<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
CHECK ONE
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 for the thirteen and twenty-seven weeks ended April
4, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
COMMISSION FILE NUMBER 0-7214
HECHINGER COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1001530
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
1801 MCCORMICK DRIVE, LARGO, MARYLAND 20774
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (301) 341-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------------- -------------
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock, as of May 19, 1998.
10 shares of Common Stock, $.01 par value
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
THIRTEEN AND TWENTY-SEVEN WEEKS ENDED APRIL 4, 1998
- --------------------------------------------------------------------------------
DESCRIPTION
Part I. Financial Information:
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information:
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Index to Exhibits
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
The information called for by this item is hereby incorporated by reference from
Exhibits 99(a) - 99(e) of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATIONS. Hechinger Company, a Delaware corporation (together with its direct
and indirect subsidiaries, the "Company"), is a leading specialty retailer
providing products and services for the care, repair, remodeling and maintenance
of the home and garden. At April 4, 1998, the Company operated 255 stores under
the Hechinger ("Hechinger"), Builders Square ("Builders Square"), Home Quarters
Warehouse ("Home Quarters"), Wye River Hardware and Home ("Wye River"), and
Better Spaces ("Better Spaces") names.
On September 25, 1997, Centers Holdings, Inc., a Delaware corporation, through a
wholly-owned subsidiary (collectively "Centers Holdings"), acquired the Company
through a merger transaction (the "Merger"). On September 25, 1997, Centers
Holdings also purchased BSQ Transferee Corp. ("BSQ"), a Delaware corporation,
which held substantially all of the assets and liabilities of the Builders
Square business of Kmart Corporation ("Kmart") (the "Initial Purchase"). BSQ and
the Company are affiliates as a result of these transactions. On September 26,
1997, the Company purchased certain assets of BSQ (the "Purchase") for cash and
the assumption of certain liabilities. The assets purchased, which consisted
primarily of inventory, and the liabilities assumed were recorded at BSQ's
carrying values, which are subject to certain adjustments. During the 13 week
period ended April 4, 1998, certain adjustments to the purchase price of the
Purchase were made relating primarily to the reduction in capital lease
obligations from putting certain stores back to BSQ and the final determination
of the fair value of certain assets purchased and liabilities assumed. The
principal assets of BSQ which were not acquired by the Company included assets
held for resale, and certain real property, buildings and fixtures. Also on
September 26, 1997, as part of the Purchase, BSQ and the Company entered into
subleases which cover substantially all of BSQ's leased operating facilities,
and a lease which covers certain operating facilities owned by BSQ.
In 1997, the Company changed its fiscal year end to the Saturday closest to
September 30. Prior to this change, the Company's fiscal year ended on the
Saturday closest to January 31. The first quarter of the Company's newly adopted
fiscal year ("1998") was 14 weeks and ended January 3, 1998. The corresponding
quarter of the previous fiscal year ("1997") ended January 4, 1997 and was 13
weeks. The second quarters of 1998 and 1997 ended April 4, 1998 and April 5,
1997, respectively, and each were 13 weeks. Results for 1997 contained herein
have been restated so as to coincide with the Company's new fiscal year. As a
result of the Purchase, the Company's financial statements include the results
of Builders Square stores subsequent to September 25, 1997.
The following table sets forth the number of stores operated by the Company in
1998 and 1997:
<TABLE>
<CAPTION>
Period 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
At beginning of fiscal year 271 117
Closings (16) 0
----- ------
At end of second quarter 255 117
===== ======
</TABLE>
<PAGE> 4
The following table sets forth the net sales reported by the Company (in
millions):
<TABLE>
<CAPTION>
Total Comparable
Period Ended Period Ended Sales Store Sales
Apr. 4, 1998 Apr. 5, 1997 % Change % Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13 weeks ended $744.5 $427.0 74% (15%)
Year-to-date $1,667.3 $918.3 82% (14%)
</TABLE>
The increase in net sales was due primarily to the increased number of stores
resulting from the acquisition of 161 Builders Square stores on September 26,
1997. Additionally, year-to-date sales increased over the previous fiscal year
as a result of the additional week in the first quarter of 1998 compared to the
first quarter of 1997 (14 weeks vs. 13 weeks). Comparable store sales for 1998
(including the Builders Square stores) compared with the same number of weeks
from the previous fiscal year decreased primarily due to increased competition.
