<PAGE> 1
SCHEDULE 14A
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
HECHINGER COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14(a)-6(i)(2) or item
22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14(a)-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14(a)-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
Hechinger Company Class A Common Stock, par value $0.10 per share (the
"Class A Common Stock")
Hechinger Company Class B Common Stock, par value $0.10 per share (the
"Class B Common Stock")
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
32,754,374 shares of Class A Common Stock
9,458,374 shares of Class B Common Stock
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$2.375 per share of Class A Common Stock
$2.375 per share of Class B Common Stock
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
$100,255,277(1)
- --------------------------------------------------------------------------------
5) Total Fee paid:
$25,327.65(1)
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
- --------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
3) Filing Party:
- --------------------------------------------------------------------------------
4) Date Filed:
- --------------------------------------------------------------------------------
- ---------------
(1) For purposes of calculating the filing fee only. Upon consummation of the
Merger, each outstanding share of Class A Common Stock and Class B Common
Stock will be converted into the right to receive $2.375 in cash per share.
The proposed maximum aggregate value of the transaction described in the
preliminary proxy materials is equal to $100,255,277 (calculated based on
the sum of the number of shares of Class A Common Stock plus the number of
shares of Class B Common Stock outstanding as of the date hereof times
$2.375). The filing fee, which is in excess of the $20,051 filing fee that
would have been required based on the new proposed maximum aggregate value,
was paid prior to the amendment of the Original Merger Agreement (as defined
herein). The proposed maximum aggregate value under the terms of the
Original Merger Agreement was approximately $126,638,244.
<PAGE> 2
HECHINGER COMPANY
1801 MCCORMICK DRIVE
LARGO, MARYLAND 20774 [HECHINGER LOGO]
September 5, 1997
Dear Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders of
Hechinger Company, a Delaware corporation ("Hechinger"), which will be held on
September 25, 1997 at 9:00 a.m. local time at 3500 Pennsy Drive, Landover,
Maryland 20785 (the "Special Meeting").
At the Special Meeting, holders of shares of Hechinger's Class A Common
Stock, $.10 par value per share (the "Class A Common Stock"), and Class B Common
Stock, par value $.10 per share (the "Class B Common Stock," and together with
the Class A Common Stock, the "Common Stock"), voting together as a single
class, will be asked to consider and vote upon a proposal to approve and adopt
the Agreement and Plan of Merger, dated as of July 17, 1997 (the "Original
Merger Agreement"), as amended as of August 27, 1997 (as so amended, the "Merger
Agreement"), by and among Hechinger, BSQ Acquisition, Inc., a Delaware
corporation ("BSQ Acquisition"), and Hechinger Acquisition, Inc., a Delaware
corporation ("Acquisition"), pursuant to which Acquisition will merge with and
into Hechinger (the "Merger"). BSQ Acquisition and Acquisition are recently
formed corporations and are indirect wholly owned subsidiaries of Green Equity
Investors II, L.P. ("GEI"). As a result of the Merger, Hechinger will be the
surviving corporation and will become a wholly owned subsidiary of BSQ
Acquisition. Pursuant to the Merger, each share of Common Stock issued and
outstanding immediately prior to the effective time of the Merger (other than
shares of Common Stock owned by Acquisition, BSQ Acquisition or held in treasury
of Hechinger, or as to which appraisal rights have been exercised) will be
converted into the right to receive $2.375 in cash, without interest. Approval
of the Merger Agreement and consummation of the Merger will cause the interests
of current holders of Common Stock (the "Stockholders") in the future operations
of Hechinger to cease. After consummation of the Merger, Hechinger's outstanding
public indebtedness will continue to remain outstanding.
Concurrently with the execution of the Original Merger Agreement, BSQ
Acquisition also entered into a Purchase and Sale Agreement, dated as of July
17, 1997 (the "BSQ Acquisition Agreement"), with Kmart Corporation, a Michigan
corporation, and Builders Square, Inc., a Delaware corporation ("Builders
Square"), pursuant to which BSQ Acquisition will purchase all of the outstanding
capital stock of a recently formed, wholly owned subsidiary of Builders Square
(to which substantially all assets and liabilities relating to the business of
Builders Square will be transferred). Since GEI plans to combine the businesses
and operations of Hechinger and Builders Square, it is a condition to the
closing of the Merger Agreement that the transactions contemplated by the BSQ
Acquisition Agreement shall have been consummated or shall be consummated
substantially concurrently with the transactions contemplated by the Merger
Agreement and vice versa.
After careful consideration of the terms and conditions of the Merger
Agreement, and after having considered a number of factors described in the
accompanying Proxy Statement, including the opinion of Donaldson, Lufkin &
Jenrette Securities Corporation, that the consideration to be paid in the Merger
is fair, in the aggregate, from a financial point of view to the Stockholders,
the Board
<PAGE> 3
of Directors of Hechinger believes that the Merger Agreement and the Merger are
in the best interests of the Stockholders, and has approved the Merger Agreement
and the Merger.
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT AND THE MERGER. Certain members of the Board of
Directors of Hechinger have conflicts of interest with respect to the Merger.
See the accompanying Proxy Statement for a description of the interests of
certain persons in the Merger. Approval and adoption of the Merger Agreement and
the Merger requires the affirmative vote of a majority of the voting power of
the outstanding shares of Common Stock, voting together as a single class. John
W. Hechinger, Jr., Hechinger's Chairman and Chief Executive Officer, John W.
Hechinger, a director of Hechinger, S. Ross Hechinger, Hechinger's Senior Vice
President -- Administration for Hechinger and a director of Hechinger, and
certain other members of the Hechinger family and affiliates controlled by
certain members of the Hechinger family, have entered into a Stockholders
Agreement, dated as of July 17, 1997, pursuant to which they have agreed upon
the terms set forth therein to vote shares of Common Stock representing
approximately 64.9% of the total voting power of the outstanding Common Stock in
favor of approval and adoption of the Merger Agreement and the Merger.
Accordingly, approval and adoption of the Merger Agreement and the Merger is
assured.
Upon approval of the Merger Agreement and the Merger, it is currently
anticipated that the Merger will be consummated promptly after the Special
Meeting. A letter of transmittal will be mailed no later than 15 days prior to
the date fixed for the Special Meeting to all Stockholders of record to use in
surrendering their stock certificates. PLEASE DO NOT SEND IN YOUR STOCK
CERTIFICATES WITH THE ENCLOSED PROXY CARD. ALONG WITH THE LETTER OF TRANSMITTAL,
YOU WILL RECEIVE INSTRUCTIONS AS TO THE PROCEDURE TO BE USED IN SURRENDERING
YOUR CERTIFICATES.
A detailed description of the Merger, along with other important
information, is set forth in the accompanying Proxy Statement and the annexes
thereto, which you should read carefully.
Regardless of the number of shares of Common Stock you own, it is important
that you vote. Whether or not you plan to attend the Special Meeting, please
complete, sign and date the enclosed proxy card and return it promptly in the
enclosed postage prepaid envelope. If you attend the Special Meeting, you may
vote in person if you wish, even though you previously have returned your proxy
card. Your prompt attention is greatly appreciated.
Very truly yours,
/s/ JOHN W. HECHINGER, JR.
John W. Hechinger, Jr.
Chairman and
Chief Executive Officer
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD.
<PAGE> 4
HECHINGER COMPANY
1801 MCCORMICK DRIVE
LARGO, MARYLAND 20774
(301) 341-1000
- ------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 25, 1997 [HECHINGER LOGO]
TO THE STOCKHOLDERS OF HECHINGER COMPANY:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Hechinger
Company, a Delaware corporation ("Hechinger"), will be held on September 25,
1997 at 9:00 a.m. local time at 3500 Pennsy Drive, Landover, Maryland 20785 (the
"Special Meeting") for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of July 17, 1997 (the "Original
Merger Agreement"), as amended as of August 27, 1997 (as so amended, the
"Merger Agreement"), by and among Hechinger, BSQ Acquisition, Inc., a
Delaware corporation ("BSQ Acquisition"), and Hechinger Acquisition, Inc.,
a Delaware corporation ("Acquisition"), pursuant to which Acquisition will
merge with and into Hechinger (the "Merger"). BSQ Acquisition and
Acquisition are recently formed corporations and are indirect wholly owned
subsidiaries of Green Equity Investors II, L.P. As a result of the Merger,
Hechinger will be the surviving corporation and will become a wholly owned
subsidiary of BSQ Acquisition. Pursuant to the Merger, each share of Class
A Common Stock, $.10 par value per share (the "Class A Common Stock"), and
Class B Common Stock, $.10 par value per share (the "Class B Common Stock,"
and together with the Class A Common Stock, the "Common Stock"), issued and
outstanding immediately prior to the effective time of the Merger (other
than shares of Common Stock owned by Acquisition, BSQ Acquisition or held
in treasury of Hechinger or as to which appraisal rights have been
exercised) will be converted into the right to receive $2.375 in cash,
without interest.
2. To consider and act upon such other matters as may properly come
before the Special Meeting or any adjournments or postponements thereof.
Concurrently with the execution of the Original Merger Agreement, BSQ
Acquisition also entered into a Purchase and Sale Agreement, dated as of July
17, 1997 (the "BSQ Acquisition Agreement"), with Kmart Corporation, a Michigan
corporation, and Builders Square, Inc., a Delaware corporation ("Builders
Square"), pursuant to which BSQ Acquisition will purchase all of the outstanding
capital stock of a recently formed, wholly owned subsidiary of Builders Square
(to which substantially all assets and liabilities relating to the business of
Builders Square will be transferred). It is a condition to the closing of the
Merger Agreement that the transactions contemplated by the BSQ Acquisition
Agreement shall have been consummated or shall be consummated substantially
concurrently with the transactions contemplated by the Merger Agreement and vice
versa.
Only holders of record of shares of Common Stock (the "Stockholders") at
the close of business on August 22, 1997, the record date for the Special
Meeting (the "Record Date"), are entitled to notice of and to vote at the
Special Meeting and any adjournments or postponements thereof. The affirmative
vote of a majority of the voting power of the outstanding shares of Common
Stock, voting together as a single class, is necessary for approval and adoption
of the Merger Agreement and the Merger. John W. Hechinger, Jr., Hechinger's
Chairman and Chief Executive Officer, John W. Hechinger, a director of
Hechinger, S. Ross Hechinger, Hechinger's Senior Vice
President -- Administration for Hechinger and a director of Hechinger, certain
other members of the Hechinger family and affiliates controlled by certain
members of the Hechinger family have entered into a Stockholders Agreement,
dated as of July 17, 1997, pursuant to which they have agreed upon
<PAGE> 5
the terms set forth therein to vote shares of Common Stock representing
approximately 64.9% of the total voting power of the outstanding Common Stock in
favor of approval and adoption of the Merger Agreement and the Merger.
Accordingly, approval and adoption of the Merger Agreement and the Merger is
assured. The Merger and other related matters are more fully described in the
accompanying Proxy Statement and the annexes thereto, which form a part of this
notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING
THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS RETURNED A
PROXY. YOUR PROXY MAY BE REVOKED IN THE MANNER DESCRIBED IN THE ACCOMPANYING
PROXY STATEMENT AT ANY TIME BEFORE IT HAS BEEN VOTED AT THE SPECIAL MEETING.
If the Merger is consummated, Stockholders who did not vote in favor of the
Merger Agreement and the Merger and otherwise complied with the requirements of
Section 262 of the General Corporation Law of the State of Delaware will have
certain appraisal rights under Delaware law. See "Summary -- Appraisal Rights"
and "Appraisal Rights" in the accompanying Proxy Statement for a description of
the procedures required to be followed to perfect appraisal rights.
By Order of the Board of Directors,
/s/ MARK R. ADAMS
Mark R. Adams
Senior Vice President,
Treasurer and Secretary
September 5, 1997
<PAGE> 6
PROXY STATEMENT
HECHINGER COMPANY
1801 McCormick Drive
Largo, Maryland 20774
(301) 341-1000
------------------------
SPECIAL MEETING OF STOCKHOLDERS
To Be Held On September 25, 1997
------------------------
INTRODUCTION
This Proxy Statement is being furnished to stockholders of Hechinger
Company, a Delaware corporation ("Hechinger" or the "Company"), in connection
with the solicitation of proxies by the Board of Directors of Hechinger (the
"Hechinger Board") for use at the Special Meeting of Stockholders of Hechinger,
and at any adjournment or postponement thereof, to be held on September 25, 1997
at 9:00 a.m. local time at 3500 Pennsy Drive, Landover, Maryland 20785 (the
"Special Meeting").
At the Special Meeting, holders of shares of Hechinger's Class A Common
Stock, $.10 par value per share (the "Class A Common Stock"), and Class B Common
Stock, par value $.10 per share (the "Class B Common Stock," and together with
the Class A Common Stock, the "Common Stock"), voting together as a single
class, will be asked to consider and vote upon a proposal to approve and adopt
the Agreement and Plan of Merger, dated as of July 17, 1997 (the "Original
Merger Agreement"), as amended pursuant to the First Amendment thereto (the
"Amendment"), dated as of August 27, 1997 (as so amended, the "Merger
Agreement"), by and among Hechinger, BSQ Acquisition, Inc., a Delaware
corporation ("BSQ Acquisition"), and Hechinger Acquisition, Inc., a Delaware
corporation ("Acquisition"), pursuant to which Acquisition will merge with and
into Hechinger (the "Merger"). BSQ Acquisition and Acquisition are recently
formed corporations and are indirect wholly owned subsidiaries of Green Equity
Investors II, L.P. ("GEI"). See "Certain Information Concerning BSQ Acquisition,
Acquisition and GEI." As a result of the Merger, Hechinger will be the surviving
corporation and will become a wholly owned subsidiary of BSQ Acquisition.
Pursuant to the Merger, each share of Common Stock issued and outstanding
immediately prior to the effective time of the Merger (other than shares of
Common Stock owned by Acquisition, BSQ Acquisition or held in treasury of
Hechinger, or as to which appraisal rights have been exercised) will be
converted into the right to receive $2.375 in cash, without interest.
Historically, the shares of Class B Common Stock have traded at all times above
$2.375 per share. Approval of the Merger Agreement and consummation of the
Merger will cause the interests of current holders of Common Stock (the
"Stockholders") in the future operations of Hechinger to cease. After
consummation of the Merger, the Company's outstanding public indebtedness will
continue to remain outstanding.
Pursuant to the terms of the Original Merger Agreement, holders of Common
Stock would have been entitled to receive $3.00 per share in cash, without
interest. Due to a deterioration of Hechinger's business and operations since
the date of the Original Merger Agreement, Hechinger and BSQ Acquisition agreed,
pursuant to the terms of the Amendment, to adjust the purchase price from $3.00
per share to $2.375 per share.
Concurrently with the execution of the Original Merger Agreement, BSQ
Acquisition also entered into a Purchase and Sale Agreement, dated July 17, 1997
(the "BSQ Acquisition Agreement"), with Kmart Corporation, a Michigan
corporation ("Kmart"), and Builders Square, Inc., a Delaware corporation
("Builders Square"), pursuant to which BSQ Acquisition will purchase all of the
outstanding capital stock of a recently formed, wholly owned subsidiary of
Builders Square ("New Builders Square") to which substantially all assets and
liabilities relating to the business of
i
<PAGE> 7
Builders Square will be transferred. GEI plans to combine the businesses and
operations of Hechinger and Builders Square and, accordingly, GEI would not be
willing to proceed with the acquisition of Hechinger if it cannot simultaneously
acquire the business of Builders Square. It is therefore a condition to the
closing of the Merger Agreement that the transactions contemplated by the BSQ
Acquisition Agreement shall have been consummated or shall be consummated
substantially concurrently with the transactions contemplated by the Merger
Agreement and vice versa.
Approval and adoption of the Merger Agreement and the Merger requires the
affirmative vote of a majority of the voting power of the outstanding shares of
Common Stock, voting together as a single class. John W. Hechinger, Jr., the
Company's Chairman and Chief Executive Officer, John W. Hechinger, a director of
Hechinger, S. Ross Hechinger, Hechinger's Senior Vice President --
Administration for Hechinger and a director of Hechinger, certain other members
of the Hechinger family and affiliates controlled by certain members of the
Hechinger family (collectively, the "Significant Stockholders") have entered
into a Stockholders Agreement, dated as of July 17, 1997 (the "Stockholders
Agreement"), pursuant to which they have (i) agreed upon the terms set forth
therein to vote shares of Common Stock representing approximately 64.9% of the
total voting power of the outstanding Common Stock in favor of approval and
adoption of the Merger Agreement and the Merger and (ii) granted an irrevocable
proxy in connection therewith. Accordingly, approval and adoption of the Merger
Agreement and the Merger is assured.
Pursuant to the terms of the Merger Agreement, consummation of the Merger
is subject to the waiver or satisfaction of a number of conditions, including
the condition that BSQ Acquisition will have obtained all financing necessary in
connection with the consummation of the transactions contemplated by the Merger
Agreement and the BSQ Acquisition Agreement and the continuation after the
Closing of the business of BSQ Acquisition and Hechinger after consummation of
these transactions. Although Leonard Green has obtained a Commitment Letter (as
defined), the obligation of the banks to provide financing is subject to various
conditions, including satisfaction with the results of their ongoing due
diligence investigation with respect to the assets, business, properties,
conditions (financial and otherwise), results of operations, prospects and
material agreements of GEI, BSQ Acquisition, Hechinger and Builders Square.
There can be no assurance that all of the conditions contained in the Merger
Agreement or the Commitment Letter will be satisfied or waived, as the case may
be, at or prior to the Closing (as defined). If such conditions are not
satisfied or waived prior to or at the Closing, BSQ Acquisition will have no
obligation to consummate the Merger and may terminate the Merger Agreement
without penalty. See "The Merger Agreement -- Conditions to Consummation of the
Merger", "-- Financing" and "Financing of the Merger."
THE BOARD OF DIRECTORS OF HECHINGER HAS APPROVED THE MERGER AGREEMENT AND
THE MERGER AND RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER. CERTAIN MEMBERS OF THE BOARD OF DIRECTORS OF HECHINGER
HAVE CONFLICTS OF INTEREST WITH RESPECT TO THE MERGER. SEE "THE
MERGER -- INTEREST OF CERTAIN PERSONS IN THE MERGER."
The information contained in this Proxy Statement relating to Acquisition,
BSQ Acquisition, Builders Square and their respective affiliates has been
supplied to Hechinger by Acquisition, BSQ Acquisition and Builders Square.
The accompanying proxy is solicited by the Hechinger Board and will be
voted in accordance with the instructions contained therein, if it is returned
duly executed and is not revoked. IF NO CHOICE IS SPECIFIED IN THE PROXY, IT
WILL BE VOTED FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND
THE MERGER. A Stockholder may revoke a proxy at any time before its exercise by
delivery of written notice, delivery to the Secretary of Hechinger of a duly
executed proxy bearing a later date or attending the Special Meeting and voting
in person.
The record date for determination of Stockholders entitled to receive
notice of and to vote at the Special Meeting was the close of business on August
22, 1997 (the "Record Date"). On that date, there were outstanding and entitled
to vote an aggregate of 32,754,374 shares of Class A Common Stock, each of which
entitles the holder thereof to one (1) vote per share, and 9,458,374 shares of
ii
<PAGE> 8
Class B Common Stock, each of which entitles the holder thereof to ten (10)
votes per share. As of the Record Date, there were approximately 1,200
beneficial holders of Class B Common Stock of which approximately 1,160 of such
holders were unaffiliated with the Significant Stockholders.
The cost of soliciting proxies will be borne by Hechinger. Brokers,
custodians and fiduciaries will be requested to forward proxy soliciting
materials to the owners of stock held in their name and Hechinger will reimburse
them for their out-of-pocket expenses in connection therewith.
This Proxy Statement is first being mailed to Stockholders on or about
September 5, 1997.
In the event that the purchase price of $2.375 per share payable to the
holders of Common Stock pursuant to the Merger Agreement is adjusted further,
Hechinger will provide revised proxy materials to the Stockholders and resolicit
proxies from such Stockholders.
The Company's principal executive offices are located at 1801 McCormick
Drive, Largo, Maryland 20774, and its telephone number is (301) 341-1000.
AVAILABLE INFORMATION
Hechinger is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by Hechinger with the Commission can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. In addition, reports, proxy statements and other information
concerning Hechinger may be inspected at the offices of Nasdaq Operations, 1735
K Street, N.W., Washington, D.C. 20006-1500.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this Proxy Statement 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 Proxy Statement. Stockholders
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; Hechinger's ability to maintain competitive pricing in its markets;
Hechinger's ability to maintain adequate levels of vendor support; the ability
of Hechinger's customer service programs, Better Spaces store and commercial
business programs to increase sales; Hechinger's ability to attract, train and
retain experienced, quality employees; Hechinger'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
Hechinger's Commission filings.
iii
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TABLE OF CONTENTS
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INDEX OF DEFINED TERMS................................................................ vi
SUMMARY............................................................................... 1
THE SPECIAL MEETING................................................................... 13
Purpose of the Special Meeting................................................... 13
Record Date; Voting Rights; Quorum............................................... 13
Vote Required.................................................................... 13
Proxies; Voting and Revocation................................................... 13
Solicitation of Proxies.......................................................... 14
THE MERGER............................................................................ 15
Background of the Merger......................................................... 15
Recommendation of the Hechinger Board; Hechinger's Reasons for the Merger........ 18
Certain Aspects of the Merger.................................................... 22
Opinion of Financial Advisor..................................................... 22
Certain Estimates of Future Operations and Other Information..................... 26
Interest of Certain Persons in the Merger........................................ 27
THE MERGER AGREEMENT.................................................................. 30
General.......................................................................... 30
Effective Time................................................................... 30
Payment for Shares............................................................... 30
Conditions to Consummation of the Merger......................................... 31
Representations and Warranties................................................... 33
Conduct of Business Pending the Merger........................................... 33
Compliance with Antitrust Laws................................................... 35
Financing........................................................................ 35
Effect on Hechinger's Stock Options; Employee Benefit Plans...................... 35
No Solicitation of Transactions.................................................. 36
Indemnification.................................................................. 36
Special Meeting.................................................................. 37
Additional Covenants............................................................. 37
Termination; Fees and Expenses................................................... 38
Amendment and Waiver............................................................. 39
Effects of the Merger............................................................ 39
THE STOCKHOLDERS AGREEMENT............................................................ 40
Voting of Shares................................................................. 40
Proxy............................................................................ 40
Certain Payments................................................................. 41
Covenants........................................................................ 41
Certain Representations and Warranties........................................... 42
FINANCING OF THE MERGER............................................................... 42
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER................................. 43
APPRAISAL RIGHTS...................................................................... 43
CERTAIN INFORMATION CONCERNING BSQ ACQUISITION, ACQUISITION AND GEI................... 46
CERTAIN INFORMATION CONCERNING BUILDERS SQUARE........................................ 46
CERTAIN INFORMATION CONCERNING THE RELATED TRANSACTION................................ 46
REGULATORY CONSIDERATIONS............................................................. 46
MARKET PRICES AND DIVIDENDS........................................................... 48
RECENT DEVELOPMENTS................................................................... 48
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION................................ 50
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION........................................................................... 51
Twenty-six Weeks Ended August 2, 1997 as compared to Twenty-six Weeks Ended
August 3, 1996.................................................................. 51
Year Ended February 1, 1997 as compared to Year Ended February 3, 1996, and Year
Ended January 28, 1995.......................................................... 53
Operations....................................................................... 53
Impairment of Long-Lived Assets.................................................. 55
Stock-Based Compensation......................................................... 56
Liquidity and Capital Resources.................................................. 56
Impact of Inflation and Changing Prices.......................................... 57
BUSINESS AND OPERATIONS OF HECHINGER.................................................. 57
Business......................................................................... 57
Products......................................................................... 57
Marketing........................................................................ 58
Competition...................................................................... 59
Seasonality...................................................................... 59
Employees........................................................................ 59
Properties....................................................................... 59
Legal Proceedings................................................................ 60
PRINCIPAL STOCKHOLDERS................................................................ 61
SECURITY OWNERSHIP OF CERTAIN DIRECTORS AND OFFICERS.................................. 63
EXPERTS............................................................................... 64
STOCKHOLDER PROPOSALS................................................................. 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENT OF HECHINGER................................ F-1
Annex A -- Agreement and Plan of Merger, dated as of July 17, 1997
Annex B -- First Amendment to Agreement and Plan of Merger, dated as of August 27, 1997
Annex C -- Stockholders Agreement
Annex D -- Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
Annex E -- Section 262 of the Delaware General Corporation Law
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INDEX OF DEFINED TERMS
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Acquisition.......................... i
Acquisition Proposal................. 5
Agents............................... 7
Aggregate Consideration.............. 7
Amendment............................ i
Antitrust Division................... 10
Approvals............................ 32
August 27th Meeting.................. 17
Better Spaces........................ 1
BSQ Acquisition...................... i
BSQ Acquisition Agreement............ i
Builders Square...................... i
Case 1 Estimates..................... 26
Case 2 Estimates..................... 26
Case 3 Estimates..................... 26
Channel.............................. 24
Class A Common Stock................. i
Class B Common Stock................. i
Closing.............................. 4
Closing Date......................... 4
Commission........................... iii
Commitment Letter.................... 7
Common Stock......................... i
Company.............................. i
Company Adverse Change Condition..... 17
Consents............................. 35
DGCL................................. 3
DLJ.................................. 2
DLJ Opinion.......................... 3
EBIT................................. 24
EBITDA............................... 24
Effective Time....................... 3
Engagement Letter.................... 25
Enterprises.......................... 10
Exchange Act......................... iii
Expenses............................. 39
Financial Buyer...................... 15
FTC.................................. 10
GEI.................................. i
Governmental Entity.................. 31
Hechinger............................ i
Hechinger Board...................... i
Hechinger Financial Statements....... 12
Hechinger Stockholders Agreement..... 42
Hechinger Trust...................... 10
Home Quarters........................ 1
HSR Act.............................. 4
In the Money Options................. 8
Indemnified Liability................ 36
Indemnified Party.................... 36
Initial DLJ Opinion.................. 25
<CAPTION>
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<S> <C>
June 10th Meeting.................... 16
June 24th Meeting.................... 16
June 26th Meeting.................... 17
Kmart................................ i
Law.................................. 31
Leonard Green........................ 15
LIFO................................. 54
Material Adverse Effect.............. 33
Merger............................... i
Merger Agreement..................... i
Merger Termination Date.............. 40
Named Executive Officers............. 8
Named Executive Officers Severance
Agreements......................... 8
New Builders Square.................. i
NNM.................................. 11
Non-Employee Directors............... 9
Options.............................. 35
Order................................ 31
Original Merger...................... 18
Original Merger Agreement............ i
Owned Shares......................... 40
Paying Agent......................... 30
Permits.............................. 32
Person............................... 33
Record Date.......................... ii
Representatives...................... 4
Rickel............................... 24
Rules................................ 10
Section 262.......................... 10
Senior Facilities.................... 7
Senior Vice Presidents............... 8
Senior Vice Presidents Severance
Agreements......................... 8
SERP................................. 9
SFAS 121............................. 55
SFAS 123............................. 56
Shares............................... 40
Significant Stockholders............. ii
Special Meeting...................... i
Stock Incentive Agreements........... 9
Stock Option Plans................... 8
Stockholders......................... i
Stockholders Agreement............... ii
Superior Consideration............... 5
Termination Fee...................... 39
Termination Payment Period........... 41
Trust................................ 9
Trust Agreement...................... 10
Unsolicited Proposal................. 5
Voting Agreement..................... 13
</TABLE>
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<PAGE> 12
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. This summary is not intended to be complete and is
qualified in all respects by reference to the detailed information appearing
elsewhere in this Proxy Statement and the Annexes hereto. Stockholders are urged
to review carefully this Proxy Statement, the Merger Agreement attached hereto
as Annex A and the other Annexes attached hereto.
HECHINGER
Hechinger is the successor to a business started in 1911 by Sidney L.
Hechinger. Hechinger is a leading specialty retailer providing products and
services for the care, repair, remodeling and maintenance of the home and
garden. Hechinger operates 117 stores under the 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 Company's principal executive offices are located at 1801
McCormick Drive, Largo, Maryland 20774, and its telephone number is (301)
341-1000.
ACQUISITION
Acquisition is a recently formed Delaware corporation and has not conducted
any activities to date other than those incident to its formation and the
transactions contemplated by the Merger Agreement. All of the outstanding
capital stock of Acquisition is owned by BSQ Acquisition. See "Certain
Information Concerning BSQ Acquisition, Acquisition and GEI."
BSQ ACQUISITION
BSQ Acquisition is a recently formed Delaware corporation and has not
conducted any activities to date other than those incident to its formation and
the transaction contemplated by the Merger Agreement and the BSQ Acquisition
Agreement. All of the outstanding capital stock of BSQ Acquisition is owned by
Centers Holdings, Inc., a Delaware corporation formed by GEI. See "Certain
Information Concerning BSQ Acquisition, Acquisition and GEI."
THE SPECIAL MEETING OF THE STOCKHOLDERS
Purpose of the Special Meeting
The Special Meeting will be held on September 25, 1997 at 9:00 a.m. local
time at 3500 Pennsy Drive, Landover, Maryland 20785. The purpose of the Special
Meeting is to consider and vote upon the approval and adoption of the Merger
Agreement and the Merger. See "The Special Meeting -- Purpose of the Special
Meeting."
Record Date
The Hechinger Board has fixed the close of business on August 22, 1997 as
the Record Date for determination of the Stockholders entitled to notice of, and
to vote at, the Special Meeting. Only holders of record of shares of Common
Stock on the Record Date are entitled to notice of and to vote at the Special
Meeting. See "The Special Meeting -- Record Date; Voting Rights; Quorum" and
"The Merger Agreement -- General."
Vote Required
Approval of the Merger Agreement and the Merger requires the affirmative
vote of a majority of the voting power of the Common Stock, voting together as a
single class. On the Record Date, there were issued and outstanding 32,754,374
shares of Class A Common Stock, each of which entitles
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<PAGE> 13
the holder thereof to one (1) vote per share, and 9,458,374 shares of Class B
Common Stock, each of which entitles the holder thereof to ten (10) votes per
share. As of the Record Date, there were approximately 1,200 beneficial holders
of Class B Common Stock of which approximately 1,160 of such holders were
unaffiliated with the Significant Stockholders. The Significant Stockholders
have entered into the Stockholders Agreement, pursuant to which they have agreed
upon the terms set forth therein to vote shares of Common Stock representing
approximately 64.9% of the total voting power of the outstanding Common Stock in
favor of approval and adoption of the Merger Agreement and the Merger.
Accordingly, approval and adoption of the Merger Agreement and the Merger is
assured. See "The Special Meeting -- Record Date; Voting Rights; Quorum -- Vote
Required" and "The Stockholders Agreement -- Voting of Shares."
In the event that the purchase price of $2.375 per share payable to the
holders of Common Stock pursuant to the Merger Agreement is adjusted further,
Hechinger will provide revised proxy materials to the Stockholders and resolicit
proxies from such Stockholders.
CONSIDERATION TO BE RECEIVED BY THE STOCKHOLDERS
Pursuant to the Merger, each share of Common Stock issued and outstanding
immediately prior to the effective time of the Merger (other than shares of
Common Stock owned by Acquisition, BSQ Acquisition or held in treasury of
Hechinger, or as to which appraisal rights have been exercised) will be
converted into the right to receive $2.375 in cash.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Hechinger Board believes that the Merger Agreement and the Merger are
in the best interests of the Stockholders, and has approved the Merger Agreement
and the Merger. The Hechinger Board recommends that the Stockholders vote FOR
approval and adoption of the Merger Agreement and the Merger. Certain members of
the Hechinger Board have conflicts of interest with respect to the Merger. See
"The Merger -- Interest of Certain Persons in the Merger." For a discussion of
the reasons for and the factors considered in making this recommendation, see
"The Merger -- Background of the Merger," "-- Recommendation of the Hechinger
Board," and "-- Reasons for the Merger."
HECHINGER'S REASONS FOR THE MERGER
At its meeting on August 27, 1997, the Hechinger Board approved the Merger
Agreement and determined that the Merger is in the best interests of the
Stockholders and recommended that the Stockholders approve and adopt the Merger
Agreement and the Merger. The material factors considered by the Hechinger Board
were the following: (i) the results of a process commenced in May 1996 and
completed in July 1997 in which Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") solicited indications of interest from entities that
Hechinger and DLJ identified as possibly having an interest in acquiring
Hechinger, which results indicated that the receipt of an all cash offer at a
price in excess of $2.375 was unlikely to be obtained in the near term; (ii) the
absence of any offer or any other indication of interest for the Company
following an announcement by the Company on June 17, 1997 that it was in
discussions with an unnamed party with respect to a possible transaction in
which the Stockholders of the Company would receive $3.00 per share in cash;
(iii) the opinion of DLJ, Hechinger's financial advisor, that, as of August 27,
1997, based upon and subject to certain matters stated therein, the
consideration to be paid in the Merger, in the aggregate, is fair, from a
financial point of view, to the Stockholders; (iv) the presentation and views
expressed by the senior management of Hechinger, including a liquidation
analysis; (v) the presentations of DLJ in connection with its opinion as to the
various financial and other considerations deemed relevant to the Hechinger
Board's evaluation of the Merger; (vi) the Hechinger Board's familiarity with
Hechinger's business, financial condition, results of operations, business
strategy and prospects, current industry, economic and market conditions, and
the Hechinger Board's assessment of the benefits and risks associated with
remaining independent; (vii) the fact
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<PAGE> 14
that the Merger Agreement provides for all cash consideration at a price
representing more than 72.7% premium over the closing price of a share of Class
A Common Stock and a 26.9% discount over the closing price of a share of Class B
Common Stock on June 10, 1997, one week prior to Hechinger's announcement that
it was in discussions with respect to a possible transaction, a 15.5% premium
over the closing price of a share of Class A Common Stock and a 32.1% discount
over the closing price of a share of Class B Common Stock on June 16, 1997 and a
9.5% discount over the closing price of a share of Class A Common Stock and a
15.5% discount over the closing price of a share of Class B Common Stock on
August 26, the date prior to the execution of the Merger Agreement; (viii) the
historically limited trading volume of the Class B Common Stock and the
likelihood that the holders of Class B Common Stock would be able to sell all or
a substantial portion of their shares for the quoted market value of such
shares; (ix) the terms and conditions of the Stockholders Agreement; (x) the
desire of the Significant Stockholders to effect the Merger; (xi) the terms and
conditions of the Merger Agreement, including the likelihood that the conditions
to the Merger will be satisfied and the removal pursuant to the Amendment of the
Company Adverse Change Condition (as defined); (xii) the fact that the Merger
would be a taxable transaction to the Stockholders; (xiii) the possible impact
of the Merger and the alternative of remaining independent on Hechinger's
business, prospects, customers and employees; and (xiv) the fact that following
consummation of the Merger, the current Stockholders of Hechinger will no longer
participate in any increases or decreases in the value of Hechinger's business;
(xv) the fact that the Merger Agreement provides for all cash consideration, at
a price representing a substantial discount to the book value of the shares of
Common Stock. See "The Merger -- Recommendation of the Hechinger Board;
Hechinger's Reasons for the Merger."
OPINION OF FINANCIAL ADVISOR
On August 27, 1997, DLJ rendered its oral opinion, which was subsequently
confirmed by a written opinion dated as of August 28, 1997, and dated as of the
date of this Proxy Statement, that, as of such dates, based upon and subject to
certain matters stated therein, the consideration to be paid in the Merger is
fair, in the aggregate, from a financial point of view to the Stockholders. A
copy of the written opinion of DLJ dated as of the date of this Proxy Statement
(the "DLJ Opinion") is attached as Annex D to this Proxy Statement. The DLJ
Opinion should be read carefully and in its entirety for assumptions made,
matters considered, scope and limits of the review and procedures followed by
DLJ in connection with the DLJ Opinion. The Company did not request nor did it
receive separate opinions from DLJ for the holders of the Class A Common Stock
and the Class B Common Stock.
THE MERGER
The Merger; Effective Time
As soon as practicable after satisfaction or waiver of all conditions to
the Merger, Acquisition will merge with and into Hechinger in accordance with
the Delaware General Corporation Law (the "DGCL"). As a result of the Merger,
Hechinger will be the Surviving Corporation and a wholly owned subsidiary of BSQ
Acquisition. The Merger will become effective at such time as the certificate of
merger is duly filed with the Secretary of State of Delaware or at such later
time as is specified in the certificate of merger (the "Effective Time").
Certain outstanding, publicly traded indebtedness of Hechinger will remain
outstanding obligations of the Company after the Effective Time.
Merger Consideration
At the Effective Time, subject to certain provisions as described herein
with respect to shares of Common Stock owned by Acquisition, BSQ Acquisition or
held in treasury of Hechinger, or as to which appraisal rights have been
exercised, each share of Common Stock issued and outstanding immediately prior
to the Effective Time will be converted into the right to receive $2.375 in
cash,
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<PAGE> 15
without interest. See "The Special Meeting -- Appraisal Rights," "The Merger
Agreement -- General."
Surrender of Stock Certificates
A letter of transmittal will be mailed no later than 15 days prior to the
date fixed for the Special Meeting to all Stockholders of record for use in
surrendering their stock certificates. See "The Merger Agreement -- Payment for
Shares."
Certain Conditions to the Merger
The respective obligations of Hechinger, BSQ Acquisition and Acquisition to
consummate the Merger are subject to the satisfaction of various conditions,
including, but not limited to (i) no Law or Order (as defined) shall have been
enacted, entered, issued or promulgated by any governmental entity which
materially restricts the consummation of the transaction contemplated thereby;
(ii) any applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), shall have expired or have
been terminated with respect to the transactions contemplated thereby; (iii) no
Governmental Entity (as defined) shall have notified either party to the Merger
Agreement that it intends to commence proceedings to restrain or prohibit the
transactions contemplated under the Merger Agreement or force recission, unless
such Governmental Entity shall have withdrawn such notice and abandoned any such
proceedings prior to the time which otherwise would have been the closing date
for the Merger (the "Closing Date"); (iv) the Merger Agreement and other
transactions contemplated thereby shall have been approved by the requisite vote
of the Stockholders; (v) that all representations and warranties made by each
party pursuant to the Merger Agreement shall be true and correct in all respects
on the date when made and as of the Closing Date; and (vi) that each party to
the Merger Agreement shall have performed or complied in all material respects
with all covenants and conditions contained in the Merger Agreement either at or
prior to the closing. The Merger Agreement provides that the closing shall take
place on the first business day on which all the conditions to effect the Merger
shall be fulfilled or waived in accordance with the Merger Agreement or such
other time and/or such other date as Hechinger, Acquisition and BSQ Acquisition
may agree (the "Closing").
The obligations of BSQ Acquisition and Acquisition to consummate the Merger
are subject to satisfaction of certain additional conditions, including: (i)
Hechinger shall have obtained all permits and approvals required to consummate
the transactions contemplated by the Merger Agreement and which permit the
Surviving Corporation to continue Hechinger's business in substantially the
manner as it is being conducted as of the date of the Merger Agreement; (ii) BSQ
Acquisition shall have made or obtained, on terms satisfactory to BSQ
Acquisition in its sole discretion, all financing necessary in connection with
the consummation of the transactions contemplated by the Merger Agreement and
the BSQ Acquisition Agreement and which are necessary to continue after the
Closing the businesses of BSQ Acquisition and the Surviving Corporation in
substantially the manner they are currently being conducted or are planned to be
conducted; and (iii) the transactions contemplated by the BSQ Acquisition
Agreement and its related agreements shall have been consummated or shall be
consummated substantially concurrently with the Merger. See "The Merger
Agreement -- Conditions to Consummation of the Merger" and "Certain Information
Concerning the Related Transaction."
No Solicitation of Transactions
The Merger Agreement provides that neither Hechinger nor any of its
officers and directors will, and Hechinger will direct and use its best efforts
to cause its employees and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it (the
"Representatives")) not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to the Stockholders) with respect to a
merger, consolidation or similar transaction, other than pursuant to
4
<PAGE> 16
the Merger Agreement, involving, or any purchase of all or any significant
portion of the properties and assets or any equity securities of Hechinger (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal") or engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal. The Merger Agreement also provides that
Hechinger will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted prior to
entering into the Merger Agreement with respect to any of such matters, and will
make all reasonable efforts to enforce any confidentiality agreements to which
it is a party. Under the terms of the Merger Agreement, Hechinger will take the
necessary steps to inform employees and representatives of the obligations
undertaken in the Merger Agreement in this regard and will notify Acquisition
and BSQ Acquisition immediately if any such inquiries or proposals are received
by, any such information is requested from, or any such negotiations or
discussions are sought to be initiated or continued with Hechinger.
Notwithstanding the foregoing, in the event Hechinger receives an Acquisition
Proposal which was not solicited by it and which did not result from a breach of
the obligations described under this paragraph (an "Unsolicited Proposal"),
Hechinger may in response provide confidential information or data (subject to
the execution of a customary confidentiality agreement) to, or engage in
discussions or negotiations with, a Person (as defined) duly authorized by a
proposed acquiror in connection with the transaction(s) contemplated by the
Unsolicited Proposal but only if (i) the Unsolicited Proposal includes
sufficient information from which the Hechinger Board can reasonably conclude
that (a) all Stockholders will receive Superior Consideration (as defined), (b)
the proposed acquiror has the financial and other resources and has the legal
ability (including, without limitation, under antitrust laws) to complete such
transaction(s) on a timely basis, and (c) such transaction(s) will not be
subject to a financing contingency and will otherwise be subject to no more
contingencies than those contained in the Merger Agreement, and (ii) Hechinger
receives a written opinion of counsel that the Hechinger Board is legally
required, in the discharge of its fiduciary duties, to provide such information
or data or engage in such discussions or negotiations concerning the
transactions contemplated by the Unsolicited Proposal. "Superior Consideration"
is defined in the Merger Agreement as consideration consisting of cash and/or
securities for all the shares of Common Stock then outstanding or for all or
substantially all the assets of Hechinger in any case having a dollar value in
excess of the aggregate consideration to be paid in the Merger and which the
Hechinger Board determines in its good faith judgment (having received the
advice of a financial advisor of nationally recognized reputation) to be more
favorable to the Stockholders than the consideration to be paid in the Merger
and for which financing, to the extent required, is committed. The Merger
Agreement also provides that if, as a result of actions taken in compliance with
Section 7.5 of the Merger Agreement (relating to the Special Meeting), Hechinger
receives a formal Unsolicited Proposal concerning a transaction in which all the
holders of Common Stock will receive Superior Consideration, the Hechinger Board
may withdraw or modify such recommendation prior to the Special Meeting;
provided, however, that Hechinger shall have received the written opinion of
counsel that the Hechinger Board is legally required to do so in the discharge
of its fiduciary duties; and provided, further, that Hechinger shall give BSQ
Acquisition five (5) business days' prior notice of such withdrawal or
modification, specifying the material terms of such Unsolicited Proposal. See
"The Merger Agreement -- No Solicitation of Transactions," "-- The Special
Meeting".
Termination of the Merger, Termination Fees
The Merger may be terminated at any time on or prior to the Closing Date:
(i) by mutual written consent of Hechinger, BSQ Acquisition and Acquisition;
(ii) by Hechinger, Acquisition or BSQ Acquisition, if (a) any of the conditions
to the other party's obligation to effect the Merger become incapable of
fulfillment, (b) the transactions contemplated by the Merger Agreement are not
consummated on or before the date which is the business day after the fiscal
month end closest to October 31, 1997 or such later date as may be reasonably
necessary in order to consummate such
5
<PAGE> 17
transactions as promptly as practicable upon obtaining Approvals of Governmental
Entities but in any event not later than December 31, 1997, (c) the other party
shall be in material breach of any of its covenants contained in the Merger
Agreement and such breach either is incapable of cure or is not cured within 15
days after notice from the party wishing to terminate, or (d) if the other party
shall be in breach of any of its representations or warranties contained in the
Merger Agreement, which breach, individually or together with all other
breaches, is reasonably expected to have a Material Adverse Effect (as defined)
and such breach either is incapable of cure or is not cured within 15 days after
notice from the party wishing to terminate; or (iii) by BSQ Acquisition and
Acquisition if (a) the Hechinger Board withdraws or modifies its recommendation
of the Merger; or (b) Hechinger breaches any of the obligations undertaken by it
under the Merger Agreement with respect to another Acquisition Proposal. The
Merger Agreement also provides that if the Hechinger Board withdraws or modifies
its recommendation of the Merger or if the Company intentionally breaches the
Merger Agreement, Hechinger shall pay a fee to BSQ Acquisition of up to
$11,000,000. There are no circumstances in which the Hechinger Board could
withdraw or modify its recommendation without subjecting the Company to
termination fee liability, other than a breach by BSQ Acquisition or Acquisition
of the terms of the Merger Agreement.
