<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 forty weeks ended July 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 August 11, 1998.
10 shares of Common Stock, $.01 par value
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
THIRTEEN AND FORTY WEEKS ENDED JULY 4, 1998
<TABLE>
<CAPTION>
DESCRIPTION
- -----------
<S> <C>
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
</TABLE>
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 July 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 second and
third quarters of 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 and third quarters of 1998 and 1997 were 13 weeks each.
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 third 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
July 4, 1998 July 5, 1997 % Change % Change
- ---------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
13 weeks ended $1,000.1 $ 625.7 60% (16%)
Year-to-date $2,667.4 $ 1,543.9 73% (15%)
</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 third quarter of 1998, cost of sales was 79.3% of sales compared with
79.6% of sales for the corresponding period in the previous year. On a
year-to-date basis, cost of sales in 1998 was 80.8% 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. For the third
quarter of 1998, as a percent of sales, the decrease in cost of sales is due
primarily to improved margin on merchandise this year compared with the
corresponding period in the prior year. On a year-to-date basis, as a percent of
sales, the increase in cost of sales is due primarily to an increase in buying
and occupancy expenses as a percentage of sales this year compared with the
corresponding period in the prior year due to the decrease in comparable stores
sales and therefore less leveraging of these fixed costs.
For the third quarter of 1998, selling, general and administrative expenses were
16.4% of sales compared with 17.3% of sales for the corresponding period last
year. On a year-to-date basis, selling, general and administrative expenses in
1998 were 18.6% of sales compared with 20.5% 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 periods 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 $27 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
$3.0 million in the 13 weeks ended July 4, 1998 and $24.3 million on a
year-to-date basis.
For the third quarter of 1998, interest expense was $14.6 million compared with
$10.8 million for the corresponding period last year. On a year-to-date basis,
interest expense was $52.3 million compared with $32.0 million for the
corresponding period last year. The increases were due primarily to higher
borrowings under the Company's revolving credit facility in 1998 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 40 weeks ended July 4,
1998 or the corresponding periods of the previous year. During the 13 weeks
ended July 4, 1998, the Company recorded approximately $0.6 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 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
<PAGE> 5
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.
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 been retained by the Company to
assess all of its major systems impacted by the Year 2000 Problem and to develop
a plan and identify the resources necessary for the Company to update or replace
any remaining non-compliant systems by mid-1999. While the Company has not
completed its assessment, the cost of executing this plan is not expected to
have a material impact on the Company's results of operations or financial
condition.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income (loss) and its components in a full set of
general-purpose financial statements. The only component of comprehensive income
for the Company is net income (loss).
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP provides guidance on identifying the
characteristics of internal-use software and accounting for the costs associated
with internal-use software. This SOP is effective for financial statements for
fiscal years beginning after December 5, 1998. The Company has not yet
determined the impact of implementing this pronouncement.
LIQUIDITY AND CAPITAL RESOURCES. Net cash flows used in operations were $86.5
million and $22.1 million for the 40 weeks ended July 4, 1998 and 39 weeks ended
July 5, 1997, respectively. The 1998 change was primarily the result of
increased losses in 1998, which included one-time business consolidation costs
of $24.3 million relating to the Purchase and increase in other current assets.
Net cash flows from investing activities were $54.8 million in the 40 weeks
ended July 4, 1998 and were primarily due to receipt of $54.4 million in
proceeds relating to the sales of seven Home Quarters Warehouse stores in the
Michigan market and other assets held for sale. 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 an increase in the purchase
price of the Purchase resulting from adjustments to capital leases of $19.3
million as well as capital spending of $2.4 million. Net cash flows used in
investing activities were $20.4 million in the 39 weeks ended July 5, 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 $14.5 million in the 40 weeks
ended July 4, 1998 and were primarily the result of $25.0 million of capital
contributed by the Company's parent partially offset by payments of $4.8 million
to redeem a portion of the 5-1/2% Convertible Subordinated Debentures. Net cash
flows from financing activities were $6.8 million in the 39 weeks ended July 5,
1997.
Cash and cash equivalents were $70.1 million and $87.2 million at July 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-
<PAGE> 6
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 July 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 July 4, 1998, approximately $39.5 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
acquired the ability to put back to BSQ 15 of the acquired stores and any
remaining related lease obligations (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 as
well as disposing of 2 additional stores to third parties ("the Initial Closed
Stores"), and recorded a liability of approximately $10 million for the costs
related to the closing of these stores. The assets acquired and liabilities
assumed from BSQ pursuant to the Purchase included amounts related to these
stores. As of July 4, 1998, all of the Initial Closed Stores have been closed
and substantially all of the leases terminated. The remaining liability is
nominal.
During the second quarter of 1998, the Company informed BSQ that it would
exercise its option to put back an additional 4 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 4 stores from the Company at its
book value, approximating $13.8 million, and is responsible for liquidating the
inventory and closing the stores. As of July 4, 1998, all of these stores have
been closed and leases have either been terminated or were terminated in August
1998.
