<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 fourteen weeks ended January 3, 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 February 20, 1998.
10 shares of Common Stock, $.01 par value
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
FOURTEEN WEEKS ENDED JANUARY 3, 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 January 3, 1998, the Company operated
259 stores under the Hechinger ("Hechinger"), Home Quarters Warehouse ("Home
Quarters"), Builders Square ("Builders Square"), 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 Corporation ("BSQ"), a Delaware
corporation, which represented substantially all of the assets and liabilities
of Builders Square, Inc. (the "Initial Purchase"). BSQ was a wholly-owned
subsidiary of Builders Square, Inc., which is in turn a wholly-owned subsidiary
of Kmart Corporation, a Michigan corporation ("Kmart"). 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. 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 which are 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 ended January 4, 1997 and was
13 weeks. Results for the prior fiscal year ("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
the first quarter of 1998 and 1997:
<TABLE>
<CAPTION>
Period 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
At beginning of period 271 117
Closings (12) 0
---- ----
At end of period 259 117
==== ====
</TABLE>
<PAGE> 4
The following table sets forth the sales reported by the Company (in millions):
<TABLE>
<CAPTION>
Total Comparable
14 Weeks 13 Weeks Sales Store Sales
Period Jan. 4, 1998 Jan. 3, 1997 % Change % Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $922.8 $491.3 88% (14%)
</TABLE>
Net sales for the first quarter of 1998 were $922.8 million. The increase was
due primarily to the increased number of stores resulting from the acquisition
of 161 Builders Square stores on September 26, 1997. Additionally, sales
increased over the first quarter of the previous 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 units) compared with the same number of weeks from the previous
fiscal year decreased primarily due to increased competition.
For the first quarter of 1998, cost of sales was 81.9% of sales compared with
80.0% of sales for the corresponding period in the previous 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
increase in cost of sales is due primarily to less leverage of distribution,
buying and occupancy expenses this year compared with the corresponding period
in the prior year due to the decrease in comparable stores sales.
Additionally, the cost of sales increased due to the effect of the newly
acquired Builders Square stores which operated at lower gross margins than the
Hechinger, Home Quarters, Wye River and Better Spaces stores.
For the first quarter of 1998, selling, general and administrative expenses
were 18.9% of sales compared with 21.1% of sales for the corresponding period
last year. As a percent of sales, the decrease in selling, general and
administrative expenses was due primarily to reductions to 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 $22 million of duplicative overhead expenses, primarily during
the first half of 1998, including costs associated with integrating information
technology systems. Expenses through the first quarter of 1998 were
approximately $13.9 million.
For the first quarter of 1998, interest expense was $19.3 million, or 2.1% of
sales, compared with $10.5 million, or 2.1% 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 period in the prior year as well as capital lease interest for
certain of the newly acquired Builders Square stores.
For the first quarter of 1998 and the corresponding period in the previous
year, the effective tax rate was 0%. 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 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.
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES. Net cash flows used in operations were $81.4
million and $46.6 million in the first quarters of 1998 and 1997, respectively.
The change was primarily the result of increased losses in the first quarter of
1998, which included one-time business consolidation costs of $13.9 million
relating to the Purchase, and an increase in other current assets.
Net cash flows from investing activities were $52.2 million in the first
quarter of 1998 and were primarily due to proceeds received during the period
from the sale of seven Home Quarters Warehouse stores in the Michigan market.
Net cash flows used in investing activities were $7.7 million in the first
quarter of 1997 and were primarily the result of capital spending resulting
from the Company's store expansion, relocation and remodeling programs.
Net cash flows from financing activities were $7.4 million in the first quarter
of 1998 and were largely funded by the Company's new senior secured revolving
credit facility. Net cash flows from financing activities were $37.9 million
in the first quarter of 1997 and were funded primarily from the Company's
revolving credit facility.
Cash and cash equivalents were $65.4 million and $87.2 million at January 3,
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 liabilities remained. The
Company consummated the sale of these stores in November 1997 and as of January
3, 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 January 3, 1998, approximately $44.1
million of accrued liabilities remained.
Pursuant to the terms of the BSQ Purchase, 10 Builders Square stores are
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 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 January 3, 1998, approximately $5 million of this accrual
remained. 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
<PAGE> 6
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 January 3, 1998, the Company had outstanding borrowings of $252 million
under the Credit Agreement, and had issued and outstanding letters of credit of
$50 million under this facility. The available borrowing as of January 3, 1998
was approximately $274 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 fiscal 1998.