Under the Merger Agreement, if either party terminates the Merger Agreement
under clauses (ii) (a) or (ii)(b) of the immediately preceding paragraph due to
failure of the condition specified in Section 8.1.4 of the Merger Agreement
(relating to the approval of the Merger Agreement by the Stockholders) to be
satisfied or Acquisition or BSQ Acquisition terminates the Merger Agreement
under clauses (ii) (c) or (d) of the immediately preceding paragraph as a result
of an intentional breach of the Merger Agreement by Hechinger or under (iii) (a)
of the immediately preceding paragraph, Hechinger shall pay to BSQ Acquisition a
termination fee in the amount of $5,000,000 plus all fees and expenses incurred
by any of Acquisition, BSQ Acquisition and their respective affiliates in
connection with the transactions contemplated by the Merger Agreement or with
respect to the proposed transactions involving Builders Square, up to an
aggregate maximum of $6,000,000 of such fees and expenses, in addition to the
termination fee of $5,000,000 (an aggregate maximum of up to $11,000,000),
including in the event that the Hechinger Board exercises its fiduciary duties
and withdraws or modifies its recommendation of the Merger. In the event that
Acquisition or BSQ Acquisition terminates the Merger Agreement under clauses
(ii) (c) or (d) of the immediately preceding paragraph as a result of an
unintentional breach of the Merger Agreement by Hechinger, Hechinger shall pay
to BSQ Acquisition all fees and expenses incurred by any of Acquisition, BSQ
Acquisition and their respective affiliates in connection with the transactions
contemplated by the Merger Agreement or with respect to the proposed
transactions involving Builders Square, up to an aggregate maximum of
$6,000,000. See "The Merger Agreement -- Termination; Fees and Expenses." As a
condition to entering into the Merger Agreement, GEI required that Hechinger
agree, in connection with the calculation of the aggregate maximum fees and
expenses referenced above, to pay to BSQ Acquisition all fees and expenses
incurred by any of Acquisition, BSQ Acquisition and their respective affiliates
in connection with the proposed transactions with Builders Square because of the
importance to GEI of acquiring both businesses simultaneously. Hechinger has
been informed by BSQ Acquisition that such aggregate fees and expenses are
approximately $6.0 million as of the date of this Proxy Statement.
THE STOCKHOLDERS AGREEMENT
Pursuant to the terms of the Stockholders Agreement, until the earlier of
(i) the Effective Time or (ii) the date on which the Merger Agreement is
terminated, the Significant Stockholders have agreed (a) not to sell 295,293
shares of Class A Common Stock and 5,163,558 shares of Class B Common Stock (an
aggregate of 5,458,851 shares of Common Stock representing 40.8% of the total
voting power of the outstanding Common Stock), (b) to vote 861,064 shares of
Class A Common Stock and 8,180,813 shares of Class B Common Stock (an aggregate
of 9,041,877 shares of Common Stock representing approximately 64.9% of the
total voting power of the outstanding Common Stock) to approve and adopt the
Merger Agreement and the Merger, and (c) to vote
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<PAGE> 18
against any action or agreement which would or could interfere or impede the
Merger, including, without limitation, any Acquisition Proposal. See "The
Stockholders Agreement."
The Stockholders Agreement also provides that, in the event (i) the Merger
Agreement is terminated under circumstances requiring the payment by Hechinger
of fees and/or expenses under the Merger Agreement, and Hechinger is thereafter
acquired (or enters into an agreement to be so acquired) pursuant to an
Acquisition Proposal or (ii) any Significant Stockholder transfers his or her
shares of Common Stock, in either case within the later of (a) 12 months after
the date of the Merger Agreement or (b) six (6) months after such termination,
such Stockholder will be required to pay to BSQ Acquisition any consideration
received in the aggregate in any transaction described in clauses (i) or (ii)
above in respect of the Common Stock held by them in excess of the amounts they
would have received under the Merger Agreement. See "The Merger
Agreement -- Termination," "-- Certain Fees and Expenses," "The Stockholders
Agreement -- Certain Payments."
FINANCING OF THE MERGER
As a condition to the obligations of Acquisition and BSQ Acquisition to
consummate the Merger, financing must be obtained in amounts sufficient to
enable BSQ Acquisition (i) to pay the aggregate consideration (the "Aggregate
Consideration") payable in the Merger and the cash portion of the consideration
under the BSQ Acquisition Agreement and (ii) to continue the operation of the
businesses of New Builders Square and Hechinger. It is expected that the
aggregate amount of financing necessary for such purposes will be approximately
$600 million in addition to amounts heretofore committed by GEI. GEI has
obtained, through one of its affiliates, a commitment letter (the "Commitment
Letter") from The Chase Manhattan Bank, Bank America Business Credit, Inc. and
Citicorp USA, Inc. (collectively, the "Agents") with respect to the borrowing by
BSQ Acquisition and/or its subsidiaries of up to $600 million under certain
senior secured credit facilities (the "Senior Facilities"), subject to, among
other things, the execution and delivery of all definitive agreements and the
Agents' satisfaction with the results of their ongoing due diligence
investigation with respect to the assets, business, properties, conditions
(financial and otherwise), results of operations, prospects and material
agreements of GEI, BSQ Acquisition, Hechinger and Builders Square. The
availability of borrowings under the Senior Facilities, including initial
borrowings of amounts necessary to pay the Aggregate Consideration, is expected
to be subject to various conditions customary for financings of the type
contemplated thereby, to be set forth in the definitive loan documentation.
There can be no assurance that the conditions under the Commitment Letter will
be waived or satisfied prior to or at the Closing. If such conditions are not
satisfied or waived prior to or at the Closing, BSQ Acquisition will have no
obligation to consummate the Merger and may terminate the Merger without
penalty.
THE RELATED TRANSACTION
Concurrently with the execution of the Original Merger Agreement, BSQ
Acquisition also entered into the BSQ Acquisition Agreement with Kmart and
Builders Square pursuant to which BSQ Acquisition will purchase all of the
outstanding capital stock of New Builders Square. It is a condition to the
closing of the Merger Agreement that the transactions contemplated by the BSQ
Acquisition Agreement shall have been consummated or shall be consummated
substantially concurrently with the transactions contemplated by the Merger
Agreement and vice versa. See "The Merger Agreement -- Conditions to
Consummation of the Merger" and "Certain Information Concerning the Related
Transactions."
INTEREST OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Hechinger Board with respect to
the Merger Agreement and the Merger, Stockholders should be aware that certain
members of the Hechinger Board and Hechinger management have certain interests
that are in addition to the interests of Stockholders generally, including the
payments to be made in respect of options of Hechinger in
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<PAGE> 19
connection with the Merger Agreement, severance arrangements, other stock
incentive arrangements and retirement plans all of which contain provisions that
would be triggered by a change of control of Hechinger. Under these plans and
agreements, a change in control will occur at the Effective Time. Payments under
such plans and agreements are being made pursuant to binding agreements with
present and former officers and directors of Hechinger, which were in effect
prior to the execution of the Original Merger Agreement and were not affected by
the Amendment. Such matters were considered by the Hechinger Board in approving
the Merger Agreement and the transactions contemplated thereby.
Options
The Merger Agreement provides that promptly after the Effective Time, each
holder of options issued under the 1982 Stock Option Plan and the 1991 Stock
Incentive Plan (collectively, the "Stock Option Plans") that have exercise
prices of less than $2.375 per share ("In the Money Options") will receive a
payment in an amount equal to the difference between (i) the product of (A)
$2.375 multiplied by (B) the aggregate number of shares of Common Stock issuable
upon exercise of all In the Money Options held by such holder and (ii) the
aggregate exercise price payable upon such exercise. No payment will be made
with respect to any option having a per share exercise price equal to or greater
than $2.375 and, in accordance with the terms of the Merger Agreement, such
options will be terminated prior to the Closing. The aggregate cash payments to
be received by directors, Named Executive Officers (as defined) and Senior Vice
Presidents (as defined) of Hechinger in exchange for their stock options will be
approximately $152,688, $10,000 of which will be received by the Non-Employee
Directors (as defined) in the aggregate.
Severance Agreements
Under the terms of individual severance agreements dated April 10, 1997
entered into by Hechinger and each of John W. Hechinger, Jr., Kenneth J. Cort
and W. Clark McClelland, the Company's Chairman and Chief Executive Officer,
President and Chief Operating Officer, and Executive Vice President and Chief
Financial Officer, respectively, each of whom is a member of the Hechinger Board
(the "Named Executive Officers"), each Named Executive Officer will receive a
benefit equal to three times the sum of his annual salary and the average of his
last three annual bonuses if the executive is terminated by the Company for
reasons other than cause, death, disability or retirement or by the Named
Executive Officer for "good reason" within two years following a change in
control of Hechinger (the "Named Executive Officers Severance Agreements"). Each
Named Executive Officer also is eligible for additional benefits for thirty-six
months in the event of such termination, including the payment of excise taxes
in connection with any payments received pursuant to the Named Executive
Officers Severance Agreements. Pursuant to the terms of the Named Executive
Officers Severance Agreements, the Named Executive Officers would receive,
excluding certain additional benefits, in the aggregate approximately $5.7
million (plus the payment of any applicable excise taxes) in the event of
termination within two years following a change in control of Hechinger.
Under the terms of individual severance agreements dated April 10, 1997
entered into by Hechinger and each of the senior vice presidents of Hechinger,
Mark R. Adams, Joanne M. Barrett, Suzanne G. Bear, J. Wayne Colley, Sally A.
Courtney, Noel H. Goulston, Richard S. Gross, Harold R. Hall, S. Ross Hechinger,
Gary E. Mercer and Carol A. Stevens (the "Senior Vice Presidents"), each Senior
Vice President will receive a benefit equal to 1.5 times the sum of his or her
annual salary and the average of his or her last three annual bonuses if (i) the
Senior Vice President is terminated for reasons other than cause, death,
disability or retirement or (ii) the Senior Vice President terminates the
Agreement for "good reason" within two years following a change in control of
Hechinger (the "Senior Vice Presidents Severance Agreements"). Each Senior Vice
President also is eligible to receive certain additional benefits for a period
of eighteen months, including the payment of excise taxes in connection with any
payments received pursuant to the Senior Vice Presidents Severance
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<PAGE> 20
Agreements. Pursuant to the terms of the Senior Vice Presidents Severance
Agreements, the Senior Vice Presidents would receive in the aggregate
approximately $4.5 million, including $464,801 for S. Ross Hechinger, who is a
member of the Hechinger Board, in the event of termination within two years
following a change in control of Hechinger.
Stock Incentive Agreements
Each of the 1992 Restricted Stock Award Agreement and the Performance
Restricted Stock Award Agreements (collectively, the "Stock Incentive
Agreements") contain change in control arrangements that will be triggered by
the Merger. These include: (i) 25,500 shares of restricted stock which have been
issued to Mr. Cort pursuant to the 1992 Restricted Stock Award Agreement and
(ii) 100,000 shares, 100,000 shares and 60,000 shares of Class A Common Stock
which were awarded in 1995 to Mr. Hechinger, Jr., Mr. Cort, and Mr. McClelland,
respectively, under the Performance Restricted Stock Award Agreements. The
aggregate amount to be received by Mr. Hechinger, Jr., Mr. Cort and Mr.
McClelland under these agreements in the event of a change of control is
approximately $678,063.
The Stock Incentive Agreements generally provide that in the event the
Named Executive Officer's employment is terminated following a change in control
due to death, disability, by the executive for good reason or by Hechinger other
than for cause, the restrictions on such shares granted shall lapse and the
executive shall receive such shares free of restrictions. The Stock Incentive
Agreements also provide for additional payments to compensate for any excise
taxes incurred in connection with the exercise of any option or receipt of any
benefits.
Retirement Plans
The Named Executive Officers are covered by a Supplemental Executive
Retirement Plan dated October 16, 1996 (the "SERP"), as amended, between each of
the Named Executive Officers and Hechinger. Under the SERP, in the event of a
change in control of Hechinger, Hechinger will fund a trust (the "Trust") for
the Named Executive Officers in an amount sufficient to purchase annuities and
make related tax payments for a ten-year period. The Trust will then purchase
annuities and make related tax payments annually during the ten-year period
unless, within two years of the change in control, such Named Executive
Officer's employment is terminated by the executive for good reason or by
Hechinger other than for cause; in which case, the Trust will purchase an
annuity (and make the related tax payment) on behalf of the Named Executive
Officers equal (together with any annuities already purchased for the executive
by the Trust) to the expected benefit over such ten-year period. Hechinger also
will make additional payments to compensate for excise taxes incurred in
connection with the provision of such benefits. The aggregate amount that
Hechinger would be required to fund to the Trust is approximately $7.7 million
in the event of a change in control of Hechinger.
The Hechinger Board and Certain Agreements
Mr. John W. Hechinger, Ms. Ann D. Jordan, Mr. Robert S. Parker, Mr. Melvin
A. Wilmore and Mr. Alan J. Zakon, all directors of Hechinger, are not employees
of Hechinger (the "Non-Employee Directors") but are eligible for a retirement
benefit after completing five years of service as a director of Hechinger. This
benefit is equal to the annual fee paid to all Non-Employee Directors at the
time of retirement and is payable annually for the number of years served as a
Non-Employee Director. As of the date of this Proxy Statement, two of the
Non-Employee Directors, Ms. Ann D. Jordan and Mr. Alan J. Zakon, are eligible
for these benefits and would each receive approximately $130,000 in the event of
a change in control of Hechinger. In addition, as of the date of this Proxy
Statement, each of the Non-Employee Directors individually owns 2,000 options to
purchase shares of Class A Common Stock at an exercise price of $1.38 per share.
9
<PAGE> 21
John W. Hechinger, a director of Hechinger, is the beneficiary of a trust
(the "Hechinger Trust") under the terms of an agreement (the "Trust Agreement")
dated as of March 11, 1997 between Hechinger and Wachovia Bank of North
Carolina, N.A., as trustee. Pursuant to the terms of the Trust Agreement, in the
event of a change in control of Hechinger, Hechinger is required to fund the
Hechinger Trust in an amount sufficient to pay the benefits that Mr. Hechinger
would be entitled to under the terms of a retirement agreement between Hechinger
and Mr. Hechinger, subject to certain adjustments. The aggregate amount that
Hechinger would be required to fund to the Hechinger Trust is approximately $3.2
million in the event of a change in control of Hechinger.
Certain Non-Compete Arrangements
Simultaneously with the execution of the Merger Agreement, John W.
Hechinger, Jr., Kenneth J. Cort and W. Clark McClelland entered into certain
arrangements with BSQ Acquisition and Acquisition pursuant to which they have
agreed to limit their ability to compete with the Surviving Corporation, and not
to hire certain employees from the Company for a period ranging from twelve (12)
to twenty-four (24) months following the Effective Date
Certain Lease Arrangements
During the last fiscal year, eleven of the Company's store sites were
leased from Hechinger Enterprises ("Enterprises"), a partnership consisting of
members of the Hechinger and England families. The rentals paid by the Company
to Enterprises under these leases in the Company's last fiscal year were $3.3
million. In the opinion of management, the terms of these leases were at least
as favorable to the Company as those of leases which the Company has with
unaffiliated lessors for comparable premises.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger will be a taxable transaction. As a result, the Stockholders
will realize taxable gain or loss for Federal income tax purposes measured by
the difference between the individual Stockholder's adjusted tax basis and the
cash received. In addition to reading the information contained in this Proxy
Statement, all Stockholders are urged to consult with their own tax advisors
concerning the tax consequences of the Merger. See "Certain Federal Income Tax
Consequences of the Merger."
APPRAISAL RIGHTS
In connection with the Merger, holders of shares of Common Stock will be
entitled to demand appraisal rights in respect of their shares of Common Stock
under Section 262 of the DGCL ("Section 262"), subject to the satisfaction by
such stockholders of the conditions for appraisal rights established by Section
262. See "Appraisal Rights" for a description of the procedures for perfecting
such rights. Failure to take any of the steps required under Section 262 on a
timely basis may result in the loss of appraisal rights. Section 262 is set
forth in full in Annex E to this Proxy Statement.
REGULATORY APPROVALS REQUIRED
Under the HSR Act and the rules that have been promulgated thereunder (the
"Rules") by the Federal Trade Commission (the "FTC"), certain merger
transactions may not be consummated unless certain information has been
furnished to the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the FTC and certain applicable waiting periods have expired. The
Merger is subject to the requirements of the HSR Act and the Rules. Pursuant to
the requirements of the HSR Act, GEI, in its capacity as the ultimate parent
entity (as defined under the Rules) of Acquisition, filed Notification and
Report Forms with respect to the Merger with the Antitrust Division and the FTC
on July 23, 1997. Hechinger also filed a Notification and Report Form with
respect to
10
<PAGE> 22
the Merger on such date. The waiting period applicable to the Merger was
terminated on August 13, 1997. See "The Merger Agreement -- Compliance with
Antitrust Laws" and "Regulatory Considerations -- Antitrust Laws."
RECENT MARKET PRICES FOR COMMON STOCK
The Common Stock is currently traded on the Nasdaq National Market (the
"NNM") under the symbols "HECHA" (Class A Common Stock) and "HECHB" (Class B
Common Stock). Historically, the shares of Class B Common Stock have traded at
all times above $2.375 per share. On June 16, 1997, the last full day of trading
prior to the public announcement by Hechinger that it was in discussions in
connection with a possible transaction in which the Stockholders would receive
$3.00 in cash for each share of Common Stock, the reported closing price on the
NNM was $2 1/16 per share of Class A Common Stock and $3 1/2 per share of Class
B Common Stock. For the 30-day period ending June 16, 1997, the average reported
closing price on the NNM of the Class A Common Stock was $2 and the Class B
Common Stock was $3.22. On July 16, 1997, the last trading day prior to
Hechinger's announcement of the execution of the Original Merger Agreement, the
reported closing price on the NNM was $2 1/8 per share of Class A Common Stock
and $3 per share of Class B Common Stock. On August 26, 1997, the last trading
day prior to Hechinger's announcement of the execution of the Merger Agreement,
the reported closing price on the NNM was $2 5/8 per share of Class A Common
Stock and $2 13/16 per share of Class B Common Stock. On September 4, 1997, the
last day prior to the mailing of this Proxy Statement, the reported closing
price on the NNM was $2 1/8 per share of Class A Common Stock and $2 3/8 per
share of Class B Common Stock. See "Market Prices and Dividends."
RECENT DEVELOPMENTS
The Company announced on August 28, 1997 a net loss for the second quarter
ended August 2, 1997 of $40.6 million or $.96 per share compared with net
earnings of $12.2 million or $.28 per share last year and that the Company
entered into the Amendment pursuant to which the cash purchase price per share
of Common Stock was reduced to $2.375 and the Company Adverse Change Condition
(as defined) was eliminated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Merger -- Background of the
Merger."
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<PAGE> 23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following summary financial information for the past five fiscal year
periods has been derived from the consolidated financial statements of Hechinger
and its subsidiaries, audited by Ernst & Young LLP, independent public
accountants (including the related notes thereto, the "Hechinger Financial
Statements"). This summary financial information should be read in conjunction
with the Hechinger Financial Statements and the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere in
this Proxy Statement.
HECHINGER COMPANY AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
FISCAL YEAR ENDED (UNAUDITED)
----------------------------------------------------------------------- ------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, AUGUST 2, AUGUST 3,
1997 1996 1995 1994 1993 1997 1996
----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <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 $1,099,607 $1,227,219
Gross Profit........... 455,208 455,932 540,680 462,266 437,009 216,506 255,408
Interest Expense....... 40,194 31,341 29,793 23,063 14,121 21,478 19,555
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) (54,111) (6,225)
Net (loss) earnings per
common share......... (.59) (1.84) (.24) .59 (.63) (1.28) (.15)
DIVIDENDS PER SHARE:
Class A Common Stock... -- $.16 $.16 $.16 $.16 -- --
Class B Common Stock... -- $.06 $.06 $.06 $.06 -- --
BOOK VALUE PER SHARE: $8.87 $9.44 $11.38 $11.75 $11.25 $7.59 $9.60
BALANCE SHEET DATA:
Total assets........... $ 1,105,103 $ 1,150,421 $ 1,261,229 $ 1,229,242 $ 1,075,749 $1,059,025 $1,235,163
Current portion of
long-term debt and
capital lease
obligations.......... 3,657 3,806 3,453 3,068 1,544 3,308 4,181
Long-term debt and
capital lease
obligations.......... 394,478 399,530 403,377 407,873 305,974 393,047 397,822
Total stockholders'
equity............... 374,256 399,039 481,273 493,867 473,924 320,272 405,403
</TABLE>
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<PAGE> 24
THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the Stockholders voting as a single class will
consider and vote upon the approval and adoption of the Merger Agreement and the
Merger.
The Hechinger Board believes that the Merger and the Merger Agreement are
in the best interests of the Stockholders, has approved the Merger Agreement and
the Merger and recommends that you vote for approval and adoption of the Merger
Agreement and the Merger. Certain members of the Hechinger Board have conflicts
of interest with respect to the Merger. See "The Merger -- Interest of Certain
Persons in the Merger."
RECORD DATE; VOTING RIGHTS; QUORUM
The Hechinger Board has fixed the close of business on August 22, 1997 as
the Record Date for the determination of Stockholders entitled to notice of, and
to vote at, the Special Meeting. As of the Record Date, there were issued and
outstanding approximately 32,754,374 shares of Class A Common Stock, each of
which entitles the holder thereof to one (1) vote per share, and 9,458,374
shares of Class B Common Stock, each of which entitles the holder thereof to ten
(10) votes per share. As of the Record Date, there were approximately 1,200
beneficial holders of Class B Common Stock of which approximately 1,160 of such
holders were unaffiliated with the Significant Stockholders. The presence in
person or by proxy of Stockholders of record of a majority of the total number
of votes attributable to all shares of Common Stock outstanding and entitled to
vote is required to constitute a quorum for purposes of the Special Meeting.
VOTE REQUIRED
Approval of the Merger Agreement and the Merger requires the affirmative
vote of holders of a majority of the voting power of the outstanding shares of
Class A Common Stock and Class B Common Stock eligible to be cast at the Special
Meeting by the holders of Common Stock voting together as a single class.
At the close of business on the Record Date, the Significant Stockholders
were the beneficial owners of an aggregate of 9,041,877 shares of Common Stock
(or 21.4% of the outstanding shares of Common Stock), which beneficial ownership
includes shares of Common Stock beneficially owned by members of the Hechinger
and England families. See "Principal Stockholders." Pursuant to a ten-year
voting agreement entered into in 1989 by members of the Hechinger and England
families and entities controlled by them (the "Voting Agreement"), John W.
Hechinger, John W. Hechinger, Jr. and S. Ross Hechinger together hold a proxy to
vote the 861,064 and 8,180,813 shares of Class A Common Stock and Class B Common
Stock, respectively, held in the aggregate by the Hechinger and England
families. The Significant Stockholders have entered into the Stockholders
Agreement, pursuant to which they have (i) agreed upon the terms set forth
therein to vote 861,064 shares of Class A Common Stock and 8,180,813 shares of
Class B Common Stock representing in the aggregate approximately 64.9% of the
total voting power of the outstanding Common Stock in favor of approval and
adoption of the Merger Agreement and the Merger and (ii) granted to BSQ
Acquisition an irrevocable proxy with respect to all of such shares to vote in
favor of approval and adoption of the Merger Agreement and the Merger. The proxy
terminates upon the Merger Termination Date (as defined). See "The Stockholders
Agreement." Accordingly, approval of the Merger Agreement and the Merger is
assured. See the "Stockholders Agreement" and "Interest of Certain Persons in
the Merger."
PROXIES; VOTING AND REVOCATION
Each properly executed proxy received prior to the vote at the Special
Meeting will be voted in the manner directed therein by the Stockholder. A
Stockholder may vote by proxy if he or she is
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<PAGE> 25
unable to attend the Special Meeting in person, or wishes to have his or her
Common Stock voted by proxy even if he or she does attend the Special Meeting.
IF A PROXY IS SUBMITTED BUT NO DIRECTIONS ARE GIVEN THEREIN, SHARES REPRESENTED
BY THE PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER.
FAILURE TO SUBMIT A PROXY, ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE
SAME EFFECT AS A VOTE AGAINST APPROVAL OF THE MERGER AGREEMENT AND THE MERGER.
A proxy may be revoked by the person giving such proxy at any time before
it is exercised by (i) providing written notice of such revocation to the
Secretary of Hechinger, (ii) submitting a proxy having a later date or (iii)
appearing at the Special Meeting and voting in person.
In the event that the purchase price of $2.375 per share payable to the
holders of Common Stock pursuant to the Merger Agreement is adjusted further,
Hechinger will provide revised proxy materials to the Stockholders and resolicit
proxies from such Stockholders.
SOLICITATION OF PROXIES
The cost of the solicitation of proxies will be borne by Hechinger. To
assist in the proxy solicitation, the Company has engaged W.F. Doring & Co. Inc.
for a fee of $3,500 plus out-of-pocket expenses. In addition to the use of the
mail, solicitation may be made in person or by telephone or otherwise by
directors, officers and regular employees of Hechinger. Such directors, officers
and regular employees will not be additionally compensated for such
solicitation, but may be reimbursed for out-of-pocket expenses incurred in
connection therewith. If undertaken, the expense of such solicitation would be
nominal. Hechinger will reimburse brokers and other persons holding shares of
Common Stock in their names, or in the names of nominees, for their expenses for
sending proxy materials to principals and obtaining their proxies.
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<PAGE> 26
THE MERGER
BACKGROUND OF THE MERGER
In May 1996, representatives of DLJ met with representatives of Hechinger
to discuss the possibility of a transaction involving Hechinger and a financial
buyer. As a result of that meeting, DLJ was authorized to contact a select group
of potential financial buyers on behalf of the Company. During 1996, DLJ
contacted and held informal discussions with a group of financial buyers,
including Leonard Green & Partners, L.P. ("Leonard Green"). At that time, none
of the parties contacted by DLJ expressed an interest in pursuing a transaction
with Hechinger on a stand-alone basis.
In December 1996, representatives of Hechinger and DLJ commenced
discussions with one of the financial buyers (the "financial buyer") previously
contacted who was potentially interested in combining Hechinger with another
home improvement retailer. These discussions terminated in February 1997.
In February 1997, Leonard Green, Builders Square and HomeBase, a subsidiary
of Waban Inc., made a public announcement that they had entered into discussions
regarding a proposed acquisition of Builders Square and HomeBase by Leonard
Green. At that time, DLJ and the Company's Chief Executive Officer contacted
Leonard Green regarding the possibility of including Hechinger in the proposed
combination of Builders Square and HomeBase.
On April 2, 1997, Leonard Green, Builders Square and HomeBase made a public
announcement that their discussions had ended concerning that proposed
transaction. Shortly thereafter, DLJ and the Company's Chief Executive Officer
contacted Leonard Green concerning a possible transaction with Hechinger.
On April 15, 1997, Leonard Green executed a confidentiality agreement with
the Company and commenced due diligence of Hechinger. On April 16, 1997, Kmart
entered into a confidentiality agreement with the Company. Since part of the
proposed consideration to be received by Kmart in connection with the BSQ
Acquisition Agreement would be equity in a company which would own Hechinger,
Kmart had an interest in conducting due diligence on Hechinger.
On April 18, 1997, representatives of Hechinger and DLJ met with
representatives of Leonard Green, Builders Square and Rothschild Inc. (the
financial advisor to Builders Square) to discuss the business and operations of
Hechinger.
On April 25, 1997, Hechinger formally retained DLJ to explore a possible
sale of the Company. At this time, representatives of DLJ had discussions with
representatives of Leonard Green and Builders Square concerning a possible
business combination. Prior to these initial discussions, after discussions with
representatives of DLJ and legal counsel, management of Hechinger determined to
proceed with negotiations on the basis of treating all holders of Common Stock
equally with respect to value. Thereafter, management of Hechinger, after
receiving indications from GEI that it intended to offer the same price for the
shares of Class A Common Stock and Class B Common Stock and consulting with
representatives of DLJ and legal counsel, continued to proceed with negotiations
on the basis of receiving equal value for all holders of Common Stock and did
not at any time during the course of negotiations with Leonard Green seek a
higher price for shares of Class B Common Stock. Neither management of Hechinger
nor DLJ believed that greater value for Stockholders could be obtained with a
two tiered pricing structure based on their belief that Leonard Green would pay
no more than a fixed amount for the entire Company, regardless of allocation
between the shares of Class A Common Stock and Class B Common Stock.
Between April 25, 1997 and May 27, 1997, DLJ had numerous discussions with
Leonard Green regarding the value of Hechinger. Initially, Leonard Green
suggested a value per share of Hechinger below $3.00 per share and DLJ proposed
a value per share of Hechinger in excess of $3.00 per share.
15
<PAGE> 27
On May 27, 1997, representatives of Hechinger and DLJ met with
representatives of Leonard Green and Leonard Green made a preliminary proposal
for an all cash acquisition of the Company at a purchase price of $3.00 per
share in cash, subject to completion of due diligence and negotiation of a
definitive merger agreement and related documentation. At this time, John W.
Hechinger, Jr. discussed the status of discussions between the Company and
Leonard Green with the Hechinger Board. Management of Hechinger, after
consulting with the Hechinger Board and representatives of DLJ, did not make a
counter proposal to Leonard Green since it determined that the proposed purchase
price of $3.00 per share of Common Stock in cash was fair and in the best
interests of the Stockholders and since the discussions with Leonard Green
during the preceding month indicated that a higher price could not be received.
On June 3 and June 4, 1997, certain members of management of Hechinger made
presentations to representatives of Leonard Green. For approximately the next
month, Leonard Green continued its due diligence, which included additional
meetings with management of the Company and legal and accounting due diligence.
On or about June 6, 1997, legal counsel for Leonard Green distributed a
first draft of the merger agreement and terms of a stockholders agreement, which
included provisions for the Significant Stockholders to vote in favor of the
proposed merger. At that time, counsel to Leonard Green advised Hechinger's
legal counsel that Leonard Green would be unwilling to proceed with a
transaction with the Company unless the Significant Stockholders entered into a
stockholders agreement with Leonard Green in connection with the proposed
transaction.
At the regularly scheduled meeting of the Hechinger Board following the
1997 annual meeting of Stockholders on June 10, 1997 (the "June 10th Meeting"),
the Company's legal counsel advised the Hechinger Board of its fiduciary duties
under Delaware law with respect to a transaction that would result in a change
of control of the Company. DLJ and legal counsel also advised the Hechinger
Board of the status of the proposed transaction with Leonard Green, including
Leonard Green's insistence on the stockholders agreement. The Non-Employee
Directors other than John W. Hechinger then met alone with DLJ and legal counsel
to discuss the proposed transaction. On June 11, 1997, negotiations between
Hechinger and Leonard Green began in connection with a proposed merger agreement
and proposed stockholders agreement. At that time and during three negotiation
sessions thereafter, the Company and its legal counsel expressed their
opposition to the proposed stockholders agreement since such agreement would
assure Stockholder approval of the proposed merger. During each negotiation
session, GEI's counsel confirmed that entering into the proposed stockholders
agreement was a condition to GEI entering into the proposed merger agreement
with Hechinger. The material terms of the Stockholders Agreement with respect to
the voting and other provisions did not change in the successive drafts of the
proposed stockholders agreement.
On June 17, 1997, due to the increased trading volume and share prices of
the Class A Common Stock and Class B Common Stock, Hechinger issued a press
release announcing that the Company was in discussions with an unnamed party
with respect to a possible transaction in which the Stockholders of the Company
would receive $3.00 per share in cash.
During the next several weeks, the Company and Leonard Green and their
respective legal counsel continued negotiations and discussions regarding the
proposed merger agreement and the stockholders agreement. Concurrently, Leonard
Green, Builders Square and Kmart negotiated the terms of their transaction
documents.
On June 24, 1997, at a special meeting of the Hechinger Board (the "June
24th Meeting"), the Hechinger Board met to consider and act upon the proposed
merger on the terms set forth in the merger agreement. At this time, DLJ and the
Company's legal counsel made presentations concerning the proposed merger
agreement and the terms of the revised stockholders agreement and DLJ rendered
its oral opinion, which was subsequently confirmed by a written opinion, to the
effect that, as of such date, based upon and subject to certain matters stated
therein, the consideration to be paid pursuant to the Original Merger Agreement
in the aggregate was fair, from
16
<PAGE> 28
a financial point of view, to the Stockholders. After considering these and
other matters, at a meeting of the Hechinger Board on June 26, 1997 (the "June
26th Meeting"), at which all but one member of the Hechinger Board were present,
those members of the Hechinger Board present unanimously approved the
Stockholders Agreement and authorized the officers of the Company to execute and
deliver the Original Merger Agreement substantially in the form provided to the
Hechinger Board, with such changes as the officers of the Company agree. The
member of the Hechinger Board who was not present at the June 26th Meeting
subsequently indicated to the Chairman of the Hechinger Board his approval of
the Stockholders Agreement and the Original Merger Agreement.
Subsequent to the June 26th Meeting, legal counsel for Leonard Green and
Builders Square continued to negotiate the terms of the BSQ Acquisition
Agreement and related agreements.
On July 17, 1997, Hechinger issued a press release announcing the execution
and delivery of the Original Merger Agreement by the Company and Leonard Green.
On that same date, Kmart and Leonard Green each issued press releases announcing
the execution and delivery of the BSQ Acquisition Agreement and related
documents. In addition, on July 17, 1997, the Stockholders Agreement was
executed by the parties thereto.
Since July 17, 1997, management of Hechinger provided Leonard Green with
certain financial information relating to the Company's business and operations.
On August 22, 1997, representatives of Leonard Green informed management of
Hechinger that they were concerned with the financial information provided by
Hechinger and the deterioration of the Company's business described therein. At
that time, representatives of Leonard Green indicated to management of Hechinger
that they were considering either terminating the Original Merger Agreement or
requesting a reduction in the purchase price from $3.00 per share. On August 25,
1997, representatives of Leonard Green contacted representatives of DLJ
concerning a proposed downward adjustment of the purchase price from $3.00 per
share to $2.00 per share based on Hechinger's current business and operations.
On August 26, 1997, representatives of DLJ, after consulting with management of
Hechinger, informed Leonard Green that a purchase price of $2.00 per share was
unacceptable but indicated that an adjustment of the purchase price to $2.50 and
the elimination of the Company Adverse Change Condition would be a proposal it
could recommend to the Company. The elimination of the Company Adverse Change
Condition was sought so that such provision in itself would not be grounds for
termination of the Merger Agreement. See "The Merger Agreement -- Conditions to
Consummation of the Merger," "-- Financing" and "Financing of the Merger." At
that time and during subsequent conversations between Leonard Green and DLJ,
Leonard Green made a counter offer of $2.25 per share. On August 27, 1997, after
further negotiations among representatives of Leonard Green, Hechinger and DLJ,
representatives of Hechinger and Leonard Green agreed, subject to approval of
the Hechinger Board and receipt of an acceptable opinion from DLJ, to a revised
purchase price of $2.375 per share and the amendment of the Original Merger
Agreement to remove the Company Adverse Change Condition. "Company Adverse
Change Condition" was the condition in the Original Merger Agreement to
Acquisition's and BSQ Acquisition's obligation to close the transactions
contemplated therein based on the occurrence after the date of the Original
Merger Agreement of any events which individually or in the aggregate have had
or are reasonably expected to have a Material Adverse Effect. There is no
understanding or agreement, tacit or otherwise, that there will be further
changes to the proposed per share price payable pursuant to the Merger
Agreement. In the event that the purchase price of $2.375 per share payable to
the holders of Common Stock pursuant to the Merger Agreement is adjusted
further, Hechinger will provide revised proxy materials to the Stockholders and
resolicit proxies from such Stockholders.
On August 27, 1997, at a special meeting of the Hechinger Board (the
"August 27th Meeting"), the Hechinger Board met to consider and act upon the
proposed amendments to the Original Merger Agreement, including the adjusted
purchase price of $2.375 per share and the removal of the Company Adverse Change
Condition. At the August 27th Meeting, DLJ and the Company's legal
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counsel made presentations concerning the proposed amendments to the Original
Merger Agreement and DLJ rendered its oral opinion, which was subsequently
confirmed by a written opinion, to the effect that, as of such date, based upon
and subject to certain matters stated therein, the consideration to be paid in
the Merger in the aggregate was fair, from a financial point of view, to the
Stockholders. After considering these and other matters, the Hechinger Board
unanimously approved the Merger and the amendment to the Original Merger
Agreement and authorized the officers of the Company to execute and deliver the
Amendment.
On August 28, 1997, Hechinger issued a press release announcing the
Amendment to the Original Merger Agreement.
RECOMMENDATION OF THE HECHINGER BOARD; HECHINGER'S REASONS FOR THE MERGER
At its meeting on June 26, 1997, the Hechinger Board approved the Original
Merger Agreement and determined that the merger under the Original Merger
Agreement (the "Original Merger") is in the best interests of the Stockholders
and recommended that the Stockholders approve and adopt the Original Merger
Agreement and the Original Merger. In reaching this determination, the Hechinger
Board consulted with legal counsel concerning the duties of the Board,
regulatory matters and the terms of the Original Merger Agreement. The Hechinger
Board also consulted with DLJ, Hechinger's financial advisor, with respect to
the financial aspects and fairness of the transaction, as well as with senior
management. The material factors considered by the Hechinger Board were the
following:
1. The results of a process commenced in May 1996 in which DLJ
solicited indications of interest from entities that Hechinger and DLJ
identified as possibly having an interest in acquiring Hechinger, which
results indicated that the receipt of an all cash offer at a price in
excess of $3.00 was unlikely to be obtained in the near term.
2. The absence of any offer or any other indication of interest for
the Company following an announcement by the Company on June 17, 1997 that
it was in discussions with an unnamed party with respect to a possible
transaction in which the Stockholders of the Company would receive $3.00
per share in cash.
3. The opinion of DLJ, Hechinger's financial advisor, that, as of such
date, based upon and subject to certain matters stated therein, the
consideration to be paid pursuant to the Original Merger Agreement, in the
aggregate, was fair, from a financial point of view, to the Stockholders.
See "-- Opinion of Financial Advisor." The Hechinger Board was aware that
the "Comparable Company Analysis" and the "Comparable Acquisition Analysis"
included within the range of values derived by DLJ in such analyses values
above the proposed purchase price of $3.00 per share. The Hechinger Board
considered the fact that the proposed purchase price of $3.00 per share was
within the range of values derived by DLJ for these analyses and that such
analyses represented only two of the analyses performed by DLJ in rendering
their opinion to the Hechinger Board. In addition, such analyses were
considered in relation to and together with all analyses prepared and
presented by DLJ as well as the other factors described herein. Because the
Hechinger Board decided that treating the holders of Class A Common Stock
and Class B Common Stock identically in negotiating the terms and
conditions of the Original Merger Agreement would result in the greatest
likelihood of obtaining maximum value for all of the Stockholders, the
Hechinger Board did not request nor did it receive separate opinions from
DLJ for the holders of the Class A Common Stock and the Class B Common
Stock. In considering such opinion, the Hechinger Board was aware of DLJ's
ownership of certain outstanding indebtedness of Hechinger and that, upon
delivery of their opinion, DLJ became entitled to certain fees in
connection with its engagement and that additional fees would become
payable to DLJ contingent upon consummation of the transactions
contemplated by the Original Merger Agreement. In addition, the Hechinger
Board also considered that the additional leverage which would be incurred
in connection with the Merger could affect the creditworthi-
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ness of Hechinger after the consummation of the Merger and, accordingly,
cause the Company's outstanding indebtedness to trade at a greater discount
than prior to the announcement of the Original Merger Agreement. The
Company did not enter into any special arrangements with DLJ with respect
to any of the Hechinger securities owned by DLJ nor did it believe that
such ownership affected DLJ's independence in rendering its opinion. See
"-- Opinion of Financial Advisor."
4. The presentation and views expressed by the senior management of
Hechinger regarding (i) the financial condition, result of operations,
business and prospects of Hechinger generally, (ii) the financial
condition, result of operations, business of Hechinger during the five
months prior to June 24, 1997 and (iii) the increasingly competitive
environment in which Hechinger operates. Such presentation also included a
liquidation analysis prepared by management of Hechinger which showed that
Stockholders would receive substantially less than $3.00 per share in cash
in connection with a hypothetical liquidation of the Company.
5. The presentations of DLJ in connection with such opinion as to the
various financial and other considerations deemed relevant to the Hechinger
Board's evaluation of the merger pursuant to the Original Merger Agreement,
including (a) a discounted cash flow analysis of Hechinger; (b) a review
and analysis of the historical and current market prices and trading
patterns of the Common Stock and the market prices and financial data
relating to other companies deemed by DLJ to be comparable to Hechinger;
(c) a review and analysis of the prices and premiums paid in, and other
terms of, acquisition transactions deemed to be relevant for purposes of
DLJ's analysis; (d) an analysis of certain other publicly traded companies;
and (e) an analysis of the implied price of the shares of Common Stock
based on familiarity with, and trends in, the industry.
6. The Hechinger Board's familiarity with the Hechinger's business,
financial condition, results of operations, business strategy and
prospects, current industry, economic and market conditions, and the
Hechinger Board's assessment of the benefits and risks associated with
remaining independent.
7. The fact that the Original Merger Agreement provided for all cash
consideration at a price representing more than 118.2% premium over the
closing price of a share of Class A Common Stock and a 7.7% discount over
the closing price of a share of Class B Common Stock on June 10, 1997, one
week prior to Hechinger's announcement that it was in discussions with
respect to a possible transaction and a 45.5% premium over the closing
price of a share of Class A Common Stock and a 14.3% discount over the
closing price of a share of Class B Common Stock on June 16, 1997. The
Hechinger Board also noted that subsequent to June 16, 1997 and prior to
the announcement of the execution of the Original Merger Agreement there
was an unusual increase in volume and the trading price of the Common Stock
well in excess of recent values and prices, which may have been
attributable to rumors of a possible transaction.
8. The historically limited trading volume of the Class B Common Stock
and that the holders of Class B Common Stock, including holders of fewer
than 100 shares, would likely be unable to sell all or a substantial
portion of their shares for the quoted market value of such shares or
realize the value represented by the quoted market price of such shares.
9. The terms and conditions of the Stockholders Agreement, including
the fact that the Significant Stockholders, who collectively own shares
representing approximately 64.9% of the total voting power of the
outstanding Common Stock, agreed, among other things, until the earlier of
(i) the Effective Time or (ii) the date on which the Original Merger
Agreement is terminated, (a) not to sell 295,293 shares of Class A Common
Stock and 5,163,558 shares of Class B Common Stock (an aggregate of
5,458,851 shares of Common Stock), (b) to vote 861,064 shares of Class A
Common Stock and 8,180,813 shares of Class B Common Stock (an aggregate of
9,041,877 shares of Common Stock representing approximately 64.9% of the
total voting power of the outstanding Common Stock) to approve and adopt
the Original Merger
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Agreement and the Original Merger, and (c) to vote against any action or
agreement which would or could interfere or impede the Original Merger,
including, without limitation, any Acquisition Proposal. See "The
Stockholders Agreement."
10. The desire of the Significant Stockholders to effect the Original
Merger.
11. The terms and conditions of the Original Merger Agreement,
including the likelihood that the conditions to the Original Merger will be
satisfied.
12. The fact that the Original Merger would be a taxable transaction
to the Stockholders.
13. The possible impact of the Original Merger and the alternative of
remaining independent on Hechinger's business, prospects, customers and
employees.
14. The fact that following consummation of the Original Merger, the
current Stockholders of Hechinger will no longer participate in any
increases or decreases in the value of Hechinger's business.
15. The fact that the Original Merger Agreement provided for all cash
consideration at a price representing a significant discount to the book
value of the shares of Common Stock. The Hechinger Board believed that the
goodwill associated with the acquisition of Home Quarters as recorded as an
asset on the Company's Financial Statements is fairly stated and fully
realizable and the other assets on the Company's balance sheet are recorded
at their value. The Hechinger Board also considered that book value is not
necessarily indicative of market value when considering the sale of the
Company in its entirety. Other factors impacted the Hechinger Board's view
of the market value of the shares of Common Stock in relation to the book
value of such shares, including: (i) the increasingly competitive
environment in which the Company operates; (ii) the financial condition,
results of operations, business and prospects of Hechinger; (iii) the
liquidation analysis prepared by management of Hechinger; (iv) the
presentation of DLJ; and (v) the other factors described herein.
At its meeting on August 27, 1997, the Hechinger Board approved the Merger
Agreement and determined that the Merger is in the best interests of the
Stockholders and recommended that the Stockholders approve and adopt the Merger
Agreement and the Merger. In reaching this determination, the Hechinger Board
consulted with legal counsel concerning the duties of the Board, regulatory
matters and the terms of the Merger Agreement. The Hechinger Board also
consulted with DLJ, Hechinger's financial advisor, with respect to the financial
aspects and fairness of the transaction, as well as with senior management. At
the August 27th Meeting, the Hechinger Board considered all of the factors set
forth above in connection with the June 26th Meeting, to the extent applicable,
as well as the following additional factors:
1. The absence of any offer or any other indication of interest for
the Company following an announcement by the Company on July 17, 1997 of
the execution and delivery of the Original Merger Agreement.
2. The opinion of DLJ, Hechinger's financial advisor, that, as of
such date, based upon and subject to certain matters stated therein, the
consideration to be paid pursuant to the Merger Agreement, in the
aggregate, is fair, from a financial point of view, to the Stockholders.
See "-- Opinion of Financial Advisor." Because the Hechinger Board decided
that treating the holders of Class A Common Stock and Class B Common Stock
identically in negotiating the terms and conditions of the Merger
Agreement would result in the greatest likelihood of obtaining maximum
value for all of the Stockholders, the Hechinger Board did not request nor
did it receive separate opinions from DLJ for the holders of the Class A
Common Stock and the Class B Common Stock. In considering such opinion,
the Hechinger Board was aware of DLJ's ownership of certain outstanding
indebtedness of Hechinger and that, upon delivery of their opinion, DLJ
became entitled to certain fees in connection with its engagement and that
additional fees would become payable to DLJ contingent upon consummation
of the Merger. In
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<PAGE> 32
addition, the Hechinger Board also considered that the additional leverage
which would be incurred in connection with the Merger could affect the
credit worthiness of Hechinger after the consummation of the Merger and,
accordingly, cause the Company's outstanding indebtedness to trade at a
greater discount than prior to the announcement of the Original Merger
Agreement. The Company did not enter into any special arrangements with DLJ
with respect to any of the Hechinger securities owned by DLJ nor did it
believe that such ownership affected DLJ's independence in rendering its
opinion. See "-- Opinion of Financial Advisor."
