support we have received from our vendors has exceeded our expectations. We
recognize the important role our vendors play in our success and are very
pleased to have them as partners.
[PHOTO]
John W. Hechinger, Jr.
Chairman and Chief Executive Officer
WE COMPLETED THE CONSOLIDATION OF OUR HECHINGER AND HOME QUARTERS
WAREHOUSE OPERATIONS IN 1996.
1
<PAGE> 4
- ----------------------------------------------------------------
AS I LOOK TO 1997, OUR EMPHASIS IS ON IMPROVING OUR PERFORMANCE.
- --------------------------------------------------------------------------------
Second, and as expected, we reduced our general and administrative
expenses by $16 million in 1996. This will grow to annual savings in excess of
$20 million in 1997, some of which we will reinvest in customer service
initiatives.
Third, we completed all of the changes necessary to get our Company
operating on uniform store and merchandising information systems. This was a
tremendous undertaking, affecting practically everyone in the Company. While
completing the merger was a difficult task, I know we are a more efficient and
effective company because of it.
In the midst of all of the reorganizing, resetting merchandise and
retraining we undertook in 1996, we saw over 30 new competing home center
warehouse stores open in our markets, the most openings we have ever seen in
any one year. Clearly, this has had and will continue to have an impact on our
results. For us, this means that over 85 percent of our markets now have
competition from "big box" home centers. We anticipate a comparable number of
competitive openings in 1997, bringing us close to 100 percent of our markets
having significant home center warehouse competition.
As a result of all of our changes and increased competition, we reported a
pre-tax loss from operations for 1996 of $25.1 million, compared with last
year's pre-tax loss from operations, before special charges, of $25.3 million.
Still, our financial position remains on firm ground. In 1996, earnings before
interest, taxes, depreciation and amortization was $72 million, up 12 percent
from last year's $64.5 million, before special charges. We also have a flexible
$200 million secured revolving credit facility, approximately $200 million of
unencumbered real estate, low maturities on our long-term debt and had $37
million in cash at year end.
As I look to 1997, our emphasis is on improving our performance. The
distractions from consolidating our Hechinger and Home Quarters operations are
behind us. Our focus is on differentiating customers' shopping experiences in
our stores from that of the competition. The backbone of this effort is our
"CUSTOMERS FIRST" program. This program promises that customers will not stand
in a check-out line for more than five minutes, and that we will be in stock on
every item we carry. Our program also places new emphasis and awareness on our
"no hassle return" policy. We are offering discount certificates to customers
when we don't live up to these heightened levels of customer service. Also,
customers who make significant annual purchases can now earn rebate
certificates. We believe these types of customer service initiatives will
differentiate us to customers and help drive sales.
In keeping with our focus to differentiate ourselves in the marketplace, we
reopened our Albany, New York store on February 27, 1997, under a new name --
Better Spaces. This is "The World's First Home Design Superstore," offering the
best of six major home specialty businesses with superior customer service
levels -- all under one roof. The six
2
<PAGE> 5
- --------------------------------------------------------------------------------
areas include: kitchen and bath; lighting; home decor; outdoor living; storage
and organization; and tools and supplies.
Better Spaces is designed to be the store of choice for anyone interested in
refurbishing, enhancing, organizing, modernizing and maintaining their home,
both inside and outside. It's designed to provide a strong, differentiated
shopping experience for customers seeking creative new ideas for their homes or
needing to solve household problems. And, we also see it becoming the store
preferred by professional customers such as plumbing, electrical and painting
contractors to help them meet their clients' needs.
The potential of this pilot store is exciting. While time will tell which
elements of the store will be successful and which will need modification, we
see Better Spaces as one idea for improving our business.
Also, we are testing another idea--an expanded Commercial Business program
in our Tidewater, Virginia market. The commercial business market is large and
fragmented. We will be offering terrific service and value to commercial
customers without significant additional capital investment on our part. If
successful, we anticipate expanding this program to other markets.
In July 1996, Robert S. Parker, Ph.D. joined our Board of Directors and is a
valuable addition to our team. Dr. Parker has been dean of the Georgetown School
of Business since 1986 and was previously a partner at McKinsey & Company. Also,
Herbert J. Broner, a member of our Board since 1988, retired from our Board this
past February. For the past nine years he has served with distinction and I wish
to take this opportunity to thank him for his leadership and his guidance.
With all the effort focused on the merger of our Hechinger and Home Quarters
operations -- on top of the competitive openings we saw -- 1996 was a difficult
year. As we see it, the way to improve our results is to do our best to give
every customer plenty of reasons to shop our stores. Our Company has made many
changes and added programs designed to differentiate us in the marketplace. By
combining our determined, loyal associates and supportive vendors with our
financial flexibility, we believe we have the resources needed to compete
effectively in our markets.
Sincerely,
/S/ JOHN W. HECHINGER, JR.
John W. Hechinger, Jr.
Chairman and Chief Executive Officer
April 21, 1997
- -------------------------------------------------------------------------------
AS WE SEE IT, THE WAY TO IMPROVE OUR RESULTS IS TO DO OUR BEST TO GIVE EVERY
CUSTOMER PLENTY OF REASONS TO SHOP OUR STORES.