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 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
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 October 8, 1997, the Company filed a Current Report on Form 8-K which
reported that (i) a change in control of the Company had occurred on September
25, 1997, (ii) the Company had requested that the Company's Common Stock be
delisted from the Nasdaq National Market and (iii) the Company intended to file
a statement on Form 15 with the Commission to terminate the Company's periodic
reporting requirements under the Exchange Act, with respect to the Company
Common Stock.
On October 14, 1997, the Company filed a Current Report on Form 8-K which
reported that (i) the Company, pursuant to a Bill of Sale, Assignment and
Assumption Agreement dated as of September 26, 1997, purchased from BSQ
Transferee Corporation ("BSQ"), a Delaware corporation (which represented
substantially all of the assets and liabilities of Builders Square, Inc.),
certain of the assets of BSQ, (ii) the Company had entered into leases and
subleases for stores and support facilities previously operated by BSQ, (iii)
the Company, Centers Holdings and BSQ had entered into the Credit Agreement,
(iv) the Company had changed its independent accountants, and (v) the Company
had changed its fiscal year end. (See Part I, Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations.)
On December 19, 1997, the Company filed a Current Report on Form 8-K/A which
filed the financial statements and pro forma financial information required by
the Current Report on Form 8-K filed by the Company on October 14, 1997.
<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.
<TABLE>
<S> <C> <C>
Date: February 20, 1998 HECHINGER COMPANY
-----------------
Registrant
/S/ Harold R. Hall
----------------------
Harold R. Hall
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
<PAGE> 9
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THE FOURTEEN WEEKS ENDED JANUARY 3, 1998
EXHIBIT NO.
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> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HECHINGER
COMPANY FORM 10-Q FOR THE 14 WEEKS ENDED JANUARY 3, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> JAN-03-1998
<CASH> 65,364
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 879,359
<CURRENT-ASSETS> 1,033,545
<PP&E> 552,333
<DEPRECIATION> 240,561
<TOTAL-ASSETS> 1,496,109
<CURRENT-LIABILITIES> 802,470
<BONDS> 352,802
0
0
<COMMON> 0
<OTHER-SE> 236,864
<TOTAL-LIABILITY-AND-EQUITY> 1,496,109
<SALES> 922,807
<TOTAL-REVENUES> 1,223
<CGS> 755,884
<TOTAL-COSTS> 930,306
<OTHER-EXPENSES> 13,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,379
<INCOME-PRETAX> (39,604)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,604)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,604)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
JAN. 3, 1998 JAN. 4, 1997
(14 WEEKS) (13 WEEKS)
--------------------------
<S> <C> <C>
REVENUES
Net sales $ 922,807 $ 491,269
Other (principally interest) 1,223 806
--------------------------
Total Revenues 924,030 492,075
COSTS AND EXPENSES
Cost of sales 755,884 393,231
Selling, general and administrative expenses 174,422 103,455
Interest expense 19,379 10,539
Business consolidation costs 13,949 -
--------------------------
Total Costs and Expenses 963,634 507,225
--------------------------
LOSS BEFORE INCOME TAXES (39,604) (15,150)
INCOME TAX EXPENSE/(BENEFIT) - -
--------------------------
NET LOSS ($ 39,604) ($ 15,150)
==========================
</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)
JAN. 3, 1998 SEPT. 27, 1997
------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 65,364 $ 87,215
Merchandise inventories 879,359 973,139
Other current assets 88,822 77,324
------------------------------
Total Current Assets 1,033,545 1,137,678
ASSETS HELD FOR SALE 26,340 76,671
PROPERTY, FURNITURE and EQUIPMENT, net 311,772 325,637
COST IN EXCESS OF NET ASSETS ACQUIRED, net 50,523 50,967
LEASEHOLD ACQUISITION COSTS, net 35,921 36,438
OTHER ASSETS 38,008 41,008
------------------------------
TOTAL ASSETS $ 1,496,109 $ 1,668,399
==============================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 252,125 $ 243,970
Current portion of long-term debt and capital lease obligations 32,127 32,382
Due to parent 34,324 34,324
Accounts payable and accrued expenses 433,406 562,987
Accrued costs for store closings 50,488 61,397
------------------------------
Total Current Liabilities 802,470 935,060
LONG-TERM DEBT, less current portion 352,802 352,960
CAPITAL LEASE OBLIGATIONS, less current portion 76,465 76,824
DEFERRED RENT 27,508 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 108,058 108,058
Accumulated deficit (112,701) (73,097)
------------------------------
Total Stockholder's Equity 236,864 276,468
------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,496,109 $ 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>
JAN. 3, 1998 JAN. 4, 1997
(14 WEEKS) (13 WEEKS)
-----------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (39,604) $ (15,150)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Store closing and restructuring expenditures (10,325) (7,288)