For the second quarter of 1998, cost of sales was 81.3% of sales compared with
78.8% of sales for the corresponding period in the previous year. On a
year-to-date basis, cost of sales in 1998 was 81.7% of sales compared with 79.5%
of sales in the previous year. 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 are due primarily to less leverage of
buying and occupancy expenses this year compared with the corresponding period
in the prior year due to the decrease in comparable stores sales.
For the second quarter of 1998, selling, general and administrative expenses
were 21.1% of sales compared with 24.6% of sales for the corresponding period
last year. On a year-to-date basis, selling, general and administrative expenses
in 1998 were 19.9% of sales compared with 22.7% of sales in the previous year.
As a percent of sales, the decreases in selling, general and administrative
expenses were due primarily to reductions in general and administrative overhead
and advertising expenses compared with the corresponding period in the prior
year.
The Company is in the process of eliminating duplicate overhead functions
related to BSQ's operations. Accordingly, the Company estimates it will incur
approximately $25 million associated with the elimination of duplicative
overhead expenses including costs associated with integrating information
technology systems. Expenses related to these business consolidation costs were
$7.4 million in the 13 week period ended April 4, 1998 and $21.4 million on a
year-to-date basis.
For the second quarter of 1998, interest expense was $18.2 million, or 2.4% of
sales, compared with $10.6 million, or 2.5% of sales, for the corresponding
period last year. On a year-to-date basis, interest expense was $37.6 million,
or 2.3% of sales, compared with $21.1 million, or 2.3% of sales, for the
corresponding period last year. The increase was due primarily to higher
borrowings under the Company's revolving credit facility this period compared
with the corresponding periods in the prior year as well as capital lease
interest for certain of the newly acquired Builders Square stores.
No Federal income tax expense was recorded for the 13 and 27 week periods ended
April 4, 1998 or the corresponding periods of the previous year. During the 13
week period ended April 4, 1998, the Company recorded approximately $1.3 million
of state income tax expense. No such amounts were recorded in the corresponding
period of the previous year. The effective tax rate for 1998 differs from the
statutory rate as a result of the effect of the valuation allowance on the
deferred tax assets. On September 25, 1997, Centers Holdings acquired the
Company. This transaction constituted an ownership change as defined under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). This
ownership change subjects the Company to a $5.5 million annual limitation in
future years in the use of certain items reflected as deferred tax assets,
including net operating loss carryforwards and certain other tax attributes
which were available on the date of the ownership change. As a result, due to
uncertainties regarding the realization in future periods of the deferred tax
assets, the Company has provided a valuation allowance on substantially all of
its gross deferred tax assets. At September 27, 1997, the Company had net
operating loss carryforwards for Federal income tax purposes of approximately
$81 million (net of approximately $44
<PAGE> 5
million which will not be utilized by the Company pursuant to the Section 382
limitation), substantially all of which is subject to the $5.5 million annual
limitation resulting from the ownership change. The Company's net operating loss
carryforwards expire between 2009 and 2012. The Company's alternative minimum
tax credit carryforward of $3.6 million is available indefinitely as it does not
expire.
The Company has been proactive with respect to ensuring that its computer
systems will be year 2000 compliant. Much of the software utilized by the
Company has been updated in recent years for business reasons, is
"off-the-shelf" in nature, and was either purchased as being year 2000
compliant, or has been updated to be compliant under routine maintenance
agreements. An outside consulting firm has recently been retained by the Company
to assess all of its major systems and develop a plan for the Company to update
or replace any remaining non-compliant systems by mid-1999. Once this plan has
been developed, the Company will be able to estimate more precisely the costs to
be incurred in this regard.
LIQUIDITY AND CAPITAL RESOURCES. Net cash flows used in operations were $95.7
million and $25.2 million in the first half of 1998 and 1997, respectively. The
change was primarily the result of increased losses in 1998, which included
one-time business consolidation costs of $21.4 million relating to the Purchase.
Net cash flows from investing activities were $55.7 million in the first half of
1998 and were primarily due to receipt of $49.9 million in proceeds relating to
the sale of seven Home Quarters Warehouse stores in the Michigan market.