3
<PAGE> 6
TABLE OF 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. 1, 1997 Feb. 3, 1996 Jan. 28, 1995 Jan. 29, 1994 Jan. 30, 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $2,199,067 $2,252,780 $2,449,554 $2,094,968 $1,869,349
Gross profit 455,208 455,932 540,680 462,266 437,009
Interest expense 40,194 31,341 29,793 23,063 14,121
Income tax (benefit) expense -- (3,000) (5,545) 10,611 (15,429)
Net (loss) earnings (25,076) (77,636) (9,911) 24,760 (26,272)
Net (loss) earnings
per common share $(.59) $(1.84) $(.24) $.59 $(.63)
- ----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER SHARE
Class A common $.00 $.16 $.16 $.16 $.16
Class B common $.00 $.06 $.06 $.06 $.06
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $1,105,103 $1,150,421 $1,261,229 $1,229,242 $1,075,749
Current portion of long-term debt
and capital lease obligations 3,657 3,806 3,453 3,068 1,544
Long-term debt and capital
lease obligations 394,478 399,530 403,377 407,873 305,974
Total stockholders' equity 374,256 399,039 481,273 493,867 473,924
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: In 1996, the Company suspended dividend payments. In 1995, the Company
recorded a charge of $25 million related to its decision to combine its
Hechinger and Home Quarters operations under one management team and a non-cash
charge of $30.3 million related to the 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 its Hechinger stores. In 1994, the Company changed its method of calculating
LIFO inventories. See Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. All years presented were 52 weeks 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):
Year ended FEB. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
- -------------------------------------------------------------------------------
Net sales $2.20 $2.25 $2.45
Net sales (decrease) increase (2%) (8%) 17%
Comparable store sales
(decrease) increase (3%) (8%) 2%
The sales decrease for 1996 compared with 1995 was due primarily to
increased competition during 1996 and fewer stores open during 1996 compared
with 1995. Additionally, the year ended February 1, 1997 was a 52-week year
compared with the previous year which was a 53-week year. The sales decrease for
1995 compared with 1994 was due to 22 stores closed as a part of the store
closing plan announced in 1994 as well as increased competition, unseasonable
weather and weak sales of existing homes. Competition is expected to continue to
expand into 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:
Year ended FEB. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
- ------------------------------------------------------------------------------
At beginning of year 118 133 125
Openings 2 10 12
Closings (3) (25) (4)
--- --- ---
At end of the year 117 118 133
=== === ===
Other income, which consists primarily of interest income, was $2.8
million, $2.9 million and $4.4 million in 1996, 1995 and 1994, respectively. The
decreases in 1996 and 1995 were due primarily to decreases in funds available
for investment.
Cost of sales was 79.3% of sales for 1996 compared with 79.8% and 77.9% of
sales for 1995 and 1994, respectively. Distribution, buying and occupancy
expenses, which are primarily fixed costs, are included in cost of sales. As a
percent of sales, the decrease in 1996 was due primarily to improvement in the
merchandise margin resulting from the Company's vendor consolidation program and
an improvement of 16 basis points resulting from a LIFO credit in 1996 of $1.0
million versus a LIFO charge in 1995 of $2.6 million, offset by the impact of
competitive pricing in certain markets. In 1995, 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 in 1995
compared with 1994. The remaining amount of the increase in 1995 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 was 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 a LIFO credit of $1.0 million in 1996
compared with LIFO charges of $2.6 million and $1.9 million in 1995 and 1994,
respectively. LIFO, inventory acquisition costs and other inventory adjustments
decreased fourth quarter cost of sales by $1.7 million, $2.0 million and $2.4
million in 1996, 1995 and 1994, respectively.
Selling, general and administrative expenses were 20.1% of sales for both
1996 and 1995, compared with 19.1% of sales for 1994. Pre-opening expenses of
$1.9 million, $7.6 million and $8.9 million are included in selling, general and
administrative expenses for 1996, 1995 and 1994, respectively.
Excluding pre-opening expenses, as a percent of sales, the increase in
selling, general and administrative expenses in 1996 was due primarily to
higher store payroll and other expenses to support the Company's customer
service programs. This was partially offset by general and administrative
expense savings from the combination of Hechinger and Home Quarters operations
under one management team. The increase in 1995 was due primarily to less
leverage of selling, general and administrative expenses as a result of lower
sales in 1995 compared with 1994. In addition, approximately $6 million was
recorded in 1995 for costs related to the combination of Hechinger and Home
Quarters operations, including relocation and professional service fees.
Interest expense, net of capitalized interest, was $40.2 million, $31.3
million and $29.8 million for 1996, 1995 and 1994, respectively. The increase in
1996 was due primarily to the utilization of the Company's revolving credit
facility. The increase in 1995 was due primarily to less interest capitalized on
construction-in-progress compared with last year. Capitalized interest amounted
to $.3 million, $2.4 million and $3.6 million for the years 1996, 1995 and 1994,
respectively.
In 1995, the Company recorded a charge of $25 million related primarily to
the Company's decision to combine its Hechinger and Home Quarters operations
under one management team. By merging the management, purchasing and
administrative functions of its two operating subsidiaries, the Company
believes it is in a better competitive position as it operates a more efficient
organization and has increased purchasing power with its vendors. In 1996, the
Company reduced its general and administrative costs by approximately $16
million primarily from the elimination of duplicate information systems and
management and administrative functions. 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 the
performance of these stores. Based on the
5
<PAGE> 8
recent performance and limited potential for long term profitability of these
stores, management decided to close them. The last store was closed in 1995.
For 1995 and 1994, these 22 stores generated revenue of $15 million and
$257 million, respectively, while generating operating losses of $0 and $14
million, respectively.
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 were 0%, 3.7% and 35.9% of the
losses before income taxes for 1996, 1995 and 1994, respectively. The effective
tax rate for 1996 differs from the statutory rate as a result of an increase in
a valuation reserve on the net deferred tax asset resulting from the current
year's loss. The effective tax rate for 1995 differed 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 in 1995. The
effective tax rate for 1994 differed from the statutory rate due primarily to
tax-free earnings on funds available for investment and various tax credits. At
February 1, 1997, the Company had a net deferred tax asset of $42.8 million. Due
to uncertainties of the amount of the deferred tax asset to be realized in
future periods, a valuation allowance of $27.9 million established in 1995 has
been increased to $39.2 million in 1996. The Company's fully reserved tax
operating loss carryforward of $52.3 million and fully reserved general business
credit carryforward of $7.6 million will begin to expire in 2008 and 2011,
respectively.
