<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
CHECK ONE
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934 for the thirteen and twenty-six weeks ended
August 2, 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)
DELAWARE 52-1001530
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1801 MCCORMICK DRIVE, LARGO, MARYLAND 20774
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 341-1000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------------ ------------
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of August 28, 1997.
32,754,374 shares of Class A Common Stock, $.10 par value
9,458,374 shares of Class B Common Stock, $.10 par value
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
[CAPTION]
DESCRIPTION
- -----------
[S]
Part I. Financial Information:
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information:
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Index to Exhibits
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
The information called for by this item is hereby incorporated by reference
from Exhibits 99(a) - 99(e) of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth the sales reported by the Company (in millions):
<TABLE>
<CAPTION>
TOTAL TOTAL TOTAL COMPARABLE
SALES SALES SALES STORE SALES
PERIOD AUGUST 2, 1997 AUGUST 3, 1996 % CHANGE % CHANGE
- ------ -------------- -------------- -------- --------
<S> <C> <C> <C> <C>
Thirteen weeks $591.6 $665.9 (11%) (10%)
Twenty-six weeks $1,099.6 $1,227.2 (10%) (10%)
</TABLE>
For the thirteen and twenty-six weeks ended August 2, 1997, the decreases in
total sales and comparable store sales were due primarily to increased
competition, unseasonable weather, customer confusion relating to the merger and
the distraction related to the amount of time and personnel required in
connection with the negotiation, execution and consummation of the Merger
Agreement (see below for further discussion). As of August 2, 1997, the
Company operated 117 stores.
For the thirteen weeks ended August 2, 1997, cost of sales was 80.8% of sales
compared with 79.0% of sales for the corresponding period last year. For the
twenty-six weeks ended August 2, 1997, cost of sales was 80.3% of sales
compared with 79.2% of sales for the corresponding period last year.
Distribution, buying and occupancy expenses are included in cost of sales and
are comprised substantially of fixed costs. As a percent of sales, the
increases in cost of sales is due primarily to higher than anticipated
inventory shrinkage this year compared with last year and less leverage of
distribution, buying and occupancy expenses as a result of lower sales this
year compared with last year.
For the thirteen weeks ended August 2, 1997, selling, general and
administrative expenses were 18.9% of sales compared with 17.8% of sales for
the corresponding period last year. For the twenty-six weeks ended August 2,
1997, selling, general and administrative expenses were 19.8% of sales compared
with 18.8% of sales for the corresponding period last year. As a percent of
sales, the increases in selling, general and administrative expenses were due
primarily to less leverage of selling, general and administrative expenses as a
result of lower sales this year compared with last year.
For the thirteen weeks ended August 2, 1997, interest expense was $10.9
million, 1.8% of sales, compared with $9.8 million, 1.5% of sales, for the
corresponding period last year. For the twenty-six weeks ended August 2, 1997,
interest expense was $21.5 million, 2.0% of sales, compared with $19.6 million,
1.6% of sales, for the corresponding period last year. The increases were due
primarily to higher borrowings under the Company's revolving credit facility
this year compared with last year.
For the thirteen and twenty-six weeks ended August 2, 1997 and the
corresponding periods last year, the effective tax rate was 0%. No tax benefits
have been recorded as all potential benefits have been recorded in prior
periods.
For the thirteen weeks ended August 2, 1997, the net loss was $40.6 million,
$0.96 per share, compared with net earnings of $12.2 million, $0.28 per share,
for the corresponding period last year. For the twenty-six weeks ended August
2, 1997, the net loss was $54.1 million, $1.28 per share, compared with a net
earnings of $6.2 million, $0.15 per share, for the corresponding period last
year. The losses for the thirteen and twenty-six weeks ended August 2, 1997
include a store closing charge of $31.8 million or $0.75 per share for the
closing of seven Michigan stores (see below for further discussion).
<PAGE> 4
In July 1997, the Company announced that a definitive agreement had been
reached to sell 100% of its outstanding common stock at cash price of $3.00 per
share to Leonard Green & Partners, L.P. In August 1997, the Company announced
that due to operating results coming in below expectations, it had agreed to
accept a revised cash price of $2.375 per share. The Company estimates that
consummation of the merger will take place in third quarter of 1997.
In July 1997, the Company entered into an agreement to sell up to seven Home
Quarters Warehouse stores in the Michigan market, subject to various conditions
including receipt of regulatory and other third-party approvals. The estimated
proceeds from this transaction, including inventory liquidation, is
approximately $60 million.