Additionally, the Company surrendered certain corporate owned life insurance
policies and received proceeds for the cash surrender value, net of policy loans
and other amounts due, of $18.3 million. Offsetting these proceeds was a
purchase accounting adjustment to capital leases of $14.4 million as well as
capital spending of $1.3 million. Net cash flows used in investing activities
were $15.7 million in the first half of 1997 and were primarily the result of
capital spending relating to the Company's store expansion, relocation and
remodeling programs.
Net cash flows from financing activities were $35.0 million in the first half of
1998 and were largely funded by $25.0 million of capital contributed by the
Company's parent as well as the Company's senior secured revolving credit
facility. Net cash flows used in financing activities were $1.4 million in the
first half of 1997.
Cash and cash equivalents were $82.2 million and $87.2 million at April 4, 1998
and September 27, 1997, respectively.
In July 1997, the Company entered into an agreement to sell seven Home Quarters
Warehouse stores in the Michigan market. As a result, as of August 2, 1997, the
Company recorded a charge of $31.8 million related to the decision to close and
sell these stores. The main components of this charge were a write-down to net
realizable value of real estate (approximately $13.6 million), and furniture,
fixtures, equipment and other assets (approximately $14.3 million) to be
disposed of, as well as estimated cash expenditures for operating costs for the
stores during the inventory liquidation period and for employee termination
costs (approximately $3.9 million). As of September 27, 1997, assets held for
sale included approximately $50.0 million related to these stores, and
approximately $3.0 million of accrued store closing liabilities remained. The
Company consummated the sale of these stores in November 1997. As of April 4,
1998, these accrued liabilities had been substantially discharged.
In 1994, the Company recorded a charge of $61.9 million primarily related to the
Company's decision to close 22 stores in certain markets. Disposition of the
closed stores is accomplished by subleasing or assigning the property to a new
occupant or reverting possession back to the landlord. The Company previously
expected that it would dispose of or sublease the remaining stores by January
1999. As a result of certain decisions made by management of the Company related
to the future disposition of these properties, in 1997 the Company revised its
estimate and recorded an additional charge of $42.7 million for the estimated
continuing carrying costs for these stores, consisting primarily of rents and
other related costs resulting in an accrual of $47.7 million as of September 27,
1997. As of April 4, 1998, approximately $42.2 million of accrued liabilities
remained.
Pursuant to the terms of the Purchase, 10 Builders Square stores were subleased
under a master month-to-month rental agreement. In addition, the Company can put
15 of the acquired stores and any remaining
<PAGE> 6
related lease obligations back to BSQ (collectively with the month-to-month
stores, the "put stores"), at any time prior to July 17, 1998. Shortly after the
Initial Purchase, BSQ began the process of putting 10 stores back to Kmart, and
accordingly recorded a liability of approximately $10 million for the costs
related to the closing of the stores. The assets acquired and liabilities
assumed from BSQ pursuant to the Purchase included amounts related to the put
stores. As of April 4, 1998, substantially all of the initial 10 stores have
been closed and the leases terminated. The remaining liability is nominal.
During the 13 week period ended April 4, 1998, the Company informed BSQ that it
would exercise its option to put back four additional put stores to BSQ. BSQ
also informed Kmart that it would put these stores back to Kmart. In accordance
with the Purchase, BSQ purchased the inventory in these four put stores from the
Company at its book value, approximating $13.8 million, and is responsible for
liquidating the inventory and closing the stores. The Company is continuing the
process of identifying the remaining put stores as well as certain overlap
stores which may be closed.
Under the terms of a sale and leaseback transaction completed in 1990, the
Company is restricted from taking certain actions that would result in its net
worth, less goodwill, falling below $175 million. Under the terms of certain
sale and leaseback transactions completed in 1992, the Company is required to
maintain a minimum net worth of $200 million. Under the 1992 transaction, in the
event this minimum net worth is not maintained, the Company could be required to
repurchase properties aggregating approximately $42 million.
On September 26, 1997, Centers Holdings, BSQ, and the Company entered into a new
senior secured revolving credit facility, which permits borrowings of up to $600
million (the "Credit Agreement"). The Credit Agreement replaced a $200 million
revolving credit facility and all letter of credit facilities outstanding. The
amount available under the facility fluctuates based on the Company's "Eligible
Inventory" balance (as defined in the credit agreement). The Credit Agreement
contains certain covenants which restrict the Company's ability to, among other
things, enter into additional indebtedness, make acquisitions or sales of
certain assets and declare and pay cash dividends. In addition, the Credit
Agreement limits the annual amount of capital expenditures of the Company and,
beginning with the period ending June 1998, requires the Company to maintain
minimum quarterly EBITDA (as defined) at increasing levels. As of April 4, 1998,
the Company had outstanding borrowings of approximately $255 million under the
Credit Agreement, and had issued and outstanding letters of credit of
approximately $43 million under this facility. The available borrowing as of
April 4, 1998 was approximately $302 million.