The net losses were 1.1%, 3.4% and .4% of sales for 1996, 1995 and 1994,
respectively.
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 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 1995, the Company adopted 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 had a carrying value of $24 million and had 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 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 determined that certain assets
with a carrying value of $33 million were impaired and had 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 1995. 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 disclose 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. See the Notes
to the Consolidated Financial Statements under the caption "Stock Compensation
Plans" for more detail.
LIQUIDITY AND CAPITAL RESOURCES. Net cash used in operations was $59.1 million
in 1996 compared with net cash flows from operations of $47.1 million and $3.5
million in 1995 and 1994, respectively. The decrease between 1996 and 1995 was
due primarily to a decrease in accounts payable and accrued expenses. This
decrease was offset by an increase in borrowings under the Company's revolving
credit facility of $84.8 million. The increase between 1995 and 1994 was due
primarily to a decrease in inventory levels due primarily to the closing of 22
stores. Cash and cash equivalents and marketable securities were $36.7 million,
$35.8 million and $95.2 million at February 1, 1997, February 3, 1996 and
January 28, 1995, respectively. Expenditures for
6
<PAGE> 9
property, furniture and equipment and other assets were $41.0 million, $107.2
million and $175.6 million in 1996, 1995 and 1994, respectively. These
expenditures are related primarily to the Company's store expansion, relocation
and remodeling programs.
The Company has entered into several financing and other transactions over
the past three years in order to generate funds for its seasonal working capital
requirements, store expansion and remodeling programs.
In February 1996, the Company's operating subsidiaries entered into a
senior secured revolving credit facility which permits borrowings of up to $200
million, with preauthorization from the lender to utilize the last $25 million.
This facility replaced a $50 million revolving credit facility and all letter
of credit facilities. This facility is secured by merchandise inventories and
expires in February 1999. Borrowings under this facility bear interest at prime
plus 1% or LIBOR plus 2.75% at the option of management. As of February 1,
1997, the Company had outstanding loans of $84.8 million and had issued and
outstanding letters of credit of $46.7 million under this facility.
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.
The Company anticipates that capital expenditures for fiscal 1997 will be
approximately $30 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 1997.
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 has had a material effect on sales or results of operations.
FORWARD-LOOKING STATEMENTS. Forward-looking statements in this annual report,
letter to stockholders and Form 10-K are made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. There are
various factors that could cause results to differ materially from those
anticipated by some statements made in this annual report, letter to
stockholders and Form 10-K. Investors are cautioned that all forward looking
statements involve risks and uncertainty. Factors that could cause actual
results to differ materially include, but are not limited to the following: the
strength and extent of new and existing competition; the Company's ability to
maintain competitive pricing in its markets; the Company's ability to maintain
adequate levels of vendor support; the ability of the Company's customer
service programs, Better Spaces store and commercial business programs to
increase sales; the Company's ability to attract, train and retain experienced,
quality employees; the Company's ability to dispose of excess real estate;
general economic conditions; housing turnover; interest rates; weather;
and other factors described from time to time in the Company's Securities and
Exchange Commission filings.
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 1, 1997 and February 3, 1996:
<TABLE>
<CAPTION>
QUARTER ENDED MAY 4, 1996 AUG. 3, 1996 NOV. 2, 1996 FEB. 1, 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $561,317 $665,902 $533,276 $438,572
GROSS PROFIT 115,845 139,564 109,006 90,794
INCOME TAX EXPENSE -- -- -- --
NET EARNINGS (LOSS) (5,990) 12,215 (9,965) (21,337)
NET EARNINGS (LOSS) PER COMMON SHARE $(.14) $.28 $(.24) $(.51)
<CAPTION>
Quarter ended April 29, 1995 July 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>
Final LIFO valuation and inventory acquisition cost adjustments impacted the
fourth quarters of 1996 and 1995. In the fourth quarter of 1995, the Company
recorded a charge of $25 million related to its decision to combine its
Hechinger and Home Quarters operations under one management team and a non-cash
charge of $30.3 million related to the adoption of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of."
All quarters presented were 13 weeks except for the quarter ended February 3,
1996, which was 14 weeks.
7
<PAGE> 10
Hechinger Company
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended FEB. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
- ----------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
REVENUES
Net sales $2,199,067 $2,252,780 $2,449,554
Other (principally interest) 2,757 2,869 4,405
---------- ---------- ----------
Total Revenues 2,201,824 2,255,649 2,453,959
COSTS AND EXPENSES
Cost of sales 1,743,859 1,796,848 1,908,874
Selling, general and administrative expenses 442,847 452,796 468,898
Interest expense 40,194 31,341 29,793
Unusual charges -- 25,000 61,850
Impairment of long-lived assets -- 30,300 --
---------- ---------- ----------
Total Costs and Expenses 2,226,900 2,336,285 2,469,415
---------- ---------- ----------
LOSS BEFORE INCOME TAXES (25,076) (80,636) (15,456)
INCOME TAX BENEFIT -- (3,000) (5,545)
---------- ---------- ----------
NET LOSS $ (25,076) $ (77,636) $ (9,911)
========== ========== ==========
NET LOSS PER COMMON SHARE $(.59) $(1.84) $(.24)
========== ========== ==========
</TABLE>
All years presented were 52 weeks except for the year ended February 3, 1996,
which was 53 weeks. See notes to consolidated financial statements.