3. The presentation and views expressed by the senior management of
Hechinger regarding (i) the financial condition, result of operations,
business and prospects of Hechinger generally, (ii) the financial
condition, result of operations, business of Hechinger during the seven
months prior to August 27, 1997 and (iii) the increasingly competitive
environment in which Hechinger operates. Such presentation also included a
liquidation analysis prepared by management of Hechinger which showed that
Stockholders would receive substantially less than $2.375 per share in
connection with a hypothetical liquidation of the Company.
4. The presentations of DLJ in connection with such opinion as to the
various financial and other considerations deemed relevant to the Hechinger
Board's evaluation of the Merger, including: (a) a discounted cash flow
analysis of Hechinger; (b) a review and analysis of the historical and
current market prices and trading patterns of the Common Stock and the
market prices and financial data relating to other companies deemed by DLJ
to be comparable to Hechinger; (c) a review and analysis of the prices and
premiums paid in, and other terms of, acquisition transactions deemed to be
relevant for purposes of DLJ's analysis; (d) an analysis of certain other
publicly traded companies; and (e) an analysis of the implied price of the
shares of Common Stock based on familiarity with, and trends in, the
industry.
5. The fact that the Merger Agreement provides for all cash
consideration at a price representing a 9.5% discount over the closing
price of a share of Class A Common Stock and a 15.5% discount over the
closing price of a share of Class B Common Stock on August 26, 1997, the
date prior to the execution of the Merger Agreement.
6. The terms and conditions of the Merger Agreement, including the
likelihood that the conditions to the Merger will be satisfied. In this
regard, the Hechinger Board considered the removal of the Company Adverse
Change Condition.
7. The fact that the Merger Agreement provided for all cash
consideration at a price representing a significant discount to the book
value of the shares of Common Stock. The Hechinger Board believed that the
goodwill associated with the acquisition of Home Quarters as recorded as an
asset on the Company's Financial Statements is fairly stated and fully
realizable, and the other assets on the Company's balance sheet are
recorded at their value. The Hechinger Board also considered that book
value is not necessarily indicative of market value when considering the
sale of the Company in its entirety. Other factors impacted the Hechinger
Board's view of the market value of the shares of Common Stock in relation
to the book value of such shares, including: (i) the increasingly
competitive environment in which the Company operates; (ii) the financial
condition, results of operations, business and prospects of Hechinger;
(iii) the liquidation analysis prepared by management of Hechinger; (iv)
the presentation of DLJ; and (v) the other factors described herein.
Concerns regarding the taxable nature of the transaction were offset by the
facts that the consideration to be paid represented a significant premium to the
recent historical market prices of the Class A Common Stock, was to be paid
entirely in cash and that the holders of Class B Common Stock would not
otherwise likely be able to receive a value greater than or equal to $2.375 per
share for all or a substantial portion of such holders' shares of Class B Common
Stock due to the historically limited trading volume of the Class B Common
Stock. Furthermore, the Hechinger Board believed that a significant advantage of
an all cash, taxable transaction was that the Stockholders would be assured of a
specific return on their investment in Hechinger, and would not be subject to
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future business risks of the combined entity's operations that would result from
the acquisition of securities issued by a potential acquiror in a tax free
transaction.
The foregoing discussion of the information and factors considered by the
Hechinger Board during the course of its deliberations prior to entering into
the Original Merger Agreement and the Merger Agreement is intended as a summary
of such information and factors. In view of the variety of factors considered in
connection with its evaluation of the Merger, the Hechinger Board did not find
it practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination. In addition,
individual members of the Hechinger Board may have given different weights to
different factors.
CERTAIN ASPECTS OF THE MERGER
Pursuant to the terms of the Merger Agreement, Stockholders will receive a
$2.375 per share cash price for each share of Common Stock. This represents a
9.5% discount over the closing price of the Class A Common Stock, and 15.5%
discount over the Class B Common Stock on August 26, 1997, one day prior to
Hechinger's entering into the Merger Agreement. Such consideration represents a
137.5% premium over the closing price of a share of Class A Common Stock, and
9.5% discount over the closing price of a share of Class B Common Stock, over
the lowest closing price of a share during the twelve months prior to the
execution of the Merger Agreement and a 44.1% discount over the closing price of
a share of Class A Common Stock, and 56.8% discount over the closing price of a
share of Class B Common Stock, over the highest closing price of a share during
the twelve months prior to the execution of the Merger Agreement.
The $2.375 per share cash payment will be taxable to the Stockholders, at
capital gains or ordinary income rates, depending upon each Stockholder's
particular circumstances. See "Certain Federal Income Tax Consequences of the
Merger." In addition, Stockholders will no longer have an ownership interest in
Hechinger and thus will not participate in the future results of operations of
Hechinger. Consequently, Stockholders will not derive any benefit from
improvements in Hechinger's operations during future periods. Similarly, because
the consideration to be received by the Stockholders will consist exclusively of
cash, Stockholders will not have any ownership interest in the combined entity
and thus will not participate in any future benefits to the combined entity's
operations resulting from the Merger. Furthermore, while the per share
consideration to be paid to the Stockholders under the terms of the Merger
Agreement represents a significant premium over the recent historical market
prices of the shares of Class A Common Stock, the Company believes that the
speculation concerning the possible sale of Hechinger in the immediate periods
prior to and subsequent to Hechinger's announcement that it had received an
offer to enter into negotiations resulted in unusually high trading and
increased the prices of the shares of Class A Common Stock and Class B Common
Stock. As a result, Stockholders who acquired their shares immediately prior to
or subsequent to that announcement, or the announcement of the execution of the
Original Merger Agreement, may receive a significantly lower return on their
investment than Stockholders who purchased their shares prior to that time, and
Stockholders who acquired shares of Class B Common Stock may realize a loss on
such shares.
OPINION OF FINANCIAL ADVISOR
On April 25, 1997, Hechinger retained DLJ to act as its financial advisor
in connection with the Merger Agreement and the transactions contemplated
thereby. In its role as financial advisor to Hechinger, Hechinger asked DLJ to
render an opinion to the Hechinger Board as to the fairness from a financial
point of view of the consideration to be received by the Stockholders in the
Merger. The Company did not request nor did it receive separate opinions from
DLJ for the holders of the Class A Common Stock and the Class B Common Stock.
Annex D sets forth the DLJ Opinion, including the factors considered, the
assumptions made and the procedures followed, by DLJ in rendering its opinion.
Stockholders should read and review Annex D to this Proxy Statement fully and
carefully.
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DLJ made presentations to the Hechinger Board on June 10, 1997 and June 24,
1997. On June 24, 1997, DLJ rendered an oral opinion, in connection with the
Original Merger Agreement, which was subsequently confirmed by a written opinion
on July 17, 1997, that, as of such dates, based upon and subject to certain
matters stated therein, the consideration to be paid pursuant to the Original
Merger Agreement is fair, in the aggregate, from a financial point of view to
the Stockholders.
On August 27, 1997, DLJ rendered an oral opinion in connection with the
Merger Agreement, which was subsequently confirmed by a written opinion on
August 28, 1997, and on the date of this Proxy Statement, that as of such dates,
based upon and subject to certain matters stated therein, the consideration to
be paid in the Merger was fair, in the aggregate, from a financial point of view
to the Stockholders.
THE FULL TEXT OF THE WRITTEN OPINION OF DLJ, DATED AS OF THE DATE OF THIS
PROXY STATEMENT, IS ATTACHED HERETO AS ANNEX D. STOCKHOLDERS SHOULD READ AND
REVIEW THE DLJ OPINION CAREFULLY AND IN ITS ENTIRETY FOR ASSUMPTIONS MADE,
MATTERS CONSIDERED, SCOPE AND LIMITS OF THE REVIEW AND PROCEDURES FOLLOWED BY
DLJ IN CONNECTION WITH SUCH OPINION. THE DLJ OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE CONSIDERATION TO BE RECEIVED BY THE STOCKHOLDERS IN THE MERGER
IN THE AGGREGATE FROM A FINANCIAL POINT OF VIEW AND DOES NOT ADDRESS ANY OTHER
ASPECT OF THE MERGER OR RELATED TRANSACTIONS. THE DLJ OPINION DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE WRITTEN OPINION OF DLJ, DATED AS
OF THE DATE OF THIS PROXY STATEMENT SET FORTH IN THIS PROXY STATEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF ANNEX D.
Hechinger selected DLJ to act as its financial advisor because of DLJ's
expertise and DLJ's familiarity with Hechinger. DLJ was not retained as an
advisor or agent to the Stockholders of Hechinger nor any other person and
rendered the DLJ Opinion solely for the benefit of the Hechinger Board. DLJ is a
nationally recognized investment banking firm and is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, leveraged buy-outs and valuations for estate, corporate and other
purposes. Hechinger did not impose any restrictions or limitations upon DLJ with
respect to the investigations made or the procedures followed by DLJ in
rendering the DLJ Opinion.
In arriving at the DLJ Opinion, DLJ reviewed the Merger Agreement and the
Hechinger Certificate of Incorporation. DLJ also reviewed financial and other
information that was publicly available or furnished to it by Hechinger,
including information provided during discussions with Hechinger's management.
Included in the information provided during discussions with Hechinger's
management were certain financial projections for Hechinger prepared by
Hechinger's management. In addition, DLJ compared certain financial and
securities data of Hechinger with various other companies whose securities are
traded in public markets, reviewed the historical stock prices and trading
volumes of the Common Stock, reviewed prices and premiums paid in certain other
business combinations and conducted such other financial studies, analyses and
investigations as DLJ deemed appropriate for purposes of rendering the DLJ
Opinion.
In rendering the DLJ Opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
it from public sources, that was provided to it by Hechinger or its
representatives or that was otherwise reviewed by it. DLJ also assumed that the
financial projections supplied to it were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of Hechinger as to the future operating and financial performance of
Hechinger. DLJ did not assume responsibility for making any independent
evaluation of the assets, liabilities or operations of Hechinger, nor did DLJ
make any independent verification of the information reviewed by it. DLJ relied
as to certain legal matters on advice of Hechinger's counsel.
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The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to it
as of, the date of the DLJ Opinion. The DLJ Opinion states that, although
subsequent developments may affect this opinion, DLJ does not have any
obligation to update, revise or reaffirm its opinion. The DLJ Opinion does not
address the relative merits of the Merger or any other business strategies being
considered by the Hechinger Board, nor does it address the Board's decision to
proceed with the Merger or any other aspect of the Merger or related
transactions. Rather, the DLJ Opinion only addresses the fairness of the
consideration to be received by the Stockholders in the Merger in the aggregate
from a financial point of view.
DLJ made a presentation to the Hechinger Board on August 27, 1997 in
connection with a written opinion dated August 28, 1997. The presentation to the
Hechinger Board on August 27, 1997 by DLJ was made at the request of the
Hechinger Board because the consideration proposed to be paid pursuant to the
Merger Agreement was different from the consideration proposed to be paid
pursuant to the Original Merger Agreement. The following summarizes all the
material financial analyses performed by DLJ in arriving at this opinion, which
DLJ discussed with the Hechinger Board.
Comparable Company Analyses. DLJ compared selected historical and
projected operating information, stock market data and financial ratios for
Hechinger to selected historical and projected operating information, stock
market data and financial ratios of certain other publicly traded home
improvement products retailing companies that are classified under the same
S.I.C. code and deemed to be similar by DLJ. The comparable companies included:
BMC West Corporation, Eagle Hardware & Garden, Inc., Payless Cashways, Inc.,
Wickes Lumber Company and Wolohan Lumber Co. DLJ did not include Home Depot and
Loews in its Comparable Company Analysis because it concluded that their
respective growth rates and profit margins were sufficiently disproportionate to
those of the Company and, accordingly, they were not comparable entities. For
these comparable companies, an analysis of current enterprise value (defined as
trading equity value adjusted by adding long-term debt (at face value) and
subtracting cash and short-term investments) to latest twelve months earnings
before interest, taxes, depreciation and amortization ("EBITDA") yielded a range
of 4.7 to 14.7 times EBITDA with a median of 6.9 times EBITDA, compared to 12.9
times and 9.7 times EBITDA of $42.0 million (using face value and market value
of Hechinger's debt, respectively) for Hechinger in the Merger. An analysis of
current enterprise value to latest twelve months earnings before interest and
taxes ("EBIT") yielded a range of 8.7 to 19.3 times EBIT with a median of 10.2
times EBIT. Because Hechinger's EBIT is negative, any comparison with multiples
thereof in the Merger would not be instructive. DLJ indicated that the ratio of
enterprise value to latest twelve months EBITDA multiples calculated for
Hechinger based on the financial terms of the Merger were within the ranges of
multiples of the comparable companies and/or above the medians with respect
thereto.
Comparable Acquisition Analysis. DLJ reviewed acquisitions involving home
improvement products retailing companies during the period from January 1, 1994
to June 24, 1997 but believed only the acquisition of Rickel Home Centers, Inc.
("Rickel") and Channel Home Centers, Inc. ("Channel") by a leveraged buyout firm
to be relevant for valuation purposes. This transaction was deemed relevant
because it is the only acquisition which involved the acquisition of two
companies in an industry comparable to Hechinger, which companies held a similar
market position to Hechinger. In examining this transaction, DLJ analyzed
certain income statement and balance sheet parameters of the acquired company
relative to the consideration paid. The multiples analyzed included total
transaction value (defined as transaction equity value adjusted by adding
long-term debt (at face value) and subtracting cash and short-term investments)
as a multiple of latest twelve months revenues, EBITDA and EBIT. An analysis of
these ratios yielded a range of value for the Common Stock of between ($14.87)
and ($1.81) and between ($11.69) and $1.36 (using face value and market value of
the debt, respectively), as compared to the Merger Consideration of $2.375 per
share.
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Acquisitions Premium Analysis. DLJ's analysis also indicated that the
average percentage premium of offer prices to trading prices one day, one week
and one month prior to the date of the announcement of discussions for 164
publicly announced transactions (between January 1, 1994 and July 25, 1997 and
of a transaction size between $50 and $250 million) was 36.6%, 42.9%, and 51.2%,
respectively. The consideration to be received by the Stockholders pursuant to
the Merger Agreement of $2.375 per share represented a premium to Class A Common
Stock based on the closing Class A Common Stock price one day, one week and one
month prior to June 7, 1997 (a date prior to Hechinger's public disclosure of
negotiations with an unnamed potential acquiror on June 17, 1997) of 52.0%,
90.0%, and 52.0%, respectively, and a discount to Class B Common Stock based on
the closing Class B common stock price one day, one week and one month prior to
June 7, 1997 (a date prior to Hechinger's public disclosure of negotiations with
an unnamed potential acquiror on June 17, 1997) of (26.9%), (26.9%), and
(29.6%), respectively.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow
analysis of Hechinger. DLJ performed this analysis based on the Case 3 Estimates
(as defined) provided by Hechinger's management. Using assumed weighted average
costs of capital between 15.0% and 17.0% and terminal EBITDA multiples of 4.0
times to 5.0 times, the analysis yielded values ranging from ($5.01) to ($4.38)
per share and from ($1.82) to ($1.20) per share of the Common Stock (using face
value and market value of the debt, respectively).
DLJ performed the same valuation analysis to render the DLJ Opinion on
August 28, 1997 as it did to render its opinion dated July 17, 1997 (the
"Initial DLJ Opinion") except that (i) in connection with its discounted cash
flow analysis, DLJ relied on the Case 3 Estimates to render the DLJ Opinion
versus the Case 1 and 2 Estimates to render the Initial DLJ Opinion and (ii) in
connection with the comparable company analysis, DLJ updated such analysis for
the recent financial results of the comparable companies and Hechinger to render
the DLJ Opinion. The Case 3 Estimates forecasted lower future cash flows and
sales and Hechinger's results for the quarter ended August 2, 1997 reflected,
among other things, lower sales than previous quarters.
The summary set forth above does not purport to be a complete description
of the analyses performed by DLJ. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances. Therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors summarized above,
DLJ has indicated to Hechinger that it believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. In
performing its analysis, DLJ made numerous assumptions with respect to industry
performance, business and economic conditions and other matters including but
not limited to the operating performance of various companies in the retail
sector, weather patterns and its effect on the Company's and its competitors'
performance, overall trends in the Gross Domestic Product and its effects on the
Company's industry. The analyses performed by DLJ are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter dated April 25, 1997 (the
"Engagement Letter"), Hechinger has agreed (i) to pay to DLJ (a) a retainer fee
of $100,000, payable upon execution of the Engagement Letter, (b) a fee of
$500,000 at the time DLJ delivers the DLJ Opinion to the Hechinger Board, (c)
upon consummation of the Merger, an amount equal to $3,600,000 plus one and two
tenths percent (1.20%) of the aggregate amount of consideration paid per share
of Common Stock to Hechinger and/or its Stockholders in excess of $100,000,000
in connection with the Merger, less the amounts paid by Hechinger pursuant to
clauses (i)(a) and (i)(b) above and (ii) upon request by DLJ from time to time,
to reimburse DLJ for all out-of-pocket expenses (including the reasonable fees
and expenses of counsel) incurred by DLJ in connection with its engagement
thereunder. The maximum aggregate compensation to be received by DLJ in connec-
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tion with the Merger is $3.6 million. DLJ and Hechinger negotiated this fee
arrangement at arm's length and the Hechinger Board was aware of such
arrangement, including the fact that a significant portion of the aggregate fee
payable to DLJ is contingent upon consummation of the Merger. DLJ and Hechinger
believe that the terms of this fee arrangement are customary in transactions of
this nature.
In the ordinary course of its business, DLJ actively trades the securities
of Hechinger for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in Hechinger's
securities. As of August 24, 1997, DLJ owned $1.5 million of the 5.50%
Convertible Subordinated Debentures, $6.5 million of the 9.45% Senior Debentures
due 2012 and $7.3 million of the 6.95% Senior Notes due 2003. There are no
special arrangements or understandings between Hechinger and DLJ with regard to
these securities. DLJ has performed investment banking and other services for
Hechinger in the past including obtaining a revolving credit facility in 1996.
Hechinger has compensated DLJ for such services. In addition, DLJ has performed
investment banking and other services for Leonard Green and its affiliates in
the past (including a $102 million initial public offering for Twinlab
Corporation in November 1996, a $100 million high yield offering, $7.5 million
preferred stock investment and $0.2 million common stock investment for Twinlab
Corporation in May 1996, a $408.8 million initial public offering for
Thrifty-Payless, Inc. in February 1996, and a $100 million high yield offering
for Carr-Gottstein Foods Co. in October 1995) and has received customary
compensation for such services. DLJ believes that none of the matters described
herein, including DLJ's ownership of Hechinger's securities, prevented DLJ from
rendering the DLJ Opinion in an independent manner.
CERTAIN ESTIMATES OF FUTURE OPERATIONS AND OTHER INFORMATION
At the request of DLJ, and in connection with its oral opinion of June 24,
1997, and its written opinion of July 17, 1997, Hechinger prepared two sets of
certain nonpublic estimates reflecting management's views as to the possible
future performance of Hechinger over the five fiscal years ending January 2002.
This information was provided to DLJ on a confidential basis. The first set of
these estimates were (a) Hechinger's revenue would be $2,043.0, $1,912.0,
$1,845.0, $1,845.0 and $1,845.0 ($ in millions) for the years ending January
1998, 1999, 2000, 2001 and 2002, respectively, and (b) Hechinger's EBITDA would
be $68.5, $53.0, $53.4, $53.4 and $53.4 ($ in millions) for the years ending
January 1998, 1999, 2000, 2001 and 2002, respectively (the "Case 1 Estimates").
The second set of estimates reflected lower revenue growth estimates and EBITDA
margins than the Case 1 Estimates (the "Case 2 Estimates"). The Case 2 Estimates
were (a) Hechinger's revenues would be $1,973.0, $1,837.0, $1,700.0, $1,700.0
and $1,700.0 ($ in millions) for the years ending January 1998, 1999, 2000, 2001
and 2002, respectively, and (b) Hechinger's EBITDA would be $59.5, $44.0, $34.2,
$34.2 and $34.2 ($ in millions) for the years ending January 1998, 1999, 2000,
2001 and 2002, respectively.
At the request of DLJ, and in connection with its oral opinion of August
27, 1997, and its written opinion of August 28, 1997, Hechinger prepared a third
set of nonpublic estimates reflecting management's view as to the possible
future performance of Hechinger over the five fiscal years ending in January
2002 (the "Case 3 Estimates"). The Case 3 Estimates were (a) Hechinger's
revenues would be $1,879.2, $1,648.0, $1,566.0, $1,566.0 and $1,566.0 ($ in
millions) for the years ending January 1998, 1999, 2000, 2001 and 2002,
respectively, and (b) Hechinger's EBITDA would be $40.4, $37.0, $32.6, $32.6 and
$32.6 ($ in millions) for the years ending January 1998, 1999, 2000, 2001 and
2002, respectively.
THE ESTIMATES REFERRED TO ABOVE WERE NOT PREPARED WITH A VIEW TO PUBLIC
DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES ESTABLISHED BY THE COMMISSION
OR THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROJECTIONS.
THE CASE 1, CASE 2 AND CASE 3 ESTIMATES ARE INCLUDED IN THIS PROXY STATEMENT
SOLELY BECAUSE SUCH INFORMATION WAS PROVIDED TO DLJ. NONE OF HECHINGER, DLJ OR
HECHINGER'S INDEPENDENT AUDITORS ASSUME ANY RESPONSIBILITY FOR THE ACCURACY OF
SUCH INFORMATION. IN ADDITION, BECAUSE THE ESTIMATES ARE INHERENTLY SUBJECT TO
SIGNIFICANT
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ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES BEYOND THE COMPANY'S
CONTROL, THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE REALIZED; ACTUAL
RESULTS MAY BE HIGHER OR LOWER THAN THOSE ESTIMATED. NEITHER HECHINGER'S
AUDITORS NOR ANY OTHER INDEPENDENT ACCOUNTANTS HAVE COMPILED, EXAMINED OR
PERFORMED ANY PROCEDURES WITH RESPECT TO THE FOREGOING ESTIMATES, NOR HAVE THEY
EXPRESSED ANY OPINION OR ANY OTHER FORM OF ASSURANCE ON SUCH INFORMATION OR ITS
ACHIEVABILITY, AND ASSUME NO RESPONSIBILITY FOR, AND DISCLAIM ANY ASSOCIATION
WITH, THE PROSPECTIVE FINANCIAL INFORMATION.
These estimates do not give effect to the Merger and should be read
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INTEREST OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Hechinger Board with respect to
the Merger Agreement and the Merger, Stockholders should be aware that certain
members of the Hechinger Board and Hechinger management have certain interests
that are in addition to the interests of Stockholders generally, including the
payments to be made in respect of options of Hechinger in connection with the
Merger Agreement, severance arrangements, other stock incentive arrangements and
retirement plans which contain provisions that would be triggered by a change of
control of Hechinger. Under these plans and agreements, a change in control will
occur at the Effective Time. The aggregate amount to be received by members of
the Hechinger Board as a result of the Merger is approximately $18.0 million, in
addition to the amount to be paid in respect of such members' Class A Common
Stock and Class B Common Stock in the Merger. Such amount will be received by
members of the Hechinger Board no later than 15 days after consummation of the
Merger, except for certain payments relating to severance, which will be
received, assuming consummation of the Merger, no later than 15 days after
termination of employment. Payments under such plans and agreements are being
made pursuant to binding agreements with present and former officers and
directors of Hechinger, which were in effect prior to the execution of the
Original Merger Agreement and were not affected by the Amendment. Such matters
were considered by the Hechinger Board in approving the Merger Agreement and the
transactions contemplated thereby and the following describes all material
additional interests of the members of the Hechinger Board relating to the
Merger.
Options
The Merger Agreement provides that promptly after the Effective Time, each
holder of In the Money Options issued under the Stock Option Plans will receive
a payment in an amount equal to the difference between (i) the product of (A)
$2.375 multiplied by (B) the aggregate number of shares of Common Stock issuable
upon exercise of all In the Money Options held by such holder and (ii) the
aggregate exercise price payable upon such exercise. No payment will be made
with respect to any option having a per share exercise price equal to or greater
than $2.375 and, in accordance with the terms of the Merger Agreement, such
options will be terminated prior to the Closing. The aggregate cash payments to
be received by directors, Named Executive Officers and Senior Vice Presidents of
Hechinger in exchange for their stock options will be approximately $152,688,
$10,000 of which will be received by the Non-Employee Directors in the
aggregate.
Severance Agreements
Under the terms of the Named Executive Officers Severance Agreements dated
April 10, 1997 entered into by Hechinger and each of the Named Executive
Officers, each of whom is a member of the Hechinger Board, each Named Executive
Officer will receive a benefit equal to three times the sum of his annual salary
and the average of his last three annual bonuses if the executive is terminated
for reasons other than cause, death, disability or retirement or by the Named
Executive Officer for "good reason" within two years following a change in
control of Hechinger. Each Named Executive Officer also is eligible for
additional benefits for thirty-six months in the event of such
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termination. These additional benefits include existing medical, dental and life
insurance (provided the executive pays the premiums due under such plans);
merchandise discounts; outplacement services; monthly auto allowances up to an
annual cost of $13,200; payment of excise taxes incurred in connection with the
payments received; and payment of legal fees if any of the Named Executive
Officers are forced to litigate to enforce their rights and are successful. The
Named Executive Officers Severance Agreements contain confidentiality
requirements applicable to the Named Executive Officers during and after their
employment with Hechinger. Pursuant to the terms of the Named Executive Officers
Severance Agreements, the Named Executive Officers would receive, excluding
certain additional benefits, in the aggregate approximately $5.7 million (plus
the payment of any applicable excise taxes) in the event of termination within
two years following a change in control of Hechinger.
Under the terms of the Senior Vice Presidents Severance Agreements dated
April 10, 1997, entered into by Hechinger and each of the Senior Vice
Presidents, each Senior Vice President will receive a benefit equal to 1.5 times
the sum of his or her annual salary and the average of his or her last three
annual bonuses if (i) the Senior Vice President is terminated for reasons other
than cause, death, disability or retirement or (ii) the Senior Vice President
terminated the Agreement for "good reason" within two years following a change
in control of Hechinger. Each Senior Vice President also is eligible to receive
certain additional benefits as described above for the Named Executive Officers
for a period of eighteen months. Pursuant to the terms of the Senior Vice
Presidents Severance Agreements, the Senior Vice Presidents would receive in the
aggregate approximately $4.5 million, including $464,801 for S. Ross Hechinger,
who is a member of the Hechinger Board, who is a member of the Hechinger Board,
in the event of termination within two years following a change in control of
Hechinger.
Stock Incentive Agreements
Hechinger's 1992 Restricted Stock Award Agreement and the Performance
Restricted Stock Award Agreements each contain change in control arrangements
that will be triggered by the Merger. These include: (i) 25,500 shares of
restricted stock which have been issued to Mr. Cort pursuant to a 1992
Restricted Stock Award Agreement and (ii) 100,000 shares, 100,000 shares and
60,000 shares of Class A Common Stock which were awarded in 1995 to Mr.
Hechinger, Jr., Mr. Cort and Mr. McClelland, respectively, under Performance
Restricted Stock Award Agreements. The aggregate amount to be received by Mr.
Hechinger, Jr., Mr. Cort and Mr. McClelland under these agreements in the event
of a change of control is approximately $678,063.
The Stock Incentive Agreements generally provide that in the event the
Named Executive Officer's employment is terminated following a change in control
due to death, disability, by the executive for good reason or by Hechinger other
than for cause, the restrictions on such shares granted shall lapse and the
executive shall receive such shares free of restrictions. The Stock Incentive
Agreements also provide for additional payments to compensate for any excise
taxes incurred in connection with the exercise of any option or receipt of any
benefits. Adjustments or substitutions may be made to the number of shares
granted following a change in control, only insofar as such changes do not have
a material adverse effect on the Named Executive Officer.
Retirement Plans
The Named Executive Officers are covered by the SERP, between each of the
Named Executive Officers and Hechinger. Under the SERP, in the event of a change
in control of Hechinger, Hechinger will fund a Trust for the Named Executive
Officers in an amount sufficient to purchase annuities and make related tax
payments for a ten-year period. The Trust will then purchase annuities and make
related tax payments annually during the ten-year period unless, within two
years of the change in control, such Named Executive Officer's employment is
terminated by the executive for good reason or by Hechinger other than for
cause; in which case, the Trust will purchase an annuity (and make the related
tax payment) on behalf of the Named Executive Officers
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equal (together with any annuities already purchased for the executive by the
Trust) to the expected benefit over such ten-year period. Hechinger also will
make additional payments to compensate for excise taxes incurred in connection
with the provision of such benefits. The aggregate amount that Hechinger would
be required to fund to the Trust is approximately $7.7 million in the event of a
change in control of Hechinger.
The Hechinger Board and Certain Agreements
Pursuant to the terms of Hechinger's 1991 Stock Incentive Plan,
Non-Employee Directors receive a one-time award of a non-qualified stock option
covering 8,000 shares of Class A Common Stock upon the date they are first
elected to the Board, and also automatically receive each year a non-qualified
stock option covering 2,000 shares of Class A Common Stock immediately following
each annual meeting of the Stockholders. Non-Employee Directors are also
eligible for a retirement benefit after completing five years of service as a
Non-Employee Director. The benefit is equal to the annual fee paid to all
Non-Employee Directors at the time of retirement and is payable annually for the
number of years served as a Non-Employee Director. As of the date of this Proxy
Statement, two of the Non-Employee Directors, Ms. Ann D. Jordan and Mr. Alan J.
Zakon, are eligible for these benefits and would each receive approximately
$130,000 in the event of a change in control of Hechinger. In addition, as of
the date of this Proxy Statement, each of the Non Employee Directors
individually owns 2,000 Options to purchase shares of Class A Common Stock each
at an exercise price of $1.38 per share.
John W. Hechinger, a director of Hechinger, is the beneficiary of the
Hechinger Trust under the terms of the Trust Agreement. Pursuant to the terms of
the Trust Agreement, in the event of a change in control of Hechinger, the
Company is required to fund the Hechinger Trust in an amount sufficient to pay
the benefits that Mr. Hechinger would be entitled to under the terms of a
retirement agreement between Hechinger and Mr. Hechinger, subject to adjustment.
The aggregate amount that Hechinger would be required to fund to the Hechinger
Trust is approximately $3.2 million in the event of a change of control of
Hechinger.
Certain Non-Compete Arrangements
Simultaneously with the execution of the Merger Agreement, John W.
Hechinger, Jr., Kenneth J. Cort and W. Clark McClelland entered into certain
arrangements with BSQ Acquisition and Acquisition pursuant to which they have
agreed to limit their ability to compete with the Surviving Corporation and not
to hire certain employees of Hechinger during for a period ranging from twelve
(12) to twenty-four (24) months.
Certain Lease Arrangements
During the last fiscal year, eleven of the Company's store sites were
leased from Enterprises, a partnership consisting of members of the Hechinger
and England families. The rentals paid by the Company to Enterprises under these
leases in the Company's last fiscal year were $3.3 million. In the opinion of
management, the terms of these leases were at least as favorable to the Company
as those of leases which the Company has with unaffiliated lessors for
comparable premises.
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THE MERGER AGREEMENT
GENERAL
The following is a description of the material terms of the Merger
Agreement. Such description does not, however, purport to be complete and is
qualified in its entirety by reference to the Merger Agreement, a copy of which
is attached hereto as Annex A and is incorporated herein by reference.
Stockholders are urged to read the Merger Agreement in its entirety.
The Merger Agreement provides, among other things, that subject to the
approval of the Merger Agreement by the Stockholders and the satisfaction or
waiver of the conditions to the Merger, Acquisition will merge with and into
Hechinger in accordance with the DGCL. As a result of the Merger, Hechinger will
be the Surviving Corporation and a wholly owned subsidiary of BSQ Acquisition.
Pursuant to the Merger, each share of Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Common Stock owned
by Acquisition, BSQ Acquisition or held in treasury, or as to which appraisal
rights have been exercised) will be converted into the right to receive $2.375
in cash, without interest. In effect, the Merger Agreement will result in the
purchase of all outstanding shares of the Common Stock by BSQ Acquisition. After
the Merger, holders of Common Stock will possess no interest in, or rights as,
Stockholders, other than the right to receive $2.375 per share in cash for each
share of Common Stock owned on the Record Date.
EFFECTIVE TIME
The Merger shall become effective at the time and on the date on which the
Certificate of Merger has been duly filed with the Secretary of State of
Delaware or such other time as is agreed to by Hechinger, BSQ Acquisition and
Acquisition and specified in the Delaware Certificate of Merger. The filing of
the Certificate of Merger will be made as soon as practicable after all
conditions contemplated by the Merger Agreement have been fulfilled or waived.
Such time is hereinafter referred to as the Effective Time.
PAYMENT FOR SHARES
The Merger Agreement provides that at or prior to the Effective Time, BSQ
Acquisition shall make available or cause to be made available to a paying agent
appointed by BSQ Acquisition with Hechinger's prior approval (the "Paying
Agent") amounts sufficient in the aggregate to provide all funds necessary for
the Paying Agent to make payments (a) to holders of Common Stock issued and
outstanding immediately prior to the Effective Time and (b) to holders of
Options (as defined) outstanding immediately prior to the Effective Time. The
Merger Agreement further provides that not later than 15 days prior to the date
fixed for the Special Meeting, Hechinger shall cause to be mailed to each person
who was, as of the Record Date, a holder of record (other than BSQ Acquisition
or Acquisition) of issued and outstanding shares of Common Stock, a form
(mutually agreed to by Hechinger and Acquisition) of letter of transmittal and
instructions for use in effecting the surrender of the certificates which,
immediately prior to the Effective Time, represent any such shares of Common
Stock in exchange for payment therefor. The Merger Agreement further provides
that Hechinger and, following the Effective Time, the Surviving Corporation
shall each use their best efforts to mail the letter of transmittal to all
persons who become holders of shares of Common Stock during the period between
the Record Date and the close of business on the business day prior to the
Effective Time. At any time after the Effective Time, upon surrender to the
Paying Agent of such certificates, together with such letter of transmittal,
duly executed and completed in accordance with the instructions thereto, the
Surviving Corporation shall promptly cause to be paid to the persons entitled
thereto a check in the amount to which such persons are entitled, after giving
effect to any required tax withholdings. In the event any holder of shares of
Common Stock, or of Options entitled to payment hereunder, holds an odd number
of shares of Common Stock or has Options exercisable into an odd number of
shares of Common Stock such that, in either case, such
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holder would otherwise receive a fractional cent, such fractional cent shall be
rounded upwards to the next whole cent; provided, however, that the parties
shall agree upon appropriate provisions in the letter of transmittal to minimize
the amount of additional consideration being paid as a result thereunder. No
interest will be paid or will accrue on the amount payable upon the surrender of
any such certificate. If payment is to be made to a person other than the
registered holder of the certificate surrendered, it shall be properly endorsed
or otherwise in proper form for transfer and the person requesting payment shall
pay any transfer or other taxes required by reason of the payment to a person
other than the registered holder of the certificate surrendered or establish to
the satisfaction of the Surviving Corporation or the Paying Agent that such tax
has been paid or is not applicable.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligation of Hechinger, BSQ Acquisition and Acquisition to close the
transactions contemplated by the Merger Agreement are subject to certain
conditions including: (i) no statute, rule, regulation, administrative
requirement, code, ordinance (a "Law"), or decree, injunction, judgment, order,
ruling, arbitration award, assessment or writ (an "Order") shall have been
enacted, entered, issued or promulgated by any government or any agency, bureau,
board, commission, court, department, official, political subdivision, tribunal
or other instrumentality of any government, whether federal, state or local,
domestic or foreign (a "Governmental Entity") (and be in effect) which prohibits
or materially restricts the consummation of the transactions contemplated by the
Merger Agreement; (ii) any applicable waiting period under the HSR Act shall
have expired or have been terminated with respect to the transactions
contemplated by the Merger Agreement; (iii) no Governmental Entity shall have
notified either party to the Merger Agreement that it intends to commence
proceedings to restrain or prohibit the transactions contemplated thereby or
force rescission, unless such Governmental Entity shall have withdrawn such
notice and abandoned any such proceedings prior to the time which otherwise
would have been the Closing Date; and (iv) the transactions contemplated by the
Merger Agreement shall have been approved by the requisite vote of the
Stockholders.
The obligation of Hechinger to close the transactions contemplated by the
Merger Agreement is also subject to the satisfaction of the following further
conditions (unless waived by Hechinger): (i) all representations and warranties
made by Acquisition or BSQ Acquisition in the Merger Agreement, any schedule or
any agreement, certificate or instrument to be executed by Acquisition or BSQ
Acquisition pursuant thereto shall be true and correct in all respects on the
date when made and on and as of the Closing Date (unless the representations and
warranties address matters as of a particular date, in which case they shall
remain true and correct in all respects as of such date) with the same effect as
if made on and as of the Closing Date (without regard to any amendment or
supplement of any such schedule, agreement or instrument after the date of the
Merger Agreement), except where such failures, in each case or in the aggregate,
have not had and are not reasonably expected to have a Material Adverse Effect
(as defined), provided that whenever any such representation or warranty is
conditioned by reference to materiality or a Material Adverse Effect, for the
purposes of this clause (i), such representation or warranty shall be treated as
if such representation or warranty did not contain any limitation as to
materiality or Material Adverse Effect as stated therein; (ii) Acquisition and
BSQ Acquisition shall have performed or complied in all material respects with
all covenants and conditions contained in the Merger Agreement, any schedule or
any agreement, certificate or instrument to be executed by Acquisition or BSQ
Acquisition pursuant thereto required to be performed or complied with by
Acquisition or BSQ Acquisition either at or prior to the Closing; (iii) at the
Closing, BSQ Acquisition shall deliver to Hechinger a certificate of the
president or any vice president and secretary or any assistant secretary of
Acquisition certifying to the matters set forth in clause (i) and (ii) above;
and (iv) BSQ Acquisition shall have delivered, or shall have caused to be
delivered, to Hechinger at or prior to the Closing the following: (a) a
certified copy of the resolutions duly adopted by the Board of Directors of
Acquisition and BSQ Acquisition authorizing the Merger Agreement and the
transactions
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contemplated thereby; and (b) such other documents, instruments or certificates
as shall be reasonably requested by Hechinger or its counsel.
The obligation of BSQ Acquisition and Acquisition to close the transactions
contemplated by the Merger Agreement is also subject to the following further
conditions (unless waived by Acquisition): (i) all representations and
warranties made by Hechinger in the Merger Agreement, any schedule or any
agreement, certificate or instrument to be executed by Hechinger pursuant
thereto shall be true and correct in all respects on the date when made and on
and as of the Closing Date (unless the representations and warranties address
matters as of a particular date, in which case they shall remain true and
correct in all respects as of such date) with the same effect as if made on and
as of the Closing Date (without regard to any amendment or supplement of any
such schedule, agreement or instrument after the date of the Merger Agreement),
except where such failures, in each case or in the aggregate, have not had and
are not reasonably expected to have a Material Adverse Effect, provided that
whenever any such representation or warranty is conditioned by reference to
materiality or a Material Adverse Effect, for the purposes of this clause (i),
such representation or warranty shall be treated as if such representation or
warranty did not contain any limitation as to materiality or Material Adverse
Effect as stated therein; (ii) except for any action requested or required to be
taken by Hechinger pursuant to Section 7.6.3 of the Merger Agreement (relating
to actions taken in compliance with certain antitrust laws), Hechinger shall
have performed or complied in all material respects with all covenants and
conditions contained in the Merger Agreement, any schedule or any agreement,
certificate or instrument to be executed by Hechinger pursuant thereto required
to be performed or complied with by Hechinger either at or prior to the Closing;
(iii) at the Closing, Hechinger shall deliver to BSQ Acquisition a certificate
of the president or any vice president and secretary or any assistant secretary
of Hechinger certifying to the matters set forth in clause (i) and (ii) above;
(iv) at the Closing, John W. Hechinger, Jr., Kenneth J. Cort and W. Clark
McClelland shall have delivered agreements containing the covenants set forth in
Exhibit B to the Merger Agreement (agreements limiting their ability to compete
with the Surviving Corporation and to hire certain employees of Hechinger for a
period ranging from twelve (12) to twenty-four (24) months from and after the
Effective Date); (v) Hechinger shall have made or obtained, on terms reasonably
satisfactory to BSQ Acquisition, all licenses, permits, franchises or
authorizations (the "Permits") and approvals, authorizations, consents,
qualifications or registrations, or any waiver of any of the foregoing, required
to be obtained from or made with, or any notice, statement or other
communication (the "Approvals") required to be filed with, delivered to, or
required from any Governmental Entity or any third party in order to consummate
the transactions contemplated by the Merger Agreement and permit the Surviving
Corporation to continue Hechinger's business in substantially the manner as it
is being conducted as of the Merger Agreement (after giving effect to the
transactions contemplated by the BSQ Acquisition Agreement), except where the
failure to obtain such Permits or Approvals, individually or in the aggregate,
would not reasonably be expected to have a Material Adverse Effect; (vi)
Hechinger shall have delivered, or shall have caused to be delivered, to BSQ
Acquisition at or prior to the Closing the following: (a) to the extent
requested by BSQ Acquisition, resignations of the directors and officers of
Hechinger and each of Hechinger's subsidiaries effective as of the Closing; (b)
certified copies of the resolutions duly adopted by the Hechinger Board and by
the Stockholders, authorizing the Merger Agreement and the transactions
contemplated thereby; (c) the corporate seal, minute books and stock transfer
books of Hechinger; and (d) such other documents, instruments or certificates as
shall be reasonably requested by BSQ Acquisition or its counsel; (vii) BSQ
Acquisition shall have made or obtained, on terms satisfactory to BSQ
Acquisition in its sole discretion, all financing necessary in connection with
the consummation of the transactions contemplated by the Merger Agreement and
the BSQ Acquisition Agreement and which are necessary to continue after the
Closing the businesses of BSQ Acquisition and the Surviving Corporation in
substantially the manner they are currently being conducted or are planned to be
conducted; and (viii) the transactions contemplated by the BSQ Acquisition
Agreement and its related agreements shall have been consummated or shall be
consummated substantially concurrently with the Merger.
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"Material Adverse Effect" is defined in the Merger Agreement as a material
adverse effect on (a) the ability of the subject Person to perform its
obligations under, and consummate the transactions contemplated by, the Merger
Agreement on a timely basis or (b) the condition (financial or otherwise),
results of operations, assets, liabilities, prospects (except insofar as they
relate generally to the industry of which Hechinger is a part) or business of
the subject Person (as defined) and its subsidiaries taken as a whole. "Person"
is defined in the Merger Agreement and hereinafter as an association, a
corporation, an individual, a partnership, a limited liability company or
limited liability partnership, a trust or any other entity or organization,
including a Governmental Entity.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. These include representations by Hechinger with respect to (i)
organization, good standing and other corporate matters; (ii) the availability
to Acquisition of Hechinger's corporate records; (iii) authorized capital and
subsidiaries; (iv) corporate authority with respect to the Merger Agreement and
the receipt of an opinion of Hechinger's financial advisor; (v)
non-contravention; (vi) required governmental and third party Approvals; (vii)
filings with the Commission and financial statements; (viii) accounts payable,
inventory and conduct of business since February 1, 1997 to the date of the
Merger Agreement; (ix) compliance with laws, including environmental laws, (x)
possession of all required Permits; (xi) material contracts; (xii) related party
transactions between Hechinger and its directors and officers; (xiii) real
property and leaseholds; (xiv) absence of undisclosed liabilities; (xv)
litigation; (xvi) tax matters; (xvii) certain matters under the Employee
Retirement Income Security Act of 1974, as amended; (xviii) certain assets;
(xix) intellectual property; (xx) labor and employment matters; (xxi) suppliers;
(xxii) personnel; (xxiii) insurance; (xxiv) required company actions in
connection with the Merger Agreement and the Merger; (xxv) takeover statutes;
and (xxvi) brokers and brokers' fees.
BSQ Acquisition and Acquisition have also made certain representations and
warranties with respect to (i) organization, good standing and corporate
authority; (ii) non-contravention; (iii) required approvals; (iv) brokers; (v)
financing in connection with the transactions contemplated by the Merger
Agreement and the BSQ Acquisition Agreement; and (vi) transaction documents.