The Company anticipates spending up to $60 million for capital expenditures in
1998. Management believes that cash and cash equivalents, cash generated from
operations and its available credit facility are adequate to meet the Company's
working capital needs and planned capital expenditures for the next 12 months.
During the 13 week period ended April 4, 1998, Centers Holdings made a
contribution of capital to the Company of $25 million in cash.
FORWARD-LOOKING STATEMENTS. Forward-looking statements in this Form 10-Q are
made pursuant to the safe harbor provision of the Private Securities Litigation
Reform Act of 1995. There are various factors that could cause results to differ
materially and adversely from those anticipated by some statements made herein.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. Factors that could cause actual results to differ materially and
adversely include, but are not limited to the following: the strength and extent
of new and existing competition; the Company's ability to maintain competitive
pricing in its markets; the Company's ability to maintain adequate levels of
vendor support; the success of the Company's customer services programs; the
Company's ability to attract, train and retain experienced, quality management
and employees; the Company's ability to assimilate Builders Square's operations
into its own; general economic conditions; housing turnover; interest rates;
weather; disposal of excess real estate; and other factors described from time
to time in the Company's Securities and Exchange Commission filings.
<PAGE> 7
PART II
ITEM 1. LEGAL PROCEEDINGS
On July 23, 1997, a purported class action complaint was filed in the Delaware
Chancery Court on behalf of all holders of the Company's common stock against
the Company and the former Company directors. The plaintiff has alleged that the
former officers and directors of the Company breached their fiduciary duties to
the 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 the Company
and by entering into an agreement with Centers Holdings under which the
consideration offered by Centers Holdings to holders of the common stock was
"unfair and grossly inadequate." The Company believes that the plaintiff's
claims are without merit and intends to defend such action vigorously.
The Company and its subsidiaries are also parties to legal proceedings and
claims arising in the ordinary course of business. Although the outcome of such
proceedings and claims cannot be determined with certainty, based upon
evaluation by legal counsel, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<S> <C>
27 Financial Data Schedule
99(a) Condensed Consolidated Statements of Operations
99(b) Condensed Consolidated Balance Sheets
99(c) Condensed Consolidated Statements of Cash Flows
99(d) Condensed Consolidated Statements of Stockholder's Equity
99(e) Notes to Condensed Consolidated Financial Statements
</TABLE>
(b) REPORTS ON FORM 8-K
On March 30, 1998, the Company filed a Current Report on Form 8-K which reported
that Mark S. Schwartz had joined the Company as President and Chief Executive
Officer replacing Anthony R. Petrillo, who had been Acting President and Chief
Executive Officer since the Company was acquired by Centers Holdings, and that
Mr. Petrillo will continue to serve the Company as a Director.