8
<PAGE> 11
Hechinger Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEB. 1, 1997 Feb. 3, 1996
- -----------------------------------------------------------------------------------------------------------------
(in thousands except share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 36,727 $ 35,785
Merchandise inventories 414,980 414,974
Other current assets 66,637 79,533
---------- ----------
TOTAL CURRENT ASSETS 518,344 530,292
PROPERTY, FURNITURE AND EQUIPMENT, net 461,752 497,577
COST IN EXCESS OF NET ASSETS ACQUIRED, net 52,066 53,743
LEASEHOLD ACQUISITION COSTS, net 46,876 49,128
OTHER ASSETS 26,065 19,681
---------- ----------
TOTAL ASSETS $1,105,103 $1,150,421
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 84,814 $ --
Accounts payable and accrued expenses 220,296 313,067
Current portion of long-term debt and capital lease obligations 3,657 3,806
---------- ----------
TOTAL CURRENT LIABILITIES 308,767 316,873
LONG-TERM DEBT 380,868 383,709
CAPITAL LEASE OBLIGATIONS 13,610 15,821
DEFERRED RENT 27,602 26,779
OTHER LONG-TERM LIABILITIES -- 8,200
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value; authorized
50,000,000 shares; issued 32,608,139 and 30,892,581 3,261 3,089
Class B common stock, $.10 par value; authorized
30,000,000 shares; issued 9,716,371 and 11,431,929 971 1,143
Additional paid-in capital 238,248 238,248
Retained earnings 132,914 157,990
Unearned compensation (253) (759)
Less treasury stock at cost,
97,265 and 39,325 Class A common shares
and 14,497 Class B common shares (885) (672)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 374,256 399,039
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,105,103 $1,150,421
========== ==========
</TABLE>
See notes to consolidated financial statements.
9
<PAGE> 12
Hechinger Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended FEB. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
- --------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES
Net loss $ (25,076) $ (77,636) $ (9,911)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Unusual charges (28,507) 24,700 55,871
Depreciation and amortization 56,898 58,535 53,268
Deferred income taxes 5,444 10,249 (24,085)
Deferred rent 823 (559) (1,122)
Changes in operating assets and liabilities:
Merchandise inventories (943) 38,170 (53,817)
Other current assets (5,314) 2,363 (17,006)
Accounts payable and accrued expenses (71,526) 7,875 (10,678)
Income taxes payable 9,132 (16,570) 10,957
--------- --------- ---------
NET CASH (USED IN)/FLOWS FROM OPERATIONS (59,069) 47,127 3,477
--------- --------- ---------
CASH FLOWS FROM/(USED IN) INVESTING ACTIVITIES
Property, furniture, equipment and other assets:
Additions (41,002) (107,185) (175,577)
Disposals 21,107 8,577 4,549
Marketable securities:
Purchases -- (192,101) (206,870)
Proceeds from sales -- 261,012 288,948
--------- --------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (19,895) (29,697) (88,950)
--------- --------- ---------
CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 467,441 -- --
Payments to revolving credit facility (382,627) -- --
Net proceeds from sale and leaseback transactions -- -- 99,295
Dividends paid to stockholders -- (5,664) (5,635)
Other (4,908) (2,233) (1,610)
--------- --------- ---------
NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES 79,906 (7,897) 92,050
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 942 9,533 6,577
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 35,785 26,252 19,675
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36,727 $ 35,785 $ 26,252
========= ========= =========
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 1,629 $ 3,428 $ 8,814
Cash payments for interest, net of amount capitalized $ 37,566 $ 30,949 $ 29,005
</TABLE>
All years presented were 52 weeks except for the year ended February 3, 1996,
which was 53 weeks. 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
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance, Jan. 29, 1994 $2,881 $1,331 $236,543 $256,836 $(2,201) $(1,523)
Restricted stock awards earned -- -- -- -- 648 --
Performance stock awards earned and issued 5 -- 577 -- -- --
Exercise of stock options including income
tax benefit 15 -- 1,037 -- -- 1,260
Conversions from Class B to Class A
common stock 179 (179) -- -- -- --
Conversion of 5 1/2% Convertible
Subordinated Debentures into shares
of Class A common stock -- -- 25 -- -- --
Purchase of treasury stock -- -- -- -- -- (244)
Adjustment to fair value of marketable securities -- -- -- (371) -- --
Cash dividends on common stock:
Class A - $.16 per share -- -- -- (4,883) -- --
Class B - $.06 per share -- -- -- (752) -- --
Net loss -- -- -- (9,911) -- --
------ ------ -------- -------- ------- -------
Balance, Jan. 28, 1995 3,080 1,152 238,182 240,919 (1,553) (507)
Restricted stock awards earned -- -- -- -- 794 --
Exercise of stock options including
income tax benefit -- -- 66 -- -- 66
Conversions from Class B to Class A
common stock 9 (9) -- -- -- --
Purchase of treasury stock -- -- -- -- -- (231)
Adjustment to fair value of marketable securities -- -- -- 371 -- --
Cash dividends on common stock:
Class A - $.16 per share -- -- -- (4,931) -- --
Class B - $.06 per share -- -- -- (733) -- --
Net loss -- -- -- (77,636) -- --
------ ------ -------- -------- ------- -------
Balance, Feb. 3, 1996 3,089 1,143 238,248 157,990 (759) (672)
RESTRICTED STOCK AWARDS EARNED -- -- -- -- 506 --
CONVERSIONS FROM CLASS B TO CLASS A
COMMON STOCK 172 (172) -- -- -- --
PURCHASE OF TREASURY STOCK -- -- -- -- -- (213)
NET LOSS -- -- -- (25,076) -- --
------ ------ -------- -------- ------- -------
BALANCE, FEB. 1, 1997 $3,261 $ 971 $238,248 $132,914 $ (253) $ (885)
====== ====== ======== ======== ======= =======
<CAPTION>
Total
- --------------------------------------------------------------------
(in thousands except per share data)
<S> <C>
Balance, Jan. 29, 1994 $493,867
Restricted stock awards earned 648
Performance stock awards earned and issued 582
Exercise of stock options including income
tax benefit 2,312
