<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 weeks ended January 2, 1999 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 16, 1999.
10 shares of Common Stock, $.01 par value
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
THIRTEEN WEEKS ENDED JANUARY 2, 1999
- --------------------------------------------------------------------------------
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
Exhibit 13 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 retailer of products and
services for the care, repair, remodeling and maintenance of the home and
garden. At January 2, 1999, the Company operated 240 stores, primarily under the
Hechinger ("Hechinger"), Home Quarters Warehouse ("Home Quarters") and Builders
Square ("Builders Square") names. The 121 Builders Square stores are located
primarily in the Southern, Southeastern, Northern and Midwestern parts of the
United States. The 63 Hechinger stores are primarily located in the Mid-Atlantic
region; and the 56 Home Quarters stores are primarily located in the
Southeastern, Northern and Midwestern parts of the United States.
The Company's fiscal year ends on the Saturday closest to September 30. The
fiscal year ended October 3, 1998 was 53 weeks ("1998"), compared with the
fiscal year ending October 2, 1999, which has 52 weeks ("1999").
The following table sets forth the number of stores operated by the Company in
1999 and 1998:
<TABLE>
<CAPTION>
Period 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
At beginning of fiscal year 244 271
Closings (4) (12)
--- ---
At end of first quarter 240 259
=== ===
</TABLE>
The following table sets forth the net sales reported by the Company (in
millions):
<TABLE>
<CAPTION>
13 Weeks 14 Weeks Total Comparable
Ended Ended Sales Store Sales
Jan. 2, 1999 Jan. 3, 1998 % Change % Change
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
$658.3 $922.8 (29%) (17%)
</TABLE>
The decrease in net sales resulted from decreased comparable store sales, the
smaller number of stores open during the period in 1999 vs. 1998, and the first
quarter of 1999 consisting of one week less than the first quarter of 1998.
For the first quarter of 1999, cost of sales was 84.1% of sales compared with
81.6% of sales for the corresponding period in the previous year. As a percent
of sales, the 1999 results were largely influenced by an increase in buying and
occupancy expenses as a percentage of sales this year compared with the
corresponding period in the prior year. This was due to the decrease in
comparable store sales (primarily as a result of increased competition) and
therefore less leveraging of these fixed costs, as well as increases in
inventory shrink.
For the first quarter of 1999, selling, general and administrative expenses were
25.0% of sales compared with 19.3% of sales for the corresponding period last
year. As a percent of sales, the increase in selling, general and administrative
expenses was due primarily to less leveraging of certain selling, general and
administrative expenses as a result of lower sales levels in the first quarter
of 1999 compared with the corresponding period last year, non-capitalizable
incremental costs related to the Company's remodeling and merchandise reset
programs, and incremental costs related to the Company's Year 2000 remediation
effort.
<PAGE> 4
For the first quarter of 1999, interest expense was $18.3 million compared with
$19.4 million for the corresponding period last year. The decrease was due
primarily to having fewer weeks during the quarter (13 weeks in 1999 vs. 14
weeks in 1998), less interest on capital leases relating to stores closed during
1998, and less interest for corporate owned life insurance resulting from
policies surrendered in 1998, and was partially offset by interest on higher
borrowings under the Company's revolving credit facility in 1999 compared with
the corresponding period in the prior year.
In the first quarter of 1998, the Company incurred $13.9 million of merger
related expenses primarily associated with the elimination of duplicate
overhead expenses including costs connected with the integration of information
technology systems related to Builders Square's operations. No such expenses
were incurred in the first quarter of 1999.
No Federal income tax expense was recorded for the first quarter of 1999 or the
corresponding period of the previous year. During the first quarter of 1999, 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 rates for 1999 and 1998 differ from the statutory rate as a result
of the effect of the valuation allowance on the deferred tax assets resulting
from each period's loss. As of October 3, 1998, the Company had net operating
loss carryforwards for Federal income tax purposes of approximately $80.7
million (net of approximately $97.0 million which will not be utilized by the
Company pursuant to Section 382 limitations), substantially all of which is
subject to a $5.5 million annual limitation resulting from the Company's
September 1997 ownership change.
YEAR 2000. The Year 2000 issue is a universal concern resulting from many
computer programs being written using two digits rather than four to define the
applicable year. Any computer program that has date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a temporary inability to process transactions or engage in
normal business activities.
State of Readiness
The Company, on a coordinated basis and with the assistance of outside
consultants, has developed a Year 2000 readiness program which has four primary
phases: (1) Inventory Analysis and Assessment, (2) Remediation, (3) Testing and
Implementation, and (4) External Agent Management. The current status for each
phase is as follows:
- - Inventory Analysis and Assessment. This phase was completed in the fourth
quarter of fiscal 1998.
- - Remediation. This phase is underway and approximately 50% complete. The
remaining effort is scheduled for completion in April 1999.