<PAGE> 8
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 19, 1998 HECHINGER COMPANY
-----------------
Registrant
/S/ Mark R. Adams
------------------
Mark R. Adams
Executive Vice President
and Chief Financial Officer
<PAGE> 9
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THE THIRTEEN AND TWENTY-SEVEN WEEKS ENDED APRIL 4, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
27 Financial Data Schedule
99(a) Condensed Consolidated Statements of Operations
99(b) Condensed Consolidated Balance Sheets
99(c) Condensed Consolidated Statements of Cash Flows
99(d) Condensed Consolidated Statements of Stockholder's Equity
99(e) Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HECHINGER
COMPANY FORM 10-Q FOR THE 27 WEEKS ENDED APRIL 4, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> APR-04-1998
<CASH> 82,195
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 971,486
<CURRENT-ASSETS> 1,115,361
<PP&E> 553,077
<DEPRECIATION> 251,999
<TOTAL-ASSETS> 1,565,037
<CURRENT-LIABILITIES> 905,322
<BONDS> 352,112
0
0
<COMMON> 0
<OTHER-SE> 217,523
<TOTAL-LIABILITY-AND-EQUITY> 1,565,037
<SALES> 1,667,289
<TOTAL-REVENUES> 1,668,938
<CGS> 1,361,371
<TOTAL-COSTS> 1,692,653
<OTHER-EXPENSES> 21,370
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,610
<INCOME-PRETAX> (82,695)
<INCOME-TAX> 1,250
<INCOME-CONTINUING> (83,945)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,945)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
APR. 4, 1998 APR. 5, 1997 APR. 4, 1998 APR. 5, 1997
(13 WEEKS) (13 WEEKS) (27 WEEKS) (26 WEEKS)
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
REVENUES
Net sales $744,482 $427,017 $1,667,289 $918,286
Other (principally interest) 426 204 1,649 1,010
------------------------------ ------------------------------
Total Revenues 744,908 427,221 1,668,938 919,296
COSTS AND EXPENSES
Cost of sales 605,487 336,669 1,361,371 729,900
Selling, general and administrative expenses 156,860 105,131 331,282 208,586
Interest expense 18,231 10,600 37,610 21,139
Business consolidation costs 7,421 - 21,370 -
------------------------------ ------------------------------
Total Costs and Expenses 787,999 452,400 1,751,633 959,625
------------------------------ ------------------------------
LOSS BEFORE INCOME TAXES (43,091) (25,179) (82,695) (40,329)
INCOME TAX EXPENSE 1,250 - 1,250 -
------------------------------ ------------------------------
NET LOSS ($44,341) ($25,179) ($83,945) ($40,329)
============================== ==============================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 1
EXHIBIT 99(b)
HECHINGER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
(UNAUDITED)
APR. 4, 1998 SEPT. 27, 1997
---------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 82,195 $ 87,215
Merchandise inventories 971,486 973,139
Other current assets 61,680 77,324
-------------------------------
Total Current Assets 1,115,361 1,137,678
ASSETS HELD FOR SALE 26,340 76,671
PROPERTY, FURNITURE AND EQUIPMENT, NET 301,078 325,637
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 50,110 50,967
LEASEHOLD ACQUISITION COSTS, NET 35,442 36,438
OTHER ASSETS 36,706 41,008
-------------------------------
TOTAL ASSETS $ 1,565,037 $ 1,668,399
===============================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 255,125 $ 243,970
Current portion of long-term debt and capital lease obligations 32,035 32,382
Due to affiliates 25,847 34,324
Accounts payable and accrued expenses 545,089 562,987
Accrued costs for store closings 47,226 61,397
-------------------------------
Total Current Liabilities 905,322 935,060
LONG-TERM DEBT, LESS CURRENT PORTION 352,112 352,960
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 61,735 76,824
DEFERRED RENT 28,345 27,087
STOCKHOLDER'S EQUITY
Common stock, $.01 par value; authorized 1,000 shares, issued 10 shares - -
Additional paid-in capital 241,507 241,507
Contributed capital 133,058 108,058
Accumulated deficit (157,042) (73,097)
-------------------------------
Total Stockholder's Equity 217,523 276,468
-------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,565,037 $ 1,668,399
===============================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 1
EXHIBIT 99(c)
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
APR. 4, 1998 APR. 5, 1997
(27 WEEKS) (26 WEEKS)
--------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (83,945) $ (40,329)
Adjustments to reconcile net loss to net cash used in
operating activities:
Store closing and restructuring expenditures (15,373) (8,715)
Depreciation and amortization 25,580 27,116
Amortization of deferred debt issuance costs 2,373 1,255
Deferred rent 1,258 1,693
Other 592 3,025
CHANGES IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories 2,474 (14,048)
Other current assets (2,681) 30,999
Accounts payable and accrued expenses (17,898) (26,173)
Due to affiliates (8,477) -
Other 406 -
--------------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (95,691) (25,177)
--------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Proceeds from sale of assets held for sale 49,924 -