Conversions from Class B to Class A
common stock --
Conversion of 5 1/2% Convertible
Subordinated Debentures into shares
of Class A common stock 25
Purchase of treasury stock (244)
Adjustment to fair value of marketable securities (371)
Cash dividends on common stock:
Class A - $.16 per share (4,883)
Class B - $.06 per share (752)
Net loss (9,911)
--------
Balance, Jan. 28, 1995 481,273
Restricted stock awards earned 794
Exercise of stock options including
income tax benefit 132
Conversions from Class B to Class A
common stock --
Purchase of treasury stock (231)
Adjustment to fair value of marketable securities 371
Cash dividends on common stock:
Class A - $.16 per share (4,931)
Class B - $.06 per share (733)
Net loss (77,636)
--------
Balance, Feb. 3, 1996 399,039
RESTRICTED STOCK AWARDS EARNED 506
CONVERSIONS FROM CLASS B TO CLASS A
COMMON STOCK --
PURCHASE OF TREASURY STOCK (213)
NET LOSS (25,076)
--------
BALANCE, FEB. 1, 1997 $374,256
========
</TABLE>
See notes to consolidated financial statements.
11
<PAGE> 14
Hechinger Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended February 1, 1997, February 3, 1996 and January 28, 1995.
BASIS OF PRESENTATION. The Company operates a chain of specialty retail home
center stores under the Hechinger ("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 Company's business is seasonal and its annual results of operations
depend to a significant extent on the results of operations for the second
quarter of the fiscal year.
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 1, 1997 ("1996") and January 28, 1995
("1994") were 52 weeks each compared with the fiscal year ended February 3, 1996
("1995") which was 53 weeks.
MERCHANDISE INVENTORIES. Inventories are stated at the lower of cost, last-in,
first-out method ("LIFO"), or market. If inventories were valued under the FIFO
method, which approximates replacement cost, inventories would have been $20.5
million and $21.5 million higher than reported at February 1, 1997 and February
3, 1996, 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 adopted 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 was 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 amortized on a straight-line basis over
the terms of the respective leases. Property, furniture and equipment are stated
at cost plus capitalized interest. Capitalized interest amounted to $.3 million,
$2.4 million and $3.6 million for the years 1996, 1995 and 1994, 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 $1.9 million, $7.6 million and $8.9 million for
the years 1996, 1995 and 1994, respectively.
ADVERTISING EXPENSES. Advertising costs are expensed as incurred. Advertising
expenses amounted to $38.0 million, $39.7 million and $40.2 million for the
years 1996, 1995 and 1994, respectively.
NET LOSS PER COMMON SHARE. Net loss per common share is calculated by dividing
the net loss, 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 net loss per share is not presented as additional
dilution is less than 3% of the primary net loss per share or is antidilutive
in the three years presented.
The number of shares used to compute net loss per common share was 42.2
million for the years 1996 and 1995 and 42.0 million for 1994.
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 $15.1 million and $13.4 million as of February
1, 1997 and February 3, 1996, 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 $16.3
million and $14.0 million as of February 1, 1997 and February 3, 1996,
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 1995, the Company recorded a charge of $25 million related primarily to
the Company's decision to combine its Hechinger and Home Quarters operations
under one management team. The main components of this charge were:
1. estimated cash expenditures for employee termination costs of
approximately $13.6 million, including severance pay and related
benefits. Approximately 300 employees were terminated as a result of
this decision. Substantially all of these employees were 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
Hechinger and Home Quarters 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 1996:
<TABLE>
<CAPTION>
Feb. 3, 1996 Change in Feb. 1, 1997
Amount Utilized in 1996 Estimate Amount
(in millions) Remaining Cash Non-cash Decr. (Incr.) Remaining
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee termination
costs $11.0 $ 8.8 $ -- $ (.2) $2.4
Pension termination
and other 7.1 7.3 -- (.2) --
Disposal of furniture,
fixtures and equipment
and other assets 2.0 -- 1.6 .4 --
----- ---- ---- ----- ----
Total $20.1 $16.1 $1.6 $ -- $2.4
===== ===== ==== ===== ====
</TABLE>
12
<PAGE> 15
As of February 1, 1997, all components of the charge have been completed
except for employee termination costs. The Company believes that the remaining
balance of $2.4 million is adequate to cover future costs and has been recorded
as a current liability as of February 1, 1997.
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 main
components of this charge were costs related to the write-down of inventories
and furniture, fixtures, equipment and other assets to be disposed of, carrying
costs of the closed stores and employee termination costs. All components of
the charge have been completed except for the carrying costs of the closed
stores. During 1996, the Company incurred approximately $11.7 million of
carrying costs for these stores, including rents, utilities and other expenses,
which have been recorded in the reserve. As of February 1, 1997, the remaining
balance of $10.4 million has been recorded as a current liability.
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. The Company believes that the balance remaining in the reserve is
adequate to cover future liabilities related to the carrying costs of the closed
stores. The merger charge and store closing charge are based on certain
estimates and as a result, the actual amounts could vary from these estimates.
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 and adopted by the Company in
1995.