In the thirteen weeks ended August 2, 1997, the Company recorded a charge of
$31.8 million related to the Company's decision to close and sell seven
stores in its Michigan market. The main components of this charge are:
1) estimated write-down to net realizable value of real estate
(approximately $13.6 million), furniture, fixtures, equipment and other
assets (approximately $14.3 million) to be disposed of approximately $27.9
million. As of August 2, 1997, all assets to be disposed of have been
written-down to the net realizable values; and,
2) estimated cash expenditures for operating costs of the stores during
the inventory liquidation period and for employee termination costs of
approximately $3.9 million.
Management anticipates that all stores will be closed by the end of November
1997. The duration of the closing process for each store is expected to be
approximately three months.
For the thirteen weeks ended August 2, 1997, expenditures for employee
termination costs associated with the merger reserve recorded in 1995 totaled
$0.2 million. The remaining balance of $1.4 million has been recorded as a
current liability as of August 2, 1997.
For the thirteen weeks ended August 2, 1997, expenditures for carrying costs of
closed stores associated with the store closing reserve recorded in 1994
totaled $2.5 million. The remaining balance of $4.3 million has been recorded
as a current liability as of August 2, 1997.
The Company believes that the balances remaining in the store closing reserves
and the merger reserve are adequate to cover future expenses related to the
employee termination costs, operating costs during inventory liquidation
periods and the carrying costs of the closed stores resulting from the store
closings and the merger of its Hechinger and Home Quarters operations.
As of August 2, 1997, the Company had outstanding loans of $87.2 million under
its revolving credit facility. In addition, the Company had issued and
outstanding letters of credit of $40.9 million under this facility.
As of August 2, 1997, the Company has approximately $50 million in real estate
and other assets that are currently not being used in its retail operations;
including approximately $9 million of real estate that has been previously
written down to their estimated net realizable values as a part of the charge
recorded in fiscal year 1995 for the adoption of SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The Company is actively pursuing the disposition of these assets and does not
anticipate that such disposal will have a material adverse effect on the
Company's consolidated financial position or results of operations.
Cash and cash equivalents were $41.1 million as of August 2, 1997, compared with
$36.7 million as of February 1, 1997. The increases in merchandise inventories
and accounts payable and accrued expenses from year-end were due primarily to
normal spring selling seasonal increases in addition to lower than expected
sales. Expenditures for property, furniture and equipment and other assets were
$8.5 million for the twenty-six weeks ended August 2, 1997. These expenditures
are related primarily to the Company's store remodeling programs.
<PAGE> 5
The Company is a party to legal proceedings and claims arising in the ordinary
course of business. Although the outcome of such proceedings and claims cannot
be determined with certainty, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
On July 23, 1997, a purported class action complaint was filed in the Delaware
Chancery Court on behalf of all holders of the Common Stock against Hechinger,
Kenneth J. Cort, John W. Hechinger, John W. Hechinger, Jr., Ross Hechinger, Ann
D. Jordan, W. Clark McClelland, Robert S. Parker and Melvin A. Wilmore. The
plaintiff has alleged that the officers and directors of Hechinger breached
their fiduciary duties to holders of the Common Stock by, among other things,
failing to take all reasonable steps to assure the maximization of stockholder
value including the implementation of a bidding mechanism to foster a fair
auction of Hechinger and by entering into an agreement with Leonard Green under
which the consideration offered by Leonard Green to holders of the Common Stock
is "unfair and grossly inadequate." The plaintiff seeks various remedies,
including an injunction to prevent consummation of the Merger. The Company
believes that the plaintiff's claims are without merit and intends vigorously
to defend such action.
Forward-looking statements in this Form 10-Q are made pursuant to the safe
harbor provision of the Private Securities Litigation Reform Act of 1995. There
are various factors that could cause results to differ materially from those
anticipated by some statements made in this Form 10-Q. 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: pending merger, sale of Home Quarters Warehouse stores in
Michigan, 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; newly introduced Wye
River Hardware & Home stores, 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 and other assets; 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.
<PAGE> 6
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a). The Annual Meeting of stockholders was held on June 10, 1997.
(b). Not applicable.