During the third quarter of 1998, the Company informed BSQ that it would
exercise its option to put back an additional 11 stores to BSQ. BSQ also
informed Kmart that it would put 10 stores back to Kmart and dispose of one
store to a third party. In accordance with the Purchase and consistent with the
4 put stores in second quarter, BSQ purchased the inventory in these 11 stores
from the Company at its book value, approximating $44.0 million, and is
responsible for liquidating the inventory and closing the stores. These stores
will be closed and leases terminated by December 1998.
During the third quarter of 1998, the Company redeemed $10.1 million of its
5-1/2% Convertible Subordinated Debentures. The debentures were redeemed at
46.9% of principal amount, with accrued interest to the date of redemption,
which resulted in the recognition of an extraordinary after-tax gain of $5.3
million.
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
<PAGE> 7
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 ended July 4,
1998, requires the Company to maintain minimum quarterly EBITDA (as defined) at
increasing levels. As of July 4, 1998, the Company had outstanding borrowings of
approximately $242 million under the Credit Agreement, and had issued and
outstanding letters of credit of approximately $44 million under this facility.
The available borrowing as of July 4, 1998 was approximately $314 million.
The Company anticipates spending up to $30 million in 1998 and up to $60 million
for capital expenditures in 1999. 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.
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; the Company's ability to make its
computer systems year 2000 compliant; the Company's ability to maintain
compliance with its debt agreements; and other factors described from time to
time in the Company's Securities and Exchange Commission filings.
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.
<PAGE> 8
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
None.
<PAGE> 9
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: August 12, 1998 HECHINGER COMPANY
-----------------
Registrant
/S/ Mark R. Adams
-----------------
Mark R. Adams
Executive Vice President, Chief Financial Officer
and General Counsel
<PAGE> 10
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THE THIRTEEN AND FORTY WEEKS ENDED JULY 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> JUL-04-1998
<CASH> 70,113
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 919,129
<CURRENT-ASSETS> 1,074,673
<PP&E> 287,809<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,504,229
<CURRENT-LIABILITIES> 831,547
<BONDS> 339,470
0
0
<COMMON> 0
<OTHER-SE> 247,947
<TOTAL-LIABILITY-AND-EQUITY> 1,504,229
<SALES> 2,667,380
<TOTAL-REVENUES> 2,670,175
<CGS> 2,154,786
<TOTAL-COSTS> 2,650,496
<OTHER-EXPENSES> 24,327
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,255
<INCOME-PRETAX> (56,903)
<INCOME-TAX> 1,875
<INCOME-CONTINUING> (58,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,257
<CHANGES> 0
<NET-INCOME> (53,521)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Property, furniture and equipment, net of accumulated depreciation
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99(a)
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
JULY 4, 1998 JULY 5, 1997 JULY 4, 1998 JULY 5, 1997
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
REVENUES
Net sales $1,000,091 $625,651 $2,667,380 $1,543,937
Other (principally interest) 1,146 177 2,795 1,187
------------------------------ -------------------------------
Total Revenues 1,001,237 625,828 2,670,175 1,545,124
COSTS AND EXPENSES
Cost of sales 793,415 497,742 2,154,786 1,227,642
Selling, general and administrative expenses 164,428 108,368 495,710 316,954
Interest expense 14,645 10,834 52,255 31,973
Business consolidation costs 2,957 - 24,327 -
------------------------------ -------------------------------
Total Costs and Expenses 975,445 616,944 2,727,078 1,576,569
------------------------------ -------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 25,792 8,884 (56,903) (31,445)
INCOME TAX EXPENSE 625 - 1,875 -
------------------------------ -------------------------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM 25,167 8,884 (58,778) (31,445)
EXTRAORDINARY ITEM - GAIN ON EARLY
RETIREMENT OF DEBT, NET OF TAX EXPENSE 5,257 - 5,257 -
------------------------------ -------------------------------
NET EARNINGS (LOSS) $30,424 $8,884 ($53,521) ($31,445)
============================== ===============================
</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)
JULY 4, 1998 SEPT. 27, 1997
------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70,113 $ 87,215
Merchandise inventories 919,129 973,139
Due from affiliates 14,916 -
Other current assets 70,515 77,324
---------------------------------------
Total Current Assets 1,074,673 1,137,678
ASSETS HELD FOR SALE 21,975 76,671
PROPERTY, FURNITURE AND EQUIPMENT, NET 287,809 325,637
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 49,698 50,967
LEASEHOLD ACQUISITION COSTS, NET 34,962 36,438
OTHER ASSETS 35,112 41,008
---------------------------------------
TOTAL ASSETS $ 1,504,229 $ 1,668,399
=======================================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 242,000 $ 243,970
Current portion of long-term debt and capital lease obligations 30,246 32,382
Due to affiliates - 34,324
Accounts payable and accrued expenses 516,201 562,987
Accrued costs for store closings 43,100 61,397
---------------------------------------
Total Current Liabilities 831,547 935,060
LONG-TERM DEBT, LESS CURRENT PORTION 339,470 352,960
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 55,485 76,824
DEFERRED RENT 29,780 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 (126,618) (73,097)
---------------------------------------
Total Stockholder's Equity 247,947 276,468
---------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,504,229 $ 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>
JULY 4, 1998 JULY 5, 1997
(40 WEEKS) (39 WEEKS)
-------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (53,521) $ (31,445)
Adjustments to reconcile net loss to net cash used in
operating activities:
Store closing and restructuring expenditures (25,435) (10,837)
Depreciation and amortization 38,103 40,756