CONDUCT OF BUSINESS PENDING THE MERGER
The Merger Agreement provides that on and after the date thereof and prior
to the Closing Date, except as otherwise consented to by Acquisition in writing
(which consent shall not be unreasonably withheld so long as such consent is not
adverse to the interests of Acquisition or BSQ Acquisition, in their sole
discretion), or as set forth in Schedule 7.1 to the Merger Agreement or as
otherwise contemplated by the Merger Agreement: Hechinger shall (i) conduct its
business in the ordinary course in all material respects; (ii) discharge
accounts payable and other current liabilities and obligations of Hechinger in
accordance with past practice; (iii) purchase and maintain inventory in an
amount consistent with normal seasonal requirements of Hechinger and intended to
facilitate the sound operation of Hechinger's business; (iv) discharge on a
timely basis any and all liabilities as and to the extent such liabilities or
any portion thereof become due prior to the Closing; provided, however, that
Hechinger shall not prepay, redeem or repurchase any indebtedness or other
obligations that are not due and payable prior to the Closing other than
pursuant to its existing revolving credit facility in the ordinary course of
business; (v) use commercially reasonable efforts to preserve the business
organization of Hechinger intact, and to preserve the goodwill of suppliers,
customers, employees and others with whom business relationships exist. The
Merger Agreement also provides that Hechinger shall not (i) borrow any money,
incur any indebtedness or guarantee any indebtedness or obligation of any
Person, other than accounts payable arising in the ordinary course of business,
consistent with past practice, and other than pursuant to its existing revolving
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credit facility in the ordinary course of business; (ii) issue, sell or dispose
of any capital stock or other equity interest in Hechinger or options, warrants
or other rights to purchase any such capital stock or equity interest or any
securities convertible into or exchangeable for such capital stock or equity
interests or otherwise make or effect any change in the issued and outstanding
capitalization of Hechinger; (iii) cause or permit any amendment, alteration or
modification in the terms of any currently outstanding options, warrants or
other rights to purchase any capital stock or equity interest in Hechinger or
any securities convertible into or exchangeable for such capital stock or equity
interest, including without limitation any reduction in the exercise or
conversion price of any such rights or securities; (iv) declare or pay any
dividend or make any other distribution, or transfer any assets, to any
Stockholder or redeem, repurchase or otherwise reacquire any of its capital
stock, except in the ordinary course of business; (v) enter into any contracts
or agreements (written or oral) that provide for aggregate payments by any party
in excess of $500,000 per contract and that are not terminable upon 90 days (or
less) notice by Hechinger without penalty or obligation to make payments related
to such termination and, to the extent Hechinger is a party to any such contract
or agreement as of the date hereof, subject to limited exceptions, Hechinger
shall not amend or waive any rights under any such contract; (vi) purchase all
or any substantial part of the properties or assets of, or otherwise acquire any
Person (or division thereof); (vii) sell, lease, transfer, assign or otherwise
dispose of any properties or assets, except for (a) sales of inventory in the
ordinary course of business consistent with past practice, and (b) sales in
connection with any transaction to which Hechinger is contractually obligated
prior to the date of the Merger Agreement; (viii) except as set forth on
Schedule 7.1.11 to the Merger Agreement, sell, lease, transfer, assign or
otherwise dispose of any owned real estate or leased real estate, and shall not
permit any lease or sublease of leased real estate to terminate or expire, in
each case except as otherwise provided in the Merger Agreement; (ix) except as
set forth on Schedule 7.1.12 to the Merger Agreement, purchase, lease or
otherwise acquire any material properties or assets except for (a) purchases of
inventory in the ordinary course of business, and (b) purchases other than in
the ordinary course of business not exceeding $100,000 individually and $500,000
in the aggregate; (x) except as may be required by law or under any existing
agreements, increase the compensation or fringe benefits payable or to become
payable by Hechinger to any of the officers or salaried employees of Hechinger,
other than routine or customary increases made in the ordinary course of
business and consistent with past practice (xi) except as set forth on Schedule
7.1.14 to the Merger Agreement, close, shut down or otherwise eliminate any of
its stores or make any other material change in the character of its business,
properties or assets other than in the ordinary course of business consistent
with past practice. The Merger Agreement further provides that Hechinger (i)
shall maintain in all material respects its existing advertising programs and
policies without material modification except for any changes made in the
ordinary course of business; (ii) shall not intentionally materially reduce the
personnel headcount of Hechinger; (iii) shall use commercially reasonable
efforts (but not requiring the expenditure of funds) to keep available the
services of the present employees of Hechinger. The Merger Agreement further
provides that Hechinger shall not, (i) except as required by GAAP, change its
material accounting principles, methods or practices, including any material
change in its policies with respect to reserves (whether for bad debts,
contingent liabilities or otherwise), any change in depreciation or amortization
policies or rates or any change in the policies pertaining to the recognition of
accounts receivable or the discharge of accounts payable or accounting for
inventories; (ii) other than in the ordinary course, shall not make any
representation or proposal to, or engage in substantive discussions with, any of
the holders (or their representatives) of any indebtedness, or to or with any
party which has issued a letter of credit which benefits Hechinger, without
prior consultation with and approval of Acquisition (which shall not be
unreasonably withheld). The Merger Agreement further provides that Hechinger
shall (i) use commercially reasonable efforts to maintain its existing Permits
and Approvals in all material respects; (ii) not violate any Law; (iii) use
commercially reasonable efforts to maintain in full force and effect all
policies of insurance now in effect and give all notices and present all claims
under all such policies in a timely fashion; and (iv) shall not enter into any
agreement or take or commit to take any action which would, if taken on or
before the Closing, result in a breach of any of
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the foregoing covenants described in this paragraph or of any representation or
warranty of Hechinger contained in the Merger Agreement.
COMPLIANCE WITH ANTITRUST LAWS
In the Merger Agreement Hechinger, BSQ Acquisition and Acquisition have
agreed to file, or cause to be filed, with the FTC and the Antitrust Division
pursuant to the HSR Act, the notification and documentary material required in
connection with the transactions contemplated by the Merger Agreement, as soon
as practicable (but no later than five (5) business days) after the execution of
the Merger Agreement.
In connection with the foregoing, Hechinger, BSQ Acquisition, and
Acquisition have also agreed in the Merger Agreement to promptly file any
additional information requested as soon as practicable after receipt of a
request for additional information. In connection therewith, Hechinger, BSQ
Acquisition, and Acquisition have also agreed to use their commercially
reasonable efforts to obtain early termination of the applicable waiting period
under the HSR Act and to coordinate and cooperate with one another in exchanging
such information and providing such reasonable assistance as may be requested in
connection with such filings.
Under the Merger Agreement, Hechinger has also agreed that, in order to
comply with the HSR Act in connection with the transactions contemplated by the
Merger Agreement, Acquisition and BSQ Acquisition shall be entitled, in their
sole discretion, to acquiesce to any divestitures, operating restrictions or
other constraints imposed or required by any Governmental Entity, provided that
such divestitures, operating restrictions or other constraints shall not have
any material effect on the terms of the Merger. On August 13, 1997, the waiting
period applicable to the Merger was terminated. See "Regulatory Considerations."
FINANCING
In the Merger Agreement, BSQ Acquisition has agreed to use its commercially
reasonable efforts to obtain, on terms satisfactory to BSQ Acquisition in its
sole discretion, all of the financing necessary in connection with the
consummation of the transactions contemplated by the Merger Agreement and the
BSQ Acquisition Agreement. BSQ Acquisition has further agreed to notify
Hechinger promptly of any significant adverse developments with respect to such
financing.
EFFECT ON HECHINGER'S STOCK OPTIONS; EMPLOYEE BENEFIT PLANS
The Merger Agreement provides that promptly after the Effective Time, the
Surviving Corporation shall cause the Paying Agent to pay to each holder of
options issued under the Options Plans (the "Options") with respect to which
agreements and Consents (as defined below) were theretofore executed and
delivered and which have exercise prices of less than $2.375 per share In the
Money Options an amount equal to the difference between (i) the product of (a)
$2.375 multiplied by (b) the aggregate number of shares of Common Stock issuable
upon exercise of all In the Money Options held by such holder and (ii) the
aggregate exercise price payable upon such exercise. No payment shall be made
with respect to any Option having a per share exercise price equal to or greater
than $2.375. The specific procedures for such payments shall be as agreed to by
the parties hereto and specified in the Consent.
With respect to the foregoing, Hechinger has agreed to use its reasonable
best efforts to obtain, prior to the Closing, agreements and consents (the
"Consents") of the holders of all Options then outstanding providing for the
Consent of each such holder to the termination, without payment other than as
provided in the immediately preceding paragraph, of all Options held by such
holder and the agreement of such holder not to exercise any such Options.
The Merger Agreement provides that, effective from and after the Effective
Time, the Surviving Corporation and its subsidiaries will provide to the persons
listed on Schedule 7.15 to the Merger
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Agreement the severance and other benefits set forth in Schedule 7.15. Such
schedule will provide for the amount and timing of all such payments.
NO SOLICITATION OF TRANSACTIONS
In the Merger Agreement, Hechinger has agreed that neither it nor any of
its officers and directors shall, and Hechinger shall direct and use its best
efforts to cause its employees and Representatives (including, without
limitation, any investment banker, attorney or accountant retained by it) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal or offer (including, without limitation, any proposal or
offer to the Stockholders) with respect to a merger, consolidation or similar
transaction, other than pursuant to the Merger Agreement, involving, or any
purchase of all or any significant portion of the properties and assets or any
equity securities of, Hechinger (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
Hechinger has also agreed in the Merger Agreement that it will immediately cease
and cause to be terminated any existing activities, discussions or negotiations
with any parties conducted heretofore with respect to any of the foregoing and
shall make all reasonable efforts to enforce any confidentiality agreements to
which it is a party. Furthermore, in the Merger Agreement, Hechinger has also
agreed that it will take the necessary steps to inform the appropriate
individuals or entities referred to in the first sentence of this paragraph of
the obligations described in this paragraph. Furthermore, Hechinger has also
agreed that it will notify Acquisition and BSQ Acquisition immediately if any
such inquiries or proposals are received by, any such information is requested
from, or any such negotiations or discussions are sought to be initiated or
continued with Hechinger. Notwithstanding the foregoing, in the event Hechinger
receives an Unsolicited Proposal which did not result from a breach of the
obligations described in this paragraph, Hechinger may in response provide
confidential information or data (subject to the execution of a customary
confidentiality agreement) to, or engage in discussions or negotiation with, a
Person duly authorized by a proposed acquiror in connection with the
transaction(s) contemplated by the Unsolicited Proposal but only if (i) the
Unsolicited Proposal includes sufficient information from which the Hechinger
Board can reasonably conclude that (a) all Stockholders will receive Superior
Consideration, (b) the proposed acquiror has the financial and other resources
and has the legal ability (including, without limitation, under antitrust laws)
to complete such transaction(s) on a timely basis, and (c) such transactions
will not be subject to a financing contingency (although the Merger Agreement
contains a financing contingency) and will otherwise be subject to no more
contingencies than those contained in the Merger Agreement, and (ii) Hechinger
receives a written opinion of counsel that the Hechinger Board is legally
required, in the discharge of its fiduciary duties, to provide such information
or data or engage in such discussions or negotiations concerning the
transactions contemplated by the Unsolicited Proposal.
INDEMNIFICATION
The Merger Agreement provides that the Surviving Corporation will indemnify
each person who is now, or has been at any time prior to the date of the Merger
Agreement, a director or officer of Hechinger or its successors and assigns
(individually an "Indemnified Party" and collectively the "Indemnified
Parties"), to the fullest extent required or permitted under the certificate or
by-laws of Hechinger, or any agreement with Hechinger in each case as in effect
immediately prior to the execution of the Merger Agreement, with respect to any
claim, liability, loss, damage, judgment, fine, penalty, amount paid in
settlement or compromise, cost or expense, including reasonable fees and
expenses of legal counsel (whenever asserted or claimed) ("Indemnified
Liability"), based in whole or in part on, or arising in whole or in part out
of, any matter, state of affairs or occurrence existing or occurring at or prior
to the Effective Time whether commenced, asserted or claimed before or after the
Effective Time, including, without limitation, liability arising under the
Securities
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Act of 1933, as amended, the Exchange Act, or state law. The Merger Agreement
further provides that the Surviving Corporation will maintain in effect for not
less than six years after the Effective Time the current policies of directors'
and officers' liability insurance maintained by Hechinger on the date of the
Merger Agreement (provided that BSQ Acquisition may substitute therefor policies
having at least the same coverage, a comparably rated issuer and containing
terms and conditions which are no less advantageous to the persons currently
covered by such policies as insured) with respect to matters existing or
occurring at or prior to the Effective Time; provided, however, that if the
aggregate annual premiums for such insurance during such period exceed 200% of
the per annum rate of the aggregate premium currently paid Hechinger for such
insurance on the date of this Agreement, then the Surviving Corporation will
provide the maximum coverage that will then be available at an annual premium
equal to 200% of such rate. The rights described in this paragraph are in
addition to any rights that an Indemnified Party may have under the certificate,
by-laws, other similar organizational documents of Hechinger or the DGCL, and
are contingent upon the occurrence of, and will survive consummation of, the
Merger and are expressly intended to benefit each Indemnified Party.
SPECIAL MEETING
In the Merger Agreement, Hechinger has agreed that it shall take all action
necessary, in accordance with applicable law and its certificate of
incorporation and by-laws, to convene the Special Meeting as promptly as
practicable, but in no event more than 45 days after a definitive proxy
statement has been filed with the Commission, for the purpose of approving the
Merger Agreement and the Merger. The Merger Agreement further provides that the
Hechinger Board shall recommend at such Special Meeting that the Merger be
approved by the Stockholders. The Merger Agreement also provides that if, as a
result of actions taken in compliance with Section 7.5 thereof (relating to an
Unsolicited Proposal), Hechinger receives a formal Unsolicited Proposal
concerning a transaction in which all the Stockholders will receive Superior
Consideration, the Hechinger Board may withdraw or modify such recommendation
prior to the Special Meeting; provided, however, that Hechinger shall have
received the written opinion of counsel that the Hechinger Board is legally
required to do so in the discharge of its fiduciary duties; and provided,
further, that Hechinger shall give BSQ Acquisition five (5) Business Days' prior
notice of such withdrawal or modification, specifying the material terms of such
Unsolicited Proposal. The Merger Agreement also provides that if the Hechinger
Board withdraws or modifies its recommendation of the Merger or if the Company
intentionally breaches the Merger Agreement, Hechinger shall pay a fee to BSQ
Acquisition of up to $11,000,000. There are no circumstances in which the
Hechinger Board could withdraw or modify its recommendation without subjecting
the Company to termination fee liability, other than a breach by BSQ Acquisition
or Acquisition of the terms of the Merger Agreement. See "-- Termination Fees
and Expenses."
ADDITIONAL COVENANTS
Pursuant to the Merger Agreement, and subject to certain conditions and
limitations described therein, Hechinger has agreed (i) to permit BSQ
Acquisition, Acquisition and their representatives to have reasonable access to
information and personnel; (ii) to prepare and file a proxy statement with the
SEC; (iii) to deliver monthly financial statements no later than 25 days from
the last day of each fiscal month between the date of the Merger Agreement and
the Closing Date; (iv) to deliver to Acquisition all material existing
environmental reports that are in Hechinger's possession and that have been
prepared within the last ten years with respect to any of the owned real estate
or the leased real estate and to permit Acquisition to continue to conduct, at
Acquisition's expense, such additional environmental investigations of
properties as it may reasonably request; and (v) that the Hechinger Board will
take such actions and grant such approvals to eliminate the effect any Takeover
Statute may have on the transactions contemplated by the Merger Agreement and by
the Stockholder Agreement.
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Pursuant to the Merger Agreement, and subject to certain conditions and
limitations described herein, Hechinger, BSQ Acquisitions and Acquisitions have
also agreed (i) to use reasonable efforts to obtain all Permits and Approvals
necessary for the consummation of the transactions contemplated in the Merger
Agreement; (ii) to promptly notify the other of any action, suit, proceeding,
claim or investigation which is threatened or commenced that materially relates
to or materially affects Hechinger, its business, its properties or assets, the
Merger Agreement or the transactions contemplated thereby; (iii) to use
reasonable best efforts to ensure that the conditions precedent to Hechinger,
BSQ Acquisition and Acquisition's obligation to close the transactions
contemplated by the Merger Agreement are satisfied, insofar as such matters are
within the control of such party including, but not limited to, providing the
other party with information supplied by such party to any Governmental Entity
and secure waivers and/or consents to consummate the transactions contemplated
by the Merger Agreement; and (iv) in the event that, at any time prior to the
Closing, Hechinger, Acquisition or BSQ Acquisition becomes aware of any matter
which, if existing or known as of the date of the Merger Agreement, would have
been required to be set forth or described in the schedules thereto or would
otherwise have rendered any representation or warranty false, such party shall
promptly provide written notice of such matters to the other party.
In addition, Hechinger has also agreed that it shall promptly provide
written notice of any events occurring after the date of the Merger Agreement
which individually or in the aggregate has had or is reasonably expected to have
a Material Adverse Effect on Hechinger.
TERMINATION; FEES AND EXPENSES
The Merger may be terminated at any time on or prior to the Closing Date:
(i) by mutual written consent of Hechinger, BSQ Acquisition and Acquisition;
(ii) by Acquisition or BSQ Acquisition, if any of the conditions set forth in
Section 8.1 of the Merger Agreement (relating to conditions to each party's
obligation to effect the Merger) or 8.3 of the Merger Agreement (relating to
conditions to BSQ Acquisition's and Acquisition's obligations to effect the
Merger) shall have become incapable of fulfillment or if the Hechinger Board
withdraws or modifies its recommendation of the Merger, whether or not in
compliance with Section 7.10 of the Merger Agreement (relating to the Special
Meeting); (iii) by Hechinger, if any of the conditions set forth in Section 8.1
of the Merger Agreement (relating to conditions to each party's obligation to
effect the merger) or 8.2 of the Merger Agreement (relating to conditions to
Hechinger's obligation to effect the Merger) shall have become incapable of
fulfillment; (iv) by Hechinger, BSQ Acquisition or Acquisition, if the
transactions contemplated by the Merger Agreement are not consummated on or
before the date which is the business day after the fiscal month end closest to
October 31, 1997 or such later date as may be reasonably necessary in order to
consummate such transactions as promptly as practicable upon obtaining Approvals
of Governmental Entities but in any event not later than December 31, 1997, and
if the failure to consummate such transactions on or before such date did not
result from the breach of any representation, warranty or agreement herein of
the party seeking such termination; (v) by Hechinger, BSQ Acquisition or
Acquisition, if the other party shall be in material breach of any of its
covenants contained in the Merger Agreement and such breach either is incapable
of cure or is not cured within 15 days after notice from the party wishing to
terminate; provided, however, that the party seeking such termination shall not
also then be in material breach of the Merger Agreement; provided further, that
any breach of the provisions of Section 7.5 (relating to other Acquisition
Proposals) shall entitle BSQ Acquisition and Acquisition to an immediate right
of termination without any notice or cure requirement; (vi) by Hechinger, BSQ
Acquisition or Acquisition, if the other party shall be in breach of any of its
representations or warranties contained in the Merger, which breach,
individually or together with all other breaches, is reasonably expected to have
a Material Adverse Effect, and such breach either is incapable of cure or is not
cured within 15 days after notice from the party wishing to terminate, provided
that the party seeking such termination shall not also then be in material
breach of the Merger Agreement.
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Under the Merger Agreement, if either party terminates the Merger Agreement
under clauses (ii), (iii) or (iv) of the immediately preceding paragraph due to
(a) failure of the condition specified in Section 8.1.4 of the Merger Agreement
(relating to the approval of the Merger Agreement and the Merger by the
Stockholders) to be satisfied or (b) the withdrawal or modification of Hechinger
Board's recommendation of the Merger (and at such time Hechinger does not have
the right to terminate the Merger Agreement under 9.1.5 of the Merger Agreement
(relating to a breach of covenant contained in the Merger Agreement) or 9.1.6 of
the Merger Agreement (relating to a breach of representations and warranties
contained in the Merger Agreement)), or Acquisition or BSQ Acquisition
terminates the Merger Agreement under Section 9.1.5 of the Merger Agreement
(relating to a breach of covenant contained in the Merger Agreement) or 9.1.6 of
the Merger Agreement (relating to a breach of representations and warranties
contained in the Merger Agreement) as a result of an intentional breach of this
Agreement by Hechinger, Hechinger shall pay to BSQ Acquisition a termination fee
in the amount of $5,000,000 (the "Termination Fee") plus all Expenses (as
defined) (an aggregate maximum of up to $11,000,000), including in the event
that the Hechinger Board exercises its fiduciary duties and withdraws or
modifies its recommendation of the Merger. In the event that Acquisition or BSQ
Acquisition terminates the Merger Agreement under Section 9.1.5 of the Merger
Agreement (relating to a breach of covenants contained in the Merger Agreement)
or 9.1.6 of the Merger Agreement (relating to a breach of representations and
warranties contained in the Merger Agreement) as a result of an unintentional
breach of the Merger Agreement by Hechinger, Hechinger shall pay to BSQ
Acquisition all Expenses. "Expenses" is defined in the Merger Agreement as all
fees and expenses (including those of counsel, accountants and other advisors
and in connection with financing commitments) incurred by any of Acquisition,
BSQ Acquisition and their respective affiliates (without any deduction on
account of or other allocation of such expenses to the transactions contemplated
by the proposed transaction involving Builders Square) in connection with the
transactions contemplated by the Merger Agreement or with respect to the
proposed transactions involving Builders Square, up to an aggregate maximum of
$6,000,000 (the "Expenses"). As a condition to entering into the Merger
Agreement, GEI required that Hechinger agree, in connection with the calculation
of the aggregate maximum fees and expenses referenced above, to pay to BSQ
Acquisition all fees and expenses incurred by any of Acquisition, BSQ
Acquisition and their respective affiliates in connection with the proposed
transactions with Builders Square because of the importance to GEI of acquiring
both businesses simultaneously. Hechinger has been informed by BSQ Acquisition
that such aggregate fees and expenses are approximately $6 million as of the
date of this Proxy Statement.
AMENDMENT AND WAIVER
The Merger Agreement provides that it may be amended, modified or
supplemented only by an instrument in writing signed by all parties thereto, and
that no waiver by any party to the Merger Agreement of any provisions thereto
shall be effective unless set forth in writing and executed by the party so
waiving.
EFFECTS OF THE MERGER
If the Merger is consummated, Stockholders will be entitled to receive
$2.375 in cash, without interest, for each share of Common Stock owned by them.
Effectively, the Merger will result in the purchase of all outstanding shares of
Common Stock by Acquisition. After consummation of the Merger, Hechinger will
become a wholly owned subsidiary of Acquisition and former holders of shares of
Common Stock will no longer possess any interest in, or rights as Stockholders,
other than the right to receive $2.375 in cash per share. Appraisal rights will
be available to any Stockholder who complies with the provisions of Section 262
of the DGCL regarding appraisal rights attached hereto as Annex E. See
"Description of Appraisal Rights."
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After the Effective Time, the Common Stock will be delisted from the NNM
and Hechinger will no longer be subject to the reporting requirements of the
Exchange Act. Certain outstanding, publicly traded indebtedness of Hechinger
will remain outstanding obligations of the Company after the Effective Time and,
accordingly, Hechinger will continue to file reports under the Exchange Act
after the Merger. Hechinger anticipates that, if its Stockholders approve the
principal terms of the Merger Agreement and the Merger, there will be no further
public trading market for the Common Stock. See "Available Information" for
information concerning the reporting requirements that are currently applicable
to Hechinger. For a discussion of certain publicly traded indebtedness of
Hechinger held by DLJ, see "The Merger -- Opinion of Financial Advisor."
THE STOCKHOLDERS AGREEMENT
The Significant Stockholders, who control approximately 64.9% of the voting
power of the outstanding Common Stock, entered into a Stockholders Agreement
with Acquisition and BSQ Acquisition on July 17, 1997. Pursuant to the Voting
Agreement, the Significant Stockholders (i) agreed to vote 861,064 shares or
2.6% of the Class A Common Stock and 8,180,813 shares or 86.5% of the Class B
Common Stock held by certain members of the Hechinger and England families and
certain affiliates controlled by them representing in the aggregate
approximately 64.9% of the total voting power of the outstanding Common Stock in
favor of approval and adoption of the Merger Agreement and the Merger and (ii)
granted to BSQ Acquisition an irrevocable proxy with respect to all of such
shares to vote in favor of approval and adoption of the Merger Agreement and the
Merger. The proxy terminates upon the Merger Termination Date (as defined). See
"Principal Stockholders" and "The Special Meeting -- Vote Required."
The following is a description of the material terms of the Stockholders
Agreement. Such description does not, however, purport to be complete and is
qualified in its entirety by reference to the Stockholders Agreement, a copy of
which is attached hereto as Annex B and incorporated herein by reference.
Stockholders are urged to read the Stockholders Agreement in its entirety.
For purposes of this summary, "Shares" shall mean the shares of Common
Stock so controlled by the Significant Stockholders and the "Owned Shares" shall
mean the shares of Common Stock owned by the Significant Stockholders.
VOTING OF SHARES
The Significant Stockholders have agreed, until the earlier of (a) the
Effective Time or (b) the date on which the Merger Agreement is terminated (the
earlier thereof being hereinafter referred to as the "Merger Termination Date"),
to vote the Shares at any meeting of the Stockholders (whether annual or special
and whether or not an adjourned or postponed meeting), or, if applicable, take
action by written consent (i) for adoption and approval of the Merger Agreement
and the Merger and otherwise in favor of the Merger and any other transaction
contemplated by the Merger Agreement as such Merger Agreement may be modified or
amended from time to time and (ii) against any action, omission or agreement
which would or could impede or interfere with, or have the effect of
discouraging, the Merger, including, without limitation, any Acquisition
Proposal.
PROXY
The Significant Stockholders have also agreed in accordance with the
provisions of Section 212(e) of the DGCL, to execute and deliver to BSQ
Acquisition, an irrevocable proxy, and to irrevocably appoint BSQ Acquisition or
its designees, with full power of substitution, as their attorney and proxy to
vote, or, if applicable, to give consent with respect to, all of the Shares in
respect of any of the matters set forth in, and in accordance with the
provisions of the immediately preceding paragraph. Each Significant Stockholder
has acknowledged that the proxy executed and delivered by them shall be coupled
with an interest, shall constitute, among other things, an inducement for BSQ
Acquisition and Acquisition to enter into the Merger Agreement, shall be
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irrevocable and shall not be terminated by operation of law upon the occurrence
of any event, including, without limitation, the death or incapacity of any of
such Significant Stockholders. Notwithstanding any provision contained in such
proxy, such proxy shall terminate upon the Merger Termination Date.
CERTAIN PAYMENTS
The Stockholders Agreement provides that in the event that during the
Termination Payment Period (as defined), (i) Hechinger enters into a definitive
agreement to engage in or consummates a merger, a sale of substantially all of
its assets, a business combination or other similar transaction with a third
party, or (ii) any Significant Stockholder otherwise sells, transfers, assigns,
tenders or otherwise disposes of any of his Owned Shares, or enters into any
arrangement to do any of the foregoing, and pursuant to any transaction
described in clauses (i) or (ii) of this paragraph any Significant Stockholder
receives or will receive, directly or indirectly, aggregate consideration
(including any non-cash consideration, which shall be valued at fair market
value) in respect of its Owned Shares included in such transaction in excess of
the aggregate consideration he would have received under the Merger Agreement
for such Owned Shares (after giving effect to the adjustment provided for in the
Stockholders Agreement), then such Significant Stockholder shall pay BSQ
Acquisition, in cash (or in cash and non-cash consideration, in the same
proportion as received by the Significant Stockholders, together with any rights
or other agreements (including without limitation registration rights) with
respect to the non-cash consideration received by the Significant Stockholders),
within three business days following the consummation of such transaction, the
amount of such excess. The term "Termination Payment Period" is defined in the
Stockholders Agreement as the period (a) commencing upon termination of the
Merger Agreement under the circumstances entitling BSQ Acquisition to payment of
the termination fee and/or expense under the Merger Agreement, and (b) expiring
on the date which is the later of six months after the date of such termination
of the Merger Agreement and 12 months after the date of the Stockholders
Agreement. In connection with the execution and delivery of the Amendment, the
Significant Stockholders acknowledged in writing that the amount of payment, if
any, under these provisions would be based on the new per share price of $2.375.
COVENANTS
Each Significant Stockholder has covenanted and agreed for the benefit of
BSQ Acquisition that, until the Merger Termination Date, he will not: (i) sell,
transfer, pledge, hypothecate, encumber, assign, tender or otherwise dispose of,
or enter into any contract, option or other arrangement or understanding with
respect to the sale, transfer, pledge, hypothecation, encumbrance, assignment,
tender or other disposition of, any of his Owned Shares or any interest therein;
(ii) other than as expressly contemplated by the Stockholders Agreement, grant
any powers of attorney or proxies or consents in respect of any of the Shares,
deposit any of such Shares into a voting trust, enter into a voting agreement
with respect to any of such Stockholder's Shares or otherwise restrict or take
any action adversely effecting the ability of such Stockholder to freely
exercise all voting rights with respect thereto; (iii) directly, or indirectly
through his or her agents and representatives, initiate, solicit or encourage,
any inquiries or the making or implementation of any Acquisition Proposal or
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to, an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; and such Significant Stockholders shall (a) immediately
cease and cause to be terminated any existing activities, including discussions
or negotiations with any parties, conducted before the date of the Stockholders
Agreement with respect to any of the foregoing and will take the necessary steps
to inform his or her agents and representatives of the obligations undertaken in
this clause (iii), and (b) notify BSQ Acquisition immediately if any such
inquires or proposals are received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated or continued
with, them; (iv) convert any shares of Class B Common Stock included in such
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Stockholder's Shares into shares of Class A Common Stock; (v) permit or cause,
or take any action or fail to take any action which in either case would have
the effect of permitting or causing, any other owner of any of such
Stockholder's Shares to do or engage in any of the actions prohibited by clauses
(i) through (iv) to the extent such Shares are covered by the Stockholders
Agreement, dated as of August 23, 1989, by and between members of the Hechinger
family, members of the England family and Hechinger (the "Hechinger Stockholders
Agreement") and the Voting Agreement, by and among the Voters referred to
therein and the persons listed on Exhibits A and B thereto; and (vi) terminate,
amend or modify, or grant any waivers under, either the Hechinger Stockholders
Agreement or the Voting Agreement.
BSQ Acquisition has covenanted and agreed for the benefit of the
Significant Stockholders that (i) immediately upon execution of the Stockholders
Agreement, BSQ Acquisition shall enter into the Merger Agreement, and (ii) until
the Merger Termination Date, shall use all reasonable efforts to take, or cause
to be taken, all action, and do, or cause to be done, all things necessary or
advisable in order to consummate and make effective the transactions
contemplated by the Stockholders Agreement and the Merger Agreement, consistent
with the terms and conditions of each such agreement; provided, however, that
nothing in Section 4 (relating to covenants of BSQ Acquisition described in this
paragraph), Section 13 (relating to further assurances by the parties to the
Stockholders Agreement), or any other provision of the Stockholders Agreement is
intended, nor shall it be construed, to limit or in any way restrict BSQ
Acquisition's or Acquisition's right or ability to exercise any of its rights
under the Merger Agreement.
CERTAIN REPRESENTATIONS AND WARRANTIES
The Stockholders Agreement contains various representations and warranties
of the parties thereto. These include representations by the Significant
Stockholders with respect to (i) non-contravention; (ii) right, power and
authority to deliver the Stockholders Agreement; (iii) due execution and
delivery; (iv) ownership and voting right with respect to such Stockholder's
Shares; (v) good and valid title to Such Stockholder's Owned Shares; (vi) due
authorization, execution, delivery and validity of the Hechinger Stockholders
Agreement and the Voting Agreement; and (vii) due authorization, execution,
delivery and validity of leases between Hechinger and Enterprises to which a
Significant Stockholder is a party. The representations and warranties contained
in the Stockholders Agreement are made as of the date of the Stockholders
Agreement and as of the date of the Closing.
FINANCING OF THE MERGER
As a condition to the obligations of Acquisition and BSQ Acquisition to
consummate the Merger, financing must be obtained in amounts sufficient to
enable BSQ Acquisition (i) to pay the Aggregate Consideration payable in the
Merger and the cash portion of the consideration under the BSQ Acquisition
Agreement and (ii) to continue the operation of the businesses of New Builders
Square and Hechinger. It is expected that the aggregate amount of financing
necessary for such purposes will be approximately $600 million in addition to
amounts heretofore committed by GEI. GEI has obtained, through one of its
affiliates, the Commitment Letter from the Agents with respect to the borrowing
by BSQ Acquisition and/or its subsidiaries of up to $600 million under the
Senior Facilities, subject to, among other things, the execution and delivery of
all definitive agreements and the Agents' satisfaction with the results of their
ongoing due diligence investigation with respect to the assets, business,
properties, conditions (financial and otherwise), results of operations,
prospects and material agreements of GEI, BSQ Acquisition, Hechinger and
Builders Square. The availability of borrowings under the Senior Facilities,
including initial borrowings of amounts necessary to pay the Aggregate
Consideration, is expected to be subject to various conditions customary for
financings of the type contemplated thereby, to be set forth in the definitive
loan documentation. There can be no assurance that the conditions under the
Commitment Letter will be waived or satisfied prior to or at the Closing. If
such conditions are not satisfied prior to or at the
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Closing, BSQ Acquisition will have no obligation to consummate the Merger and
may terminate the Merger without penalty.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following describes the material federal income tax consequences of the
Merger to the Stockholders, without consideration of the particular facts and
circumstances of each Stockholder's situation. In particular, it does not
discuss the consequences that might be relevant to Stockholders who acquired
their shares of Common Stock through the exercise of employee stock options or
otherwise as compensation. EACH STOCKHOLDER IS URGED TO CONSULT WITH HIS OR HER
TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO HIM OR HER OF THE MERGER OR THE EXERCISE OF APPRAISAL RIGHTS. NO
RULING HAS BEEN OR WILL BE REQUESTED FROM THE INTERNAL REVENUE SERVICE AS TO ANY
OF THE TAX EFFECTS OF THE TRANSACTIONS DISCUSSED IN THIS PROXY STATEMENT AND NO
OPINION OF COUNSEL HAS BEEN OR WILL BE RENDERED WITH RESPECT TO ANY OF THE TAX
EFFECTS TO THE STOCKHOLDERS OF THE MERGER.
The receipt of cash for shares of Common Stock pursuant to the Merger or
pursuant to the exercise of appraisal rights will be a taxable transaction for
federal income tax purposes to the Stockholders receiving such cash. Each
Stockholder will recognize gain or loss measured by the difference between such
Stockholder's adjusted tax basis for the Common Stock owned by such Stockholder
at the Effective Time or at the time appraisal rights are satisfied, as the case
may be, and the amount of cash received therefor.
Provided that the shares of Common Stock are held as capital assets, the
gain or loss recognized in connection with the exchange of such shares of Common
Stock for cash contemplated by the Merger will be capital in nature. If such
shares of Common Stock have been held for more than twelve months, the gain or
loss will be long-term capital gain or loss for federal income tax purposes.
In order to avoid backup federal income tax withholding on payments made
with respect to shares exchanged for cash pursuant to the Merger, certain
Stockholders must provide the Exchange Agent with their correct taxpayer
identification numbers by completing the Substitute Form W-9 to be included with
the Letter of Transmittal.
APPRAISAL RIGHTS
Stockholders will be entitled to appraisal rights under Section 262 of the
DGCL as to shares owned by them. Section 262 is reprinted in its entirety as
Annex E to this Proxy Statement.
This discussion is not a complete statement of the law and is qualified in
its entirety by reference to Annex E. THIS DISCUSSION AND ANNEX E SHOULD BE
REVIEWED CAREFULLY BY ANY STOCKHOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL
RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE FAILURE TO STRICTLY
COMPLY WITH THE PROCEDURES SET FORTH HEREIN AND THEREIN WILL RESULT IN THE LOSS
OF APPRAISAL RIGHTS.
A Stockholder of Record who makes the demand described herein with respect
to such shares, who continuously is the record holder of such shares through the
Effective Time, and who neither votes in favor of the Merger nor consents hereto
in writing, will be entitled to seek an appraisal by the Delaware Court of
Chancery of the fair value of his or her shares of Common Stock. A person having
a beneficial interest in shares of Common Stock that are held of record in the
name of another person, such as a broker or nominee, must act promptly to cause
the record holder to properly follow the steps summarized below and in a timely
manner to perfect whatever appraisal rights the record holder may have.
Under Section 262, where a merger is to be submitted for adoption at a
meeting of stockholders, a constituent corporation must notify each of the
record holders of its stock who were such as
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of the record date and for whom appraisal rights are available, not less than 20
days prior to such meeting, of the availability of such appraisal rights and
include in each such notice a copy of Section 262. This Proxy Statement shall
constitute such notice to the Stockholders of Record.
STOCKHOLDERS WHO DESIRE TO EXERCISE THEIR APPRAISAL RIGHTS MUST NOT VOTE IN
FAVOR OF THE MERGER. EACH STOCKHOLDER ELECTING TO DEMAND THE APPRAISAL OF HIS OR
HER SHARES OF COMMON STOCK MUST DELIVER TO HECHINGER, BEFORE THE TAKING OF THE
VOTE ON THE MERGER AT THE SPECIAL MEETING, A WRITTEN DEMAND FOR APPRAISAL OF HIS
OR HER SHARES OF COMMON STOCK. ANY SUCH STOCKHOLDER MUST MAIL OR DELIVER HIS OR
HER WRITTEN DEMAND TO THE SECRETARY OF HECHINGER AT HECHINGER COMPANY, 1801
MCCORMICK DRIVE, LARGO, MARYLAND 20774. Such demand for appraisal will be
sufficient if it reasonably informs Hechinger of the Stockholder's identity and
that the Stockholder intends to thereby demand appraisal of his or her shares of
Common Stock. Appraisal rights will not be available under Section 262 if the
Stockholder does not continuously hold through the Effective Time the shares of
Common Stock with respect to which appraisal is being demanded. Within ten days
after the Effective Time, Hechinger must provide notice of the Effective Time to
all Stockholders who have therefore complied with Section 262.
A demand for appraisal must be executed by, or by another as agent for, the
Stockholder of record, fully and correctly, as such Stockholder's name appears
on Hechinger's list of Stockholders. Beneficial owners who are not record owners
and who desire their corresponding record holder to exercise appraisal rights
should instruct the record holder to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights BEFORE the taking
of the vote on the Merger at the Special Meeting. If the shares of Common Stock
are held of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, such demand must be executed by the fiduciary or by an agent on his
behalf. If the shares of Common Stock are held of record by more than one
person, as in a joint tenancy or tenancy in common, such demand must be executed
by all joint owners. An authorized agent, including an agent for two or more
joint owners, may execute the demand for appraisal for a Stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, such person is acting as agent for the
record holder. If a Stockholder holds shares of Common Stock through a broker
who in turn holds the shares through a central securities depository nominee, a
demand for appraisal of such shares must be made by or on behalf of the
depository nominee and must identify the depository nominee as the record
holder.
A record holder, such as a broker, who holds shares of Common Stock as
nominee for others, may exercise appraisal rights with respect to the shares of
Common Stock held for all or less than all beneficial owners of shares of Common
Stock as to which such person is the record holder. In such case, the written
demand must set forth the number of shares of Common Stock covered by such
demand. Where the number of shares of Common Stock is not expressly stated, the
demand will be presumed to cover all shares of Common Stock outstanding in the
name of such record holder.
Within 120 days after the Effective Time, either Hechinger, as the
Surviving Corporation in the Merger, or any Stockholder who previously has
complied with the required conditions of Section 262 and who is otherwise
entitled to appraisal rights, may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares of Common
Stock. If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine which Stockholders are
entitled to appraisal rights and will appraise the shares of Common Stock owned
by such Stockholders, determining the fair value of such shares of Common Stock
exclusive of any element of value arising from the accomplishment of expectation
of the Merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Delaware Court of Chancery is to take into account all relevant factors. In
Weinberger v. UOP Inc., decided February 1, 1983, the Delaware Supreme Court
discussed the factors that could be considered in determining fair value in an
appraisal proceeding, stating that "proof of value by any techniques or methods
which are generally considered
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acceptable in the financial community and otherwise admissible in court" should
be considered and that "[f]air price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
has stated that in making this determination of fair value the court must
consider market value, asset value, dividends, earnings prospects, the nature of
the enterprise and any other facts which could be ascertained as of the date of
the merger which throw any light on future prospects of the merged corporation.
Section 262 provides that fair value is to be "exclusive of any element of value
arising from the accomplishment or expectation of the merger." In Cede & Co. v.
Technicolor, Inc., decided October 21, 1996, the Delaware Supreme Court stated
that such exclusion is a "narrow exclusion [that] does not encompass known
elements of value," but which rather applies only to the speculative elements of
value arising from such accomplishment or expectation. In Weinberger, the
Delaware Supreme Court construed Section 262 to mean that "elements of future
value, including the nature of the enterprise, which are known or susceptible of
proof as of the date of the merger and not the product of speculation, may be
considered." In addition, Delaware courts have decided that the statutory
appraisal remedy, depending on the factual circumstances, may or may not be a
stockholder's exclusive remedy in connection with transactions such as the
Merger.
Stockholders considering seeking appraisal should have in mind that the
"fair value" of their shares of Common Stock determined under Section 262 could
be more than, the same as or less than the market value of such securities or
the consideration to be reviewed in the Merger. The cost of the appraisal
proceeding may be determined by the Delaware Court of Chancery and taxed against
the parties as the Delaware Court of Chancery deems equitable in the
circumstances. Upon application of a dissenting Stockholder, the Delaware Court
of Chancery may order that all or a portion of the expenses incurred by any
dissenting Stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorneys' fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of Common Stock
entitled to appraisal.
Within 120 days after the Effective Time, any Stockholder who has
previously complied with the requirements for exercise of appraisal rights as
discussed above is entitled, upon written request, to receive from the Surviving
Corporation a statement setting forth the aggregate number of shares of Common
Stock not voted in favor of the Merger and with respect to which demands for
appraisal have been made and the aggregate number of holders of such shares.
Such statement must be mailed to the Stockholders within 10 days after the
written request therefor has been received by the Surviving Corporation.
Any Stockholder who has duly demanded appraisal in compliance with Section
262 will not, from and after the Effective Time, be entitled to vote for any
purpose the shares of Common Stock subject to such demand or to receive payment
of dividends or other distribution on such shares of Common Stock, except for
dividends or distributions payable to stockholders of record at a date prior to
the Effective Time.
At any time within 60 days after the Effective Time, any Stockholder shall
have the right to withdraw his or her demand for appraisal and to accept the
terms offered in the Merger; after this period, the Stockholder may withdraw his
or her demand for appraisal only with the consent of Hechinger. If no petition
for appraisal is filed with the Delaware Court of Chancery within 120 days after
the Effective Time, Stockholders' rights to appraisal shall cease. Inasmuch as
Hechinger will have no obligation to file such a petition, and has no present
intention to do so, any Stockholder who desires such a petition to be filed is
advised to file it on a timely basis. However, no petition timely filed in the
Delaware Court of Chancery demanding appraisal shall be dismissed as to any
Stockholder without the approval of the Delaware Court of Chancery, and such
approval may be conditioned upon such terms as the Delaware Court of Chancery
deems just. Any holder of Common Stock who effectively withdraws his or her
demand for appraisal, or whose right to an appraisal shall cease, shall be
deemed to have lost such holder's appraisal rights.
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CERTAIN INFORMATION CONCERNING BSQ ACQUISITION, ACQUISITION AND GEI
BSQ Acquisition, Inc. and its wholly owned subsidiary, Hechinger
Acquisition, Inc. are Delaware corporations recently formed specifically for the
purpose of entering into the transactions contemplated by the Merger Agreement
and the BSQ Acquisition Agreement and, in the case of BSQ Acquisition, to serve
as an intermediate holding company for the businesses of Hechinger and New
Builders Square. Neither has conducted any activities to date other than those
incident to its formation and the transactions contemplated by the Merger
Agreement and, in the case of BSQ Acquisition, the BSQ Acquisition Agreement.
Acquisition and BSQ Acquisition are each indirect wholly owned subsidiaries of
Green Equity Investors II, L.P., a Delaware limited partnership and an affiliate
of Leonard Green. GEI is an investment partnership which from time to time makes
investments in various business enterprises.
The principal executive offices of each of Acquisition, BSQ Acquisition and
GEI are located at 11111 Santa Monica Boulevard, Suite 2000, Los Angeles,
California 90025. See "The Merger -- Background of the Merger" for information
concerning past negotiations between Hechinger and affiliates of GEI concerning
a possible merger or other acquisition involving Hechinger.
CERTAIN INFORMATION CONCERNING BUILDERS SQUARE
Builders Square is a Delaware corporation and a wholly owned subsidiary of
Kmart. Builders Square operates 162 home improvement stores in the midwest and
Texas.
CERTAIN INFORMATION CONCERNING THE RELATED TRANSACTION
Concurrently with the execution of the Original Merger Agreement, BSQ
Acquisition also entered into the BSQ Acquisition Agreement pursuant to which
BSQ Acquisition will purchase all of the outstanding capital stock of New
Builders Square. It is a condition to the Closing of the Merger Agreement that
the transaction contemplated by the BSQ Acquisition Agreement shall have been
consummated or shall be consummated substantially concurrently with the
transactions contemplated by the Merger Agreement and vice versa.
The consummation of the transactions contemplated by the BSQ Acquisition
Agreement is subject to certain additional conditions, including the receipt of
all necessary regulatory and third party approvals, satisfactory financing for
the transactions as described under "Financing of the Merger," delivery of
various documents required thereunder and other customary conditions similar to
those contained in the Merger Agreement.
REGULATORY CONSIDERATIONS
ANTITRUST LAWS
Under the HSR Act and the Rules by the FTC, certain merger transactions may
not be consummated unless certain information has been furnished to the
Antitrust Division and the FTC and certain applicable waiting periods have
expired. The Merger is subject to the requirements of the HSR Act and the Rules.