(c). At such meeting all nine of the nominees for election as directors were
elected to hold office until the next Annual Meeting. The votes cast with
respect to each nominee for election as a director were as follows:
<TABLE>
<CAPTION>
Nominee For Abstain
<S> <C> <C>
John W. Hechinger, Jr. 119,023,555 2,214,369
Kenneth J. Cort 119,181,719 2,056,205
John W. Hechinger 119,187,693 2,050,231
S. Ross Hechinger 119,186,618 2,051,753
Ann D. Jordan 119,175,672 2,062,252
W. Clark McClelland 119,180,392 2,057,532
Robert S. Parker 119,185,321 2,052,603
Melvin A. Wilmore 119,185,190 2,052,734
Alan J. Zakon 119,185,290 2,052,634
</TABLE>
At such meeting the stockholders ratified the appointment of Ernst & Young LLP
as the Company's independent accountants for the fiscal year ending January 31,
1998. The votes cast with respect to such matter were as follows:
<TABLE>
<S> <C>
For 120,134,012
Against 811,787
Abstain 292,125
</TABLE>
At such meeting the stockholders voted against the consideration of a
stockholder proposal. The votes cast with respect to such matter were as
follows:
<TABLE>
<S> <C>
For 10,910,027
Against 93,629,014
Abstain 1,139,913
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------ --------
<S> <C>
11 Statement Regarding Computation of Earnings Per Share
99(a) Consolidated Statements of Operations
99(b) Consolidated Balance Sheets
99(c) Consolidated Statements of Cash Flows
99(d) Consolidated Statements of Stockholders' Equity
99(e) Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 7
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated July 21, 1997 was to file a
copy of the press release announcing the definitive merger
agreement among Hechinger Company, Hechinger Acquisition, Inc. and
BSQ Acquisition, Inc. A Current Report on Form 8-K dated August
29, 1997 was to file a copy of the press release to announce
execution of amendment number one to the merger agreement.
<PAGE> 8
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Date: September 4, 1997 HECHINGER COMPANY
-----------------
Registrant
/S/ W. CLARK McCLELLAND
-----------------------
W. Clark McClelland
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
<PAGE> 9
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
[CAPTION]
EXHIBIT NO.
- -----------
[S]
11 Statement Regarding Computation of Earnings Per Share
99(a) Consolidated Statements of Operations
99(b) Consolidated Balance Sheets
99(c) Consolidated Statements of Cash Flows
99(d) Consolidated Statements of Stockholders' Equity
99(e) Notes to Consolidated Financial Statements
<PAGE> 1
EXHIBIT 11
HECHINGER COMPANY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
AUG. 2, 1997 AUG. 3, 1996 AUG. 2, 1997 AUG. 3, 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (40,567) $ 12,215 $ (54,111) $ 6,225
Interest on 5-1/2% convertible debentures, net of tax benefit (1) - 1,072 - -
------------ ------------ ------------ ----------
Net earnings (loss) for primary and fully diluted earnings per share $ (40,567) $ 13,287 $ (54,111) $ 6,225
============ ============ ============ ==========
Weighted average shares outstanding 42,187 42,151 42,187 42,163
Dilutive effect of stock options and restricted stock and performance
share awards after application of the treasury stock method (1) - 152 - 101
Additional shares issuable assuming full conversion of the 5-1/2%
convertible debentures into Class A common stock (1) - 4,420 - -
------------ ------------ ------------ ----------
Common and common equivalent shares outstanding for primary
earnings per share 42,187 46,723 42,187 42,264
Additional dilution from stock options, restricted stock and
performance share awards after application of the treasury stock
method (1) - - - 58
------------ ------------ ------------ ----------
Common and common equivalent shares outstanding for fully diluted
earnings per share 42,187 46,723 42,187 42,322
============ ============ ============ ==========
Primary earnings (loss) per common share ($0.96) $0.28 ($1.28) $0.15
============ ============ ============ ==========
Fully diluted earnings (loss) per common share ($0.96) $0.28 ($1.28) $0.15
============ ============ ============ ==========
</TABLE>
(1) The 5-1/2% Convertible Subordinated Debentures, stock options, restricted
stock and performance share awards were antidilutive for the 13 weeks and
26 weeks ended August 2, 1997. The 5-1/2% Convertible Subordinated
Debentures were antidilutive for the 26 weeks ended August 3, 1996.
See notes to consolidated financial statements.