Proceeds from surrender of corporate owned life insurance 18,304 -
Purchase of net assets from BSQ (14,406) -
Property, furniture, equipment and other asset additions (1,269) (17,924)
Other 3,132 2,196
--------------------------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES 55,685 (15,728)
--------------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 268,125 171,612
Payments on revolving credit facility (256,970) (179,522)
Contributed Capital 25,000 -
Other (1,169) 6,476
--------------------------------
NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES 34,986 (1,434)
--------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (5,020) (42,339)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 87,215 76,817
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,195 $ 34,478
================================
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 1,001 $ 254
Cash payments for interest $ 39,274 $ 20,816
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 1
EXHIBIT 99(d)
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK, COMMON COMMON ADDITIONAL
PAR $. 01 STOCK STOCK PAID-IN CAPITAL
---------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, FEB. 1, 1997 $ - $ 3,261 $ 971 $ 238,248
Restricted stock awards earned - - - -
Conversions from Class B to Class A common stock - 24 (24) -
Capital contribution - - - -
Cancellation of Class A and Class B common stock and
issuance of common stock, par $.01, pursuant to Merger - (3,285) (947) 3,259
Net loss - - - -
---------------------------------------------------------------
BALANCE, SEPT. 27, 1997 - - - 241,507
Capital contribution - - - -
Net loss - - - -
---------------------------------------------------------------
BALANCE, APR. 4, 1998 (UNAUDITED) $ - $ - $ - $ 241,507
===============================================================
<CAPTION>
RETAINED
CONTRIBUTED EARNINGS UNEARNED TREASURY
CAPITAL (DEFICIT) COMPENSATION STOCK TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, FEB. 1, 1997 $ - $ 132,914 $ (253) $ (885) $ 374,256
Restricted stock awards earned - - 165 - 165
Conversions from Class B to Class A common stock - - - - -
Capital contribution 108,058 - - - 108,058
Cancellation of Class A and Class B common stock and
issuance of common stock, par $.01, pursuant to Merger - - 88 885 -
Net loss - (206,011) - - (206,011)
----------------------------------------------------------------------
BALANCE, SEPT. 27, 1997 108,058 (73,097) - - 276,468
Capital contribution 25,000 - - - 25,000
Net loss - (83,945) - - (83,945)
----------------------------------------------------------------------
BALANCE, APR. 4, 1998 (UNAUDITED) $ 133,058 $ (157,042) $ - $ - $ 217,523
======================================================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 1
EXHIBIT 99(e)
HECHINGER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SEVEN WEEKS ENDED APRIL 4, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
A. BASIS OF PRESENTATION
Hechinger Company, a Delaware corporation (together with its direct and indirect
subsidiaries, the "Company"), is a leading specialty retailer providing products
and services for the care, repair, remodeling and maintenance of the home and
garden. At April 4, 1998, the Company operated 255 stores under the Hechinger
("Hechinger"), Builders Square ("Builders Square"), Home Quarters Warehouse
("Home Quarters"), Wye River Hardware and Home ("Wye River"), and Better Spaces
("Better Spaces") names.
On September 25, 1997, Centers Holdings, Inc., a Delaware corporation, through a
wholly-owned subsidiary (collectively "Centers Holdings"), acquired the Company
through a merger transaction (the "Merger"). On September 25, 1997, Centers
Holdings also purchased BSQ Transferee Corp. ("BSQ"), a Delaware corporation,
which held substantially all of the assets and liabilities of the Builders
Square business of Kmart Corporation ("Kmart") (the "Initial Purchase"). BSQ and
the Company are affiliates as a result of these transactions. On September 26,
1997, the Company purchased certain assets of BSQ (the "Purchase") for cash and
the assumption of certain liabilities. The assets purchased, which consisted
primarily of inventory, and the liabilities assumed were recorded at BSQ's
carrying values, which are subject to certain adjustments. During the 13 week
period ended April 4, 1998, certain adjustments to the purchase price of the
Purchase were made relating primarily to the reduction in capital lease
obligations from putting certain stores back to BSQ (see Note C) and the final
determination of the fair value of certain assets purchased and liabilities
assumed. The aggregate effect of these adjustments was to increase the purchase
price by approximately $14.4 million. The principal assets of BSQ which were not
acquired by the Company included assets held for resale, and certain real
property, buildings and fixtures. Also on September 26, 1997, as part of the
Purchase, BSQ and the Company entered into subleases which cover substantially
all of BSQ's leased operating facilities, and a lease which covers certain
operating facilities owned by BSQ.