Management reviews long-lived assets and certain intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of such assets may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate to the carrying amount, including
associated intangible assets of such operation. If the operation is determined
to be unable to recover the carrying amount of its assets, then intangible
assets are written down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending upon the nature of the assets. In 1995,
based on its review, the Company 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 had 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 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 determined that
certain assets with a carrying value of $33 million were impaired and
had 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.
PROPERTY, FURNITURE AND EQUIPMENT. The Company's investments in property,
furniture and equipment consist of the following:
(in thousands) FEB. 1, 1997 Feb. 3, 1996
- -----------------------------------------------------------------------
Land $ 99,091 $ 99,982
Buildings 197,151 191,338
Leasehold improvements 120,944 115,937
Furniture, fixtures and equipment 245,061 232,776
Capital leases 24,762 24,875
Construction-in-progress -- 11,719
--------- ---------
687,009 676,627
Less accumulated depreciation and
amortization (225,257) (179,050)
--------- ---------
$ 461,752 $ 497,577
========= =========
Accumulated amortization on capital leases was $16.1 million and $14.2
million as of February 1, 1997 and February 3, 1996, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES. Accounts payable and accrued expenses
consist of the following:
(in thousands) FEB. 1, 1997 Feb. 3, 1996
- -----------------------------------------------------------------------
Accounts payable $111,851 $176,643
Accrued expenses and other 77,113 109,820
Accrued compensation and benefits 31,332 26,604
-------- --------
$220,296 $313,067
======== ========
Accrued expenses and other at February 1, 1997 includes
$2.4 million and $10.4 million for the remaining balances of the merger reserve
and store closing reserve, respectively. Accrued expenses and other at February
3, 1996 includes $20.1 million and $13.9 million for the current portions of the
merger reserve and store closing reserve, respectively.
LONG-TERM DEBT AND OTHER CREDIT ARRANGEMENTS. Long-term debt consists of the
following:
(in thousands) FEB. 1, 1997 Feb. 3, 1996
- -----------------------------------------------------------------------
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 43,206 43,637
Other long-term debt 15,953 18,252
-------- --------
382,209 384,939
Less current portion (1,341) (1,230)
-------- --------
$380,868 $383,709
======== ========
Under the terms of the 6.95% Senior Notes and 9.45% Senior Debentures, the
Company is restricted, in certain circumstances, from pledging certain Company
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 of $6.6 million, or 5% of the $132 million aggregate principal amount
of Convertible Subordinated Debentures issued, are to be made annually
commencing April 1, 1998, to and including April 1, 2011. Convertible
Subordinated Debentures purchased by the Company in prior years are sufficient
to fulfill the mandatory sinking fund payment scheduled for April 1, 1998 and
partially fulfill the scheduled payment for April 1, 1999.
13
<PAGE> 16
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 $39.9 million.
Other long-term debt consists primarily of a sale and leaseback transaction
that has been recorded as a financing transaction rather than as a sale.
Aggregate principal maturities of all long-term debt are as follows:
Fiscal year (in thousands)
- ----------------------------------------------------------------------
1997 $ 1,341
1998 1,459
1999 5,934
2000 8,572
2001 8,801
Remainder 356,102
--------
$382,209
========
In February 1996, the Company's operating subsidiaries entered into a
senior secured revolving credit facility which permits borrowings of up to $200
million, with preauthorization from the lender to utilize the last $25 million.
This facility replaced a $50 million revolving credit facility and all letter
of credit facilities. This facility is secured by merchandise inventories and
expires in February 1999. Borrowings under this facility bear interest at prime
plus 1% or LIBOR plus 2.75% at the option of management. As of February 1,
1997, the Company had outstanding loans of $84.8 million and had issued and
outstanding letters of credit of $46.7 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.
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:
FEB. 1, 1997 Feb. 3, 1996
CARRYING MARKET Carrying Market
(in thousands) VALUES VALUES Values Values
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 36,727 $ 36,727 $ 35,785 $ 35,785
Long-term debt:
Publicly traded debt 323,050 164,452 323,050 197,141
Privately held debt 57,818 35,984 60,659 42,863
-------- -------- -------- --------
Total long-term debt $380,868 $200,436 $383,709 $240,004
======== ======== ======== ========
INCOME TAXES. The income tax benefits are summarized as follows:
(in thousands)
Year ended FEB. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
- --------------------------------------------------------------------------
Current $(5,444) $(13,249) $ 18,540
Deferred 5,444 10,249 (24,085)
------- -------- --------
$ -- $ (3,000) $ (5,545)
======= ======== ========
Significant components of the Company's deferred tax liabilities and assets
are as follows:
(in thousands) FEB. 1, 1997 Feb. 3, 1996
- -----------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization $ -- $ 4,103
Inventories 9,816 12,078
Other 3,342 2,575
------- -------
Total deferred tax liabilities 13,158 18,756
------- -------
Deferred tax assets:
Accrued expenses for unusual charges 10,168 23,363
Depreciation and amortization 2,742 --
Alternative minimum tax and other
tax credit carryforwards 11,292 15,419
Accrued compensation and benefits 8,230 5,515
Net operating loss carryforward 18,303 7,086
Other 5,230 4,310
------- -------
Total deferred tax assets 55,965 55,693
Valuation allowance 39,174 27,860
------- -------
Net deferred tax assets 16,791 27,833