<PAGE> 1
EXHIBIT 99(a)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
AUG. 2, 1997 AUG. 3, 1996 AUG. 2, 1997 AUG. 3, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 591,626 $ 665,902 $1,099,607 $ 1,227,219
Other (principally interest) 239 845 239 1,361
---------- ---------- ----------- ------------
Total Revenues 591,865 666,747 1,099,846 1,228,580
COSTS AND EXPENSES
Cost of sales 477,771 526,338 883,101 971,811
Selling, general and administrative expenses 111,975 118,394 217,578 230,989
Interest expense 10,886 9,800 21,478 19,555
Store closing charge 31,800 - 31,800 -
---------- ---------- ----------- ------------
Total Costs and Expenses 632,432 654,532 1,153,957 1,222,355
---------- ---------- ----------- ------------
EARNINGS (LOSS) BEFORE INCOME TAXES (40,567) 12,215 (54,111) 6,225
INCOME TAX EXPENSE - - - -
---------- ---------- ----------- ------------
NET EARNINGS (LOSS) ($40,567) $12,215 ($54,111) $6,225
========== ========== =========== ============
PRIMARY AND FULLY DILUTED EARNINGS
(LOSS) PER COMMON SHARE ($0.96) $0.28 ($1.28) $0.15
========== ========== =========== ============
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Primary 42,187 46,723 42,187 42,264
Fully diluted 42,187 46,723 42,187 42,322
DIVIDENDS PER SHARE:
Class A common stock $0.00 $0.00 $0.00 $0.00
Class B common stock $0.00 $0.00 $0.00 $0.00
</TABLE>
See notes to consolidated financial statements.
<PAGE> 1
EXHIBIT 99(b)
HECHINGER COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
(unaudited)
AUG. 2, 1997 FEB. 1, 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 41,081 $ 36,727
Merchandise inventories 429,204 414,980
Other current assets 45,478 66,637
------------- ------------
Total Current Assets 515,763 518,344
PROPERTY, FURNITURE AND EQUIPMENT, net 423,889 461,752
COST IN EXCESS OF NET ASSETS ACQUIRED, net 51,225 52,066
LEASEHOLD ACQUISITION COSTS, net 45,762 46,876
OTHER ASSETS 22,566 26,065
------------- ------------
TOTAL ASSETS $ 1,059,205 $ 1,105,103
============= ============
<CAPTION>
(unaudited)
AUG. 2, 1997 FEB. 1, 1997
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 87,208 $ 84,814
Accounts payable and accrued expenses 224,102 220,296
Current portion of long-term debt and capital lease
obligations 3,308 3,657
Store closing reserve 3,870 -
------------- ------------
Total Current Liabilities 318,488 308,767
LONG-TERM DEBT 380,284 380,868
CAPITAL LEASE OBLIGATIONS 12,763 13,610
DEFERRED RENT 27,398 27,602
STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value; authorized
50,000,000 shares; issued 32,851,639 and 32,608,139 3,285 3,261
Class B common stock, $.10 par value, authorized
30,000,000 shares; issued 9,472,871 and 9,716,371 947 971
Additional paid-in capital 238,248 238,248
Retained earnings 78,803 132,914
Unearned compensation (126) (253)
Less treasury stock at cost, 97,265 Class A common
shares and 14,497 Class B common shares (885) (885)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 320,272 374,256
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,059,205 $ 1,105,103
============= ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 1
EXHIBIT 99(c)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
26 WEEKS ENDED
AUG. 2, 1997 AUG. 3, 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings (loss) $ (54,111) $ 6,225
Adjustments to reconcile earnings (loss) to net cash provided by
operating activities:
Unusual charges 26,532 (17,705)
Depreciation and amortization 28,007 28,866
Deferred rent expense (204) (636)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories (18,724) (45,936)
Other current assets 16,145 (11,698)
Accounts payable and accrued expenses 10,151 31,840
Income taxes payable 3,737 11,302
------------- -------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 11,533 2,258
------------- -------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Property, furniture, equipment and other assets:
Additions (8,506) (29,990)
Disposals 586 16,737
------------- -------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (7,920) (13,253)
------------- -------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 245,973 268,355
Payments to revolving credit facility (243,579) (202,143)
Other (1,653) (1,194)
------------- -------------
NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 741 65,018
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,354 54,023
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36,727 35,785
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,081 $ 89,808
============= =============
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ - $ -
Cash payments for interest, net of amount capitalized $ 21,367 $ 20,132
</TABLE>
See notes to consolidated financial statements.