Depreciation and amortization 13,741 13,406
Amortization of deferred debt issuance costs 1,243 603
Deferred rent 421 2,433
CHANGES IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories 93,780 69,270
Other current assets (11,519) (787)
Accounts payable and accrued expenses (129,581) (110,717)
Other 405 1,596
-----------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (81,439) (46,634)
-----------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Proceeds from sale of assets held for sale 49,924 -
Property, furniture, equipment and other asset additions (22) (9,218)
Other 2,303 1,503
-----------------------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES 52,205 (7,715)
-----------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 162,125 114,145
Payments on revolving credit facility (153,970) (83,558)
Other (772) 7,298
-----------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 7,383 37,885
-----------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (21,851) (16,464)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 87,215 76,817
-----------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,364 $ 60,353
=============================
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ - $ -
Cash payments for interest $ 21,890 $ 12,421
</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 ADDITIONAL
COMMON STOCK, COMMON COMMON PAID-IN
PAR $. 01 STOCK STOCK 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
Net loss - - - -
-----------------------------------------------------------
BALANCE, JAN. 3, 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
Net loss - (39,604) - - (39,604)
---------------------------------------------------------------------
BALANCE, JAN. 3, 1998 (UNAUDITED) $ 108,058 $(112,701) $ - $ - $ 236,864
=====================================================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 1
EXHIBIT 99(e)
HECHINGER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FOURTEEN WEEKS ENDED JANUARY 3, 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 January 3, 1998, the Company operated 259 stores under the
Hechinger ("Hechinger"), Home Quarters Warehouse ("Home Quarters"), Builders
Square ("Builders Square"), 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 Corporation ("BSQ"), a Delaware
corporation, (which represented substantially all of the assets and liabilities
of Builders Square, Inc.) (the "Initial Purchase"). BSQ was a wholly-owned
subsidiary of Builders Square, Inc., which is in turn a wholly-owned subsidiary
of Kmart Corporation, a Michigan corporation ("Kmart"). 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. 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 which are 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 ended January 4, 1997 and was
13 weeks. Results for the prior fiscal year ("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. Certain amounts in
the financial statements for the fiscal period ended January 4, 1997 have been
reclassified to conform to the presentation for the period ended January 3,
1998.
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 fourteen weeks ended January 3, 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 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 $27.1
million and $25.6 million higher than reported at January 3, 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 liabilities remained. The Company consummated the sale of
these stores in November 1997 and as of January 3, 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 (the "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 January 3,
1998, approximately $44.1 million of accrued liabilities remained.
Pursuant to the terms of the BSQ Purchase, 10 Builders Square stores are
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 January 3, 1998, approximately $5
million of this accrual remained. The Company is continuing the process of
identifying the remaining stores as well as certain overlap stores which may be
closed.
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.
<PAGE> 3
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 January 3, 1998, the Company had outstanding borrowings of $252 million
under the Credit Agreement, and had issued and outstanding letters of credit of
$50 million under this facility. The available borrowing as of January 3, 1998
was approximately $274 million.
E. TAXES ON INCOME
For the first quarter of 1998 and the corresponding period in the previous
year, the effective tax rate was 0%. 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 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
The Company can put an additional 15 of the stores acquired from BSQ and any
remaining related lease obligations back to BSQ which in turn can put these
stores and related lease obligations back to Kmart at any time prior to July
17, 1998. 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 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 $22 million of duplicative overhead expenses, primarily during
the first half of 1998, including costs associated with integrating information
technology systems. Expenses through the first quarter of 1998 were
approximately $13.9 million.