Pursuant to the requirements of the HSR Act, GEI, in its capacity as the
ultimate parent entity (as defined under the Rules) of Acquisition and BSQ
Acquisition, filed Notification and Report Forms with respect to the Merger with
the Antitrust Division and the FTC on July 12, 1997. Hechinger also filed a
Notification and Report Form with respect to the Merger on such date. The
waiting period applicable to the Merger was terminated on August 13, 1997.
At any time before or after the consummation of the Merger, the Antitrust
Division or the FTC could take such action under the antitrust laws as either
deems necessary or desirable in the public
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interest, including seeking to enjoin the Merger or seeking certain divestitures
following consummation of the Merger. Private parties (including individual
states) may also bring legal actions under the antitrust laws. Neither Hechinger
nor BSQ Acquisition believes that the consummation of the Merger will result in
a violation of any applicable antitrust laws. However, there can be no assurance
that a challenge to the Merger on antitrust grounds will not be made, or if such
a challenge is made, what the result will be. See "The Merger
Agreement -- Compliance with Antitrust Laws."
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MARKET PRICES AND DIVIDENDS
The Class A Common Stock and Class B Common Stock are each listed and
principally traded on NNM (symbols: HECHA and HECHB). The following table sets
forth the high and low sales prices per share of Common Stock on the NNM and the
cash dividends per share of Common Stock paid, for each quarterly period for the
two most recent fiscal years and through the third quarter of the 1997 fiscal
year.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK
-------------------------- --------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
1995
First Quarter.................................. $13 1/2 $9 5/8 $ .04 $13 1/2 $9 3/4 $.016
Second Quarter................................. 9 7/8 6 1/4 .04 10 6 1/4 .016
Third Quarter.................................. 7 1/8 3 3/8 .04 7 1/4 3 7/8 .016
Fourth Quarter................................. 6 1/8 4 .04 6 1/8 4 1/8 .016
1996
First Quarter.................................. 6 3 1/2 -- 6 1/4 3 3/4 --
Second Quarter................................. 5 1/4 3 1/4 -- 7 5 1/4 --
Third Quarter.................................. 4 1/4 3 1/8 -- 5 3/4 4 1/2 --
Fourth Quarter................................. 3 5/16 1 15/16 -- 4 3/4 3 1/2 --
1997
First Quarter.................................. 2 1/16 1 3/8 -- 3 9/16 3 --
Second Quarter................................. 2 23/32 1 3/16 -- 3 5/8 2 3/4 --
Third Quarter through September 4, 1997........ 2 7/8 2 -- 3 1/4 2 --
</TABLE>
Historically, the shares of Class B Common Stock have traded at all times
above $2.375 per share. On June 16, 1997, the last full day of trading prior to
the public announcement by Hechinger that it was in discussions in connection
with a possible transaction in which the Stockholders would receive $3.00 in
cash for each share of Common Stock, the reported closing price on the NNM was
$2 1/16 per share of Class A Common Stock and $3 1/2 per share of Class B Common
Stock. For the 30-day period ending June 16, 1997, the average reported closing
price on the NNM was $2 per share of Class A Common Stock and $3.22 per share of
Class B Common Stock. On July 16, 1997, the last full day of trading prior to
the public announcement of the execution of the Original Merger Agreement, the
reported closing price on the NNM was $2 1/8 per share of Class A Common Stock
and $3 per share of Class B Common Stock. On August 26, 1997, the last trading
day prior to Hechinger's announcement of the execution of the Merger Agreement,
the reported closing price on the NNM was $2 5/8 per share of Class A Common
Stock and $2 13/16 per share of Class B Common Stock. On September 4, 1997, the
last day prior to the mailing of this Proxy Statement, the reported closing
price on the NNM was $2 1/8 per share of Class A Common Stock and $2 3/8 per
share of Class B Common Stock.
RECENT DEVELOPMENTS
The Company announced on August 28, 1997 a net loss for the second quarter
ended August 2, 1997 of $40.6 million or $.96 per share compared with net
earnings of $12.2 million or $.28 per share last year and that the Company
entered into the Amendment pursuant to which the cash purchase price per share
of Common Stock was reduced to $2.375 and the Company Adverse Change Condition
was eliminated. Specifically, as to the Company's results, the Company announced
that the loss for this year's second quarter includes a charge of $31.8 million
related to previously announced store closings in Michigan. Earnings before
interest, taxes, depreciation and amortization (EBITDA) for the quarter were
$15.7 million compared with $36.4 million for the second quarter last year.
Sales for the second quarter were $591.6 million compared with $665.9 million
last year, a decrease of 11.2%. Comparable store sales were down 10.3% for the
quarter.
For the first half of fiscal 1997, including the store closing charge, the
Company reported a net loss of $54.1 million or $1.28 per share compared with
net earnings of $6.2 million or $.15 per share
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last year. EBITDA was $27.2 million as compared with $54.6 million last year.
Sales for the first half of fiscal 1997 were $1.1 billion compared with $1.2
billion last year, a decrease of 10.4%. Comparable store sales were down 9.9%
for the first half of fiscal 1997.
The loss for the second quarter and for the first half of the current
fiscal year included a store closing charge of $31.8 million or $.75 per share
for the closing of seven Michigan stores. The charge consists of $27.9 million
in non-cash asset write-downs and $3.9 million in cash for severance and
operating costs during the inventory liquidation period. The Company has entered
into an agreement to sell up to seven of its Home Quarters stores to Costco
Companies, Inc., subject to various conditions including receipt of regulatory
and other third party approvals. Proceeds from this transaction, including
inventory liquidation, could amount to approximately $60 million. In addition,
operating results for the second quarter were adversely impacted by higher than
anticipated inventory shrinkage. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Merger -- Background of the
Merger."
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following summary financial information for the past five fiscal year
periods has been derived from the consolidated financial statements of Hechinger
and its subsidiaries, audited by Ernst & Young LLP, independent public
accountants (including the related notes thereto, the "Hechinger Financial
Statements"). This summary financial information should be read in conjunction
with the Hechinger Financial Statements and the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere in
this Proxy Statement.
HECHINGER COMPANY AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
FISCAL YEAR ENDED (UNAUDITED)
------------------------------------------------------------------- -----------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30, AUGUST 2, AUGUST 3,
1997 1996 1995 1994 1993 1997 1996
----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <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 $1,099,607 $1,227,219
Gross Profit................... 455,208 455,932 540,680 462,266 437,009 216,506 255,408
Interest Expense............... 40,194 31,341 29,793 23,063 14,121 21,478 19,555
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) (54,111) (6,225)
Net (loss) earnings per common
share........................ (.59) (1.84) (.24) .59 (.63) (1.28) (.15)
DIVIDENDS PER SHARE:
Class A Common Stock........... -- $.16 $.16 $.16 $.16 -- --
Class B Common Stock........... -- $.06 $.06 $.06 $.06 -- --
BOOK VALUE PER SHARE: $8.87 $9.44 $11.38 $11.75 $11.25 $7.59 $9.60
BALANCE SHEET DATA:
Total assets................... $ 1,105,103 $ 1,150,421 $ 1,261,229 $ 1,229,242 $ 1,075,749 $1,059,025 $1,235,163
Current portion of long-term
debt and capital lease
obligations.................. 3,657 3,806 3,453 3,068 1,544 3,308 4,181
Long-term debt and capital
lease obligations............ 394,478 399,530 403,377 407,873 305,974 393,047 397,822
Total stockholders' equity..... 374,256 399,039 481,273 493,867 473,924 320,272 405,403
</TABLE>
50
<PAGE> 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 AS COMPARED TO TWENTY-SIX WEEKS ENDED
AUGUST 3, 1996
The following table sets forth the sales reported by Hechinger (in millions):
<TABLE>
<CAPTION>
COMPARABLE
STORE
TOTAL SALES TOTAL SALES TOTAL SALES SALES
PERIOD AUGUST 2, 1997 AUGUST 3, 1996 % CHANGE % CHANGE
- ------------------------------ -------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Thirteen weeks $ 591.6 $ 655.9 (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. As of August 2, 1997, the Company operates 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).
51
<PAGE> 63
In July 1997, the Company announced that a definite agreement had been
reached to sell 100% of its outstanding Common Stock at a cash price of $3.00
per share to Leonard Green. 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 the 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 its seven
stores in the 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 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.
52
<PAGE> 64
Management of Hechinger believes that neither the Company's vendor
consolidation program nor "Customer First" will have a material effect on the
Company's future operating results.
Hechinger 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
Hechinger'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.
YEAR ENDED FEBRUARY 1, 1997 AS COMPARED TO YEAR ENDED FEBRUARY 3, 1996, AND YEAR
ENDED JANUARY 28, 1995
OPERATIONS
The following table sets forth the sales reported by Hechinger (in
billions):
<TABLE>
<CAPTION>
YEAR ENDED FEB. 1, 1997 FEB. 3, 1996 JAN. 28, 1995
------------------------------------------------ ------------ ------------ -------------
<S> <C> <C> <C>
Net sales....................................... $ 2.20 $ 2.25 $2.45
Net sales (decrease) increase................... (2%) (8%) 17%
Comparable store sales
(decrease) increase........................... (3%) (8%) 2%
</TABLE>
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 Hechinger's markets and could have an adverse impact on sales.
The following table sets forth the number of stores operated by Hechinger:
<TABLE>
<CAPTION>
YEAR ENDED FEB. 1, 1997 FEB. 3, 1996 JAN. 28, 1995
------------------------------------------------ ------------ ------------ -------------
<S> <C> <C> <C>
At beginning of year............................ 118 133 125
Openings........................................ 2 10 12
Closings........................................ (3) (25) (4)
----- ----- -----
At end of year.................................. 117 118 133
===== ===== =====
</TABLE>
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
53
<PAGE> 65
improvement in the merchandise margin resulting from Hechinger's vendor
consolidation program and an improvement of 16 basis points resulting from a
last in, first out method ("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, Hechinger changed its method of calculating LIFO inventories to
provide for a better matching of costs and revenues, to more closely conform the
LIFO methods used to the method used for the majority of its inventories, to
provide for a LIFO adjustment more representative of Hechinger's actual
inflation on its inventories and to 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 Hechinger'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 Hechinger'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, Hechinger recorded a charge of $25 million related primarily to
Hechinger'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, Hechinger 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, Hechinger 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, Hechinger recorded a charge of $61.9 million primarily related to
Hechinger'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
54
<PAGE> 66
which adversely affected the performance of these stores. Based on the recent
performance and limited potential for long term profitability of these stores,
management decided to close them. The 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%, 37% 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 Hechinger'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, Hechinger 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. Hechinger'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 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,
Hechinger adopted this statement and recorded a non-cash charge of $30.3 million
described as follows:
1. Hechinger has a number of real estate properties which were acquired
for future store expansion. As a result of Hechinger's decision to
slow down its expansion plans and not
55
<PAGE> 67
to pursue development of these properties, Hechinger 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, Hechinger recorded an
impairment loss of approximately $15 million; and
2. Hechinger reviewed its property, furniture, fixtures and equipment
and evaluated how these assets will continue to be used in its
operations. Based on this evaluation, Hechinger 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, Hechinger 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 measure
merit provisions of SFAS 123 had been adopted.
Hechinger 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 Hechinger'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 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 Hechinger's
store expansion, relocation and remodeling programs.
Hechinger 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, Hechinger'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,
Hechinger 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, Hechinger 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 Hechinger's option for nine additional terms of
five years each and Hechinger has a right of first refusal to repurchase the
properties.
56
<PAGE> 68
Hechinger 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 Hechinger's working capital needs and planned capital expenditures for
fiscal 1997.
IMPACT OF INFLATION AND CHANGING PRICES
Hechinger 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.
BUSINESS AND OPERATIONS OF HECHINGER
BUSINESS
Hechinger is the successor to a business started in 1911 by Sidney L.
Hechinger. Hechinger is a leading specialty retailer providing products and
services for the care, repair, remodeling and maintenance of the home and
garden. Hechinger operates 117 stores under the Hechinger, Home Quarters and
Better Spaces names. The 64 Hechinger stores are primarily located in the Mid-
Atlantic region; the 53 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 Hechinger
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
1997 openings............................................... 0 0
1997 closings............................................... 0 0
As of July 1, 1997.......................................... 117 9,890
</TABLE>
In 1996, Hechinger relocated two of its stores to new, larger facilities
and sold and closed one store owned by it. Subsequent to year-end, Hechinger
reopened its Home Quarters store located in Albany, New York under the name,
"Better Spaces." See "-- Marketing" and the "Notes to Consolidated Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for further discussion of store closures.
PRODUCTS
All of Hechinger'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.
57
<PAGE> 69
The following table sets forth the percentage of sales accounted for by
merchandise category:
<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 Hechinger's stores are nationally advertised,
brand name products. Hechinger also offers some private label items such as
garden equipment, supplies and paint. Hechinger 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, Hechinger decided to combine its Hechinger and Home Quarters
operations under one management team. By merging the merchandise acquisition
function of Hechinger and Home Quarters, Hechinger believes it has increased its
purchasing power with its vendors. Hechinger 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."
MARKETING
The majority of Hechinger'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.
Hechinger offers its customers a liberal return policy.
In 1996, as a part of the vendor consolidation program, Hechinger completed
over 150 resets of merchandise assortment, including major remodeling of the
Kitchen and Bath and Flooring departments. Additionally, in the fall of 1996,
Hechinger 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 Hechinger's "no hassle"
return policy and its frequent buyer "Project Rewards" program. Hechinger plans
to expand this program to approximately 50% of its stores in 1997.
In February 1997, Hechinger 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.
Hechinger employs a multi-media marketing strategy using television, radio,
newspaper, direct mail and a "databook," which is compact enough to carry along
as a shopping reference and serves as an "idea" book. Hechinger's advertisements
focus on the stores' wide selection and values, featuring recognizable brand
names and emphasizing Hechinger's commitment to meeting or beating competitors'
prices. Hechinger's use of recognizable brand names enables it to share
advertising costs cooperatively with its suppliers.
Hechinger 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.
58
<PAGE> 70
Hechinger offers a private label credit card program pursuant to which
credit is extended to its customers by a third-party financial institution.
Hechinger 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 Hechinger's total sales.
COMPETITION
The business of Hechinger is highly competitive. Hechinger competes in each
of its market areas with numerous 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 Hechinger or have been
operating longer in particular geographic areas than Hechinger.
The extent of Hechinger's competition varies by geographic area.
Competitors have entered several of Hechinger's existing markets and established
competitors are expanding in certain of these markets, which may, in each case,
adversely affect Hechinger's sales. In addition, Hechinger'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 Hechinger's
financial results will not be impacted negatively by existing competition, by
the further expansion of competitors into Hechinger's markets or by Hechinger'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.
Management believes that the principal methods of competition in
Hechinger's industry are the quality of the trained personnel, merchandise
selection, pricing, advertising and store size, location and condition.
Hechinger believes that it faces significant competition in each of these areas
in the majority of its established market areas. However, Hechinger's
competitive position varies from market to market.
SEASONALITY
Hechinger'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. Hechinger generated 30% of its sales in the second
quarter of 1996.
EMPLOYEES
Hechinger currently has approximately 16,000 employees, approximately half
of whom are employed on a part-time basis. Hechinger conducts comprehensive
employee training programs which have enabled Hechinger to promote from within
many current store managers and merchants. In addition, Hechinger supplements
its work force by recruiting from outside sources. Hechinger believes its
employee relations are satisfactory.
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.
Hechinger currently owns 22 stores and leases the remaining stores.
Hechinger 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. Nine of the store
sites are leased from an affiliate.
Hechinger's stores are serviced, in part, from Hechinger's modern warehouse
and distribution facility in Landover, Maryland, which has approximately 640,000
square feet under roof. In addition,
59
<PAGE> 71
Hechinger 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.
LEGAL PROCEEDINGS
Hechinger 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 Hechinger'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.
60
<PAGE> 72
PRINCIPAL STOCKHOLDERS
The following table provides information as to the only Stockholders of
record known to management of Hechinger to own more than 5% of the outstanding
shares of Class A Common Stock or Class B Common Stock as of August 27, 1997.
The share totals and percentages set forth below reflect duplicative counting of
shares in certain instances where the beneficial ownership is attributable to
more than one Stockholder in accordance with the definition of "beneficial
ownership" set forth in the rules and regulations applicable to proxy statement
disclosure. For example, John W. Hechinger, John W. Hechinger, Jr., and S. Ross
Hechinger are deemed to each have beneficial ownership of 8,180,813 shares of
Class B Common Stock for which they together hold a proxy to vote pursuant to
the Voting Agreement, as described below. Pursuant to the terms of the
Stockholders Agreement, the Significant Stockholders have (i) agreed upon the
terms set forth therein to vote 861,064 shares or 2.6% of the Class A Common
Stock and 8,180,813 shares or 86.5% of the Class B Common Stock held by certain
members of the Hechinger and England families and certain affiliates controlled
by them, representing in the aggregate approximately 64.9% of the total voting
power of the outstanding Common Stock in favor of approval at adoption of the
Merger Agreement and the Merger and (ii) granted to BSQ Acquisition an
irrevocable proxy with respect to all of such shares to vote in favor of
approval and adoption of the Merger Agreement and the Merger. The proxy
terminates upon the Merger Termination Date.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
BENEFICIALLY PERCENT OF BENEFICIALLY PERCENT OF
NAME AND ADDRESS OWNED CLASS A OWNED CLASS B
- -------------------------------------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Charles B. Johnson(1) 3,871,776 11.8% -- --
Rupert H. Johnson, Jr.(1) 3,871,776 11.8% -- --
Franklin Resources, Incorporated(1) 3,871,776 11.8% -- --
Templeton Investment, Incorporated(2) 2,125,000 6.5% -- --
Catherine S. England(3) 144,226 * 541,002(7) 5.7%
Richard England, Jr.(3) 50,000 * 848,983(8) 9.0%
John W. Hechinger(3)(4) 861,064 2.6% 8,180,813(9)(11) 86.5%
John W. Hechinger, Jr.(3)(4) 861,064 2.6% 8,180,813(10)(11) 86.5%
June R. Hechinger(3) 136,695 * 2,502,869(12) 26.5%
S. Ross Hechinger(3)(4) 861,064 2.6% 8,180,813(11)(13) 86.5%
Nancy Hechinger Lowe(3) 111,889 * 901,043(14) 9.5%
Sally Hechinger Rudoy(3) 121,889 * 831,042(15) 8.8%
June Limited Partnership(3)(5) 26,557 * 2,601,229 27.5%
Lois Associates Limited
Partnership(3)(6) 0 0 1,386,455 14.7%
</TABLE>
- ---------------
* Less than 1%
(1) The address for these individuals and entity is 777 Mariners Island
Boulevard, San Mateo, California 94404.
(2) The address for this entity is 500 East Broward Boulevard, Suite 2100, Fort
Lauderdale, Florida 33394.
(3) The address for these individuals and entities is 1801 McCormick Drive,
Largo, Maryland 20774.
(4) Members of the Hechinger and England families beneficially own a total of
861,064 shares (2.6%) of the outstanding Class A Common Stock. Pursuant to
the Voting Agreement with members of the Hechinger and England families and
entities controlled by them, John W. Hechinger, John W. Hechinger, Jr. and
S. Ross Hechinger together hold a proxy to vote their 861,064 shares of
Class A Common Stock held by certain members of the Hechinger and England
families and entities controlled by them.
61
<PAGE> 73
(5) June Limited Partnership is a partnership consisting of members of the
family of John W. Hechinger. John W. Hechinger, Jr., S. Ross Hechinger,
Sally Hechinger Rudoy and Nancy Hechinger Lowe are the general partners of
June Limited Partnership and John W. Hechinger and June R. Hechinger are
the limited partners of June Limited Partnership.
(6) Lois Associates Limited Partnership is a partnership consisting of members
of the family of Richard England. Catherine England, Richard England, Jr.
and Joan England Akman are the general partners of Lois Associates Limited
Partnership.
(7) Represents 59,160 shares held directly by Ms. England, 467,262 shares held
indirectly by Ms. England by virtue of her holdings in family partnerships,
6,715 shares held directly by Ms. England's former spouse and 7,865 shares
held indirectly by Ms. England as custodian for her minor children.
(8) Represents 381,722 shares held directly by Mr. England, 467,261 shares held
indirectly by Mr. England by virtue of her holdings in a family
partnership.
(9) Includes 1,009,336 shares held directly by Mr. Hechinger, 669,824 shares
held indirectly by Mr. Hechinger by virtue of his holdings in a family
partnership and a family trust, 489,917 shares held directly by Mr.
Hechinger's spouse and 333,792 shares held indirectly by Mr. Hechinger's
spouse by virtue of her ownership interest in a family partnership.
(10) Includes 376,566 shares held directly by Mr. Hechinger, Jr., 628,383 shares
held indirectly by Mr. Hechinger, Jr. by virtue of his holdings in family
partnerships and his children's trusts, 5,827 shares held directly by Mr.
Hechinger, Jr.'s spouse, 4,614 shares held indirectly by Mr. Hechinger,
Jr.'s spouse as custodian for her minor children and 23,481 shares held
indirectly by Mr. Hechinger, Jr. as custodian for his minor children.
(11) Members of the Hechinger and England families beneficially own a total of
8,180,813 shares (86.5%) of the outstanding Class B Common Stock. Pursuant
to the Voting Agreement with members of the Hechinger and England families
and entities controlled by them, John W. Hechinger, John W. Hechinger, Jr.,
and S. Ross Hechinger together hold a proxy to vote these 8,180,813 shares
of Class B Common Stock held by certain members of the Hechinger and
England families and entities controlled by them.
(12) Represents 489,917 shares held directly by Mrs. Hechinger, 333,792 shares
held indirectly by Mrs. Hechinger by virtue of her holdings in a family
partnership, 1,009,336 shares held directly by Mrs. Hechinger's spouse and
669,824 shares held indirectly by Mrs. Hechinger's spouse by virtue of his
ownership interest in a family partnership and a family trust.
(13) Includes 471,180 shares held directly by Mr. Hechinger, 538,383 shares held
indirectly by Mr. Hechinger by virtue of his holdings in family
partnerships, 5,827 shares held directly by Mr. Hechinger's spouse and
23,481 shares held indirectly by Mr. Hechinger as custodian for his minor
children.
(14) Represents 323,404 shares held directly by Mrs. Lowe through a revocable
trust, 556,158 shares held indirectly by Mrs. Lowe by virtue of her
holdings in family partnerships and her children's trusts, 5,827 shares
held directly by Mrs. Lowe's spouse and 15,654 shares held indirectly by
Mrs. Lowe as custodian for her children.
(15) Represents 271,180 shares held directly by Mrs. Rudoy, 538,381 shares held
indirectly by Mrs. Rudoy by virtue of her holdings in family partnerships,
5,827 shares held directly by Mrs. Rudoy's spouse and 15,654 shares held
indirectly by Mrs. Rudoy as custodian for her minor children.
62
<PAGE> 74
SECURITY OWNERSHIP OF CERTAIN DIRECTORS AND OFFICERS
The following table sets forth the beneficial ownership of Common Stock by
each of the directors each Named Executive Officer, and all of Hechinger's
directors and executive officers as a group as of August 27, 1997.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
NAME AUGUST 27, 1997 % OF CLASS AUGUST 27, 1997 % OF CLASS
- ------------------------- ------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
John W. Hechinger (1)(3) (1) (1) (1)
Kenneth J. Cort 118,372(3) less than 1% -- --
John W. Hechinger, Jr. (2)(3) (2) (2) (2)
S. Ross Hechinger (2)(3) (2) (2) (2)
Ann D. Jordan 16,300(3) less than 1% -- --
W. Clark McClelland 159,145(3) less than 1% 1,592 less than 1%
Robert S. Parker 0(3) -- -- --
Melvin A. Wilmore 0(3) -- -- --
Alan J. Zakon 16,000(3) less than 1% 2,000 less than 1%
All Directors and
Executive Officers as a
group (9 persons) 1,926,426 5.7% 8,184,405 86.5%
</TABLE>
- ---------------
(1) By virtue of their direct holdings of Hechinger's shares, their ownership
interests in a family partnership and a family trust, and stock option
grants which are currently exercisable into Class A Common Stock, Mr. and
Mrs. John W. Hechinger own 79,360 shares (.2%), and 67,335 shares (.2%)
respectively, of Class A Common Stock and 1,679,160 shares (17.8%) and
823,709 shares (8.7%), respectively, of Class B Common Stock. Pursuant to
the Voting Agreement with members of the Hechinger and England families and
entities controlled by them, John W. Hechinger, together with John W.
Hechinger, Jr. and S. Ross Hechinger, holds a proxy to vote a total of
861,064 shares (2.6%) of Class A Common Stock and 8,180,813 shares (86.5%)
of Class B Common Stock held by certain members of the Hechinger and England
families and certain family partnerships.
(2) John W. Hechinger, Jr., and S. Ross Hechinger are the adult sons of John W.
Hechinger. By virtue of their direct holdings of Hechinger's shares, their
spouses' holdings, their holdings as custodians for their minor children,
their interests in family partnerships and their children's trusts, and
stock option grants which are currently exercisable into Class A Common
Stock, John W. Hechinger, Jr. owns 804,705 shares (2.5%) of Class A Common
Stock and 1,038,871 shares (11.0%) of Class B Common Stock and S. Ross
Hechinger owns 219,071 shares (2.5%) of Class A Common Stock and 1,038,871
shares (11.0%) of Class B Common Stock. Pursuant to the Voting Agreement
with members of the Hechinger and England families and entities controlled
by them, John W. Hechinger, Jr., S. Ross Hechinger, together with John W.
Hechinger, hold proxies to vote a total of 861,064 shares (2.6%) of Class A
Common Stock and 8,180,813 shares (86.5%) of Class B Common Stock held by
certain members of the Hechinger and England families and entities
controlled by them.
(3) The number and percentage of shares of Class A Common Stock represented in
the table as beneficially owned by John W. Hechinger, Kenneth J. Cort, John
W. Hechinger, Jr., S. Ross Hechinger, Ann D. Jordan, W. Clark McClelland,
Robert S. Parker, Melvin A. Wilmore and Alan J. Zakon include 10,000;
92,872; 671,304, 74,241; 16,000; 107,014; 0; 0; and 16,000, respectively, of
stock option grants which are currently exercisable into Class A Common
Stock.
Section 16(a) of the Exchange Act requires Hechinger's directors, executive
officers, and persons who own more than 10% of a registered class of Hechinger's
equity securities, to file with the Commission initial reports of ownership and
reports of changes in ownership of shares of Hechinger's common stock and other
equity securities of Hechinger. Executive officers, directors
63
<PAGE> 75
and beneficial owners of greater than 10% of the Common Stock are required by
Commission regulation to furnish Hechinger with copies of all Section 16(a)
forms they file.
To Hechinger's knowledge, based on review of the copies of such reports
furnished to Hechinger and representations from certain persons that no other
reports or forms were required for such persons, all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with during the last fiscal year.
EXPERTS
The consolidated financial statements of Hechinger included in this Proxy
Statement have been audited by Ernst & Young LLP, independent public
accountants, as set forth in their report. The consolidated financial statements
referred to above have been incorporated herein by reference in reliance upon
the authority of that firm as experts in giving said reports.
STOCKHOLDER PROPOSALS
Hechinger will hold its Annual Meeting in 1998 only if the Merger is not
consummated. In the event of such a meeting, any Stockholder proposals intended
to be presented must be received by Hechinger at its principal executive offices
no later than January 12, 1998 in order to be eligible for inclusion in the
proxy statement and form of proxy in connection with such meeting.
64
<PAGE> 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF HECHINGER
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Consolidated Balance Sheet as of February 1, 1997 and February 3, 1996............... F-3
Consolidated Statements of Operations as of February 1, 1997, February 3, 1996 and
January 28, 1995................................................................... F-4
Consolidated Statements of Cash Flows as of February 1, 1997, February 3, 1996 and
January 28, 1995................................................................... F-5
Consolidated Statements of Stockholders' Equity...................................... F-6
Notes to Consolidated Financial Statements for the years ended February 1, 1997,
February 3, 1996 and January 28, 1995.............................................. F-7
Unaudited Consolidated Statements of Operations as of August 2, 1997 and August 3,
1996............................................................................... F-19
Unaudited Consolidated Balance Sheets as of August 2, 1997 and Audited Consolidated
Balance Sheets as of February 1, 1997.............................................. F-20
Unaudited Consolidated Statements of Cash Flows as of August 2, 1997 and August 3,
1996............................................................................... F-21
Consolidated Statements of Stockholders' Equity...................................... F-22
Notes to Consolidated Financial Statements for the thirteen and twenty-six weeks
ended August 2, 1997............................................................... F-23
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of 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
F-2
<PAGE> 78
HECHINGER COMPANY
CONSOLIDATED BALANCE SHEET
<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.
F-3
<PAGE> 79
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.
F-4
<PAGE> 80
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 FLOWS (USED IN)/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.
F-5
<PAGE> 81
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS CLASS
A B ADDITIONAL
COMMON COMMON PAID-IN RETAINED UNEARNED TREASURY
STOCK STOCK CAPITAL EARNINGS COMPENSATION STOCK TOTAL
------ ------ ---------- -------- ------------ -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, Jan. 29, 1994...... $2,881 $1,331 $236,543 $256,836 $ (2,201) $(1,523) $493,867
Restricted stock awards
earned.................... -- -- -- -- 648 -- 648
Performance stock awards
earned and issued......... 5 -- 577 -- -- -- 582
Exercise of stock options
including income tax
benefit................... 15 -- 1,037 -- -- 1,260 2,312
Conversions from Class B to
Class A common stock...... 179 (179) -- -- -- -- --
Conversion of 5 1/2%
Convertible Subordinated
Debentures into shares of
Class A common stock...... -- -- 25 -- -- -- 25
Purchase of treasury
stock..................... -- -- -- -- -- (244) (244)
Adjustment to fair value of
marketable securities..... -- -- -- (371) -- -- (371)
Cash dividends on common
stock:
Class A -- $.16 per share... -- -- -- (4,883) -- -- (4,883)
Class B -- $.06 per share... -- -- -- (752) -- -- (752)
Net loss.................... -- -- -- (9,911) -- -- (9,911)
----- ----- -------- ------- -------- -------- --------
BALANCE, Jan. 28, 1995...... 3,080 1,152 238,182 240,919 (1,553) (507) 481,273
Restricted stock awards
earned.................... -- -- -- -- 794 -- 794
Exercise of stock options
including income tax
benefit................... -- -- 66 -- -- 66 132
Conversions from Class B to
Class A common stock...... 9 (9) -- -- -- -- --
Purchase of treasury
stock..................... -- -- -- -- -- (231) (231)
Adjustment to fair value of
marketable securities..... -- -- -- 371 -- -- 371
Cash dividends on common
stock:
Class A -- $.16 per share... -- -- -- (4,931) -- -- (4,931)
Class B -- $.06 per share... -- -- -- (733) -- -- (733)
Net loss.................... -- -- -- (77,636) -- -- (77,636)
----- ----- -------- ------- -------- ------- --------
BALANCE, Feb. 3, 1996....... 3,089 1,143 238,248 157,990 (759) (672) 399,039
Restricted Stock Awards
Earned.................... -- -- -- -- 506 -- 506
Conversions From Class B To
Class A common stock...... 172 (172) -- -- -- -- --
Purchase of treasury
stock..................... -- -- -- -- -- (213) (213)
Net loss.................... -- -- -- (25,076) -- -- (25,076)
----- ----- -------- -------- -------- ------- --------
BALANCE, Feb. 1, 1997....... $3,261 $ 971 $238,248 $132,914 $ (253) $ (885) $374,256
===== ===== ======== ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 82
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995.
BASIS OF PRESENTATION.
Hechinger 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 Hechinger and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
Hechinger'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.
Hechinger'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 Hechinger adopted Statement of Financial Accounting Standards No. 121.
In 1994, Hechinger 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 Hechinger'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, Hechinger 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
F-7
<PAGE> 83
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest. Capitalized interest amounted to $.3 million, $2.4 million and $3.6
million for the years 1996, 1995 and 1994, respectively.
CASH EQUIVALENTS.
Hechinger 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.
F-8
<PAGE> 84
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995, Hechinger recorded a charge of $25 million related primarily to
Hechinger'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
Hechinger's administrative offices;
2. estimated cash expenditures of approximately $7.7 million for costs
primarily related to terminating Hechinger'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 UTILIZED IN 1996 CHANGE IN FEB. 1, 1997
AMOUNT ----------------- ESTIMATE AMOUNT
REMAINING CASH NON-CASH DECR. (INCR.) REMAINING
------------ ----- -------- ------------- ------------
(IN MILLIONS)
<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>
As of February 1, 1997, all components of the charge have been completed
except for employee termination costs. Hechinger 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, Hechinger recorded a charge of $61.9 million primarily related to
Hechinger'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, Hechinger 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 Hechinger will dispose of the remaining stores by
January 1999. Hechinger 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 Hechinger in 1995.
F-9
<PAGE> 85
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, Hechinger recorded a non-cash charge of $30.3 million
described as follows:
1. Hechinger has a number of real estate properties which were acquired
for future store expansion. As a result of Hechinger's decision to
slow down its expansion plans and not to pursue development of these
properties, Hechinger 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, Hechinger recorded an impairment loss of
approximately $15 million; and
2. Hechinger reviewed its property, furniture, fixtures and equipment
and evaluated how these assets will continue to be used in its
operations. Based on this evaluation, Hechinger 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, Hechinger recorded an
impairment loss of approximately $15 million.
PROPERTY, FURNITURE AND EQUIPMENT.
Hechinger's investments in property, furniture and equipment consist of the
following:
<TABLE>
<CAPTION>
FEB. 1, 1997 FEB. 3, 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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)
-------- --------
Total:................................................. $461,752 $497,577
======== ========
</TABLE>
Accumulated amortization on capital leases was $16.1 million and $14.2
million as of February 1, 1997 and February 3, 1996, respectively.
F-10
<PAGE> 86
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES.
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
FEB. 1, 1997 FEB. 3, 1996
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C>
Accounts payable............................................ $111,851 $176,643
Accrued expenses and other.................................. 77,113 109,820
Accrued compensation and benefits........................... 31,332 26,604
---------- ----------
Total:................................................. $220,296 $313,067
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
FEB. 1, 1997 FEB. 3, 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
6.95% Senior Notes, due 2003................................ $100,000 $100,000
9.45% Senior Debentures, due 2012........................... 100,000 100,000
5 1/2% Convertible Subordinated Debentures.................. 123,050 123,050
Mortgage loans.............................................. 43,206 43,637
Other long-term debt........................................ 15,953 18,252
---------- ----------
382,209 384,939
Less current portion........................................ (1,341) (1,230)
---------- ----------
Total:................................................. $380,868 $383,709
========== ==========
</TABLE>
Under the terms of the 6.95% Senior Notes and 9.45% Senior Debentures,
Hechinger is restricted, in certain circumstances, from pledging certain assets
owned by Hechinger and entering into sale and leaseback transactions. The 5 1/2%
Convertible Subordinated Debentures are convertible into Class A common stock of
Hechinger 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 Hechinger 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 Hechinger 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.
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.
F-11
<PAGE> 87
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate principal maturities of all long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR (IN THOUSANDS)
-------------------------------------------------------------- --------------
<S> <C>
1997.......................................................... $ 1,341
1998.......................................................... 1,459
1999.......................................................... 5,934
2000.......................................................... 8,572
2001.......................................................... 8,801
Remainder..................................................... 356,102
--------
Total:................................................... $382,209
========
</TABLE>
In February 1996, Hechinger'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,
Hechinger 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 Hechinger 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 Hechinger'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 Hechinger's current incremental
borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of Hechinger's financial instruments
are as follows:
<TABLE>
<CAPTION>
FEB. 1, 1997 FEB. 3, 1996
-------------------- --------------------
CARRYING MARKET CARRYING MARKET
VALUES VALUES VALUES VALUES
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
F-12
<PAGE> 88
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES.
The income tax benefits are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
FEB. 1, 1997 FEB. 3, 1996 JAN. 28, 1995
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current......................................... $ (5,444) $(13,249) $18,540
Deferred........................................ 5,444 10,249 (24,085)
-------- ---------- ---------
Total:..................................... $ -- $ (3,000) $(5,545)
======== ========== ========
</TABLE>
Significant components of Hechinger's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
FEB. 1, 1997 FEB. 3, 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
Reconciliations of the Federal statutory rate to Hechinger's effective tax
rate are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
FEB. 1, 1997 FEB. 3, 1996 JAN. 28, 1995
------------ ------------ -------------
<S> <C> <C> <C>
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
----- ----- -----
Total:.................................. --% (3.7)% (35.9)%
===== ===== =====
</TABLE>
F-13
<PAGE> 89
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASES AND OTHER COMMITMENTS.
Hechinger 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, Hechinger 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, Hechinger 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 Hechinger's option for nine additional terms of
five years each. Hechinger has recorded the transaction as an operating lease.
Under the terms of the sale and leaseback transactions completed in 1992,
Hechinger 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, Hechinger 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,
Hechinger has a right of first refusal to repurchase the properties.
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
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL AFFILIATED NONAFFILIATED
------------------------------------------------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
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 Hechinger........ (161,817) -- (161,817)
---------- ---------- -------------
Total minimum lease payments, net................ $1,121,171 $ 12,541 $ 1,108,630
========== ======== ==========
</TABLE>
F-14
<PAGE> 90
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL LEASES
<TABLE>
<CAPTION>
FISCAL YEAR TOTAL AFFILIATED NONAFFILIATED
---------------------------------------------------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======== ========= ========
</TABLE>
Capital lease obligations bear imputed interest at rates ranging from 7.0%
to 17.3%. Amortization of assets recorded under capital lease obligations is
included in depreciation and amortization expense.
Net rent expense charged to operations was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
FEB. 1, 1997 FEB. 3, 1996 JAN. 28, 1995
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C>
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
========== ========== =========
</TABLE>
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.
Hechinger 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 Hechinger's
consolidated financial position, results of operations or liquidity.
STOCKHOLDERS' EQUITY.
Hechinger has two classes of common stock, designated as Class A and Class
B. Hechinger also has authorized 20 million shares of $1.00 par value preferred
stock, none of which has been issued.
F-15
<PAGE> 91
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, Hechinger 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 Common Stock
to Class A Common Stock.............. 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, Hechinger terminated its defined benefit pension
plan. In 1996, Hechinger 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.
Hechinger 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 Hechinger
on employee pretax contributions of up to 6%. The profit sharing plan allows for
discretionary annual contributions as determined by the Board of Directors.
Hechinger 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.
F-16
<PAGE> 92
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK COMPENSATION PLANS.
In 1991, stockholders approved the Hechinger 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 Hechinger. 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 Hechinger's stock authorized
for issuance upon exercise of options. At February 1, 1997, 3.3 million shares
were available for future grants.
Incentive stock options granted must be at the fair market value on the
date of the grant. Nonqualified stock options may be granted at a price not less
than 40% of the fair market value at the date of the grant. 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:
<TABLE>
<CAPTION>
FEB. 1, 1997 FEB. 3, 1996
-------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
(SHARES IN THOUSANDS)
---------------------
<S> <C> <C> <C> <C>
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
======= =======
</TABLE>
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, Hechinger awarded rights to earn 260,000 shares of Class A common
stock to certain key executives of Hechinger 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, Hechinger established a performance share plan to award officers
and key employees of Hechinger 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
F-17
<PAGE> 93
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Issued to Employees" and discloses pro forma net income/loss as if the
recognition and measurement provisions of SFAS 123 had been adopted.
Hechinger 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
Hechinger 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:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
FEB. 1, 1997 FEB. 3, 1996
------------ ------------
<S> <C> <C>
Risk-free interest rates.................................... 6.1% 6.4%
Dividend yields............................................. 0.0% 2.7%
Volatility factors of the expected market price of common
stock..................................................... .50 .43
Expected life of the option in years........................ 5 5
</TABLE>
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 Hechinger'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.
Hechinger's pro forma information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
FEB. 1, 1997 FEB. 3, 1996
------------ ------------
<S> <C> <C>
Pro forma net loss ($ in millions).......................... $(27.1) $(78.9)
Pro forma net loss per share................................ $ (.64) $(1.87)
</TABLE>
F-18
<PAGE> 94
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...................... 10,888 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
---------- ---------- ------------ ------------
LOSS BEFORE INCOME TAXES................... (40,567) 12,215 (54,111) 6,225
INCOME TAX EXPENSE......................... -- -- -- --
---------- ---------- ------------ ------------
NET LOSS................................... $(40,567) $ 12,215 $ (54,111) $ 6,225
========== ========== ============ ============
PRIMARY AND FULLY DILUTED 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.
F-19
<PAGE> 95
HECHINGER COMPANY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUG. 2,
1997 FEB. 1, 1997
----------- ------------
(UNAUDITED)
<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
=========== ============
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 32,751,639 and 32,608,139..................... 3,285 3,261
Class B common stock, $.10 par value, authorized 30,000,000
shares; issued 9,572,871 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.
F-20
<PAGE> 96
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------------
AUG 2, 1997 AUG 3, 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM/(USED IN) OPERATING ACTIVITIES
Net loss....................................................... $ (54,111) $ 6,225
Adjustments to reconcile earnings 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 FROM/(USED IN) 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.
F-21
<PAGE> 97
HECHINGER COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS CLASS
A B ADDITIONAL
COMMON COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS
------ ------ ---------- --------
<S> <C> <C> <C> <C>
BALANCE, Feb. 3, 1996.......................................... $3,089 $1,143 $238,248 $157,990
Restricted stock awards earned............................. -- -- -- --
Conversions from Class B to Class A common stock (1,715,558
Class A common shares)................................... 172 (172) -- --
Purchase of treasury stock (57,940 Class A common shares).. -- -- -- --
Net loss................................................... -- -- -- (25,076)
------ ------ -------- --------
BALANCE, Feb. 1, 1997.......................................... 3,261 971 238,248 132,914
Restricted stock awards earned............................. -- -- -- --
Conversions from Class B to Class A common stock (243,500
Class A common shares)................................... 24 (24) -- --
Net loss................................................... -- -- -- (54,111)
------ ------ -------- --------
BALANCE, May 3, 1997 (unaudited)............................... $3,285 $ 947 $238,248 $ 78,803
====== ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
UNEARNED TREASURY
COMPENSATION STOCK TOTAL
------------ -------- --------
<S> <C> <C> <C>
BALANCE, Feb. 3, 1996................................................. $ (759) $ (672) $399,039
Restricted stock awards earned.................................... 506 -- 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) (213)
Net loss.......................................................... -- -- (25,076)
----- ----- --------
BALANCE, Feb. 1, 1997................................................. (253) (885) 374,256
Restricted stock awards earned.................................... 127 -- 127
Conversions from Class B to Class A common stock (243,500 Class A
common shares).................................................. -- -- --
Net loss.......................................................... -- -- (54,111)
----- ----- --------
BALANCE, Aug. 2, 1997 (unaudited)..................................... $ (126) $ (885) $320,272
===== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE> 98
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, 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 Hechinger 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.
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-23
<PAGE> 99
HECHINGER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-24
<PAGE> 100
ANNEX A
AGREEMENT AND PLAN OF MERGER BY AND AMONG HECHINGER ACQUISITION, INC., A
DELAWARE CORPORATION AND BSQ ACQUISITION, INC., A DELAWARE CORPORATION AND
HECHINGER COMPANY, A DELAWARE CORPORATION, DATED AS OF JULY 17, 1997
<PAGE> 101
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is entered into as of July 17, 1997, by
and among Hechinger Acquisition, Inc., a Delaware corporation, BSQ Acquisition,
Inc., a Delaware corporation and the sole stockholder of Hechinger Acquisition,
Inc., and Hechinger Company, a Delaware corporation, with respect to the
following facts and circumstances:
A. The Boards of Directors of Hechinger Acquisition, Inc., BSQ
Acquisition, Inc. and Hechinger Company have each determined that it is in
the best interests of its respective stockholders for BSQ Acquisition, Inc.
to acquire Hechinger Company through a merger of Hechinger Acquisition,
Inc. with and into Hechinger Company upon the terms and subject to the
conditions set forth herein.
B. In order to induce Hechinger Acquisition, Inc. and BSQ Acquisition,
Inc. to enter into this Agreement and Plan of Merger, certain stockholders
of Hechinger Company will enter into a Stockholders Agreement with BSQ
Acquisition, Inc., the form of which is attached hereto as Exhibit A,
pursuant to which, among other things, such stockholders will agree to vote
their shares in favor of the merger contemplated hereby and will grant to
BSQ Acquisition, Inc. an option to purchase shares of Common Stock of
Hechinger Company held by such stockholders pursuant to the terms and
conditions set forth therein.
C. The parties hereto desire to make certain representations,
warranties, covenants and agreements in connection with the merger
contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants contained herein and intending to be
legally bound, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Certain Terms. For all purposes of this Agreement, except as otherwise
expressly provided:
1.1.1 the terms defined in this Article 1 have the meanings assigned
to them in this Article 1 and include the plural as well as the singular;
1.1.2 all accounting terms not otherwise defined herein have the
meanings assigned under GAAP;
1.1.3 all references in this Agreement to designated "Articles,"
"Sections" and other subdivisions are to the designated Articles, Sections
and other subdivisions of the body of this Agreement;
1.1.4 pronouns of either gender or neuter shall include, as
appropriate, the other pronoun forms;
1.1.5 the words "include," "includes" and "including" shall be deemed
in each case to be followed by the words "without limitation";
1.1.6 the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision; and
1.1.7 the term "party" or "parties" when used herein refer to
Acquisition and BSQ Acquisition, on the one hand, and the Company on the
other.