In 1997, the Company changed its fiscal year end to the Saturday closest to
September 30. Prior to this change, the Company's fiscal year ended on the
Saturday closest to January 31. The first quarter of the Company's newly adopted
fiscal year ("1998") was 14 weeks and ended January 3, 1998. The corresponding
quarter of the previous fiscal year ("1997") ended January 4, 1997 and was 13
weeks. The second quarters of 1998 and 1997 ended April 4, 1998 and April 5,
1997, respectively, and each were 13 weeks. Results for 1997 contained herein
have been restated so as to coincide with the Company's new fiscal year. As a
result of the Purchase, the Company's financial statements include the results
of Builders Square stores subsequent to September 25, 1997.
In the opinion of the management of the Company, the accompanying unaudited
condensed 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-seven weeks ended April 4, 1998 are not necessarily
indicative of the results to be expected for the fiscal year ending October 3,
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
included in the Company's Annual Report on Form 10-K for the transition period
ended September 27, 1997.
<PAGE> 2
B. MERCHANDISE INVENTORY
Inventories of Hechinger, Home Quarters, Wye River and Better Spaces stores are
stated at the lower of cost, last-in, first-out method ("LIFO"), or market.
Inventories of Builders Square stores are stated at lower of cost or market,
with cost determined on the LIFO method using the retail inventory method and
internal price indices to measure inflation.
If inventories were valued under the first-in, first-out method ("FIFO") method,
which approximates replacement cost, inventories would have been $28.9 million
and $25.6 million higher than reported at April 4, 1998 and September 27, 1997,
respectively. Distribution, buying and occupancy expenses are included in cost
of sales.
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.
C. STORE CLOSING RESERVES
In July 1997, the Company entered into an agreement to sell seven Home Quarters
Warehouse stores in the Michigan market. As a result, as of August 2, 1997, the
Company recorded a charge of $31.8 million related to the decision to close and
sell these stores (the "Detroit Store Closing Charge"). The main components of
this charge were a write-down to net realizable value of real estate
(approximately $13.6 million), and furniture, fixtures, equipment and other
assets (approximately $14.3 million) to be disposed of, as well as estimated
cash expenditures for operating costs for the stores during the inventory
liquidation period and for employee termination costs (approximately $3.9
million). As of September 27, 1997, assets held for sale included approximately
$50.0 million related to these stores, and approximately $3.0 million of accrued
store closing liabilities remained. The Company consummated the sale of these
stores in November 1997. As of April 4, 1998, these accrued liabilities had been
substantially discharged.
In 1994, the Company recorded a charge of $61.9 million primarily related to the
Company's decision to close 22 stores in certain markets ("Store Closing
Charge"). Disposition of the closed stores is accomplished by subleasing or
assigning the property to a new occupant or reverting possession back to the
landlord. The Company previously expected that it would dispose of or sublease
the remaining stores by January 1999. As a result of certain decisions made by
management of the Company related to the future disposition of these properties,
in 1997 the Company revised its estimate and recorded an additional charge of
$42.7 million for the estimated continuing carrying costs for these stores,
consisting primarily of rents and other related costs (together with the Store
Closing Charge, the "Store Closing Charges") resulting in an accrual of $47.7
million as of September 27, 1997. As of April 4, 1998, approximately $42.2
million of accrued liabilities remained.
Pursuant to the terms of the Purchase, 10 Builders Square stores were subleased
under a master month-to-month rental agreement. In addition, the Company can put
15 of the acquired stores and any remaining related lease obligations back to
BSQ (collectively with the month-to-month stores, the "put stores"), at any time
prior to July 17, 1998. Shortly after the Initial Purchase, BSQ began the
process of putting 10 stores back to Kmart, and accordingly recorded a liability
(the "Put Store Accrual") of approximately $10 million for the costs related to
the closing of the stores. The assets acquired and liabilities assumed from BSQ
pursuant to the Purchase included amounts related to the put stores. As of April
4, 1998, substantially all of the initial 10 stores have been closed and the
leases terminated. The remaining liability is nominal.
During the 13 week period ended April 4, 1998, the Company informed BSQ that it
would exercise its option to put back four additional put stores to BSQ. BSQ
also informed Kmart that it would put these stores back to Kmart. In accordance
with the Purchase, BSQ purchased the inventory in these four put stores from the
Company at its book value, approximating $13.8 million, and is responsible for
liquidating the inventory and closing the stores. The Company is continuing the
process of identifying the remaining put stores as well as certain overlap
stores which may be closed.