------- -------
Net deferred tax assets $ 3,633 $ 9,077
======= =======
Reconciliations of the Federal statutory rate to the Company's effective
tax rate are summarized as follows:
Year ended FEB. 1, 1997 Feb. 3, 1996 Jan. 28, 1995
- ------------------------------------------------------------------------------
Statutory rate (35.0)% (35.0)% (35.0)%
Effect of asset reserve 39.5 34.6 --
Federal tax credits (7.2) -- (5.3)
Federal tax-exempt
investment income -- (1.0) (4.7)
Amortization of goodwill 3.3 .7 4.9
Other (.6) (3.0) 4.2
---- ---- ----
--% (3.7)% (35.9)%
==== ==== ====
LEASES AND OTHER COMMITMENTS. The Company leases certain stores and equipment
from 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 the sale and leaseback
transaction completed in 1990, the Company is restricted from taking certain
actions that would result in 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 1, 1997, 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:
OPERATING LEASES
(in thousands)
Fiscal year Total Affiliated Nonaffiliated
- ---------------------------------------------------------------------------
1997 $ 76,124 $ 1,360 $ 74,764
1998 76,667 1,360 75,307
1999 76,938 1,360 75,578
2000 77,134 1,374 75,760
2001 75,458 1,027 74,431
Remainder 900,667 6,060 894,607
---------- ------- ----------
Total minimum lease payments 1,282,988 12,541 1,270,447
Minimum sublease rentals due
to the Company (161,817) -- (161,817)
---------- ------- ----------
Total minimum lease payments, net $1,121,171 $12,541 $1,108,630
========== ======= ==========
CAPITAL LEASES
(in thousands)
Fiscal year Total Affiliated Nonaffiliated
- ---------------------------------------------------------------------------
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
2001 2,399 962 1,437
Remainder 12,528 2,793 9,735
-------- ------- -------
Total minimum lease payments 27,811 8,076 19,735
Less imputed interest (11,885) (2,533) (9,352)
-------- ------- -------
Present value of net minimum
lease payments (including current
portion of $2,316) $ 15,926 $ 5,543 $10,383
======== ======= =======
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:
(in thousands)
Year ended FEB. 1, 1997 Feb. 3, 1996 Jan. 28,1995
- -------------------------------------------------------------------------------
Minimum operating lease rentals $ 70,535 $ 66,174 $ 62,794
Excess rentals:
Capital leases 1,047 1,238 1,352
Operating leases 487 676 591
-------- -------- --------
72,069 68,088 64,737
Less sublease income (20,552) (16,623) (13,192)
-------- -------- --------
Net rent expense $ 51,517 $ 51,465 $ 51,545
======== ======== ========
Net rent expense paid to affiliates $ 3,329 $ 3,811 $ 3,840
======== ======== ========
The net rent expense charged to operations does not include approximately
$6.1 million, $5.7 million and $.6 million charged to the store closing reserve
for 1996, 1995 and 1994, respectively.
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, results of operations or liquidity.
STOCKHOLDERS' EQUITY. The Company has two classes of common stock, designated as
Class A and Class B. The Company also has authorized 20 million shares of $1.00
par value preferred stock, none of which has been issued.
Class A and B shares are identical in all respects except that (1) when
dividends are paid, 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 1996, the Company suspended 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 1, 1997 were as follows:
<TABLE>
<CAPTION>
Issued Treasury
Class A Class B Class A Class B
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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) -- --
Conversion 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)
CONVERSIONS FROM CLASS B TO CLASS A 1,715,558 (1,715,558) -- --
PURCHASE OF TREASURY -- -- (57,940) --
---------- ---------- ------- -------
BALANCE, FEB. 1, 1997 32,608,139 9,716,371 (97,265) (14,497)
========== ========== ======= =======
</TABLE>
EMPLOYEE BENEFIT PLANS AND RETIREMENT AGREEMENTS. As of December 31, 1995, the
Company terminated its defined benefit pension plan. In 1996, the Company
completed distribution of the plan assets to all qualified participants. The
cost of the pension curtailment and benefit settlement was accrued as a
component of the 1995 merger reserve. See discussion of Unusual Charges above.
The Company maintains a 401(k) plan and a profit sharing plan for all
qualified employees. 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 profit sharing plan allows for
discretionary annual contributions as determined by the Board of Directors.
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
$1.6 million and $3.9 million at February 1, 1997 and February 3, 1996,
respectively.
Total expenses related to all of the above plans amounted to $4.0 million,
$3.8 million and $6.3 million, for the years 1996, 1995 and 1994, 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 1,
1997, 3.3 million shares were available for future grants.
15
<PAGE> 18
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 1, 1997, nonqualified options were
granted. At February 1, 1997, options to purchase 2.4 million shares were
exercisable under the Incentive Plan and its predecessor, The 1982 Stock Option
Plan.
A summary of stock options is as follows:
FEB. 1, 1997 Feb. 3, 1996
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
(shares in thousands) SHARES PRICE Shares Price
- --------------------------------------------------------------------------------
Beginning balance 4,618 $10.01 3,314 $12.30
Granted 779 3.88 1,948 7.00
Canceled (348) 13.41 (635) 12.75
Exercised -- -- (9) 8.86
----- ------ ----- ------
Ending balance 5,049 $ 8.83 4,618 $10.01
===== ====== ===== ======
Weighted average fair
value of options granted
during the year $ 1.97 $ 2.73
====== ======
The exercise prices for options outstanding as of February 1, 1997, ranged
from $3 7/8 to $22. The weighted average remaining contractual life of those
options is 6.9 years.
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 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 1996, no shares were
reserved for distribution under the plan. At February 1, 1997, 711,000 shares
were available for future awards.