- - Testing and Implementation. Testing design and execution has begun, with
a scheduled completion date of June 1999.
- - External Agent Management. External agents include merchandisers,
software vendors, telecommunications / data communications providers,
EDI, and critical suppliers (utilities, contractors, benefit providers,
insurers, facilities, etc.). The Company has initiated formal
communications with its significant suppliers to determine the extent to
which each supplier is Year 2000 compliant and the potential impact on
the Company if suppliers fail to correct their Year 2000 issues. The
Company is still in the process of verifying application readiness of its
vendors, assigning levels of criticality to external agents, and
developing contingency plans related to vendors whose failure to address
their Year 2000 issues could impact the Company. Failure of the Company's
significant vendors to correct their Year 2000 issues could significantly
reduce the Company's inventory levels and sales and affect the Company's
ability to serve its customers.
The Company has not encountered any significant difficulties with any of the
project phases to date. Additionally, the Company is in the process of
developing contingency plans for those business functions which might be
affected by the Year 2000 problem and expects to have a plan by March 1999.
Year 2000 Costs
The Company incurred approximately $1.9 million during the 13 weeks ended
January 2, 1999 for the phases completed and in process to date. The Company
estimates it will incur approximately an additional
<PAGE> 5
$10 million of internal and external costs as the Company completes the
remediation, testing and implementation, external agent management, and
contingency plans in fiscal year 1999 and the end of calendar 1999. The Company
expects Year 2000 costs to be funded from cash generated from operations and
available credit facility.
Year 2000 Risks
Failure to identify and successfully remediate the Company's internal systems,
as well as infrastructure failures, such as loss of electric power, loss of
telecommunication services, delays or cancellations of shipping or
transportation, shut-downs of significant manufacturers or suppliers, or
computer errors by vendors and major bank errors, could significantly reduce the
Company's ability to sell its inventory and serve its customers. With respect to
the Company's internal systems, the most reasonable worst case scenario for the
Company with respect to the Year 2000 problem would be a major disruption in its
distribution and merchandising operations with respect to customers and
suppliers. With respect to external parties, the most reasonable worst case
scenario with respect to the Year 2000 problem is the failure of a supplier to
be Year 2000 compliant such that the Company's supply of needed inventory would
be interrupted temporarily. These scenarios are part of the contingency plans
currently under development.
The foregoing discussion regarding Year 2000 project timing, effectiveness,
implementation, and costs are based on management's current evaluation using
available information. Factors that might cause material changes include, but
are not limited to, the availability of key Company Year 2000 personnel and
external consultants, the readiness of third parties, and the Company's ability
to respond to unforeseen Year 2000 complications.
During 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 $107.5
million and $81.8 million for the 13 and 14 weeks ended January 2, 1999 and
January 3, 1998, respectively. The change was primarily the result of increased
losses in 1999 in addition to decreases in accounts payable and accrued
expenses.
Net cash flows used in investing activities were $0.6 million in the 13 weeks
ended January 2, 1999 and were due to capital spending of $10.4 million, largely
offset by receipt of $9.8 million in net proceeds relating to the sale of assets
held for sale. Net cash flows from investing activities were $52.6 million in
the 14 weeks ended January 3, 1998 and were primarily due to receipt of $49.9
million in net proceeds relating to the sale of seven Home Quarters stores in
the Michigan market.
Net cash flows from financing activities were $136.1 million in the 13 weeks
ended January 2, 1999 and were primarily the result of net proceeds from the
revolving credit facility of $132 million and a decrease in amounts due from
affiliates of $22.6 million, partially offset by $12.1 million used to prepay a
mortgage and redeem a portion of the 5-1/2% Convertible Subordinated Debentures,
and $5.4 million of debt financing costs paid in connection with amending the
Credit Agreement (see below). Net cash flows from financing activities were $7.4
million in the 14 weeks ended January 3, 1998, primarily due to net proceeds
from the revolving credit facility.
Cash and cash equivalents were $49.1 million and $21.1 million at January 2,
1999 and October 3, 1998, respectively.
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
<PAGE> 6
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 its non-operating properties, in 1997 the
Company revised its estimate and recorded an additional store closing charge of
$42.7 million for the estimated continuing carrying costs for non-operating
properties, consisting primarily of rents and other related costs. The
reductions to the accrual in 1999 and 1998 represent the net operating costs of
non-operating properties, along with lease termination fees for certain
non-operating properties. The Company believes that the remaining accrual of
$38.8 million as of January 2, 1999 is adequate to cover future liabilities
related to the carrying cost of the closed stores, which the Company is actively
marketing.
During first quarter 1999, the Company closed four Florida stores, sold the
associated leases and leaseholds, and is in the process of liquidating inventory
and vacating the stores. A gain on this sale of approximately $1.8 million,
representing the excess of sales proceeds over estimated expenses of closing
these stores, is included in other income in the accompanying Condensed
Consolidated Financial Statements. The Company believes that the remaining
accrual of $6.2 million as of January 2, 1999 is adequate to cover remaining
expenses related to the closing of these stores.