Gain on redemption of 5-1/2% Convertible Subordinated Debentures (5,257) -
Amortization of deferred debt issuance costs 3,527 1,889
Deferred rent 2,693 545
Other 201 3,256
CHANGES IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories 16,359 32,822
Other current assets (11,516) 23,294
Accounts payable and accrued expenses (46,663) (82,342)
Due to/from affiliates (5,224) -
Other 272 -
-------------------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (86,461) (22,062)
-------------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Proceeds from sale of assets held for sale 54,424 1,788
Proceeds from surrender of corporate owned life insurance 18,304 -
Purchase of net assets from BSQ (19,322) -
Property, furniture, equipment and other asset additions (2,378) (24,580)
Other 3,798 2,360
-------------------------------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES 54,826 (20,432)
-------------------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 419,125 360,809
Payments on revolving credit facility (421,095) (359,534)
Contributed capital 25,000 -
Payments on redemption of 5-1/2% Convertible Subordinated Debentures (4,845) -
Other (3,652) 5,561
-------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 14,533 6,836
-------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (17,102) (35,658)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 87,215 76,817
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70,113 $ 41,159
=====================================
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 2,994 $ 1,401
Cash payments for interest $ 57,489 $ 33,490
</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, JULY 4, 1998 (UNAUDITED) $ - $ - $ - $ 241,507
===================================================================
</TABLE>
<TABLE>
<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 - (53,521) - - (53,521)
-------------------------------------------------------- ----------
BALANCE, JULY 4, 1998 (UNAUDITED) $ 133,058 $ (126,618) $ - $ - $ 247,947
======================================================== ==========
</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 FORTY WEEKS ENDED JULY 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 July 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 second and
third quarters of 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 $19.3 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 and third quarters of 1998 and 1997 were 13 weeks each.
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 forty weeks ended July 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"), which
approximates replacement cost, inventories would have been $30.7 million and
$25.6 million higher than reported at July 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 July 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 July 4, 1998, approximately $39.5
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
acquired the ability to put back to BSQ 15 of the acquired stores and any
remaining related lease obligations (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 as
well as disposing of 2 additional stores to third parties ("the Initial Closed
Stores"), and recorded a liability of approximately $10 million for the costs
related to the closing of these stores (the "Put Store Accrual"). The assets
acquired and liabilities assumed from BSQ pursuant to the Purchase included
amounts related to these stores. As of July 4, 1998, all of the Initial Closed
Stores have been closed and substantially all of the leases terminated. The
remaining liability is nominal.
During the second quarter of 1998, the Company informed BSQ that it would
exercise its option to put back an additional 4 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 4 stores from the Company at its
book value, approximating $13.8 million, and is responsible for liquidating the
inventory
<PAGE> 3
and closing the stores. As of July 4, 1998, all of these stores have been closed
and leases have either been terminated or were terminated in August 1998.
During the third quarter of 1998, the Company informed BSQ that it would
exercise its option to put back an additional 11 stores to BSQ. BSQ also
informed Kmart that it would put 10 stores back to Kmart and dispose of one
store to a third party. In accordance with the Purchase and consistent with the
4 put stores in second quarter, BSQ purchased the inventory in these 11 stores
from the Company at its book value, approximating $44.0 million, and is
responsible for liquidating the inventory and closing the stores. These stores
will be closed and leases terminated by December 1998.
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 ended July 4, 1998, requires the Company to maintain
minimum quarterly EBITDA (as defined) at increasing levels. As of July 4, 1998,
the Company had outstanding borrowings of $242 million under the Credit
Agreement, and had issued and outstanding letters of credit of $44 million under
this facility. The available borrowing as of July 4, 1998 was approximately $314
million.
E. LONG-TERM DEBT
During the third quarter of 1998, the Company redeemed $10.1 million of its
5-1/2% Convertible Subordinated Debentures. The debentures were redeemed at
46.9% of principal amount, with accrued interest to the date of redemption,
which resulted in the recognition of an extraordinary after-tax gain of $5.3
million.
F. TAXES ON INCOME
No Federal income tax expense was recorded for the 13 and 40 weeks ended July 4,
1998 or the corresponding periods of the previous year. During the 13 weeks
ended July 4, 1998, the Company recorded approximately $0.6 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 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.
G. 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
<PAGE> 4
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.
H. 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.
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.
I. 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 $27 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
$3.0 million in the 13 weeks ended July 4, 1998 and $24.3 million on a
year-to-date basis.
J. CAPITAL CONTRIBUTION
During the second quarter of 1998, Centers Holdings made a contribution of
capital to the Company of $25 million in cash.