Total charges to earnings for these plans amounted to $.5 million, $.8
million and $1.0 million for the years 1996, 1995 and 1994, respectively.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting and Disclosure of Stock-Based Compensation" was issued in 1995. The
statement relates to the measurement of compensation of stock options issued to
employees and requires either the expense recognition based on the fair value
method or the continued application of APB 25, "Accounting for Stock Issued to
Employees" and disclose pro forma net income/loss 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 pro forma
information regarding net loss and net loss per share has been determined as if
the Company had accounted for its employee stock options under the fair value
method of SFAS 123. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted average assumptions:
Year ended FEB. 1, 1997 Feb. 3, 1996
- -----------------------------------------------------------------------
Risk-free interest rates 6.1% 6.4%
Dividend yields .0% 2.7%
Volatility factors of the expected market
price of common stock .50 .43
Expected life of the option in years 5 5
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period of two years.
The Company's pro forma information is as follows:
Year ended FEB. 1, 1997 Feb. 3, 1996
- ------------------------------------------------------------------------
Pro forma net loss ($ in millions) $(27.1) $(78.9)
Pro forma net loss per share $ (.64) $(1.87)
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 1, 1997 and February 3, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended February 1, 1997. 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 1, 1997 and February 3, 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 1, 1997, 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, DC
February 27, 1997
16
<PAGE> 19
Hechinger Company
DIRECTORS AND OFFICERS
DIRECTORS
JOHN W. HECHINGER, JR.
Chairman of the Board and
Chief Executive Officer
Hechinger Company
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
W. CLARK MCCLELLAND
Executive Vice President
and Chief Financial Officer
Hechinger Company
ROBERT S. PARKER, PH.D.
Dean of the School of Business
Georgetown University
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,
Divisional Merchandise
Manager
SUZANNE G. BEAR
Senior Vice President,
Marketing and Advertising
J. WAYNE COLLEY
Senior Vice President,
Logistics, Distribution and
Merchandise Presentation
SALLY A. COURTNEY
Senior Vice President, General
Merchandise Manager
NOEL H. GOULSTON
Senior Vice President,
Strategic Planning
RICHARD S. GROSS
Senior Vice President,
Controller
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
BETSY A. BLACKMON
Vice President, Divisional
Merchandise Manager
ARTHUR R. BURKE
Vice President, Divisional
Merchandise Manager
RICHARD M. DOW
Area Vice President
MICHAEL P. GOOD
Vice President, Finance
STEPHEN F. GUARALDO
Vice President,
Commercial Business
RICHARD A. HAYS
Vice President, Divisional
Merchandise Manager
JAMES F. IAMPIERI
Vice President, Merchandise
Administration
G. MICHAEL KING
Area Vice President
WARREN L. MARTIN
Vice President, Divisional
Merchandise Manager
RICHARD A. POVLAK
Vice President, Loss
Prevention
MAX S. ROBUCK
Vice President, Divisional
Merchandise Manager
COMPANY 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, DC 20036
STOCK TRANSFER AGENT
American Stock Transfer &
Trust Company
Shareholder Relations
40 Wall Street
New York, NY 10005
Information contact:
Barry S. Rosenthal
800-937-5449
COMPANY MAILING ADDRESS
Hechinger Company
1801 McCormick Drive
Largo, MD 20774
301-341-1000
STOCK LISTING
Nasdaq National Market tier of
The Nasdaq Stock 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
1801 McCormick Drive
Largo, MD 20774
PRICE RANGE OF COMMON STOCK
Hechinger Company common stock trades on the National Market tier of the Nasdaq
Stock 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 3,229 Class A and
977 Class B stockholders of record.
In 1996, the Company suspended dividend payments for both the Class A
common and Class B common shares. In 1995, the Company declared quarterly cash
dividends of $.04 per share on its Class A common and $.016 per share on its
Class B common.
Year ended FEB. 1, 1997 Feb. 3, 1996
- --------------------------------------------------------------------------------
Period HIGH LOW High Low
- --------------------------------------------------------------------------------
1st Quarter
Class A $6 $3 1/2 $13 1/2 $9 5/8
Class B 6 1/4 3 3/4 13 1/2 9 3/4
2nd Quarter
Class A 5 1/4 3 1/4 9 7/8 6 1/4
Class B 7 5 1/4 10 6 1/4
3rd Quarter
Class A 4 1/4 3 1/8 7 1/8 3 3/8
Class B 5 3/4 4 1/2 7 1/4 3 7/8
4th Quarter
Class A 3 5/16 1 15/16 6 1/8 4
Class B 4 3/4 3 1/2 6 1/8 4 1/8
[RECYCLE 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
(C) 1997 Hechinger Company
<PAGE> 20
[HECHINGER LOGO]
Hechinger Company 1801 McCormick Drive Largo, Maryland 20774 301-341-1000
<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>
<PAGE> 1
EXHIBIT 23
HECHINGER COMPANY
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Hechinger Company of our report dated February 27, 1997, included in the
Annual Report to Stockholders of Hechinger Company for the year ended February
1, 1997.
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, of our report dated February 27, 1997,
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 1, 1997.
ERNST & YOUNG LLP
Washington, DC
April 28, 1997
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> FEB-01-1997
<CASH> 36,727
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 414,980
<CURRENT-ASSETS> 66,637
<PP&E> 461,752<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,105,103
<CURRENT-LIABILITIES> 308,767
<BONDS> 380,868
0
0
<COMMON> 4,232
<OTHER-SE> 370,024
<TOTAL-LIABILITY-AND-EQUITY> 1,105,103
<SALES> 2,199,067
<TOTAL-REVENUES> 2,201,824
<CGS> 1,743,859
<TOTAL-COSTS> 2,186,706
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,194
<INCOME-PRETAX> (25,076)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,076)
<DISCONTINUED> 0
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<NET-INCOME> (25,076)
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<FN>
<F1>Property, Furniture and equipment, net of accumulated depreciation
</FN>
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