<PAGE> 1
EXHIBIT 99(d)
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
COMMON COMMON PAID-IN RETAINED UNEARNED TREASURY
STOCK STOCK CAPITAL EARNINGS COMPENSATION STOCK
------- ------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
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) - - - -
(1,715,558 Class A common shares)
Purchase of treasury stock (57,940 Class A common shares) - - - - - (213)
Net loss - - - (25,076) - -
------- ------- --------- --------- --------- ------
BALANCE, FEB. 1, 1997 3,261 971 238,248 132,914 (253) (885)
Restricted stock awards earned - - - - 127 -
Conversions from Class B to Class A common stock 24 (24) - - - -
(243,500 Class A common shares)
Net loss - - - (54,111) - -
------- ------- --------- --------- --------- ------
BALANCE, AUGUST 2, 1997 (unaudited) $3,285 $ 947 $238,248 $ 78,803 $ (126) $(885)
======= ======= ========= ========= ========= ======
<CAPTION>
TOTAL
---------
<S> <C>
BALANCE, FEB. 3, 1996 $ 399,039
Restricted stock awards earned 506
Conversions from Class B to Class A common stock -
(1,715,558 Class A common shares)
Purchase of treasury stock (57,940 Class A common shares) (213)
Net loss (25,076)
---------
BALANCE, FEB. 1, 1997 374,256
Restricted stock awards earned 127
Conversions from Class B to Class A common stock -
(243,500 Class A common shares)
Net loss (54,111)
---------
BALANCE, AUGUST 2, 1997 (unaudited) $ 320,272
=========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 1
EXHIBIT 99(e)
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
(unaudited)
A. BASIS OF PRESENTATION
In the opinion of the management of Hechinger Company (the "Company"), the
accompanying unaudited consolidated financial statements include all
adjustments (which consist of normal recurring accruals) considered necessary
for a fair statement of the results for the interim periods presented. The
operating results for the thirteen and twenty-six weeks ended August 2, 1997
are not necessarily indicative of the results to be expected for the fiscal
year ending January 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. The financial
statements presented herein should be read in conjunction with the financial
statements incorporated by reference in the Company's Annual Report on Form
10-K for the year ended February 1, 1997.
B. MERCHANDISE INVENTORY
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and costs. Interim results are subject to
the final year-end LIFO inventory valuation.
All inventories reported at August 2, 1997 and February 1, 1997 were valued
using the LIFO inventory valuation method. If all inventories had been valued
under the FIFO method, which approximates replacement cost, inventories would
have been $21.4 million and $20.5 million higher than reported at August 2,
1997 and February 1, 1997, respectively.
C. TAXES ON INCOME
For the thirteen and twenty-six weeks ended August 2, 1997 and the
corresponding periods last year, the effective tax rate was 0%. No tax benefits
have been recorded as all potential benefits have been recorded in prior
periods.
D. EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share" was issued in February 1997. The statement is required to be adopted by
the Company for the periods ending January 31, 1998. Early adoption of SFAS 128
is not permitted. The statement requires companies to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. Adoption of SFAS 128 is not
expected to have a material impact in either the primary or fully diluted
earnings per share of the Company. If the Company had adopted SFAS 128 as of
the second quarter of 1997, the impact on earnings per share would not have
been material.
<PAGE> 2
E. REVOLVING CREDIT FACILITY
As of August 2, 1997, the Company had outstanding loans of $87.2 million under
its revolving credit facility. In addition, the Company had issued and
outstanding letters of credit of $40.9 million under this facility.
F. CONTINGENCIES
The Company is a party to legal proceedings and claims arising in the ordinary
course of business. Although the outcome of such proceedings and claims cannot
be determined with certainty, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
On July 23, 1997, a purported class action complaint was filed in the Delaware
Chancery Court on behalf of all holders of the Common Stock against Hechinger,
Kenneth J. Cort, John W. Hechinger, John W. Hechinger, Jr., Ross Hechinger, Ann
D. Jordan, W. Clark McClelland, Robert S. Parker and Melvin A. Wilmore. The
plaintiff has alleged that the officers and directors of Hechinger breached
their fiduciary duties to holders of the Common Stock by, among other things,
failing to take all reasonable steps to assure the maximization of stockholder
value including the implementation of a bidding mechanism to foster a fair
auction of Hechinger and by entering into an agreement with Leonard Green under
which the consideration offered by Leonard Green to holders of the Common Stock
is "unfair and grossly inadequate." The plaintiff seeks various remedies,
including an injunction to prevent consummation of the Merger. The Company
believes that the plaintiff's claims are without merit and intends vigorously
to defend such action.
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