<PAGE> 3
The Detroit Store Closing Charge, the Store Closing Charges, and the Put Store
Accrual were based on certain estimates and as a result, the actual amounts
could vary from these estimates.
D. REVOLVING CREDIT FACILITY
On September 26, 1997, Centers Holdings, BSQ, and the Company entered into a new
senior secured revolving credit facility, which permits borrowings of up to $600
million (the "Credit Agreement"). The Credit Agreement replaced a $200 million
revolving credit facility and all letter of credit facilities outstanding. The
amount available under the facility fluctuates based on the Company's "Eligible
Inventory" balance (as defined in the credit agreement). The Credit Agreement
contains certain covenants which restrict the Company's ability to, among other
things, enter into additional indebtedness, make acquisitions or sales of
certain assets and declare and pay cash dividends. In addition, the Credit
Agreement limits the annual amount of capital expenditures of the Company and,
beginning with the period ending June 1998, requires the Company to maintain
minimum quarterly EBITDA (as defined) at increasing levels. As of April 4, 1998,
the Company had outstanding borrowings of $255 million under the Credit
Agreement, and had issued and outstanding letters of credit of $43 million under
this facility. The available borrowing as of April 4, 1998 was approximately
$302 million.
E. TAXES ON INCOME
No Federal income tax expense was recorded for the 13 and 27 week periods ended
April 4, 1998 or the corresponding periods of the previous year. During the 13
week period ended April 4, 1998, the Company recorded approximately $1.3 million
of state income tax expense. No such amounts were recorded in the corresponding
period of the previous year. The effective tax rate for 1998 differs from the
statutory rate as a result of the effect of the valuation allowance on the
deferred tax assets. On September 25, 1997 Centers Holdings acquired the
Company. This transaction constituted an ownership change as defined under
Section 382 of the Internal Revenue Code of 1986, as amended. This ownership
change subjects the Company to a $5.5 million annual limitation in future years
in the use of certain items reflected as deferred tax assets, including net
operating loss carryforwards and certain other tax attributes which were
available on the date of the ownership change. As a result, due to uncertainties
regarding the realization in future periods of the deferred tax assets, the
Company has provided a valuation allowance on substantially all of its gross
deferred tax assets. At September 27, 1997, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately $81 million (net
of approximately $44 million which will not be utilized by the Company pursuant
to the Section 382 limitation), substantially all of which is subject to the
$5.5 million annual limitation resulting from the ownership change. The
Company's net operating loss carryforwards expire between 2009 and 2012. The
Company's alternative minimum tax credit carryforward of $3.6 million is
available indefinitely as it does not expire.
F. LEASE COMMITMENTS
Under the terms of a sale and leaseback transaction completed in 1990, the
Company is restricted from taking certain actions that would result in its net
worth, less goodwill, falling below $175 million. Under the terms of certain
sale and leaseback transactions completed in 1992, the Company is required to
maintain a minimum net worth of $200 million. Under the 1992 transactions, in
the event this minimum net worth is not maintained, the Company could be
required to repurchase properties aggregating approximately $42 million.
G. CONTINGENCIES
On July 23, 1997, a purported class action complaint was filed in the Delaware
Chancery Court on behalf of all holders of the Company's common stock against
the Company and the former Company directors. The plaintiff has alleged that the
former officers and directors of the Company breached their fiduciary duties to
the 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 the Company
and by entering into an agreement with Centers Holdings under which the
consideration offered by Centers Holdings to holders of the common stock was
"unfair and grossly inadequate." The Company believes that the plaintiff's
claims are without merit and intends to defend such action vigorously.
<PAGE> 4
The Company and its subsidiaries are also parties to legal proceedings and
claims arising in the ordinary course of business. Although the outcome of such
proceedings and claims cannot be determined with certainty, based upon
evaluation by legal counsel, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
H. BUSINESS CONSOLIDATION COSTS
The Company is in the process of eliminating duplicate overhead functions
related to BSQ's operations. Accordingly, the Company estimates it will incur
approximately $25 million associated with the elimination of duplicative
overhead expenses including costs associated with integrating information
technology systems. Expenses related to these business consolidation costs were
$7.4 million in the 13 week period ended April 4, 1998 and $21.4 million on a
year-to-date basis.
I. CAPITAL CONTRIBUTION
During the 13 week period ended April 4, 1998, Centers Holdings made a
contribution of capital to the Company of $25 million in cash.