<PAGE> 102
1.2 Definitions. As used in this Agreement and the Exhibits and Schedules
delivered pursuant to this Agreement, the following definitions shall apply:
1.2.1 "Acquisition" means Hechinger Acquisition, Inc., a Delaware
corporation, and, unless the context otherwise requires, its Subsidiaries.
1.2.2 "Acquisition Proposal" has the meaning set forth in Section 7.5
hereof.
1.2.3 "Action" means any action, complaint, petition, investigation,
suit, litigation or other proceeding, whether civil or criminal, in law or
in equity, or before any arbitrator or Governmental Entity.
1.2.4 "Agreement" means this Agreement, as amended or supplemented,
together with all Exhibits and Schedules attached or incorporated by
reference, in each case as amended or supplemented.
1.2.5 "Approval" means any approval, authorization, consent,
qualification or registration, or any waiver of any of the foregoing,
required to be obtained from or made with, or any notice, statement or
other communication required to be filed with or delivered to, any
Governmental Entity or any other Person.
1.2.6 "Balance Sheet" has the meaning set forth in Section 5.13
hereof.
1.2.7 "BSQ" means Builders Square, Inc., a Delaware corporation.
1.2.8 "BSQ Acquisition" means BSQ Acquisition, Inc., a Delaware
corporation and the sole stockholder of Acquisition, and, unless the
context otherwise requires, its Subsidiaries.
1.2.9 "BSQ Acquisition Agreement" means the Purchase and Sale
Agreement of even date herewith among Kmart, BSQ and BSQ Acquisition.
1.2.10 "Business Day" means any day that is not a Saturday, Sunday or
legal holiday in the State of California.
1.2.11 "CAA" has the meaning set forth in Section 5.9.3 hereof.
1.2.12 "CERCLA" has the meaning set forth in Section 5.9.3 hereof.
1.2.13 "Certificate" has the meaning set forth in Section 3.1 hereof.
1.2.14 "Class A Common Stock" means the Company's Class A common
stock, par value $.10 per share.
1.2.15 "Class B Common Stock" means the Company's Class B common
stock, par value $.10 per share.
1.2.16 "Closing" has the meaning set forth in Section 2.2 hereof.
1.2.17 "Closing Date" means the date and time of the Closing.
1.2.18 "Code" means the Internal Revenue Code of 1986, as amended.
1.2.19 "Company" means Hechinger Company, a Delaware corporation, and,
unless the context otherwise requires, its Subsidiaries.
1.2.20 "Company Board" has the meaning set forth in Section 5.23
hereof.
1.2.21 "Consents" has the meaning set forth in Section 7.13 hereof.
1.2.22 "CWA" has the meaning set forth in Section 5.9.3 hereof.
1.2.23 "Delaware Certificate of Merger" has the meaning set forth in
Section 2.3 hereof.
1.2.24 "DGCL" has the meaning set forth in Section 2.1 hereof.
A-2
<PAGE> 103
1.2.25 "Dissenting Stockholders" has the meaning set forth in Section
4.1(a) hereof.
1.2.26 "Encumbrance" means any charge, encumbrance, security interest,
lien, option, equity, adverse claim or restriction, except for any
restrictions on transfer generally arising under any applicable federal or
state securities law.
1.2.27 "Environmental Laws or Orders" has the meaning set forth in
Section 5.9.2(a) hereof.
1.2.28 "EPCRA" has the meaning set forth in Section 5.9.3 hereof.
1.2.29 "ERISA" has the meaning set forth in Section 5.16.1 hereof.
1.2.30 "ERISA Affiliate" has the meaning set forth in Section 5.16.1
hereof.
1.2.31 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
1.2.32 "Expenses" has the meaning set forth in Section 9.3 hereof.
1.2.33 "Fiscal 1996 Form 10-K" has the meaning set forth in Section
5.7 hereof.
1.2.34 "GAAP" means generally accepted accounting principles in the
United States, as in effect from time to time, consistently applied.
1.2.35 "Governmental Entity" means any government or any agency,
bureau, board, commission, court, department, official, political
subdivision, tribunal or other instrumentality of any government, whether
federal, state or local, domestic or foreign.
1.2.36 "Hazardous Substances" has the meaning set forth in Section
5.9.3 hereof.
1.2.37 "H-S-R Act" has the meaning set forth in Section 7.6 hereof.
1.2.38 "In the Money Options" has the meaning set forth in Section 4.4
hereof.
1.2.39 "Income Tax" means (i) any income, alternative or add-on
minimum tax, gross income, gross receipts, franchise, profits, including
estimated taxes relating to any of the foregoing, or other similar tax or
other like assessment or charge of similar kind whatsoever, excluding any
Other Tax, together with any interest and any penalty, addition to tax or
additional amount imposed by any Taxing Authority responsible for the
imposition of any such Tax (domestic or foreign); or (ii) any liability of
a Person for the payment of any taxes, interest, penalty, addition to tax
or like additional amount resulting from the application of Treas. Reg.
sec.1.1502-6 or comparable provisions of any Taxing Authority in respect of
a Consolidated Return.
1.2.40 "Indebtedness" means all obligations for borrowed money and
accounts payable, however evidenced, including principal and interest.
1.2.41 "Kmart" means Kmart Corporation, a Michigan corporation.
1.2.42 "Knowledge" or any similar term or phrase (including the words
"known" and "aware" even though not capitalized) referring to "knowledge"
means, as to any entity, the knowledge, after due inquiry, of the officers
of such entity (and, in the case of the Company, means the knowledge, after
due inquiry, of John W. Hechinger, Jr., Kenneth J. Cort, S. Ross Hechinger,
W. Clark McClelland and Mark R. Adams, the Company's Chief Executive
Officer, President and Chief Operating Officer, Senior Vice
President -- Administration, Executive Vice President and Chief Financial
Officer and Senior Vice President, Treasurer and Secretary, respectively.).
For this purpose, "due inquiry" means inquiry of and consultation with the
entity's directors, officers and advisors, including legal counsel and
outside auditors, who in each case are the principal persons responsible
for such matters as of the date hereof.
1.2.43 "Law" means any statute, rule, regulation, administrative
requirement, code or ordinance of any Governmental Entity.
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1.2.44 "Leased Real Estate" has the meaning set forth in Section
5.12.2 hereof.
1.2.45 "Material Adverse Effect" means a material adverse effect on
(i) the ability of the subject Person to perform its obligations under, and
consummate the transactions contemplated by, this Agreement on a timely
basis or (ii) the condition (financial or otherwise), results of
operations, assets, liabilities, prospects (except insofar as they relate
generally to the industry of which the Company is a part) or business of
the subject Person and its Subsidiaries taken as a whole.
1.2.46 "Merger" has the meaning set forth in Section 2.1 of this
Agreement.
1.2.47 "Merger Consideration" has the meaning set forth in Section
4.1(a) hereof.
1.2.48 "Monthly Financial Statements" has the meaning set forth in
Section 7.7 hereof.
1.2.49 "1982 Options" has the meaning set forth in Section 5.3 hereof.
1.2.50 "1982 Plan" has the meaning set forth in Section 5.3 hereof.
1.2.51 "1991 Options" has the meaning set forth in Section 5.3 hereof.
1.2.52 "1991 Plan" has the meaning set forth in Section 5.3 hereof.
1.2.53 "Options" has the meaning set forth in Section 5.3 hereof.
1.2.54 "Order" means any decree, injunction, judgment, order, ruling,
arbitration award, assessment or writ.
1.2.55 "Other Tax" means any sales, use, ad valorem, business license,
withholding, payroll, employment, excise, stamp, transfer, recording,
occupation, premium, property, value added, custom duty, severance,
windfall profit or license tax, governmental fee or other similar
assessment or charge, together with any interest and any penalty, addition
to tax or additional amount imposed by any Taxing Authority responsible for
the imposition of any such tax (domestic or foreign).
1.2.56 "Owned Real Estate" has the meaning set forth in Section 5.12.1
hereof.
1.2.57 "Paying Agent" has the meaning set forth in Section 4.2 hereof.
1.2.58 "Permit" means any license, permit, franchise or authorization.
1.2.59 "Permitted Encumbrances" means (i) Encumbrances disclosed on
Schedule 1.2.59 hereto, (ii) liens for Taxes, assessments, governmental
charges or levies or mechanics' and other statutory liens which are not
material in amount relative to the property affected, and which are not yet
delinquent or can be paid without penalty or are being contested in good
faith and by appropriate proceedings in respect thereof, and (iii)
imperfections of title which are not substantial in amount relative to the
property affected and which do not materially interfere with the present
use of the property subject thereto or affected thereby.
1.2.60 "Person" means an association, a corporation, an individual, a
partnership, a limited liability company or limited liability partnership,
a trust or any other entity or organization, including a Governmental
Entity.
1.2.61 "Plans" has the meaning set forth in Section 5.16.1 hereof.
1.2.62 "Preferred Stock" has the meaning set forth in Section 5.3
hereof.
1.2.63 "RCRA" has the meaning set forth in Section 5.9.3 hereof.
1.2.64 "Record Date" means the date established by the Company Board
for purposes of determining the holders of the Class A Common Stock and
Class B Common Stock entitled to vote at the Special Meeting.
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1.2.65 "Reports" has the meaning set forth in Section 5.7 hereof.
1.2.66 "Representatives" means Persons acting on behalf of another
Person, including their respective officers, directors, employees,
representatives, agents, independent accountants, investment bankers and
counsel.
1.2.67 "SEC" means the United States Securities and Exchange
Commission.
1.2.68 "SEC Documents" means any reports, schedules, forms, statements
or other documents filed by the Company with the SEC.
1.2.69 "Securities Act" means the Securities Act of 1933, as amended.
1.2.70 "Service" means the Internal Revenue Service or any successor
entity.
1.2.71 "Shares" has the meaning set forth in Section 4.1(a) hereof.
1.2.72 "Special Meeting" has the meaning set forth in Section 7.10
hereof.
1.2.73 "Stock Plans" shall have the meaning set forth in Section 5.3
hereof.
1.2.74 "Stockholders Agreement" means the Stockholders Agreement to be
entered into by the stockholders of the Company listed on Schedule 1.2.74
hereto, in substantially the form attached hereto as Exhibit A.
1.2.75 "Subsidiary" of a company means any Person in which such
company has a direct or indirect equity or ownership interest by vote or
value of in excess of 50%.
1.2.76 "Superior Consideration" has the meaning set forth in Section
7.5 hereof.
1.2.77 "Surviving Corporation" has the meaning set forth in Section
2.1 hereof.
1.2.78 "Takeover Statute" has the meaning set forth in Section 7.17
hereof.
1.2.79 "Tax" means Income Taxes and Other Taxes as the context
requires.
1.2.80 "Tax Laws" means the Code, federal, state, county, local or
foreign laws relating to Taxes and any regulations or official
administrative pronouncements released thereunder.
1.2.81 "Tax Return" means any return, report, information return,
schedule, certificate, statement or other document (including any related
or supporting information) filed or required to be filed with, or, where
none is required to be filed with a Taxing Authority, the statement or
other document issued by, a Taxing Authority in connection with any Tax.
1.2.82 "Taxing Authority" means any federal, state, local or foreign
governmental authority responsible for the imposition of any Tax.
1.2.83 "Termination Fee" shall have the meaning set forth in Section
9.3 hereof.
1.2.84 "TSCA" has the meaning set forth in Section 5.9.3 hereof.
ARTICLE 2
THE MERGER; CLOSING; EFFECTIVE TIME
2.1 The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 2.3) Acquisition shall be merged with
and into the Company and the separate corporate existence of Acquisition shall
thereupon cease (the "Merger"). The Company shall be the surviving corporation
in the Merger (sometimes hereinafter referred to as the "Surviving Corporation")
and shall continue to be governed by the laws of the State of Delaware, and the
separate corporate existence of the Company with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger,
except as set forth in Section 3.1. The Merger shall have the effects specified
in the Delaware General Corporation Law (the "DGCL").
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2.2 Closing. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Irell & Manella LLP, 333 South Hope Street, Los Angeles,
California at 9:00 A.M. (Los Angeles time) on the first business day on which
the last to be fulfilled or waived of the conditions set forth in Article 8
hereof shall be fulfilled or waived in accordance with this Agreement or (ii) at
such other place and time and/or on such other date as the Company, Acquisition
and BSQ Acquisition may agree.
2.3 Effective Time. As soon as practicable following the Closing, and
provided that this Agreement has not been terminated or abandoned pursuant to
Article 9 hereof, the Company, Acquisition and BSQ Acquisition will cause a
Certificate of Merger (the "Delaware Certificate of Merger") to be executed and
filed with the Secretary of State of Delaware as provided in Section 251 of the
DGCL. The Merger shall become effective at the time and on the date on which the
Delaware Certificate of Merger has been duly filed with the Secretary of State
of Delaware or such other time as is agreed to by the parties hereto and
specified in the Delaware Certificate of Merger, and such time is hereinafter
referred to as the "Effective Time."
ARTICLE 3
CERTIFICATE OF INCORPORATION AND BY-LAWS;
OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION
3.1 The Certificate of Incorporation. The Certificate of Incorporation of
the Company (the "Certificate") in effect at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the DGCL, except that Article Fourth of
the Company's Certificate shall be amended to read in its entirety as follows:
"The aggregate number of shares which the Corporation shall have the
authority to issue is 1,000 shares of Common Stock, par value $0.01 per
share."
3.2 The By-Laws. The by-laws of the Company in effect at the Effective
Time shall be the by-laws of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the DGCL.
3.3 Officers and Directors. The directors of Acquisition and the officers
of Acquisition at the Effective Time shall, from and after the Effective Time,
be the directors and officers, respectively, of the Surviving Corporation until
their successors have been duly elected or appointed and qualified or until
their earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and By-Laws.
ARTICLE 4
CONVERSION OR CANCELLATION OF SHARES IN THE MERGER
4.1 Conversion or Cancellation of Shares. The manner of converting or
canceling shares of the stock of the Company and Acquisition in the Merger shall
be as follows:
(a) At the Effective Time, each share (collectively, the "Shares") of
the Class A Common Stock and the Class B Common Stock issued and
outstanding immediately prior to the Effective Time (other than Shares
owned by Acquisition or BSQ Acquisition and Shares which are held by
stockholders ("Dissenting Stockholders") exercising appraisal rights
pursuant to Section 262 of the DGCL) shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into the
right to receive, without interest, an amount in cash (the "Merger
Consideration") equal to $3.00. All such Shares, by virtue of the Merger
and without any action on the part of the holders thereof, shall no longer
be outstanding and shall be canceled and retired and shall cease to exist,
and each holder of a certificate representing any such Shares shall
thereafter cease to have any rights with respect to such Shares, except the
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right to receive the Merger Consideration for such Shares upon the
surrender of such certificate in accordance with Section 4.2 or the right,
if any, to receive payment from the Surviving Corporation of the "fair
value" of such Shares as determined in accordance with Section 262 of the
DGCL.
(b) At the Effective Time, each Share issued and outstanding at the
Effective Time and owned by Acquisition or BSQ Acquisition, and each Share
issued and held in the Company's treasury at the Effective Time, shall, by
virtue of the Merger and without any action on the part of the holder
thereof, cease to be outstanding, shall be canceled and retired without
payment of any consideration therefor and shall cease to exist.
(c) At the Effective Time, each share of Common Stock, par value $.01
per share, of Acquisition issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the
part of Acquisition or BSQ Acquisition, be converted into one share of the
Surviving Corporation's Common Stock, par value $.01 per share.
4.2 Payment for Shares. At or prior to the Effective Time, BSQ Acquisition
shall make available or cause to be made available to the paying agent appointed
by BSQ Acquisition with the Company's prior approval (the "Paying Agent")
amounts sufficient in the aggregate to provide all funds necessary for the
Paying Agent to make payments (a) pursuant to Section 4.1(a) hereof to holders
of Shares issued and outstanding immediately prior to the Effective Time and (b)
pursuant to Section 4.4 hereof to holders of Options outstanding immediately
prior to the Effective Time. Not later than 15 days prior to the date fixed for
the Special Meeting pursuant to Section 7.10 hereof, the Company shall cause to
be mailed to each person who was, as of the Record Date, a holder of record
(other than Acquisition or BSQ Acquisition) of issued and outstanding Shares a
form (mutually agreed to by Acquisition and the Company) of letter of
transmittal and instructions for use in effecting the surrender of the
certificates which, immediately prior to the Effective Time, represent any of
such Shares in exchange for payment therefor. The Company and, following the
Effective Time, the Surviving Corporation shall each use its best efforts to
mail the letter of transmittal to all persons who become holders of Shares
during the period between the Record Date and the close of business on the
business day prior to the Effective Time. At any time after the Effective Time,
upon surrender to the Paying Agent of such certificates, together with such
letter of transmittal, duly executed and completed in accordance with the
instructions thereto, the Surviving Corporation shall promptly cause to be paid
to the persons entitled thereto a check in the amount to which such persons are
entitled, after giving effect to any required tax withholdings. No interest will
be paid or will accrue on the amount payable upon the surrender of any such
certificate. If payment is to be made to a person other than the registered
holder of the certificate surrendered, it shall be a condition of such payment
that the certificate so surrendered shall be properly endorsed or otherwise in
proper form for transfer and that the person requesting such payment shall pay
any transfer or other taxes required by reason of the payment to a person other
than the registered holder of the certificate surrendered or establish to the
satisfaction of the Surviving Corporation or the Paying Agent that such tax has
been paid or is not applicable. One year following the Effective Time, the
Surviving Corporation shall be entitled to cause the Paying Agent to deliver to
it any funds (including any interest received with respect thereto) made
available to the Paying Agent which have not been disbursed to holders of
certificates formerly representing Shares outstanding on the Effective Time, and
thereafter such holders shall be entitled to look to the Surviving corporation
only as general creditors thereof with respect to the cash payable upon due
surrender of their certificates. Notwithstanding the foregoing, neither the
Paying Agent nor any party hereto shall be liable to any holder of certificates
formerly representing Shares for any amount paid to a public official pursuant
to any applicable abandoned property, escheat or similar law. The Surviving
Corporation shall pay all charges and expenses, including those of the Paying
Agent, in connection with the exchange of cash for Shares and BSQ Acquisition
shall reimburse the Surviving Corporation for such charges and expenses.
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4.3 Dissenters' Rights. If any Dissenting Stockholder shall be entitled to
be paid the "fair value" of his or her Shares, as provided in Section 262 of the
DGCL, the Company shall give Acquisition and BSQ Acquisition notice thereof and
each shall have the right to participate in all negotiations and proceedings
with respect to any such demands. The Company shall not, except with the prior
written consent of BSQ Acquisition, voluntarily make any payment with respect
to, or settle or offer to settle, any such demand for payment. If any Dissenting
Stockholder shall fail to perfect or shall have effectively withdrawn or lost
the right to dissent, the Shares held by such Dissenting Stockholder shall
thereupon be treated as though such Shares had been converted into the Merger
Consideration pursuant to Section 4.1.
4.4 Payment for Options. Promptly after the Effective Time, the Surviving
Corporation shall cause the Paying Agent to pay to each holder of Options with
respect to which Consents were theretofore executed and delivered and which have
exercise prices of less than $3.00 per share ("In the Money Options") an amount
equal to the difference between (i) the product of (A) $3.00 multiplied by (B)
the aggregate number of Shares issuable upon exercise of all In the Money
Options held by such holder and (ii) the aggregate exercise price payable upon
such exercise. No payment shall be made with respect to any Option having a per
Share exercise price equal to or greater than $3.00. The specific procedures for
such payments shall be as agreed to by the parties hereto and specified in the
Consent.
4.5 Transfer of Shares After the Effective Time. No transfers of Shares
shall be made on the stock transfer books of the Surviving Corporation at or
after the Effective Time.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Acquisition and BSQ
Acquisition as follows:
5.1 Organization and Good Standing. Each of the Company and the Company's
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its respective state of incorporation and has the
corporate power and authority to carry on its business as the same is now being
conducted and to own all its properties and assets. Each of the Company and the
Company's Subsidiaries is duly qualified to transact business as a foreign
corporation in each of the jurisdictions in which the nature of its business as
the same is now being conducted or the ownership of its properties and assets
require it to be qualified, which jurisdictions are listed in Schedule 5.1
hereto, except for those jurisdictions in which failure to be so qualified would
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
5.2 Corporate Records. The Company has made available to Acquisition a
complete and correct copy of the certificate of incorporation and by-laws, each
as amended to date, of each of the Company and the Company's Subsidiaries. Each
of the certificates of incorporation and by-laws so delivered are in full force
and effect. The corporate records and minute books of the Company and the
Company's Subsidiaries reflect all material action taken and authorizations made
at meetings of such companies' Boards of Directors or any committees thereof and
at any stockholders' meetings thereof.
5.3 Authorized Capital; Subsidiaries. The authorized capital stock of the
Company consists of 50,000,000 shares of Class A Common Stock, of which
32,754,374 Shares (which includes 25,500 Restricted Shares and does not include
97,265 Shares of Class A Common Stock held in the treasury of the Company) were
outstanding and 260,000 additional shares were issued as Performance Restricted
Shares (all of which will be fully vested as of the Closing) on July 10, 1997,
30,000,000 shares of Class B Common Stock, of which 9,458,374 Shares were
outstanding (not including 14,497 Shares of Class B Common Stock held in the
treasury of the Company) on July 10, 1997, and 20,000,000 shares of Preferred
Stock, par value $1.00 per share (the "Preferred Stock"), of which no shares
were outstanding on July 10, 1997. All of the outstanding shares have been duly
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authorized and are validly issued, fully paid and nonassessable. The Company has
no shares of its capital stock reserved for issuance, except that, as of July
10, 1997, there were no shares reserved for issuance pursuant to options (the
"1982 Options") issued under the Company's 1982 Stock Option Plan (the "1982
Plan") and 2,485,578 shares reserved for issuance pursuant to options (the "1991
Options", and collectively with the 1982 Options, the "Options") issued under
the Company's 1991 Stock Incentive Plan (the "1991 Plan" and collectively with
the 1982 Plan, the "Stock Plans"), which Options have exercise prices as set
forth in Schedule 5.3(a), and all of which Options will be terminated on or
before the Closing Date (subject to payment as provided in Section 4.4), and
4,419,899 shares subject to issuance pursuant to the Company's 5 1/2% Debentures
due 2012 (the "Debentures"). Except as set forth in Schedule 5.3(b), each of the
outstanding shares of capital stock of each of the Company's Subsidiaries is
duly authorized, validly issued, fully paid and nonassessable and owned, either
directly or indirectly, by the Company free and clear of all Encumbrances.
Except as set forth in Schedule 5.3(a), there are no shares of capital stock of
the Company authorized, issued or outstanding, and except as set forth in
Schedule 5.3(a) and as provided in the Stockholders Agreement, there are no
preemptive rights or outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of the
Company or any of the Company's Subsidiaries. After the Effective Time, the
Surviving Corporation will have no obligation to issue, transfer or sell any
shares of the Company's capital stock or capital stock of the Surviving
Corporation pursuant to any Plan (as defined in Section 5.16.1) or otherwise. To
the Company's knowledge, there are no voting trust agreements, proxies or other
contracts or arrangements restricting or relating to voting or dividend rights
or the transferability of the Company's capital stock (other than as provided in
this Agreement or the Stockholders Agreement, and except as set forth in
Schedule 5.3(c)). The Company has no Subsidiaries or other equity interests
other than the Company's Subsidiaries set forth on Schedule 5.3(d).
5.4 Corporate Authority. The Company has the corporate power and authority
and has taken all corporate action necessary in order to execute and deliver
this Agreement and, subject only to approval of this Agreement by the holders of
a majority in vote of the outstanding Shares, voting together as a single class,
to consummate the transactions contemplated hereby. The Company has received the
written opinion of Donaldson, Lufkin & Jenrette Securities Corporation to the
effect that the Merger Consideration to be received by the holders of the Shares
is fair to such holders from a financial point of view, and the Company has
provided a true and complete copy of such opinion to Acquisition. This Agreement
has been duly executed and delivered by the Company and is a valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms.
5.5 Absence of Conflict. Except as set forth in Schedule 5.5, the
execution, delivery and performance of this Agreement, the consummation of the
transactions contemplated hereby, and compliance with the provisions hereof do
not and will not (i) conflict with or result in any breach of the terms,
conditions, or provisions of the respective charter and bylaws of the Company
and each of the Company's Subsidiaries; (ii) violate, or conflict with, or
result in a breach of any provisions of, or constitute a default (or an event
which, with notice or lapse of time or both, would constitute a default) under,
or give rise to a right of termination, cancellation, modification or
acceleration of the performance required by or a loss of a material benefit
under, or result in the creation or imposition of (or the obligation to create
or impose) any Encumbrance (other than Permitted Encumbrances) upon any of the
properties or assets of the Company under, any of the terms, conditions or
provisions of any material agreement, indenture, note, bond, mortgage, deed of
trust, undertaking, permit, lease, franchise, license or other instrument to
which the Company is a party or by which it or any of its properties or assets
may be bound or affected; or (iii) violate any Law or Order applicable to the
Company, except for any such violations of Law or Order which would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
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5.6 Approvals.
5.6.1 Schedule 5.6.1 contains a list of all significant categories of
Approvals of Governmental Entities which, to the Knowledge of the Company,
are required to be given or obtained by the Company from any and all
Governmental Entities in connection with the consummation of the
transactions contemplated by this Agreement, except where the failure to be
given or obtain such Approvals, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.
5.6.2 Schedule 5.6.2 contains a list of all non-governmental Approvals
which, to the Knowledge of the Company, are required to be given or
obtained by the Company from any and all third parties in connection with
the consummation of the transactions contemplated by this Agreement, except
where the failure to give or obtain such Approvals, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse
Effect.
5.7 SEC Filings; Financial Statements. The Company has heretofore
delivered or made available to Acquisition a complete and correct copy of each
registration statement, offering circular relating to the offering of
securities, report, proxy statement or information statement prepared by it
since January 28, 1995, including, without limitation, (A) its Annual Report on
Form 10-K (the "Fiscal 1996 Form 10-K") for the year ended February 1, 1997, and
(B) its Quarterly Report on Form 10-Q for the period ended May 3, 1997, each in
the form (including exhibits and any amendments thereto) filed with the SEC or
other available exemption from registration under the Securities Act
(collectively, the "Reports"). As of their respective dates or, if amended, as
of the date of the last such amendment prior to the date of this Agreement, the
Company's Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. Each of the Company's consolidated balance sheets
included in or incorporated by reference into its Reports (including the related
notes and schedules) fairly presents the consolidated financial position of the
Company as of its date and each of the consolidated statements of income, cash
flows and stockholders' equity included in or incorporated by reference into its
Reports (including any related notes and schedules) fairly presents the
consolidated results of operations, retained earnings and cash flows, as the
case may be, of the Company for the periods set forth therein (subject, in the
case of unaudited statements, to normal year-end audit adjustments), in each
case in accordance with GAAP consistently applied through the periods indicated.
5.8 Accounts Payable and Inventory; Conduct of Business.
5.8.1 Accounts Payable and Inventory. Except as disclosed in Schedule
5.8.1, since February 1, 1997 to the date hereof the Company has (i)
discharged its accounts payable and other current liabilities and
obligations in accordance with past practice, and (ii) purchased and
maintained inventory in an amount consistent with normal seasonal
requirements of the Company's business and intended to facilitate the sound
operation of the Company's business.
5.8.2 Conduct of Business. Except as disclosed in the SEC Documents,
in Schedule 5.8.2 or as contemplated by this Agreement, since February 1,
1997 to the date hereof, the Company's business has been conducted in the
ordinary course, and there has not been any:
(a) adverse and material change in the condition (financial or
otherwise), results of operations, assets, liabilities, prospects
(except insofar as they relate generally to the industry of which the
Company is a part) or business of the Company;
(b) amendment to the Company's or any of the Company's
Subsidiaries' charter or by-laws;
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(c) sale, assignment, disposition, transfer, pledge, mortgage or
lease of any asset primarily used or held for use in the Company's
business, other than sales of inventory in the ordinary course of
business consistent with past practice;
(d) incurrence of any Indebtedness, other than accounts payable
arising in the ordinary course of business, consistent with past
practice, and other than under the existing revolving credit facility in
the ordinary course of business;
(e) sale, assignment, disposition, transfer, pledge, mortgage or
lease of any Owned Real Estate or Leased Real Estate;
(f) increase in the compensation or fringe benefits payable or to
become payable to any officers or salaried employees of the Company,
other than routine increases made in the ordinary course of business and
consistent with past practice or as required by Law or under any
existing agreements;
(g) issuance, sale or disposition of any capital stock or other
equity interest in the Company or options, warrants or other rights to
purchase any such capital stock or equity interest or any securities
convertible into or exchangeable for such capital stock or equity
interest or any other change in the issued and outstanding
capitalization of the Company;
(h) any amendment, alteration or modification in the terms of any
currently outstanding options, warrants or other rights to purchase any
capital stock or equity interest in the Company or any securities
convertible into or exchangeable for such capital stock or equity
interest, including without limitation any reduction in the exercise or
conversion price of any such rights or securities;
(i) declaration or payment of any dividend or other distribution,
or the transfer of any assets, by the Company to any stockholders of the
Company, or any redemption, repurchase or other acquisition by the
Company of its capital stock, except in the ordinary course of business;
(j) change by the Company in any of its material accounting
principles, methods or practices, including any material change in its
policies with respect to reserves (whether for bad debts, contingent
liabilities or otherwise), any change in depreciation or amortization
policies or rates or any change in the policies pertaining to the
recognition of accounts receivable or the discharge of accounts payable
or accounting for inventories;
(k) material adverse changes in the business organization of the
Company, the Company's relationships with employees or the Company's
relationships with the suppliers listed on Schedule 5.20, (or any
material adverse changes in relationships with other customers and
suppliers that are material to the Company);
(l) except in the ordinary course of business, consistent with past
practice, or as necessary to consummate the transactions contemplated
hereby, entering into or amending of any Contract identified in
Schedules under Sections 5.11, 5.12, 5.16 or 5.19;
(m) closure, shut down or other elimination of any of the Company's
stores or any other material change in the character of its business,
properties or assets, except in the ordinary course of business,
consistent with past practice;
(n) damage, destruction or loss with respect to any of the
properties or assets of the Company which would have a Material Adverse
Effect; or
(o) agreement to do, cause or suffer any of the foregoing.
5.9 Compliance with Law.
5.9.1 Except as set forth in Schedule 5.9.1, the Company has conducted
its business in all material respects in compliance with and does not in
any material respect violate any applicable
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Laws or Orders (including any Laws or Orders relating to employment
discrimination, occupational safety, manufacture, warehousing, conservation
or corrupt practices, but excluding matters subject to the remainder of
this Section 5.9), and the Company has not received any notice alleging any
such violation that remains pending or unsatisfied.
5.9.2 Except as set forth in Schedule 5.9.2 and as would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company:
(a) all of the Company's assets (including assets and properties
that are owned, leased or operated) and their existing and, to the
knowledge of the Company, prior uses complied and comply with, and the
Company is not in violation of and has not violated, in connection with
the ownership, use, maintenance or operation of any such assets or
properties or the conduct of the Company's business, any applicable Law
or Order of any Governmental Entity relating to the handling,
manufacturing, treatment, storage, disposal, discharge, use or
transportation of Hazardous Substances, environmental pollution,
pollution control or other environmental or non-occupational health and
safety matters (collectively, "Environmental Laws or Orders");
(b) there are no conditions or circumstances that may reasonably be
expected to trigger or result in an obligation by the Company pursuant
to any Environmental Laws or Orders to conduct or to make any
investigation, work, repairs, construction, remediation or capital
expenditures with respect to any parcel of Owned Real Estate, Leased
Real Estate or other property or asset (real or personal) of the Company
or used in the Company's business, nor has the Company received any
notice of any claim regarding any Environmental Law or Order with
respect to any such property or asset;
(c) there is no liability relating to the Company's business to
which the Company will or reasonably could be expected to be subject,
whether absolute, accrued, contingent or otherwise, arising out of or
related to, directly or indirectly, any Environmental Laws or Orders;
(d) there has been no release of Hazardous Substances on, under or
affecting (i) any parcel of Owned Real Estate or Leased Real Estate
(real or personal); (ii) any other current property or asset of the
Company or used in the Company's business (real or personal); or (iii)
any former property or asset of the Company or used in the Company's
business (real or personal) during the time that any such former
property or asset was owned, leased, subleased by the Company or used in
the Company's business, and the Company is not, nor could it reasonably
be expected to be, liable for any potential investigation or cleanup of
any property or facility as the result of disposing, transporting or
arranging for the disposal of Hazardous Substances from any Owned Real
Estate or Leased Real Estate occurring prior to the Closing Date.
5.9.3 For purposes of this Agreement, "Hazardous Substances" shall
mean all substances, materials, chemicals, compounds or wastes regulated
by, under or pursuant to any applicable Environmental Laws or Orders,
including the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C.
Sections 6901 et seq., the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), 42 U.S.C. Sections 9601 et seq.,
the Clean Water Act ("CWA"), 33 U.S.C. Sections 1251 et seq., the Clean Air
Act ("CAA"), 42 U.S.C. Sections 7401 et seq., the Toxic Substances Control
Act ("TSCA"), 15 U.S.C. Sections 2601 et seq., the Emergency Planning and
Community Right-to-Know Act of 1986 ("EPCRA"), Title III of Public Law
99-499, the Safe Drinking Water and Toxic Enforcement Act, Cal. Health and
Safety Code Sections 25249.5 et seq., any and all state or local
counterparts thereto or other similar state or local Laws and Orders,
including any and all rules and regulations promulgated thereunder, or any
common law theory based on nuisance, negligence, product liability,
trespass, ultrahazardous activity or strict liability. The term "Release"
shall have the meaning accorded such term under CERCLA.
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5.10 Permits. Except as set forth in Schedule 5.10, the Company has and is
in material compliance with, or has a valid exemption from the requirement to
obtain, all Permits and Approvals from Governmental Entities necessary to
conduct its business and own its properties and assets in all material respects
in the manner it is currently being conducted.
5.11 Contracts.
5.11.1 Schedule 5.11.1 lists (a) all contracts and agreements (written
or oral) existing as of the date hereof of the Company that provide for
aggregate payments by any party in excess of $500,000 per contract and that
are not terminable upon 90 days (or less) notice by the Company without
penalty or obligation to make payments related to such termination, (b) all
agreements containing covenants that, as of the Closing, would limit in any
material respect the freedom of the Company to compete with any person in
any line of business or in any area or territory, (c) all documents
evidencing any Indebtedness of the Company, (d) all supplier agreements of
the Company pertaining to discounts, rebates or other allowances or other
non-ordinary course arrangements and (e) all license agreements pertaining
to intellectual or intangible property rights of the Company; provided that
Schedule 5.11.1 shall not include (i) contracts and agreements that are set
forth on a Schedule identified under Sections 5.12, 5.16 and 5.19 hereof,
(ii) purchase orders for inventory and merchandise held for sale to
customers entered into in the ordinary course of business in a manner
consistent with past practice and that accounted for less than 2% of total
inventory and merchandise purchases of the Company during the most recently
completed fiscal year or are expected to account for less than 2% of total
inventory and merchandise purchases of the Company during the current
fiscal year, and (iii) any leases for tangible personal property requiring
monthly payments of less than $25,000. Copies of all of the agreements,
contracts and arrangements referred to in this Section have been heretofore
made available to Acquisition.
5.11.2 Except as set forth in Schedule 5.11.1, (i) the Company is not,
and to the Knowledge of the Company no other party to any contract listed
on said Schedule is, in material violation thereof or in material default
with respect thereto; (ii) each contract listed on said Schedule is a
valid, binding and enforceable obligation of the Company and, to the
Knowledge of the Company, the other parties thereto and is in full force
and effect, except where the failure to be valid, binding, enforceable and
in full force and effect would not, individually or in the aggregate,
reasonably be expected to be material; and (iii) none of the contracts
listed on said schedule contains provisions adverse to the Company upon a
change in control thereof.
5.11.3 Except as set forth on Schedule 5.11.3, no officer or director
of the Company, no shareholder of the Company related to any such officer
or director, and no "associate" (as such term is defined in Rule 14a-1
under the Exchange Act) of any of them, has any interest in any material
contract or agreement (including all leases of real property) of, or other
business arrangement with, the Company, or in any material property
(including any real property and any material personal property, tangible
or intangible), used in or pertaining to the business of the Company.
5.12 Real Property and Leaseholds.
5.12.1 Schedule 5.12.1 lists and identifies all parcels of real
property currently owned in fee by the Company (the "Owned Real Estate").
The Company holds marketable and legal title to each of the real properties
constituting Owned Real Estate, free and clear of all Encumbrances, except
for Permitted Encumbrances.
5.12.2 Schedule 5.12.2(a) lists and identifies all parcels of real
property leased or subleased to the Company (collectively, the "Leased Real
Estate"). Except as set forth on Schedule 5.12.2(b), the Company holds
valid and subsisting leasehold interests to each of the leaseholds
constituting Leased Real Estate, free and clear of all Encumbrances, except
for Permitted Encumbrances.
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5.12.3 With respect to each lease, master lease or sublease of any
real estate described in Schedule 5.12.2, except as set forth in Schedule
5.12.3, the Company is not and, to the Knowledge of the Company no other
party thereto is, in default with respect to any material term or condition
thereof, nor has any event occurred which through the passage of time or
the giving of notice, or both, would constitute a material default
thereunder, except in each such case for such defaults as would not
reasonably be expected to result in (i) a material payment being made by
the Company to the landlord, (ii) termination of the lease, or (iii) any
other material adverse consequence, individually or in the aggregate, to
the Company.
5.12.4 Except as set forth on Schedule 5.12.4(a), all the real
property leases relating to the Leased Real Estate are in full force and
effect (including those that have expired original terms and are continuing
on a month-to-month or similar basis) and the Company is entitled to all
the rights of a tenant thereunder, taking into account the consummation of
the transactions contemplated by this Agreement. Except as set forth on
Schedule 5.12.4(b), none of such real property leases contains any
requirements for notice or consent with respect to, or otherwise provides
restrictions against, a change in control of the Company. Except as set
forth on Schedule 5.12.4(c), no Action against the Company is pending or,
to the Knowledge of the Company, threatened in connection with any such
real property leases, except for any Action (not involving the failure to
pay rent) which is not, individually or in the aggregate, reasonably
expected to have a Material Adverse Effect.
5.13 Absence of Undisclosed Liabilities. Except as accrued on the balance
sheet of the Company at February 1, 1997 included in the fiscal 1996 Form 10-K
(the "Balance Sheet") or set forth in the notes thereto, and except as set forth
in Schedule 5.13, the Company does not have any liability (whether absolute,
accrued, contingent, or otherwise, matured or unmatured, and whether due or to
become due), which liability is required (or would be required had such
liabilities existed at February 1, 1997) to be reflected on the Balance Sheet or
the notes thereto in accordance with GAAP, except for liabilities and
obligations incurred since February 1, 1997 in the ordinary course of business
and consistent with past practice or those which would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
5.14 Litigation.
5.14.1 Except as set forth in Schedule 5.14, there are no Actions
pending or, to the Knowledge of the Company, claims threatened against the
Company, at law, in equity or in any arbitral proceeding, and there is no
investigation or proceeding pending or, to the Knowledge of the Company,
threatened before or by any Governmental Entity nor is there any currently
effective Order against the Company, except for any such Actions, claims,
investigations, proceedings or Orders which would not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
Schedule 5.14 accurately identifies those pending or, to the Knowledge of
the Company, threatened claims listed therein which are material and (i)
may not be covered by third party insurance or (ii) with respect to which
the insurance carrier has denied coverage or has advised the Company that
it is defending such claim under reservation of rights or (iii) for which
the Company is self-insured.
5.15 Tax Matters.
5.15.1 Except as set forth in Schedule 5.15.1, the Company (i) has (or
by the Closing Date will have) timely filed all material Tax Returns
required to be filed by it as of the Closing Date, (ii) has used its
commercially reasonable efforts to maintain all required records with
respect to any liability for Taxes for taxable years with respect to which
the statute of limitations has not yet expired, regardless of whether such
liability has been previously assessed in whole or in part or is assessed
in whole or in part after the date of this Agreement and (iii) has timely
paid, or has made appropriate provision on its balance sheet (in accordance
with GAAP) for, all Taxes shown to be due on or with respect to Tax Returns
referred to in clause (i) above or claimed to be due from it by any Taxing
Authority with respect to any liability for Taxes. Except
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as set forth in Schedule 5.15.1, all Tax Returns described in clause (i)
are true, correct and complete in all material respects. Except as set
forth in Schedule 5.15.1, with respect to periods commencing on or after
February 1, 1997, the Company has not incurred any material liability for
Taxes other than as reflected on the Balance Sheet. Except as set forth in
Schedule 5.15.1, there are no material Encumbrances with respect to Taxes
upon any of the Company's properties or assets, except for current Taxes
not yet due.
5.15.2 The appropriate Tax Returns of the Company have been examined
by the Service for all periods up to and including January 31, 1994. Except
to the extent reserved for in the Balance Sheet or as shown in Schedule
5.15.2, no material issue has been raised by a Taxing Authority in any such
examination which reasonably could be expected to result in a proposed
deficiency, penalty or interest for any other period.
5.15.3 Except as set forth in Schedule 5.15.3, there are no
outstanding agreements or waivers extending the statutory period of
limitation applicable to any U.S. federal Tax Returns required to be filed
by, or which include or are treated as including, the Company.
5.15.4 Except as set forth in Schedule 5.15.4, the Company is not
involved in or subject to any joint venture, partnership or other
arrangement or contract which is treated as a partnership for federal,
state, local or foreign income tax purposes.
5.15.5 All material elections with respect to Income Taxes affecting
the Company as of the date hereof are set forth in Schedule 5.15.5.
5.15.6 Except as set forth in Schedule 5.15.6, there are no tax
sharing agreements or similar arrangements with respect to or involving the
Company.
5.15.7 The Company was not included and is not includible in any
consolidated or unitary Tax Return with any corporation other than such a
return of which the Company is the common parent corporation.
5.15.8 Except as set forth on Schedule 5.15.8, the Company has not
agreed to and is not required to make any material adjustment under section
481(a) of the Internal Revenue Code (the "Code").
5.15.9 Except as set forth in Schedule 5.15.9, the Company has not
entered into any compensatory agreements with respect to the performance of
services which payment thereunder would result in a non-deductible expense
to such company pursuant to Section 280G of the Code or an excise tax to
the recipient of such payment pursuant to Section 4999 of the Code.
5.16 ERISA Matters.
5.16.1 For purposes of this Agreement, the term "Plans" shall mean (i)
all "employee benefit plans" (as such term is defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
of which the Company is or ever was a sponsor or participating employer or
as to which the Company makes contributions or is required to make
contributions and (ii) any similar employment, severance or other
arrangement or policy of the Company (whether written or oral) providing
for health, life, vision or dental insurance coverage (including
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits or retirement
benefits, fringe benefits, or for profit sharing, deferred compensation,
bonuses, stock options, stock appreciation or other forms of incentive
compensation or post-retirement health, life, vision or dental insurance,
compensation or benefits, in each case (other than in the case of a
deferred benefit pension plan within the meaning of Section 3(35) of ERISA)
for the benefit of employees or former employees of the Company. Schedule
5.16.1 lists and identifies each Plan of the Company and its ERISA
affiliates. For purposes of this Agreement, the term "ERISA Affiliate"
shall mean any member of the same controlled group of businesses as the
Company, within the last six years, within the meaning of Section
4001(a)(14) of ERISA.
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5.16.2 Each Plan has been operated in all material respects in
accordance with its terms and all applicable laws and the annual report for
each such Plan with respect to which such report is required has been
timely filed. Except as set forth on Schedule 5.16.2, no claim is pending
or, to the knowledge of the Company, threatened against any such Plan or
ERISA Affiliate except for benefits properly due.
5.16.3 All continuation coverage under any Plan or any plan maintained
by any ERISA Affiliate that is a medical benefit plan has been provided in
all material respects in conformity with the Code and ERISA.
5.16.4 The Company has made all contributions that are required of it
under any Plan for all plan years ending on or prior to the Closing Date
and that become due on or prior to the Closing Date.
5.16.5 A letter has been received by the Company from the Internal
Revenue Service determining that each funded employee pension plan as
defined in Section 3(2) of ERISA that is intended to meet the requirements
of Section 401(a) of the Code meets such requirements.
5.16.6 Except as set forth in Schedule 5.16.6, neither the Company nor
any ERISA Affiliate has incurred any unsatisfied liability under Title IV
of ERISA (other than liability for premiums due the Pension Benefit
Guaranty Corporation), whether by reason of the termination of any pension
plan or the withdrawal from any multi-employer plan, or assumed any
liability under Section 4204 of ERISA.
5.16.7 None of the Plans has an accumulated funding deficiency (as
defined in Section 412 of the Code), and no prohibited transaction (as
defined in Section 4975 of the Code) has occurred with respect to any Plan
unless the transaction has been corrected and all liability occasioned
thereby has been satisfied.
5.16.8 The Company has substantially complied with all material
reporting and disclosure requirements under ERISA and the Code to the
extent applicable to any Plan.
5.16.9 The Company has no reason to believe that any multi-employer
plan listed on Schedule 5.16.1 is or is expected imminently to be in
reorganization or has been or is expected imminently to be terminated.
5.16.10 The aggregate unfunded current liability (as defined in
Section 412(1)(8)(A) of the Code) of all single employer plans maintained
by the Company is only of such magnitude that all liability under Title IV
of ERISA created by the termination of all such plans on the date hereof
and as of the Closing Date would be unlikely to exceed $2,000,000.
5.16.11 The Company has, in any summary plan description of any
employee benefit plan (as defined in Section 3(3) of ERISA), or in any
summary of material modification thereof circulated to the employees,
reserved its rights to amend or terminate the plan to which the summary
related and, to the knowledge of the Company, has not represented otherwise
in any such description or material, nor, except as set forth in Schedule
5.16.11, has the Company represented that any health or medical insurance
benefit is available to any employee after such employee's separation from
service with the Company except as provided in any disability plan or as
required by law.
5.16.12 There are no liens against the property of the Company or any
of its ERISA Affiliates under Section 412(n) of the Code or Sections 302(f)
or 4068 of ERISA.
5.17 Assets.
5.17.1 Except as indicated in Schedule 5.17, the Company holds title
to or a leasehold, consignment or license in each item of material tangible
personal property owned by or in the possession of the Company. Except as
indicated in Schedule 5.17 or on the Balance Sheet or the notes thereto:
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(a) each item of tangible personal property listed in the fixed
asset ledger of the Company as being owned is owned free and clear of
all Encumbrances except for Permitted Encumbrances; and
(b) The Company is not in default with respect to any term or
condition of any lease of personal property, nor has any event occurred
which through the passage of time or the giving of notice, or both,
would result in such a default, in each case except as would not
individually or in the aggregate reasonably be expected to have a
Material Adverse Effect; and
(c) except for such items of equipment as are undergoing repair or
refurbishment or are being held for replacement, in each case in the
ordinary course of business and consistent with past practice, and
except to the extent that no material liability will be incurred in
restoring equipment to reasonable operating condition, all of the
equipment (including machinery, spare parts, automobiles, trucks, other
vehicles, tools, operating and office supplies, and computer hardware
and softwares) owned or leased or otherwise used by the Company is in
reasonable operating condition and, subject to normal maintenance, is
available for use.
5.17.2 All accounts receivable, unbilled invoices and other
receivables of the Company due or recorded in the records and books of
account of the Company as being due to the Company (less the amount of any
provision or reserve therefor made in the records and books of account of
the Company) (a) arose in the ordinary course of business, and (b) are
reasonably expected to be collectible.
5.17.3 Except as set forth in Schedule 5.17.3, the values at which
inventories of the Company are carried on the Balance Sheet reflect the
inventory valuation policy of the Company consistent with its past practice
and in accordance with GAAP.
5.18 Intellectual Property. Schedule 5.18(a) sets forth a list of all
registered trade names, patents, trademarks, service marks and copyrights and
applications for any of the foregoing which are used or held for use by the
Company. Except as set forth in Schedule 5.18(b), the Company owns the trade
name (and related trademark) "Hechinger," "Home Quarters" and "Better Spaces" in
all jurisdictions in which such trade name and related trademark are in use, and
there is not any conflict in any jurisdiction in which such trade name and
related trademark are in use by any Person with the rights of the Company
therein or any conflict by the Company with the rights of any other Person
therein nor has any license to use such name been granted to any Person. Except
as set forth in Schedule 5.18(c), the Company has all patents, trademarks, trade
names, service marks, trade secrets, copyrights and other proprietary
intellectual property rights, or licenses in respect of any such rights owned by
others, as are necessary to continue the Company's business substantially as
currently conducted, and there is not any conflict in any jurisdiction in which
any such proprietary intellectual property is in use by any Person with the
rights of the Company therein or any conflict by the Company with the rights of
any other Person therein, except where in any case or in the aggregate such
failure to have such rights or such conflict would not be likely to result in a
Material Adverse Effect.
5.19 Labor and Employment Matters.
5.19.1 Schedule 5.19(a) is a complete copy of all current employee
handbooks utilized by the Company. Schedule 5.19(b) is an accurate list of
each employment contract of the Company which provides for aggregate annual
payments of more than $75,000 for personal services or employment which is
not terminable on 30 days (or less) notice by the Company without penalty
or obligation to make payments related to such termination. Except as
provided in Schedule 7.15 and except in accordance with the contracts,
agreements, plans or programs identified in Schedule 5.16 or Schedule 5.19,
no individual will accrue or receive material additional benefits, service
or accelerated rights to payment of benefits as a result of the
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transactions contemplated by this Agreement (either alone or combined with
any other event or transaction). There are no collective bargaining
agreements or other material labor agreements to which the Company is a
party.
5.19.2 The Company is in compliance in all material respects with all
applicable Laws relating to the employment of labor, including those
related to wages, hours, occupational safety and health, plant closings and
mass layoffs, collective bargaining and the payment and withholding of
taxes and other sums as required by appropriate Governmental Entities, and
there has been withheld and paid to the appropriate Governmental Entities,
or there is being held for payment not yet due to such Governmental
Entities, all amounts required to be withheld from the employees of the
Company, and the Company is not liable for any arrears of wages, taxes,
penalties or other sums for failure to comply with any of the foregoing
except for such failures which would not, individually or in the aggregate,
be expected to have a Material Adverse Effect.
5.19.3 As of the date hereof, and except as set forth in Schedule
5.19.3, there is no (i) unfair labor practice complaint against the Company
pending before the National Labor Relations Board or any other federal,
state, local or foreign agency; (ii) pending labor strike, work stoppage,
work slow down or lockout affecting the Company; (iii) pending material
grievance or unfair dismissal proceeding relating to the Company; (iv)
material claim by employees of the Company alleging discrimination under
any federal, state or local law or constitution, including claims of
discrimination or retaliation based on race, color, creed, age, sex, sexual
orientation, national origin, religion or disability; (v) other material
claims affecting the Company relating to employment, including those based
on statute, contract or tort; (vi) pending representation question or union
organizing activities respecting a significant number of the employees of
the Company; or (vii) to the Knowledge of the Company, threat,
investigation, charge or complaint with regard to any of the foregoing
relating to the Company.
5.20 Suppliers. Set forth on Schedule 5.20 hereto is a list of the ten
largest suppliers based on the dollar value of materials or products sold
or purchased, respectively, of the Company for the year ended February 1,
1997.
5.21 Personnel, etc. Set forth on Schedule 5.21 is a list setting
forth:
(a) the name of each officer of each of the Company and the Company
Subsidiaries, specifying the title and job classification of each such
Person; and
(b) the name of each director of each of the Company and the
Company Subsidiaries.
The Company has heretofore provided Acquisition with a complete and
accurate schedule of compensation which each of the officers referred to in
clause (a) above is currently entitled to receive, and all payroll records
relating to non-officer employees heretofore provided to Acquisition are
accurate and complete.
5.22 Insurance. The Company is currently insured for reasonable amounts
with financially sound and reputable insurance companies, against such risks as
the Company reasonably believes is customary in the business in which it is
engaged. All of the insurance policies and bonds maintained by the Company are
in full force and effect, the Company is not in default in any material respect
thereunder and all material claims thereunder have been filed in due and timely
fashion or as required by any such insurance policies. Since February 3, 1996,
no material claim by the Company on or in respect of an insurance policy or bond
has been declined or refused by the relevant insurer or insurers. Between the
date hereof and the Closing Date, the Company will maintain the levels of
insurance coverage in effect on the date hereof and will submit all claims
existing prior to the Closing Date to its insurance carrier on or before the
Closing Date. Schedule 5.22 lists all insurance policies maintained by or for
the benefit of the Company or its directors, officers, employees or agents,
specifying (i) the type of policy, (ii) policy limits and (iii) self insurance
amounts.
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5.23 Company Action. The Board of Directors of the Company (the "Company
Board") has adopted resolutions recommending that this Agreement and the Merger
be approved by its stockholders and directing that this Agreement and the Merger
be submitted for consideration by its stockholders at a Special Meeting thereof.
5.24 Takeover Statutes. No Takeover Statute applicable to it is applicable
to the Merger, the Stockholders Agreement or the other transactions contemplated
hereby.
5.25 Brokers. Except as set forth in Schedule 5.25, all negotiations
relative to this Agreement and the transactions contemplated hereby have been
conducted by the Company in such manner as not to give rise to, and the
consummation of the transactions contemplated hereby will not give rise to, any
valid claim against Acquisition, BSQ Acquisition or the Company or any of their
respective directors, officers, stockholders or affiliates for a brokerage
commission, finder's fee or other like payment to any person or entity.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF
ACQUISITION AND BSQ ACQUISITION
BSQ Acquisition and, as to itself, Acquisition hereby each represents and
warrants to the Company as follows:
6.1 Organization and Good Standing; Authority. Each of Acquisition and BSQ
Acquisition is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the corporate power and
authority and has taken all corporate action necessary in order to execute and
deliver this Agreement and consummate the transactions contemplated hereby. This
Agreement has been duly executed and delivered by each of Acquisition and BSQ
Acquisition and is a valid and legally binding obligation of each of them,
enforceable against Acquisition and BSQ Acquisition in accordance with its
terms.
6.2 Absence of Conflict. Except as set forth in Schedule 6.2, the
execution, delivery and performance of this Agreement, the consummation of the
transactions contemplated hereby, and compliance with the provisions hereof do
not and will not (i) violate, or conflict with, or result in a breach of any
provisions of, or constitute a default (or an event which, with the notice or
lapse of time or both, would constitute a default) under, or give rise to a
right of termination, cancellation, modification or acceleration of the
performance required by or a loss of a material benefit under, or result in the
creation or imposition of (or the obligation to create or impose) any
Encumbrance upon any of the properties or assets of Acquisition or BSQ
Acquisition under any of the terms, conditions or provisions of the respective
charter and bylaws of Acquisition and BSQ Acquisition or any material agreement,
indenture, note, bond, mortgage, deed of trust, undertaking, permit, lease,
franchise, license or other instrument to which Acquisition or BSQ Acquisition
is a party or by which either of them or any of its respective properties or
assets may be bound or affected; or (ii) violate any Law or Order applicable to
Acquisition and BSQ Acquisition, except for any such violations of Law or Order
which would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
6.3 Approvals. Schedule 6.3 contains a list of all Approvals of
Governmental Entities which, to the knowledge of Acquisition or BSQ Acquisition,
are required to be given or obtained by Acquisition or BSQ Acquisition from any
and all Governmental Entities in connection with the consummation of the
transactions contemplated by this Agreement, except where the failure to be
given or obtain such Approvals, individually or in the aggregate, would not
reasonable be expected to have a Material Adverse Effect.
6.4 Brokers. All negotiations relative to this Agreement and the
transactions contemplated hereby have been conducted by Acquisition and BSQ
Acquisition in such manner as not to give rise
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to, and the consummation of the transactions contemplated hereby will not give
rise to, any valid claim against the Company or any of its directors, officers,
stockholders or affiliates for a brokerage commission, finder's fee or other
like payment to any person or entity.
6.5 Financing. Acquisition has delivered to the Company a copy of a
commitment letter from Chase Manhattan Bank relating to such financing as, in
Acquisition's judgment, is reasonably expected to be necessary to consummate the
transactions contemplated hereby and by the BSQ Acquisition Agreement.
6.6 Transaction Agreements. Set forth on Schedule 6.6 is a list of all
agreements, contracts and other binding written commitments that relate to the
transactions contemplated by the BSQ Acquisition Agreement and the transactions
contemplated hereby. A copy of all items listed on such schedule has been
delivered by Acquisition, BSQ Acquisition or their respective Representatives to
the Company or its Representatives.
ARTICLE 7
COVENANTS
7.1 Conduct of Business Pending Closing. The Company agrees that on and
after the date hereof and prior to the Closing Date, except as otherwise
consented to by Acquisition in writing (which consent shall not be unreasonably
withheld so long as such consent is not adverse to the interests of Acquisition
or BSQ Acquisition, in their sole discretion), as set forth in Schedule 7.1, or
as otherwise contemplated by this Agreement:
7.1.1 The Company shall conduct its business in the ordinary course in
all material respects;
7.1.2 The Company shall (i) discharge accounts payable and other
current liabilities and obligations of the Company in accordance with past
practice, (ii) purchase and maintain inventory in an amount consistent with
normal seasonal requirements of the Company and intended to facilitate the
sound operation of the Company's business, and (iii) discharge on a timely
basis any and all liabilities as and to the extent such liabilities or any
portion thereof become due prior to the Closing; provided, however, that
the Company shall not prepay, redeem or repurchase any Indebtedness or
other obligations that are not due and payable prior to the Closing other
than pursuant to its existing revolving credit facility in the ordinary
course of business;
7.1.3 The Company shall use commercially reasonable efforts to
preserve the business organization of the Company intact, and to preserve
the goodwill of suppliers, customers, employees and others with whom
business relationships exist;
7.1.4 The Company shall not borrow any money, incur any Indebtedness
or guarantee any Indebtedness or obligation of any Person, other than
accounts payable arising in the ordinary course of business, consistent
with past practice, and other than pursuant to its existing revolving
credit facility in the ordinary course of business;
7.1.5 The Company shall not issue, sell or dispose of any capital
stock or other equity interest in the Company or options, warrants or other
rights to purchase any such capital stock or equity interest or any
securities convertible into or exchangeable for such capital stock or
equity interests or otherwise make or effect any change in the issued and
outstanding capitalization of the Company;
7.1.6 The Company shall not cause or permit any amendment, alteration
or modification in the terms of any currently outstanding options, warrants
or other rights to purchase any capital stock or equity interest in the
Company or any securities convertible into or exchangeable for
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such capital stock or equity interest, including without limitation any
reduction in the exercise or conversion price of any such rights or
securities;
7.1.7 Except as set forth on Schedule 7.1.7, the Company shall not
declare or pay any dividend or make any other distribution, or transfer any
assets, to any stockholders of the Company, or redeem, repurchase or
otherwise reacquire any of its capital stock, except in the ordinary course
of business;
7.1.8 The Company shall not enter into any contracts or agreements
(written or oral) that provide for aggregate payments by any party in
excess of $500,000 per contract and that are not terminable upon 90 days
(or less) notice by the Company without penalty or obligation to make
payments related to such termination and, to the extent the Company is a
party to any such contract or agreement as of the date hereof, the Company
shall not amend or waive any rights under any such contract (other than
contracts of the type referred to in clauses (ii) and (iii) of the proviso
set forth in Section 5.11.1);
7.1.9 The Company shall not purchase all or any substantial part of
the properties or assets of, or otherwise acquire any Person (or division
thereof);
7.1.10 The Company shall not sell, lease, transfer, assign or
otherwise dispose of any properties or assets, except for (i) sales of
inventory in the ordinary course of business consistent with past practice,
and (ii) sales in connection with any transaction to which the Company is
contractually obligated prior to the date hereof described on Schedule
7.1.10;
7.1.11 Except as set forth on Schedule 7.1.11, the Company shall not
sell, lease, transfer, assign or otherwise dispose of any Owned Real Estate
or Leased Real Estate, and the Company shall not permit any lease or
sublease of Leased Real Estate to terminate or expire, in each case except
as otherwise provided in this Agreement;
7.1.12 Except as set forth on Schedule 7.1.12, the Company shall not
purchase, lease or otherwise acquire any material properties or assets
except for (i) purchases of inventory in the ordinary course of business,
and (ii) purchases other than in the ordinary course of business not
exceeding $100,000 individually and $500,000 in the aggregate;
7.1.13 Except as may be required by law or under any existing
agreements, the Company shall not increase the compensation or fringe
benefits payable or to become payable by the Company to any of the officers
or salaried employees of the Company, other than routine or customary
increases made in the ordinary course of business and consistent with past
practice;
7.1.14 Except as set forth on Schedule 7.1.14, the Company shall not
close, shut down or otherwise eliminate any of its stores or make any other
material change in the character of its business, properties or assets
other than in the ordinary course of business consistent with past
practice;
7.1.15 The Company shall maintain in all material respects its
existing advertising programs and policies without material modification
except for any changes made in the ordinary course of business;
7.1.16 The Company shall not intentionally materially reduce the
personnel headcount of the Company and shall use commercially reasonable
efforts (but not requiring the expenditure of funds) to keep available the
services of the present employees of the Company;
7.1.17 Except as required by GAAP, the Company shall not change its
material accounting principles, methods or practices, including any
material change in its policies with respect to reserves (whether for bad
debts, contingent liabilities or otherwise), any change in depreciation or
amortization policies or rates or any change in the policies pertaining to
the recognition of accounts receivable or the discharge of accounts payable
or accounting for inventories;
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7.1.18 Other than in the ordinary course, the Company shall not make
any representation or proposal to, or engage in substantive discussions
with, any of the holders (or their representatives) of any Indebtedness, or
to or with any party which has issued a letter of credit which benefits the
Company, without prior consultation with and approval of Acquisition (which
shall not be unreasonably withheld);
7.1.19 The Company shall (i) use commercially reasonable efforts to
maintain its existing Permits and Approvals in all material respects, and
(ii) not violate any Law;
7.1.20 The Company shall use commercially reasonable efforts to
maintain in full force and effect all policies of insurance now in effect
and give all notices and present all claims under all such policies in a
timely fashion; and
7.1.21 The Company shall not enter into any agreement or take or
commit to take any action which would, if taken on or before the Closing,
result in a breach of any of the foregoing covenants contained in this
Section 7.1 or of any representation or warranty of the Company contained
in this Agreement.
7.2 Access. Except to the extent that the Company determines in good faith
that so doing would constitute a breach of contract or a violation of law, the
Company shall permit Acquisition, BSQ Acquisition and their Representatives to
have reasonable access during normal business hours, upon reasonable notice and
in such manner as will not unreasonably interfere with the conduct of the
Company's business, to all of the directors, officers, employees, agents and
Representatives of the Company and all properties, books, records, operating
instructions, procedures and Tax Returns of the Company and all other
information with respect to the Company, its business and operations and its
assets and properties as Acquisition, BSQ Acquisition or their Representatives
may from time to time reasonably request, and to make copies of such books,
records and other documents.
7.3 Permits and Approvals. The Company, Acquisition and BSQ Acquisition
shall use commercially reasonable efforts to obtain all Permits and Approvals
reasonably necessary for the consummation of the transactions contemplated
hereby and to permit the Company, following the Closing, to continue to conduct
its business in substantially the manner it is being conducted as of the date
hereof (taking into account the transactions contemplated by the BSQ Acquisition
Agreement).
7.4 Litigation. Until the Closing, each of the Company, Acquisition and BSQ
Acquisition shall promptly notify the other of any action, suit, proceeding,
claim or investigation which is threatened or commenced that materially relates
to or materially affects the Company, its business, its properties or assets,
this Agreement or the transactions contemplated hereby.
7.5 Acquisition Proposals. The Company agrees that neither it nor any of
its officers and directors shall, and the Company shall direct and use its best
efforts to cause its employees and Representatives (including, without
limitation, any investment banker, attorney or accountant retained by it) not
to, initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal or offer (including, without limitation, any proposal or
offer to stockholders of the Company) with respect to a merger, consolidation or
similar transaction, other than pursuant to this Agreement, involving, or any
purchase of all or any significant portion of the properties and assets or any
equity securities of, the Company (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any Person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal.
The Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing and shall make all reasonable efforts to
enforce any confidentiality agreements to which it is a party. The Company will
take the necessary steps to inform the appropriate individuals or entities
referred to in the first sentence hereof of the obligations undertaken in this
Section 7.5. The Company will notify
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Acquisition and BSQ Acquisition immediately if any such inquiries or proposals
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with the
Company. Notwithstanding the foregoing, in the event the Company receives an
Acquisition Proposal which was not solicited by it and which did not result from
a breach of this Section 7.5 (an "Unsolicited Proposal"), the Company may in
response provide confidential information or data (subject to the execution of a
customary confidentiality agreement) to, or engage in discussions or
negotiations with, a Person duly authorized by a proposed acquiror in connection
with the transaction(s) contemplated by the Unsolicited Proposal but only if (i)
the Unsolicited Proposal includes sufficient information from which the Company
Board can reasonably conclude that (A) all shareholders of Class A Common Stock
and Class B Common Stock will receive Superior Consideration (as defined below),
(B) the proposed acquiror has the financial and other resources and has the
legal ability (including, without limitation, under antitrust laws) to complete
such transaction(s) on a timely basis, and (C) such transaction(s) will not be
subject to a financing contingency and will otherwise be subject to no more
contingencies than those contained in this Agreement, and (ii) the Company
receives a written opinion of counsel that the Company Board is legally
required, in the discharge of its fiduciary duties, to provide such information
or data or engage in such discussions or negotiations concerning the
transactions contemplated by the Unsolicited Proposal. For purposes of this
Agreement, "Superior Consideration" means consideration consisting of cash
and/or securities for all the shares of Class A Common Stock and Class B Common
Stock then outstanding or for all or substantially all the assets of the Company
in any case having a dollar value in excess of the aggregate Merger
Consideration and which the Company Board determines in its good faith judgment
(having received the advice of a financial advisor of nationally recognized
reputation) to be more favorable to the Company's stockholders than the Merger
Consideration and for which financing, to the extent required, is then
committed.
7.6 H-S-R Notification.
7.6.1 Filings. As soon as practicable (but no later than five (5)
Business Days) after the execution of this Agreement, each of the Company,
Acquisition and BSQ Acquisition shall file, or cause to be filed, with the
Federal Trade Commission and the Antitrust Division of the United States
Department of Justice pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "H-S-R Act"), the notification
and documentary material required in connection with the transactions
contemplated hereby.
7.6.2 Cooperation. Acquisition, BSQ Acquisition and the Company shall
promptly file any additional information requested as soon as practicable
after receipt of a request for additional information. Acquisition, BSQ
Acquisition and the Company shall use their commercially reasonable efforts
to obtain early termination of the applicable waiting period under the
H-S-R Act. The parties hereto will coordinate and cooperate with one
another in exchanging such information and providing such reasonable
assistance as may be requested in connection with such filings.
7.6.3 Other Actions. The Company agrees that, in order to comply with
the H-S-R Act in connection with the transactions contemplated hereby,
Acquisition and BSQ Acquisition shall be entitled, in its sole discretion,
to acquiesce to any divestitures, operating restrictions or other
constraints imposed or required by any Governmental Entity, provided that
such divestitures, operating restrictions or other constraints shall not
have any material effect on the terms of the Merger.
7.7 Financial Statement Deliveries. As soon as is reasonably practicable
and in no event later than twenty-five (25) days from the last day of each
fiscal month between the date of this Agreement and the Closing Date, the
Company shall prepare and provide to Acquisition monthly historical financial
statements (the "Monthly Financial Statements") for the Company, utilizing the
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same methodology currently used in preparing the financial statements included
in the Fiscal 1996 Form 10-K.
7.8 Covenant to Satisfy Conditions. Each of the Company, Acquisition and
BSQ Acquisition will use reasonable best efforts to ensure that the conditions
set forth in Article 8 hereof are satisfied, insofar as such matters are within
the control of such party. Each such party shall promptly consult with the other
with respect to, and provide to the other any legally permitted information and
copies of all filings made by such party with any Governmental Entity or any
other information supplied by such party to a Governmental Entity (other than
confidential personnel information) in connection with this Agreement and the
transactions contemplated hereby. Acquisition, BSQ Acquisition and the Company
further covenant and agree, with respect to any pending or threatened Action,
preliminary or permanent injunction or other Order, decree or ruling or statute,
rule, regulation or executive order that would adversely affect the ability of
the parties hereto to consummate the transactions contemplated hereby, to use
reasonable best efforts to prevent or lift the entry, enactment or promulgation
thereof, as the case may be. Upon the request of Acquisition or BSQ Acquisition,
the Company agrees that it shall use reasonable best efforts to secure waivers
and/or consents from such third parties as may be necessary or desirable in
Acquisition's or BSQ Acquisition's reasonable judgment in order to consummate
the transactions contemplated hereby.
7.9 Proxy Statement. As soon as reasonably practicable after the date
hereof, the Company shall prepare a proxy statement in respect of the Special
Meeting of its stockholders to vote upon the Merger, file such proxy statement
with the SEC, respond to comments of the staff of the SEC, if any, file the
definitive proxy statement as soon as practicable and promptly thereafter mail
such proxy statement to all holders of record (as of the applicable record date)
of shares of Class A Common Stock and Class B Common Stock. The Company, BSQ
Acquisition and Acquisition shall cooperate reasonably with each other in the
preparation of the proxy statement. The Company agrees that Acquisition shall be
given reasonable opportunity to review and comment on the proxy statement and to
approve the proxy statement prior to its filing (which approval will not be
unreasonably withheld) and thereafter to participate in discussions concerning
the comments of the SEC staff and to approve all responses thereto (which
approval will not be unreasonably withheld).
7.10 Shareholders' Meeting. The Company shall take all action necessary, in
accordance with applicable law and its certificate of incorporation and by-laws,
to convene a Special Meeting of the holders of the Class A Common Stock and
Class B Common Stock (the "Special Meeting") as promptly as practicable, but in
no event more than 45 days after a definitive proxy statement has been filed
with the SEC, for the purpose of approving the Merger. The Company's board of
directors shall recommend at such Special Meeting that the Merger be approved by
its stockholders. Notwithstanding the foregoing, if, as a result of actions
taken in compliance with Section 7.5 hereof, the Company receives a formal
Unsolicited Proposal concerning a transaction in which all the holders of Class
A Common Stock and Class B Common Stock will receive Superior Consideration, the
Company Board may withdraw or modify such recommendation prior to the Special
Meeting; provided, however, that the Company shall have received the written
opinion of counsel that the Company Board is legally required to do so in the
discharge of its fiduciary duties; and provided further, that the Company shall
give BSQ Acquisition five (5) Business Days' prior notice of such withdrawal or
modification, specifying the material terms of such Unsolicited Proposal.
7.11 Environmental Matters. The Company has delivered to Acquisition all
material existing environmental reports that are in the Company's possession and
that have been prepared within the last ten (10) years with respect to any of
the Owned Real Estate or the Leased Real Estate. The Company agrees that,
following the date hereof, it shall permit Acquisition to continue to conduct,
at Acquisition's expense, such additional environmental investigations of such
properties as it may reasonably request; provided, however, that Acquisition
shall not be permitted to conduct any Phase II environmental site assessments or
audits (including any sampling of any media or material) without the Company's
prior consent, which consent shall not be unreasonably withheld, and subject to
the conditions that (i) Acquisition shall disclose to the Company the results of
any
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environmental investigation which led to Acquisition's decision to request such
additional assessment or sampling, (ii) the Company shall have the right to
conduct, at the Company's sole discretion and at the Company's expense, split
sampling in conjunction with any additional sampling Acquisition may request,
and (iii) Acquisition and the Company shall provide each other with the results
of any such additional sampling conducted by such party.
7.12 Financing. BSQ Acquisition agrees to use its commercially reasonable
efforts to obtain, on terms satisfactory to BSQ Acquisition in its sole
discretion, all of the financing necessary in connection with the consummation
of the transactions contemplated by this Agreement and the BSQ Acquisition
Agreement. BSQ Acquisition agrees to notify the Company promptly in the event
the Commitment Letter described in Section 6.6 is withdrawn.
7.13 Options. The Company shall use its reasonable best efforts to obtain,
prior to the Closing, agreements and consents (the "Consents") of the holders of
all Options then outstanding providing for the consent of each such holder to
the termination, without payment other than as provided in Section 4.4 hereof,
of all Options held by such holder and the agreement of such holder not to
exercise any such Options.
7.14 Disclosure Prior to Closing. In the event that, at any time prior to
the Closing, the Company, Acquisition or BSQ Acquisition becomes aware of any
matter which, if existing or known as of the date of this Agreement, would have
been required to be set forth or described in the Schedules hereto or would
otherwise have rendered any representation or warranty false, such party shall
promptly provide written notice of such matters to the other party. However, no
such notice provided under this Section 7.14 shall be deemed to cure any breach
of any representation or warranty made in this Agreement whether for purposes of
determining whether or not the conditions set forth in Article 5 hereof have
been satisfied or otherwise. In addition, the Company shall promptly provide
written notice of any events occurring after the date hereof which individually
or in the aggregate has had or are reasonably expected to have a Material
Adverse Effect on the Company.
7.15 Employee Benefits. Effective from and after the Effective Time, the
Surviving Corporation and its Subsidiaries will provide to the persons listed on
Schedule 7.15 the severance and other benefits set forth in Schedule 7.15. Such
schedule will provide for the amount and timing of all such payments.
7.16 Directors' and Officers' Insurance And Indemnification. The Surviving
Corporation will indemnify each person who is now, or has been at any time prior
to the date hereof, a director or officer of the Company or its successors and
assigns (individually an "Indemnified Party" and collectively the "Indemnified
Parties"), to the fullest extent required or permitted under the Certificate or
by-laws of the Company, or any agreement with the Company in each case as in
effect immediately prior to the execution of this Agreement, with respect to any
claim, liability, loss, damage, judgment, fine, penalty, amount paid in
settlement or compromise, cost or expense, including reasonable fees and
expenses of legal counsel (whenever asserted or claimed) ("Indemnified
Liability"), based in whole or in part on, or arising in whole or in part out
of, any matter, state of affairs or occurrence existing or occurring at or prior
to the Effective Time whether commenced, asserted or claimed before or after the
Effective Time, including, without limitation, liability arising under the
Securities Act, the Exchange Act, or state law. The Surviving Corporation will
maintain in effect for not less than six years after the Effective Time the
current policies of directors' and officers' liability insurance maintained by
the Company on the date hereof (provided that BSQ Acquisition may substitute
therefor policies having at least the same coverage, a comparably rated issuer
and containing terms and conditions which are no less advantageous to the
persons currently covered by such policies as insured) with respect to matters
existing or occurring at or prior to the Effective Time; provided, however, that
if the aggregate annual premiums for such insurance during such period exceed
200% of the per annum rate of the aggregate premium currently paid by the
Company for such insurance on the date of this Agreement, then the Surviving
Corporation will
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provide the maximum coverage that will then be available at an annual premium
equal to 200% of such rate. The rights under this Section 7.16 are in addition
to rights that an Indemnified Party may have under the Certificate, by-laws,
other similar organizational documents of the Company or the DGCL. The rights
under this Section 7.16 are contingent upon the occurrence of, and will survive
consummation of, the Merger and are expressly intended to benefit each
Indemnified Party.
7.17 Antitakeover Statutes. If any Takeover Statute (as defined below) is
or may become applicable to the transactions contemplated hereby or by the
Stockholder Agreement, the Company Board will grant such approvals and take such
actions as are necessary so that the transactions contemplated hereby and
thereby may be consummated as promptly as practicable on the terms contemplated
hereby and thereby and otherwise act to eliminate the effects of any Takeover
Statute on any of the transactions contemplated hereby or thereby. For purposes
of this Agreement, a "Takeover Statute" means a "fair price", "moratorium",
"control share acquisition" or other similar antitakeover statute or regulation
enacted under state or federal laws in the United States, including without
limitation Section 203 of the DGCL.
ARTICLE 8
CONDITIONS OF PURCHASE
8.1 General Conditions. The obligations of the parties to effect the
Closing shall be subject to the following conditions unless waived in writing by
both parties:
8.1.1 No Law or Orders. No Law or Order shall have been enacted,
entered, issued or promulgated by any Governmental Entity (and be in
effect) which prohibits or materially restricts the consummation of the
transactions contemplated hereby.
8.1.2 H-S-R. Any applicable waiting period under the H-S-R Act shall
have expired or have been terminated with respect to the transactions
contemplated hereby.
8.1.3 Legal Proceedings. No Governmental Entity shall have notified
either party to this Agreement that it intends to commence proceedings to
restrain or prohibit the transactions contemplated hereby or force
rescission, unless such Governmental Entity shall have withdrawn such
notice and abandoned any such proceedings prior to the time which otherwise
would have been the Closing Date.
8.1.4 Stockholder Approval. The Merger and the other transactions
contemplated hereby shall have been approved by the requisite vote of the
stockholders of the Class A Common Stock and Class B Common Stock.
8.2 Conditions Precedent to the Obligations of the Company. The
obligations of the Company to close the transactions contemplated by this
Agreement shall be subject to the satisfaction on or prior to the Closing Date
of each of the following conditions precedent, any of which may be waived by the
Company:
8.2.1 Accuracy of Acquisition's and BSQ Acquisition's Representations
and Performance of Obligations.
(a) All representations and warranties made by Acquisition or BSQ
Acquisition in this Agreement, any Schedule or any agreement,
certificate or instrument to be executed by Acquisition or BSQ
Acquisition pursuant hereto shall be true and correct in all respects on
the date when made and on and as of the Closing Date (unless the
representations and warranties address matters as of a particular date,
in which case they shall remain true and correct in all respects as of
such date) with the same effect as if made on and as of the Closing Date
(without regard to any amendment or supplement of any such Schedule,
agreement or instrument after the date hereof), except where such
failures, in each case or in the aggregate, have not had and are not
reasonably expected to have a Material Adverse
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Effect, provided that, whenever any such representation or warranty is
conditioned by reference to materiality or a Material Adverse Effect,
for the purposes of this Section 8.2.1(a), such representation or
warranty shall be treated as if such representation or warranty did not
contain any limitation as to materiality or Material Adverse Effect as
stated therein.
(b) Acquisition and BSQ Acquisition shall have performed or
complied in all material respects with all covenants and conditions
contained in this Agreement, any Schedule or any agreement, certificate
or instrument to be executed by Acquisition or BSQ Acquisition pursuant
hereto required to be performed or complied with by Acquisition or BSQ
Acquisition either at or prior to the Closing.
(c) At the Closing, BSQ Acquisition shall deliver to the Company a
certificate of the president or any vice president and secretary or any
assistant secretary of Acquisition certifying to the matters set forth
in (a) and (b) above.
8.2.2 Acquisition Deliveries. BSQ Acquisition shall have delivered,
or shall have caused to be delivered, to the Company at or prior to the
Closing the following:
(a) a certified copy of the resolutions duly adopted by the Board
of Directors of Acquisition and BSQ Acquisition authorizing this
Agreement and the transactions contemplated hereby and thereby; and
(b) such other documents, instruments or certificates as shall be
reasonably requested by the Company or its counsel.
8.3 Conditions Precedent to Obligations of Acquisition and BSQ
Acquisition. The obligations of Acquisition and BSQ Acquisition to close the
transactions contemplated by this Agreement shall be subject to the satisfaction
on or prior to the Closing Date of each of the following conditions precedent,
any of which may be waived by Acquisition:
8.3.1 Accuracy of the Company's Representations and Performance of
Obligations.
(a) All representations and warranties made by the Company in this
Agreement, any Schedule or any agreement, certificate or instrument to
be executed by the Company pursuant hereto shall be true and correct in
all respects on the date when made and on and as of the Closing Date
(unless the representations and warranties address matters as of a
particular date, in which case they shall remain true and correct in all
respects as of such date) with the same effect as if made on and as of
the Closing Date (without regard to any amendment or supplement of any
such Schedule, agreement or instrument after the date hereof), except
where such failures, in each case or in the aggregate, have not had and
are not reasonably expected to have a Material Adverse Effect, provided
that, whenever any such representation or warranty is conditioned by
reference to materiality or a Material Adverse Effect, for the purposes
of this Section 8.3.1(a), such representation or warranty shall be
treated as if such representation or warranty did not contain any
limitation as to materiality or Material Adverse Effect as stated
therein.
(b) Except for any action requested or required to be taken by the
Company pursuant to Section 7.6.3 hereof, the Company shall have
performed or complied in all material respects with all covenants and
conditions contained in this Agreement, any Schedule or any agreement,
certificate or instrument to be executed by the Company pursuant hereto
required to be performed or complied with by the Company either at or
prior to the Closing.
(c) At the Closing, the Company shall deliver to BSQ Acquisition a
certificate of the president or any vice president and secretary or any
assistant secretary of the Company certifying to the matters set forth
in (a) and (b) above.
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(d) At the Closing, John W. Hechinger, Jr., Kenneth J. Cort and W.
Clark McClelland shall have delivered agreements containing the
covenants set forth in Exhibit B hereto.
8.3.2 Permits and Approvals. The Company shall have made or obtained,
on terms reasonably satisfactory to BSQ Acquisition, all Permits and
Approvals required from any Governmental Entity or any third party in order
to consummate the transactions contemplated hereby and permit the Surviving
Corporation to continue the Company's business in substantially the manner
as it is being conducted as of the date hereof (after giving effect to the
transactions contemplated by the BSQ Acquisition Agreement), except where
the failure to obtain such Permits or Approvals, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse
Effect.
8.3.3 Company Adverse Changes. There shall not have occurred after
the date hereof any events which individually or in the aggregate have had
or are reasonably expected to have a Material Adverse Effect on the
Company.
8.3.4 Deliveries. The Company shall have delivered, or shall have
caused to be delivered, to BSQ Acquisition at or prior to the Closing the
following:
(a) to the extent requested by BSQ Acquisition, resignations of the
directors and officers of the Company and each of the Company's
Subsidiaries effective as of the Closing;
(b) certified copies of the resolutions duly adopted by the Company
Board and by the holders of the Class A Common Stock and Class B Common
Stock, authorizing this Agreement and the transactions contemplated
hereby;
(c) the corporate seal, minute books and stock transfer books of
the Company; and
(d) such other documents, instruments or certificates as shall be
reasonably requested by BSQ Acquisition or its counsel.
8.3.5 Financing. BSQ Acquisition shall have made or obtained, on
terms satisfactory to BSQ Acquisition in its sole discretion, all financing
necessary in connection with the consummation of the transactions
contemplated by this Agreement and the BSQ Acquisition Agreement and which
are necessary to continue after the Closing the businesses of BSQ
Acquisition and the Surviving Corporation in substantially the manner they
are currently being conducted or are planned to be conducted.
8.3.6 Related Transaction. The transactions contemplated by the BSQ
Acquisition Agreement and its related agreements shall have been
consummated or shall be consummated substantially concurrently with the
transactions contemplated hereby.
ARTICLE 9
TERMINATION
9.1 Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time on or prior to the Closing Date:
9.1.1 Mutual Consent. By mutual written consent of the parties
hereto;
9.1.2 By Acquisition or BSQ Acquisition. By Acquisition or BSQ
Acquisition, if any of the conditions set forth in Section 8.1 or 8.3 shall
have become incapable of fulfillment, or if the Company Board withdraws or
modifies its recommendation of the Merger, whether or not in compliance
with Section 7.10 hereof;
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9.1.3 By the Company. By the Company, if any of the conditions set
forth in Section 8.1 or 8.2 shall have become incapable of fulfillment;
9.1.4 Failure of Conditions. By Acquisition, BSQ Acquisition or the
Company, if the transactions contemplated hereby are not consummated on or
before the date which is the business day after the fiscal month end
closest to October 31, 1997 or such later date as may be reasonably
necessary in order to consummate such transactions as promptly as
practicable upon obtaining Approvals of Governmental Entities (but in any
event not later than December 31, 1997), and if the failure to consummate
such transactions on or before such date did not result from the breach of
any representation, warranty or agreement herein of the party seeking such
termination;
9.1.5 Breach of Covenant. By Acquisition, BSQ Acquisition or the
Company, if the other party shall be in material breach of any of its
covenants contained in this Agreement and such breach either is incapable
of cure or is not cured within 15 days after notice from the party wishing
to terminate; provided that the party seeking such termination shall not
also then be in material breach of this Agreement; provided further that
any breach of the provisions of Section 7.5 hereof shall entitle
Acquisition and BSQ Acquisition to an immediate right of termination
without any notice or cure requirement.
9.1.6 Breach of Representations and Warranties. By Acquisition, BSQ
Acquisition or the Company, if the other party shall be in breach of any of
its representations or warranties contained in this Agreement, which
breach, individually or together with all other breaches, is reasonably
expected to have a Material Adverse Effect, and such breach either is
incapable of cure or is not cured within 15 days after notice from the
party wishing to terminate, provided that the party seeking such
termination shall not also then be in material breach of this Agreement.
9.2 Manner and Effect of Termination. Termination shall be effected by the
giving of written notice to that effect by the party seeking termination. If
this Agreement is validly terminated and the transactions contemplated hereby
are not consummated, this Agreement shall become null and void and of no further
force and effect and no party shall be obligated to the others hereunder;
provided, however, that termination shall not affect (i) the rights and remedies
available to a party as a result of the breach by the other party hereunder
(provided that, subject to clause (iv) below, the provisions of Section 9.3
shall constitute the exclusive legal remedy of Acquisition and BSQ Acquisition
with respect to breach by the Company described therein), (ii) the provisions of
Sections 5.25 and 6.4 hereof, (iii) the obligations of the Company pursuant to
Section 9.3 below or (iv) the rights available to the parties under Section 11.9
hereof.
9.3 Certain Payments Upon Termination. In the event that either party
terminates this Agreement under Section 9.1.2, 9.1.3 or 9.1.4 due to the failure
of the condition specified in Section 8.1.4 to be satisfied or to the withdrawal
or modification of the Company Board's recommendation of the Merger (and at such
time the Company does not have the right to terminate this Agreement under
Section 9.1.5 or 9.1.6 hereof), or Acquisition or BSQ Acquisition terminates
this Agreement under Section 9.1.5 or 9.1.6 as a result of an intentional breach
of this Agreement by the Company, the Company shall pay to BSQ Acquisition a
termination fee in the amount of $5,000,000 (the "Termination Fee") plus all
Expenses (as defined below). In the event that Acquisition or BSQ Acquisition
terminates this Agreement under Section 9.1.5 or 9.1.6 as a result of an
unintentional breach of this Agreement by the Company, the Company shall pay to
BSQ Acquisition all Expenses. For purposes of this Section 9.3, "Expenses" shall
mean all fees and expenses (including those of counsel, accountants and other
advisors and in connection with financing commitments) incurred by any of
Acquisition, BSQ Acquisition and their respective affiliates (without any
deduction on account of or other allocation of such expenses to the transactions
contemplated by the proposed transactions involving BSQ) in connection with the
transactions contemplated by this Agreement or with respect to the proposed
transactions involving BSQ, up to an aggregate maximum of $6,000,000 (the
"Expenses"). All payments required to be made hereunder shall be made by wire
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<PAGE> 130
transfer of immediately available funds within two (2) Business Days of the
event giving rise to the payment of such expenses. The Company acknowledges that
the agreements contained in this Section 9.3 are an integral part of the
transactions contemplated by this Agreement and that, without said agreements,
Acquisition and BSQ Acquisition would not enter into this Agreement;
accordingly, if the Company fails promptly to pay the Termination Fee and
Expenses due pursuant to this Section 9.3, and, in order to obtain such payment,
BSQ Acquisition commences a suit which results in a judgment against the Company
for the fees and expenses set forth herein, the Company will pay to BSQ
Acquisition BSQ Acquisition's reasonable expenses (including attorneys' fees and
expenses) in connection with such suit, together with interest on the amounts
due hereunder at the legal rate determined by the court rendering such judgment.
ARTICLE 10
OTHER AGREEMENTS
10.1 Confidentiality. The Company agrees that from the date hereof until
the Closing Date or earlier termination of this Agreement it will not, and will
use reasonable best efforts to ensure that none of its directors, officers,
Representatives, agents or employees will, without the prior written consent of
Acquisition, submit or disclose to or file with any other Person, or use, any
confidential or non-public information relating to the Company, Acquisition, BSQ
Acquisition, Kmart or BSQ, except for such disclosure as may be required by Law
or applicable accounting regulations. Each of Acquisition and BSQ Acquisition
agrees that from the date hereof until the Closing Date or earlier termination
of this Agreement it will not, and will use reasonable best efforts to ensure
that none of its directors, officers, Representatives, agents or employees will,
without the prior written consent of the Company, submit or disclose to or file
with any other Person, or use, any confidential or non-public information
relating to the Company, except for such disclosure as may be required by Law or
applicable accounting regulations.
ARTICLE 11
MISCELLANEOUS
11.1 Expenses. Except as otherwise specifically provided for herein, each
of the Company, on the one hand, and Acquisition and BSQ Acquisition, on the
other, shall pay all of its costs and expenses (including attorneys',
accountants' and investment bankers' fees) incurred in connection with this
Agreement and the transactions contemplated hereby.
11. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given upon receipt if delivered personally or sent by facsimile
transmission (receipt of which is confirmed) or by courier service promising
overnight delivery (with delivery confirmed the next day) or three (3) Business
Days after sent by registered or certified mail (postage prepaid, return receipt
requested). Notices shall be addressed as follows:
<TABLE>
<S> <C>
To the Company:.............................. Hechinger Company
1801 McCormick Drive
Largo, Maryland 20774
Attention: John W. Hechinger, Jr.
Facsimile: (301) 925-3115
With a copy to:.............................. Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Barbara L. Becker, Esq.
Facsimile: (212) 541-5369
</TABLE>
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<PAGE> 131
<TABLE>
<S> <C>
To Acquisition
or BSQ Acquisition:.......................... Hechinger Acquisition, Inc.
or BSQ Acquisition, Inc.
c/o Leonard Green & Partners, L.P.
11111 Santa Monica Boulevard
Suite 2000
Los Angeles, California 90025
Attention: Jonathan D. Sokoloff
Facsimile: (310) 954-0404
With a copy to:.............................. Irell & Manella LLP
333 South Hope Street, 33rd Floor
Los Angeles, California 90071
Attention: Edmund M. Kaufman, Esq.
Facsimile: (213) 229-0515
</TABLE>
Either party may from time to time change its address for the purpose of notices
by a similar notice specifying the new address but no such change shall be
effective as against any Person until such Person shall have actually received
it.
11.3 Entire Agreement. This Agreement contains the final and entire
agreement between the parties with respect to the transactions contemplated
hereby and supersedes all written or verbal representations, warranties,
commitments and other understandings prior to the date hereof. No reference
shall be made to any draft of this Agreement for purposes of interpretation or
resolution of ambiguity or otherwise. All Exhibits annexed hereto, and all
Schedules referred to herein, are hereby incorporated in and made a part of this
Agreement as if set forth in full herein.
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
11.5 Severability. If any provision hereof shall be held to be
unenforceable or invalid by any court of competent jurisdiction or as a result
of future legislative action, such holding or action shall be strictly construed
and shall not alter the enforceability, validity or effect of any other
provision hereof.
11.6 Assignability. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the parties hereto and their respective
successors and permitted assigns; provided, however, that neither this Agreement
nor any right or obligation hereunder may be assigned by either party without
the prior written consent of the other to be given in the other party's sole
discretion.
11.7 Captions. The descriptive headings herein are inserted for
convenience only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
11.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
11.9 Specific Performance. The parties hereto agree that if any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof (without requirement to post bond), in addition to any and all other
remedies at law or in equity.
11.10 Amendment and Waiver. This Agreement may be amended, modified or
supplemented only by an instrument in writing signed by all parties hereto. No
waiver by any party of any of the provisions hereof shall be effective unless
set forth in writing and executed by the party so waiving.
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<PAGE> 132
Any waiver or failure to insist upon strict compliance with any obligation,
covenant, agreement, provision, term or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure to comply.
11.11 Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use all commercially reasonable
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things necessary, proper or advisable, whether under applicable laws
and regulations or otherwise, to remove any injunctions or other impediments or
delays, legal or otherwise, in order to consummate and make effective the
transactions contemplated by this Agreement.
11.12 Publicity. Except as hereinafter provided, the Company, Acquisition
and BSQ Acquisition shall not, and each of them shall use commercially
reasonable efforts to cause their respective directors, officers, employees,
Representatives and agents not to, discuss publicly or make any public statement
with respect to this Agreement or the transactions contemplated hereby without
the other party's approval. Before making any such public announcements, the
parties hereto shall use good faith efforts to agree upon the text of a joint
announcement to be made by the parties hereto or use good faith efforts to
obtain the other party's approval of the text of any public announcement to be
made solely on behalf of such party. If the parties hereto are unable to agree
on or approve such a public statement or announcement and legal counsel for a
party is of the opinion that such statement or announcement is required by law
or the rules of any stock exchange on which the parties' securities are traded,
then such party may make or issue the legally required statement or
announcement.
11.13 Force Majeure. Anything to the contrary in this Agreement
notwithstanding, no party hereto shall be liable to the other parties hereto for
any loss, injury, delay, damages or other casualty suffered or incurred by such
other party hereto due to strikes, riots, storms, fires, explosions, acts of
God, war, governmental action, or any other cause similar thereto which is
beyond the reasonable control of such parties, and any failure or delay by any
party hereto in performance of any of its obligations under this Agreement due
to one or more of the foregoing causes shall not be considered as a breach of
this Agreement. In the event that performance of any of the material obligations
under this Agreement shall be suspended due to one or more of the foregoing
causes and such suspension shall have a material adverse impact on consummation
of the transactions as contemplated in this Agreement or on the operations or
financial conditions or prospects of the Company, then the aggrieved party which
shall be materially and adversely affected thereby may terminate this Agreement.
11.14 Attorney's Fees. In any suit or proceeding arising out of this
Agreement or to interpret or enforce any provision of this Agreement, the
prevailing party shall be entitled to all reasonable out-of-pocket expenses and
reasonable attorneys' fees incurred by such party in connection with such suit
or proceeding.
11.15 Confidentiality. Acquisition, BSQ Acquisition and the Company agree
and acknowledge that, until the Closing, they will continue to be bound by the
Confidentiality Agreement dated April 15, 1997 between Leonard Green & Partners,
L.P. and the Company.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 133
11.16 Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for the agreements contained in Article 4, and Sections
6.4, 7.15 and 7.16 hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first written above.
HECHINGER COMPANY,
a Delaware corporation
By: /s/ JOHN W. HECHINGER, JR.
------------------------------------
Name: John W. Hechinger, Jr.
Title: Chairman and CEO
HECHINGER ACQUISITION, INC.,
a Delaware corporation
By: /s/ GREGORY J. ANNICK
------------------------------------
Name: Gregory J. Annick
Title: Vice President, Secretary
and Treasurer
BSQ ACQUISITION, INC.,
a Delaware corporation
By: /s/ JONATHAN D. SOKOLOFF
------------------------------------
Name: Jonathan D. Sokoloff
Title: Chairman
A-33
<PAGE> 134
EXHIBITS
<TABLE>
<S> <C>
Exhibit A................... Stockholders Agreement
Exhibit B................... Non-Competition Covenant
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 1.2.59............. Permitted Encumbrances
Schedule 1.2.74............. Stockholders to Enter Into Stockholders Agreement
Schedule 5.1................ Jurisdictions
Schedule 5.3................ Encumbrances on Outstanding Shares of Company Stock; Voting
Trust, Proxy and Similar Agreements; Subsidiaries
Schedule 5.5................ Conflicts (Hechinger)
Schedule 5.6.1 ............. Significant Categories of Governmental Approvals
Schedule 5.6.2 ............. Non-Governmental Approvals
Schedule 5.8.1 ............. Accounts Payable and Inventory
Schedule 5.8.2 ............. Conduct of Business
Schedule 5.9.1 ............. Compliance With Law
Schedule 5.9.2 ............. Environmental Compliance
Schedule 5.10............... Permits
Schedule 5.11.1............. Certain Contracts
Schedule 5.11.3............. Interests of Certain Persons
Schedule 5.12.1............. Owned Real Estate
Schedule 5.12.2............. Leased Real Estate
Schedule 5.12.3............. Real Estate Defaults
Schedule 5.12.4............. Certain Real Estate Disclosures
Schedule 5.13............... Liabilities
Schedule 5.14............... Litigation
Schedule 5.15.1............. Certain Tax Disclosures
Schedule 5.15.2............. Certain Tax Examination Disclosures
Schedule 5.15.3............. Period of Limitations Agreements
Schedule 5.15.4............. Partnerships for Tax Purposes
Schedule 5.15.5............. Tax Elections
Schedule 5.15.6............. Tax Sharing Arrangements
Schedule 5.15.8............. Tax Adjustments
Schedule 5.15.9............. Compensatory Agreements
Schedule 5.16.1............. Plans
Schedule 5.16.2............. Certain Claims
Schedule 5.16.6............. Unsatisfied Liabilities
Schedule 5.16.11............ Benefit Related Representations
Schedule 5.17............... Certain Tangible Personal Property
Schedule 5.17.3............. Deviations from Inventory Valuation Policy
Schedule 5.18............... Intellectual Property
Schedule 5.19............... Employee Handbooks; Employment Contracts
Schedule 5.19.3............. Certain Labor Disclosures
Schedule 5.20............... Suppliers
Schedule 5.21............... Personnel
Schedule 5.22............... Insurance Policies
Schedule 5.25............... Brokers
Schedule 6.2................ Conflicts (Acquisition & BSQ Acquisition)
Schedule 6.3................ Approvals of Governmental Entities
Schedule 6.6................ Certain Agreements
Schedule 7.1................ Conduct of Business
Schedule 7.1.7 ............. Certain Distributions
Schedule 7.1.10............. Certain Sales
Schedule 7.1.11............. Certain Real Estate Transactions
Schedule 7.1.12............. Certain Purchases, Leases or Acquisitions
Schedule 7.1.14............. Closures and Other Termination of Stores
Schedule 7.15............... Persons Eligible for Benefits; Severance and Other Benefits
</TABLE>
A-34
<PAGE> 135
EXHIBIT A
Stockholders Agreement (See Annex C)
A-35
<PAGE> 136
EXHIBIT B
The applicable stockholder shall not:
(a) during the Non-Competition Term (as defined below), without the
prior written consent of Purchaser, directly or indirectly, engage in,
assist (financially or otherwise), or perform services (other than on
behalf of the Company or any of its affiliates) in any Competitive
Business, whether such engagement, assistance or performance is as an
officer, director, proprietor, employee, partner, stockholder or other
investor (other than as a holder of less than 1% of the outstanding capital
stock of a publicly traded corporation), creditor, guarantor, consultant,
advisor, agent, sales representative or other participant; and
(b) during the Non-Competition Term, directly, indirectly or as an
agent on behalf of or in conjunction with any person, firm, partnership,
corporation or other entity, hire, solicit, encourage the resignation of,
or in any other manner seek to engage or employ any Ineligible Person (as
defined below), whether or not for compensation and whether as an officer,
employee, consultant, advisor, independent sales representative,
independent contractor or otherwise.
As used above:
(i) "Competitive Business" means any business, including without
limitation the business of any of the Named Stores (as defined below),
involving the marketing and sale of services, products or service or
product categories, where 50% or more of the revenues of any such business
are derived from services, products or service or product categories which
the Company sells or markets, regardless of the format of such business.
Without limiting the foregoing, any business involving the marketing and
sale of hardware, home improvement and home decor products (and the
offering of related services) through a "home center," hardware store or
"do-it-yourself" format, the Company's "better Spaces" format or any other
format currently utilized or planned to be utilized by the Company, shall
be deemed a "Competitive Business." "Named Stores" means the Home Depot,
Home Base, Menards, Lowe's, Sears Hardware, D-I-Y, Eagle Hardware and
Garden and National Home Centers stores, or any of their successors and
assigns.
(ii) "Ineligible Person" means any person who (x) is at the time an
offer of employment is extended to him or her an employee of the Company or
its affiliated entities or (y) has been such an employee within the twelve
months prior to such time and either resigned or was terminated for cause
as a result of his or her intentional action or inaction.
(iii) "Non-Competition Term" means (x) with respect to John W.
Hechinger, Jr., a period of 24 months from and after the Effective Time,
(y) with respect to W. Clark McClelland, a period of 24 months from and
after the Effective Time in the case of any such engagement with or
assistance or performance to companies operating the Named Stores, and in
all other cases a period of 12 months from and after the Effective Time,
and (z) with respect to Kenneth J. Cort, a period of 24 months from and
after the Effective Time in the case of any such engagement with or
assistance or performance to companies operating the Named Stores, and in
all other cases a period of 18 months from and after the Effective Time.
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<PAGE> 137
ANNEX B
FIRST AMENDMENT, DATED AS OF AUGUST 27, 1997, TO THE AGREEMENT AND PLAN OF
MERGER, DATED AS OF JULY 17, 1997, BETWEEN HECHINGER COMPANY, BSQ ACQUISITION,
INC. AND HECHINGER ACQUISITION, INC.
<PAGE> 138
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
FIRST AMENDMENT, dated as of August 27, 1997 (the "First Amendment"), to
the AGREEMENT AND PLAN OF MERGER, dated as of July 17, 1997 (the "Merger
Agreement"), by and among Hechinger Acquisition, Inc., a Delaware corporation
("Acquisition"), BSQ Acquisition, Inc., a Delaware corporation ("BSQ
Acquisition"), and Hechinger Company, a Delaware corporation ("Hechinger").
RECITALS
A. The Merger Transaction. Acquisition, BSQ Acquisition and Hechinger have
entered into the Merger Agreement, providing for the Merger (as defined in the
Merger Agreement) of Acquisition with and into Hechinger and pursuant to which
Hechinger, following the Merger, will become a wholly owned subsidiary of BSQ
Acquisition.
B. Amendment. Acquisition, BSQ Acquisition and Hechinger desire to amend
certain terms set forth in the Merger Agreement pursuant to Section 11.10 of the
Merger Agreement which permits the amendment thereof by written agreement of the
parties thereto.
NOW, THEREFORE, in consideration of the premises, and of the respective
representations, warranties, covenants and agreement set forth therein, the
parties hereto hereby agree as follows:
1. Definitions. All capitalized terms used but not defined herein
shall have the meanings ascribed to them in the Merger Agreement.
2. Amendment.
2.1 Section 4.1(a). Section 4.1(a) of the Merger Agreement is
hereby amended by deleting the words "equal to $3.00" in the eleventh
line thereof and substituting in their place the words "equal to
$2.375."
2.2 Section 4.2. Section 4.2 of the Merger Agreement shall be
amended by inserting, immediately after the end of the fourth sentence
thereof, the following sentence:
"In the event any holder of Shares or of Options entitled to
payment hereunder holds an odd number of Shares or has options
exercisable into an odd number of Shares such that, in either case,
such holder would otherwise receive a fractional cent, such
fractional cent shall be rounded upwards to the next whole cent;
provided, however, that the parties hereto shall agree upon
appropriate provisions in the letter of transmittal referred to above
to minimize the amount of additional consideration being paid as a
result of this sentence."
2.3 Section 4.4. Section 4.4 of the Merger Agreement is hereby
amended by (i) deleting the words "less than $3.00 per share" in the
fifth line thereof and substituting in their place the words "less than
$2.375 per share"; (ii) deleting the words "$3.00 multiplied by" in the
seventh line thereof and substituting in their place the words "$2.375
multiplied by"; and (iii) deleting the words "greater than $3.00" in the
twelfth line thereof and substituting in their place the words "greater
than $2.375."
2.4 Section 8.3.3. Section 8.3.3 of the Merger Agreement is hereby
amended by deleting the text thereof in its entirety and substituting in
its place "[Reserved.]"
3. Certain Schedules. The items set forth in Schedule 1 attached to
this First Amendment as Exhibit A shall be deemed to have been disclosed in
Schedules 5.11.3 and 7.1 of the Merger Agreement.
4. Counterparts. For the convenience of the parties hereto, this
First Amendment may be executed in any number of separate counterparts,
each such counterpart being deemed to be an original instrument, and all
such counterparts shall together constitute the same agreement.
B-2
<PAGE> 139
5. Merger Agreement. Except as herein expressly amended, the Merger
Agreement is ratified and confirmed in all respects and shall remain in
full force and effect in accordance with its terms. All references to the
Merger Agreement shall mean such Agreement as amended hereby and as may in
the future be amended, restated, supplemented or modified from time to
time.
6. Governing Law. This First Amendment shall be governed by and
construed in accordance with the laws of the State of Delaware.
B-3
<PAGE> 140
SIGNATURE PAGE TO FIRST AMENDMENT DATED AUGUST 27, 1997 BY AND AMONG HECHINGER
ACQUISITION, INC., BSQ ACQUISITION, INC. AND HECHINGER COMPANY
IN WITNESS WHEREOF, this First Amendment has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first hereinabove written.
HECHINGER COMPANY
By: /s/ JOHN W. HECHINGER, JR.
------------------------------------
Name: John W. Hechinger, Jr.
Title: Chairman and CEO
HECHINGER ACQUISITION, INC.
By: /s/ GREGORY J. ANNICK
------------------------------------
Name: Gregory J. Annick
Title: Vice President, Secretary
and Treasurer
BSQ ACQUISITION, INC.
By: /s/ GREGORY J. ANNICK
------------------------------------
Name: Gregory J. Annick
Title: Vice President, Secretary
and Treasurer
B-4
<PAGE> 141
ANNEX C
STOCKHOLDERS AGREEMENT, DATED AS OF JULY 16, 1997, BETWEEN BSQ ACQUISITION,
INC., HECHINGER ACQUISITION INC. AND CERTAIN STOCKHOLDERS OF HECHINGER COMPANY
LISTED ON THE SIGNATURE PAGE THERETO.
<PAGE> 142
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT, dated as of July 16, 1997, by and among BSQ
Acquisition, Inc., a Delaware corporation ("Purchaser"), and the stockholders
listed on the signature page hereof (each such stockholder being referred to
herein as a "Stockholder" and, collectively with each other Stockholder, the
"Stockholders").
WITNESSETH:
WHEREAS, each Stockholder, as of the date hereof, is the owner of or has
the sole right to vote with respect to the number of shares of (i) Class A
Common Stock, par value $0.10 per share (the "Class A Stock") and (ii) Class B
Common Stock, par value $0.10 per share (the "Class B Stock" and, together with
the Class A Stock, the "Common Stock"), of Hechinger Company, a Delaware
corporation (the "Company"), set forth below the name of such Stockholder on
Schedule 1 attached hereto, and the Stockholders collectively have the right,
pursuant to the 1989 Voting Agreement referred to below, to vote with respect to
the additional shares of Class A Stock and Class B Stock set forth on Schedule 1
(as to the shares of which any Stockholder is the owner, the "Owned Shares," and
collectively with all other shares which any Stockholder has the sole right or
the right under the 1989 Voting Agreement to vote, the "Shares" (in each case
after giving effect to Section 6 hereof)); and
WHEREAS, in reliance upon the execution and delivery of this Agreement,
Purchaser and Hechinger Acquisition, Inc., a Delaware corporation and a wholly
owned subsidiary of Purchaser ("Acquisition"), will enter into an Agreement and
Plan of Merger, dated as of the date hereof (the "Merger Agreement"), with the
Company which provides, among other things, that upon the terms and subject to
the conditions thereof Acquisition shall be merged with and into the Company and
the separate corporate existence of Acquisition shall thereupon cease; and
WHEREAS, to induce Purchaser and Acquisition to enter into the Merger
Agreement and to incur the obligations set forth therein, the Stockholders are
entering into this Agreement pursuant to which each Stockholder agrees to vote
in favor of the Merger and certain other matters as set forth herein, and to
make certain agreements with respect to such Stockholder's Shares upon the terms
and conditions set forth herein;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereto agree as follows:
Section 1. Voting of Shares; Proxy. (a) Each Stockholder agrees that
until the earlier of (i) the Effective Time (as defined in the Merger
Agreement) or (ii) the date on which the Merger Agreement is terminated
(the earlier thereof being hereinafter referred to as the "Merger
Termination Date"), such Stockholder shall vote all of such Stockholder's
Shares at any meeting of the Company's stockholders (whether annual or
special and whether or not an adjourned or postponed meeting), or, if
applicable, take action by written consent (i) for adoption and approval of
the Merger Agreement and otherwise in favor of the Merger and any other
transaction contemplated by the Merger Agreement as such Merger Agreement
may be modified or amended from time to time and (ii) against any action,
omission or agreement which would or could impede or interfere with, or
have the effect of discouraging, the Merger, including, without limitation,
any Acquisition Proposal (as defined in the Merger Agreement) other than
the Merger. Any such vote shall be cast or consent shall be given in
accordance with such procedures relating thereto as shall ensure that it is
duly counted for purposes of determining that a quorum is present and for
purposes of recording the results of such vote or consent.
(a) At the request of Purchaser, each Stockholder, in furtherance
of the transactions contemplated hereby and by the Merger Agreement, and
in order to secure the performance by such Stockholder of his duties
under this Agreement, shall promptly execute, in
<PAGE> 143
accordance with the provisions of Section 212(e) of the Delaware General
Corporation Law, and deliver to Purchaser, an irrevocable proxy,
substantially in the form of Annex A hereto, and irrevocably appoint
Purchaser or its designees, with full power of substitution, his or her
attorney and proxy to vote, or, if applicable, to give consent with
respect to, all of such Stockholder's Shares in respect of any of the
matters set forth in, and in accordance with the provisions of, Section
1(a) above. Each Stockholder acknowledges that the proxy executed and
delivered by him shall be coupled with an interest, shall constitute,
among other things, an inducement for Purchaser and Acquisition to enter
into the Merger Agreement, shall be irrevocable and shall not be
terminated by operation of law upon the occurrence of any event,
including, without limitation, the death or incapacity of such
Stockholder. Notwithstanding any provision contained in such proxy, such
proxy shall terminate upon the Merger Termination Date.
Section 2. Certain Payments After Termination. In the event that,
during the Termination Payment Period (as defined below), (i) the Company
enters into a definitive agreement to engage in or consummates a merger, a
sale of substantially all of its assets, a business combination or other
similar transaction with a third party, or (ii) any Stockholder otherwise
sells, transfers, assigns, tenders or otherwise disposes of any of his
Owned Shares, or enters into any arrangement to do any of the foregoing,
and pursuant to any transaction described in clauses (i) or (ii) above any
Stockholder receives or will receive, directly or indirectly, aggregate
consideration (including any non-cash consideration, which shall be valued
at fair market value) in respect of the Owned Shares included in such
transaction in excess of the aggregate consideration he would have received
under the Merger Agreement for such Owned Shares (after giving effect to
the last sentence of Section 6 hereof), then such Stockholder shall pay
Purchaser, in cash (or in cash and non-cash consideration, in the same
proportion as received by the stockholders, together with any rights or
other agreements (including without limitation registration rights) with
respect to the non-cash consideration received by the stockholders), within
three business days following the consummation of such transaction, the
amount of such excess. The term "Termination Payment Period" shall mean the
period (A) commencing upon termination of the Merger Agreement under the
circumstances entitling Purchaser to payment of the Termination Fee and/or
Expenses thereunder and (B) expiring on the date which is the later of six
months after the date of such termination of the Merger Agreement and 12
months after the date hereof.
Section 3. Covenants of Stockholders. Each Stockholder covenants and
agrees for the benefit of Purchaser that, until the Merger Termination
Date, he/she will not:
(a) sell, transfer, pledge, hypothecate, encumber, assign, tender
or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to the sale, transfer, pledge,
hypothecation, encumbrance, assignment, tender or other disposition of,
any of his Owned Shares or any interest therein;
(b) other than as expressly contemplated by this Agreement, grant
any powers of attorney or proxies or consents in respect of any of such
Stockholder's Shares, deposit any of such Shares into a voting trust,
enter into a voting agreement with respect to any of such Shares or
otherwise restrict or take any action adversely affecting the ability of
such Stockholder freely to exercise all voting rights with respect
thereto;
(c) directly, or indirectly through his or her agents and
representatives, initiate, solicit or encourage, any inquiries or the
making or implementation of any Acquisition Proposal or engage in any
negotiations concerning, or provide any confidential information or data
to, or have any discussions with, any person relating to, an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal; and such Stockholder shall (i)
immediately cease and cause to be terminated any existing activities,
including discussions or negotiations with any parties, conducted
heretofore with respect to any of the foregoing and will take the
necessary steps to inform his or her agents and
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<PAGE> 144
representatives of the obligations undertaken in this Section 3(c), and
(ii) notify Purchaser immediately if any such inquiries or proposals are
received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued
with, him or her;
(d) convert any shares of Class B Stock included in such
Stockholder's Shares into shares of Class A Stock;
(e) permit or cause, or take any action or fail to take any action
which in either case would have the effect or permitting or causing, any
other owner of any of such Stockholder's Shares to do or engage in any
of the actions prohibited by the foregoing paragraphs (a) through (d) to
the extent such Shares are covered by the Stockholders' Agreement, dated
as of August 23, 1989, by and between Members of the Hechinger Family,
Members of the England Family and Hechinger Company (the "1989
Stockholders' Agreement") or the Voting Agreement, dated as of August
23, 1989, by and among the Voters referred to therein and the persons
listed on Exhibits A and B thereto (the "1989 Voting Agreement"); or
(f) terminate, amend or modify, or grant any waivers under, either
the 1989 Stockholders' Agreement or the 1989 Voting Agreement.
Section 4. Covenants of Purchaser. Purchaser covenants and agrees for
the benefit of the Stockholders that (a) immediately upon execution of this
Agreement, Purchaser shall enter into the Merger Agreement, and (b) until
the Merger Termination Date, it shall use all reasonable efforts to take,
or cause to be taken, all action, and do, or cause to be done, all things
necessary or advisable in order to consummate and make effective the
transactions contemplated by this Agreement and the Merger Agreement,
consistent with the terms and conditions of each such agreement; provided,
however, that nothing in this Section 4, Section 13 or any other provision
of this Agreement is intended, nor shall it be construed, to limit or in
any way restrict Purchaser's or Acquisition's right or ability to exercise
any of its rights under the Merger Agreement.
Section 5. Representations and Warranties of the Stockholders. Each
Stockholder represents and warrants to Acquisition that: (a) the execution,
delivery and performance by such Stockholder of this Agreement will not
conflict with, require a consent, waiver or approval under, or result in a
breach of or default under, any of the terms of any contract, commitment or
other obligation (written or oral) to which such Stockholder is bound; (b)
such Stockholder has full right, power and authority to execute and deliver
this Agreement and to perform his obligations hereunder; (c) this Agreement
has been duly executed and delivered by such Stockholder and constitutes a
legal, valid and binding obligation of such Stockholder, enforceable
against such Stockholder in accordance with its terms; (d) such Stockholder
is the sole owner of or has the right to vote with respect to such
Stockholder's Shares and such Stockholder's Shares represent all shares of
Common Stock of or with respect to which such Stockholder is the sole owner
or has the right to vote at the date hereof, and such Stockholder does not
have any right to acquire, nor is he or she the "beneficial owner" (as such
term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) of, any other shares of any class of capital stock of the Company
or any securities convertible into or exchangeable or exercisable for any
shares of any class of capital stock of the Company (other than shares
subject to options or other rights granted by the Company); (e) such
Stockholder owns its Owned Shares free and clear of all liens, claims,
pledges, charges, proxies, restrictions, encumbrances, proxies and voting
agreements of any nature whatsoever (each an "Encumbrance") other than as
provided by this Agreement (and except under the 1989 Voting Agreement and
the 1989 Stockholders' Agreement, the terms of which have been waived by
the parties thereto to the extent necessary for Stockholder to execute and
deliver this Agreement), and good and valid title to its Owned Shares, free
and clear of any Encumbrance, will pass to Purchaser upon closing; (f) each
of the 1989 Stockholders' Agreement and the 1989 Voting
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<PAGE> 145
Agreement was duly authorized, executed and delivered and is in full force
and effect, and such agreements have not been amended or modified in any
respect; and (g) all contracts and agreements listed on Schedule 5.11.1 to
the Merger Agreement to which such Stockholder or any of his "associates"
(as such term is used in the Merger Agreement) is a party were duly
authorized, executed and delivered by the parties thereto and are in full
force and effect, and none of the parties to any such contract or agreement
is in material breach or default thereunder. The representations and
warranties contained herein shall be made as of the date hereof and as of
the Closing.
Section 6. Adjustments; Additional Shares. In the event (a) of any
stock dividend, stock split, merger (other than the Merger)
recapitalization, reclassification, combination, exchange of shares or the
like of the capital stock of the Company on, of or affecting the Common
Stock or (b) that any Stockholder shall become the owner of, or otherwise
obtain the right to vote with respect to, any additional shares of Common
Stock or other securities entitling the holder thereof to vote or give
consent with respect to the matters set forth in Section 1, then the terms
of this Agreement shall apply to the shares of capital stock or other
instruments or documents that the Stockholders own or have the right to
vote immediately following the effectiveness of the events described in
clause (a) or any Stockholder becoming the owner of or obtaining the right
to vote with respect to any Common Stock or other securities as described
in clause (b), as though, in either case, they were Shares and/or Owned
Shares hereunder. For purposes of determining under Section 2 hereof the
aggregate consideration that a Stockholder would have received pursuant to
the Merger Agreement, the Merger Consideration provided therein shall be
deemed adjusted upon the occurrence of any of the events described in
clause (a) of the foregoing sentence in such manner as may be appropriate,
in the reasonable judgment of Purchaser, to preserve the economic intent of
said Section 2.
Section 7. Specific Performance. Each Stockholder acknowledges that
the agreements contained in this Agreement are an integral part of the
transactions contemplated by the Merger Agreement, and that, without these
agreements, Purchaser and Acquisition would not enter into the Merger
Agreement, and acknowledges that damages would be an inadequate remedy for
any breach by him of the provisions of this Agreement. Accordingly, the
Stockholders each agree that the obligations of the Stockholders hereunder
shall be specifically enforceable and they shall not take any action to
impede Purchaser from seeking to enforce such right of specific
performance.
Section 8. Notices. All notices, requests, claims, demands and other
communications hereunder shall be effective upon receipt (or refusal of
receipt), shall be in writing and shall be delivered in person, by telecopy
or telefacsimile, by telegram, by next-day courier service, or by mail
(registered or certified mail, postage prepaid, return receipt requested)
to any Stockholder at the address listed on the signature page hereof, and
to Purchaser c/o Leonard Green and Partners, L.P. at 11111 Santa Monica
Boulevard, Suite 2000, Los Angeles, California 90025, Attention: Jonathan
D. Sokoloff, telecopy number 310-954-0404, or to such other address or
telecopy number as any party may have furnished to the other in writing in
accordance herewith.
Section 9. Binding Effect; Survival. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, personal representatives, successors and assigns.
Section 10. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable
to agreements made and to be performed entirely within such State, without
giving effect to conflicts of laws principles.
Section 11. Counterparts. This Agreement may be executed in two
counterparts, both of which shall be an original and both of which together
shall constitute one and the same agreement.
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<PAGE> 146
Section 12. Effect of Headings. The Section headings herein are for
convenience of reference only and shall not affect the construction hereof.
Section 13. Additional Agreements; Further Assurance. Subject to the
terms and conditions herein provided, each of the parties hereto agrees to
use all reasonable efforts to take, or cause to be taken, all action and to
do, or cause to be done, all things necessary, proper or advisable to
consummate and make effective the transactions contemplated by this
Agreement. The Stockholders will provide Purchaser with all documents which
may reasonably be requested by Purchaser and will take reasonable steps to
enable Purchaser to obtain all rights and benefits provided it hereunder.
Section 14. Amendment; Waiver. No amendment or waiver of any
provision of this Agreement or consent to departure therefrom shall be
effective unless in writing and signed by Purchaser and all affected
Stockholders, in the case of an amendment, or by the party which is the
beneficiary of any such provision, in the case of a waiver or a consent to
depart therefrom.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto all as of the day and year first above written.
BSQ ACQUISITION, INC.
By /s/ JONATHAN D. SOKOLOFF
------------------------------------
Name: Jonathan D. Sokoloff
Title: Chairman
JOHN W. HECHINGER, SR.
By: /s/ JOHN W. HECHINGER, JR.
----------------------------------
John W. Hechinger, Jr., as
Attorney-in-fact for
John W. Hechinger, Sr.
Address: 1801 McCormick Drive
Largo, MD 20774
JOHN W. HECHINGER, JR.
By: /s/ JOHN W. HECHINGER, JR.
----------------------------------
John W. Hechinger, Jr.
Address: 1801 McCormick Drive
Largo, MD 20774
JUNE HECHINGER
By: /s/ JOHN W. HECHINGER, JR.
----------------------------------
John W. Hechinger, Jr., as
Attorney-in-fact for
June Hechinger
Address: 1801 McCormick Drive
Largo, MD 20774
S. ROSS HECHINGER
By: /s/ S. ROSS HECHINGER
----------------------------------
S. Ross Hechinger
Address: 1801 McCormick Drive
Largo, MD 20774
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<PAGE> 147
JUNE LIMITED PARTNERSHIP
/s/ JOHN W. HECHINGER, JR.
- --------------------------------------
By: John W. Hechinger, Jr.,
General Partner
/s/ S. ROSS HECHINGER
- --------------------------------------
By: S. Ross Hechinger, General
Partner
/s/ JOHN W. HECHINGER, JR.
- --------------------------------------
By: John W. Hechinger, Jr. as
Attorney-in-fact for Sally
Hechinger Rudoy, General Partner
/s/ JOHN W. HECHINGER, JR.
- --------------------------------------
By: John W. Hechinger, Jr. as
Attorney-in-fact for
Nancy Hechinger Lowe, General
Partner
Address for June Limited Partnership:
1801 McCormick Drive
Largo, MD 20774
JARSAN ASSOCIATES LIMITED PARTNERSHIP
/s/ JOHN W. HECHINGER, JR.
- --------------------------------------
By: John W. Hechinger, Jr.
General Partner
/s/ S. ROSS HECHINGER
- --------------------------------------
By: S. Ross Hechinger
General Partner
/s/ JOHN W. HECHINGER, JR.
- --------------------------------------
By: John W. Hechinger, Jr. as
Attorney-in-fact for
Sally Hechinger Rudoy, General
Partner
/s/ JOHN W. HECHINGER, JR.
- --------------------------------------
By: John W. Hechinger, Jr. as
Attorney-in-fact for
Nancy Hechinger Lowe, General
Partner
Address for Jarsan Associates Limited Partnership:
1801 McCormick Drive
Largo, MD 20774
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<PAGE> 148
SCHEDULE 1
<TABLE>
<S> <C> <C>
John W. Hechinger:
Owned Shares:............................... 0 A Shares and 1,009,336 B Shares
Shares/Sole Right to Vote:.................. 0 A Shares and 0 B Shares
John W. Hechinger, Jr.:
Owned Shares:............................... 96,690 A Shares and 376,566 B Shares
Shares/Sole Right to Vote:.................. 0 A Shares and 0 B Shares
June Hechinger:
Owned Shares:............................... 63,927 A Shares and 489,917 B Shares
Shares/Sole Right to Vote:.................. 0 A Shares and 0 B Shares
S. Ross Hechinger:
Owned Shares:............................... 108,119 A Shares and 471,180 B Shares
Shares/Sole Right to Vote:.................. 0 A Shares and 0 B Shares
June Limited Partnership:
Owned Shares:............................... 26,557 A Shares and 2,601,229 B Shares
Shares/Sole Right to Vote:.................. 0 A Shares and 0 B Shares
Jarsan Partnership:
Owned Shares:............................... 0 A Shares and 215,330 B Shares
Shares/Sole Right to Vote:.................. 0 A Shares and 0 B Shares
Total Number of Shares covered by 1989 Voting and
Stockholders' Agreements....................... 861,064 A Shares and 8,180,813 B Shares
</TABLE>
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<PAGE> 149
ANNEX A
[FORM OF PROXY]
IRREVOCABLE PROXY
In order to secure the performance of the duties of the undersigned
pursuant to the Stockholder Agreement, dated as of July , 1997 (the
"Stockholder Agreement"), between the undersigned and BSQ Acquisition, Inc., a
Delaware corporation, a copy of such agreement being attached hereto and
incorporated by reference herein, the undersigned hereby irrevocably appoints
and , and each of them, the attorneys,
agents and proxies, with full power of substitution in each of them, for the
undersigned and in the name, place and stead of the undersigned, in respect of
any of the matters set forth in clauses (i) and (ii) of Section 1(a) of the
Stockholder Agreement, to vote or, if applicable, to give written consent, in
accordance with the provisions of said Section 1(a) and otherwise act
(consistent with the terms of the Stockholder Agreement) with respect to all
shares of Class A and Class B Common Stock, par value $.10 per share (the
"Shares"), of Hechinger Company, a Delaware corporation (the "Company"), whether
now owned or hereafter acquired, which the undersigned is or may be entitled to
vote at any meeting of the Company held after the date hereof, whether annual or
special and whether or not an adjourned or postponed meeting, or, if applicable,
to give written consent with respect thereto. This Proxy is coupled with an
interest, shall be irrevocable and binding on any successor in interest of the
undersigned and shall not be terminated by operation of law on the occurrence of
any event, including, without limitation, the death or incapacity of the
undersigned. This Proxy shall operate to revoke any prior proxy as to the Shares
heretofore granted by the undersigned. This Proxy shall terminate as and when
provided in Section 1(b) of the Stockholder Agreement. This Proxy has been
executed in accordance with Section 212(e) of the Delaware General Corporation
Law.
<TABLE>
<S> <C>
Dated:
-------------------- --------------------
Dated:
-------------------- --------------------
</TABLE>
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<PAGE> 150
ANNEX D
[DONALDSON, LUFKIN & JENRETTE LOGO]
September 5, 1997
Board of Directors
Hechinger Company
1801 McCormick Drive
Largo, MD 20774
Dear Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of Hechinger Company (the "Company") of the
consideration to be received by such stockholders pursuant to the terms of the
Agreement and Plan of Merger dated as of July 17, 1997 and amended as of August
27, 1997 (the "Agreement"), by and among Hechinger Acquisition, Inc.
("Acquisition Sub"), BSQ Acquisition, Inc. and the Company, whereby Acquisition
Sub will be merged (the "Merger") with and into the Company.
Pursuant to the Agreement, in the Merger each share of Class A Common
Stock, par value $.10 per share ("Class A Common Stock"), of the Company and
each share of Class B Common Stock, par value $.10 per share ("Class B Common
Stock," and together with Class A Common Stock, "Company Common Stock"), of the
Company will be converted, subject to certain exceptions, into the right to
receive, without interest, an amount in cash equal to $2.375 (the "Merger
Consideration").
In arriving at our opinion, we have reviewed the Agreement. We also have
reviewed the Certificate of Incorporation of the Company and financial and other
information that was publicly available or furnished to us by the Company
including information provided during discussions with management. Included in
the information provided during discussions with management was certain
financial projections of the Company for the period beginning February 2, 1997
and ending January 31, 2002 prepared by the management of the Company. In
addition, we have compared certain financial and securities data of the Company
with various other companies whose securities are traded in public markets,
reviewed the historical stock prices and trading volumes of the Company Common
Stock, reviewed prices and premiums paid in certain other business combinations
and conducted such other financial studies, analyses and investigations as we
deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that they have been
reasonably prepared on a basis reflecting the best currently available estimates
and judgments of the management of the Company as to the future operating and
financial performance of the Company. We have not assumed any responsibility for
making an independent evaluation of the Company's
<PAGE> 151
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to certain legal matters on advice
of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the Merger and any other business strategies being considered by the
Company's Board of Directors, nor does it address the Board's decision to
proceed with the Merger. Our opinion does not constitute a recommendation to any
holder of Company Common Stock as to whether such stockholder should vote on the
proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. DLJ has performed
investment banking and other services for the Company in the past including
raising a revolving credit facility in 1996 and has been compensated for such
services. In addition, DLJ has performed investment banking and other services
for Leonard Green & Partners and its affiliates in the past and has received
customary compensation for such services.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the aggregate Merger Consideration to be received by the
holders of Company Common Stock pursuant to the Merger is fair to such
stockholders in the aggregate from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ DOUGLAS V. BROWN
------------------------------------
Douglas V. Brown
Managing Director
D-2
<PAGE> 152
ANNEX E
DELAWARE GENERAL CORPORATION LAW -- SECTION 262
262 APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the
<PAGE> 153
merger, appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the
E-2
<PAGE> 154
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of time and place fixed for the hearing
of such petition by registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the addresses therein
stated. Such notice shall also be given by 1 or more publications at least 1
week before the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may
E-3
<PAGE> 155
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted his certificates of stock to the Register
in Chancery, if such is required, may participate fully in all proceedings until
it is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
E-4
<PAGE> 156
[HECHINGER LOGO]
<PAGE> 157
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HECHINGER COMPANY
COMMON CLASS A
THE UNDERSIGNED HEREBY (i) ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL
MEETING OF STOCKHOLDERS OF HECHINGER COMPANY ("HECHINGER"), TO BE HELD AT 3500
PENNSY DRIVE, LANDOVER, MARYLAND AT 9:00 A.M., LOCAL TIME ON SEPTEMBER 25, 1997
(THE "SPECIAL MEETING"), AND ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF, AND THE
PROXY STATEMENT FURNISHED IN CONNECTION THEREWITH, AND (ii) APPOINTS W. CLARK
MCCLELLAND AND MARK R. ADAMS, AND EACH OF THEM, AS HIS OR HER PROXIES (WITH FULL
POWER OF SUBSTITUTION) FOR AND IN THE NAME, PLACE AND STEAD OF THE UNDERSIGNED,
TO VOTE UPON AND ACT WITH RESPECT TO ALL OF THE SHARES OF CLASS A COMMON STOCK,
PAR VALUE $.10 PER SHARE OF HECHINGER, STANDING IN THE NAME OF THE UNDERSIGNED,
OR WITH RESPECT TO WHICH THE UNDERSIGNED IS ENTITLED TO VOTE AND ACT, AT THE
SPECIAL MEETING AND AT ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE> 158
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF STOCKHOLDERS
HECHINGER COMPANY
COMMON CLASS A
SEPTEMBER 25, 1997
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
(1) To consider and vote upon a proposal to approve and [ ] [ ] [ ] [X] PLEASE MARK YOUR
adopt the First Amendment, dated as of August 27, VOTE AS IN THIS
1997, to the Agreement and Plan of Merger, dated as EXAMPLE
of July 17, 1997, as amended by such amendment (the
"Merger Agreement"), by and among Hechinger
Company, a Delaware corporation. BSQ Acquisition,
Inc., a Delaware corporation ("BSQ Acquisition"),
and Hechinger Acquisition, Inc., a Delaware
corporation ("Acquisition"), pursuant to which
Acquisition will merge with and into Hechinger (the
"Merger"). As a result of the Merger, Hechinger
will be the surviving corporation and will become a
wholly owned subsidiary of BSQ Acquisition.
</TABLE>
<TABLE>
<S> <C>
THIS PROXY, WHEN PROPERLY EXECUTED AND DELIVERED, WILL
BE VOTED AS SPECIFIED ABOVE. IF NO SPECIFICATION IS
MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOS-
ALS. THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU
(2) In the discretion of the proxies named above, on SIGN AND RETURN THIS CARD.
such other businesses as may properly come before
the Special Meeting or any adjournments or post-
ponements thereof.
Notwithstanding stockholder approval of proposal num-
ber 1, Hechinger reserves the right to terminate the
Merger Agreement and abandon the Merger at any time
prior to the consummation of the Merger, subject to the
terms and conditions of the Merger Agreement.
The undersigned hereby revokes any proxy heretofore
given to vote or act with respect to the Class A Common
Stock and hereby ratifies and confirms all that the
proxies named above, their substitutes, or any of them
may lawfully do by virtue hereof.
PLEASE PROMPTLY MARK, SIGN, DATE AND RETURN THIS PROXY
IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
</TABLE>
SIGNATURE OF STOCKHOLDER ____________ SIGNATURE OF STOCKHOLDER (IF JOINTLY
HELD) ____________ DATE: ___ 1997
Note: Please date this proxy and sign your name exactly as it appears hereon.
Where there is more than one owner, each should sign. When signing as an
attorney, administrator, executor, guardian, or trustee, please add your title
as such. If executed by a corporation, the proxy should be signed by a duly
authorized officer and the full name of the corporation should be stated.
<PAGE> 159
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
HECHINGER COMPANY
COMMON CLASS B
THE UNDERSIGNED HEREBY (i) ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL
MEETING OF STOCKHOLDERS OF HECHINGER COMPANY ("HECHINGER"), TO BE HELD AT 3500
PENNSY DRIVE, LANDOVER, MARYLAND AT 9:00 A.M., LOCAL TIME ON SEPTEMBER 25, 1997
(THE "SPECIAL MEETING"), AND ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF, AND THE
PROXY STATEMENT FURNISHED IN CONNECTION THEREWITH, AND (ii) APPOINTS W. CLARK
MCCLELLAND AND MARK R. ADAMS, AND EACH OF THEM, AS HIS OR HER PROXIES (WITH FULL
POWER OF SUBSTITUTION) FOR AND IN THE NAME, PLACE AND STEAD OF THE UNDERSIGNED,
TO VOTE UPON AND ACT WITH RESPECT TO ALL OF THE SHARES OF CLASS B COMMON STOCK,
PAR VALUE $.10 PER SHARE OF HECHINGER, STANDING IN THE NAME OF THE UNDERSIGNED,
OR WITH RESPECT TO WHICH THE UNDERSIGNED IS ENTITLED TO VOTE AND ACT, AT THE
SPECIAL MEETING AND AT ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
<PAGE> 160
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF STOCKHOLDERS
HECHINGER COMPANY
COMMON CLASS B
SEPTEMBER 25, 1997
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
<TABLE>
<S> <C> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
(1) To consider and vote upon a proposal to approve and [ ] [ ] [ ] [X] PLEASE MARK YOUR
adopt the First Amendment, dated as of August 27, VOTE AS IN THIS
1997, to the Agreement and Plan of Merger, dated as EXAMPLE
of July 17, 1997, as amended by such amendment (the
"Merger Agreement"), by and among Hechinger
Company, a Delaware corporation. BSQ Acquisition,
Inc., a Delaware corporation ("BSQ Acquisition"),
and Hechinger Acquisition, Inc., a Delaware
corporation ("Acquisition"), pursuant to which
Acquisition will merge with and into Hechinger (the
"Merger"). As a result of the Merger, Hechinger
will be the surviving corporation and will become a
wholly owned subsidiary of BSQ Acquisition.
</TABLE>
<TABLE>
<S> <C>
THIS PROXY, WHEN PROPERLY EXECUTED AND DELIVERED, WILL
BE VOTED AS SPECIFIED ABOVE. IF NO SPECIFICATION IS
MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOS-
ALS. THE PROXIES CANNOT VOTE YOUR SHARES UNLESS YOU
(2) In the discretion of the proxies named above, on SIGN AND RETURN THIS CARD.
such other businesses as may properly come before
the Special Meeting or any adjournments or post-
ponements thereof.
Notwithstanding stockholder approval of proposal num-
ber 1, Hechinger reserves the right to terminate the
Merger Agreement and abandon the Merger at any time
prior to the consummation of the Merger, subject to the
terms and conditions of the Merger Agreement.
The undersigned hereby revokes any proxy heretofore
given to vote or act with respect to the Class B Common
Stock and hereby ratifies and confirms all that the
proxies named above, their substitutes, or any of them
may lawfully do by virtue hereof.
PLEASE PROMPTLY MARK, SIGN, DATE AND RETURN THIS PROXY
IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED.
</TABLE>
SIGNATURE OF STOCKHOLDER ____________ SIGNATURE OF STOCKHOLDER (IF JOINTLY
HELD) ____________ DATE: ___ 1997
Note: Please date this proxy and sign your name exactly as it appears hereon.
Where there is more than one owner, each should sign. When signing as an
attorney, administrator, executor, guardian, or trustee, please add your title
as such. If executed by a corporation, the proxy should be signed by a duly
authorized officer and the full name of the corporation should be stated.