Management reviews the ongoing performance of, and future prospects for, its
stores and its markets in conjunction with its planning process. In situations
where remarketing leases and/or selling owned stores may potentially represent a
preferable use of Company resources, management is committed to investigating
these options in order to enhance store, market and Company results. The
financial statement impact, if any, of store closings is recorded when a
decision is finalized and criteria for accrual have been met.
In February 1999, the Company made a decision to close 34 stores, primarily
underperforming locations and stores in remote geographic locations. A
substantial charge related to these closings will be recorded in the second
quarter of 1999, representing losses on liquidation of inventory, store closing
costs including severance, and carrying costs of closed locations. The Company
has incurred costs of approximately $2 million per store in connection with
recent store closings. The Company is currently negotiating the sale of leases
for 15 of these locations and is vigorously pursuing disposition of the
remaining locations. The length of time the Company expects to hold each of the
properties before disposition, as well as the expected gain or loss on
disposition, will have a significant effect on the store closing charge.
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 as disclosed in its annual audited
financial statements. 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. In this event, the Company would be
required to utilize borrowing available under the Amended and Restated Credit
Agreement, if any, and/or arrange third-party financing for the properties,
subject to capital expenditure and other limitations. There can be no assurance
that the Company will be able to consummate any such transaction, if necessary.
As of January 2, 1999, the Company's net worth was $162.5 million. Unless the
Company's results improve or there is an additional capital contribution, the
Company may not be able to satisfy this net worth requirement at the end of
1999. In this circumstance, the earliest the Company would expect to repurchase
the properties would be February 2000.
In order to provide additional availability for seasonal purchases, remodeling
and merchandise reset activity, as well as to provide additional flexibility and
address concerns with regard to quarterly EBITDA requirements during the first
half of 1999, the Company entered into an amendment of the Credit Agreement and
entered into a supplemental revolving facility in the amount of $50 million.
On December 31, 1998, the Company amended the Credit Agreement (the "Amended and
Restated Credit Agreement"), increasing the advance rate against "Eligible
Inventory" (the "borrowing base") for a period of time. The increased advance
rate begins to decrease in April 1999, until resuming the original advance rate
on June 21, 1999. The Amended and Restated Credit Agreement is guaranteed by the
Company, collateralized by merchandise inventories and other assets and expires
in September 2002, and contains certain additional financial covenants and
increased interest rates. The borrowings under the Amended and
<PAGE> 7
Restated Credit Agreement bear interest at a rate which fluctuates based on (i)
the greatest of (a) Prime Rate, (b) the Base CD Rate (as defined) plus 1.0%, or
(c) the Federal Funds rate plus 0.5%; plus an additional 1.25% or (ii) LIBOR
plus 2.75%. In addition, the Company pays a fee at the rate of 0.5% per annum on
any available borrowing. Financing fees aggregating approximately $5.4 million
paid in conjunction with this transaction are included in Other Assets in the
accompanying Condensed Consolidated Financial Statements.
Also on December 31, 1998, the Company concurrently entered into a short-term
secured revolving credit facility (the "Supplemental Agreement") which permits
borrowings of up to an additional $50 million. The Supplemental Agreement
expires on June 30, 1999 and provides funds during periods when there is
insufficient availability under the borrowing base of the Amended and Restated
Credit Agreement. Borrowings under the Supplemental Agreement bear interest at
the same rate and are generally under the same terms as the Amended and Restated
Credit Agreement.
In connection with the Supplemental Agreement, GEI II, the majority shareholder
of Centers Holdings, Inc., the Company's indirect parent, and Kmart agreed to
repurchase from the lenders 20% and 80%, respectively, of the outstanding
amounts of such supplemental credit, up to the amount of $10 million and $40
million, respectively, in case of an event of default, as defined. The Company
paid GEI II and Kmart fees equal to 1.0% of their repurchase commitments under
this agreement. Should the Company borrow any amount under the Supplemental
Agreement, Kmart's warrant to purchase shares of the common stock of Centers
Holdings increases from 210,000 to 245,000 shares, representing approximately
31.6% of the common stock of Centers Holdings issued and outstanding after
giving effect to the warrant.
The Amended and Restated 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 Amended and Restated Credit Agreement limits
the annual amount of capital expenditures of the Company and, beginning with the
period ending December 31, 1998, requires the Company to maintain minimum
quarterly EBITDA (as defined) at increasing levels.
In order to meet the amended quarterly EBITDA covenants, the Company must
improve its operating results in the second half of the current fiscal year as
compared to 1998 and has been taking steps to improve virtually every aspect of
its business operation, including but not limited to: management personnel,
store remodeling and merchandise reset programs, merchandise procurement and
distribution logistics, labor management and training, information systems, and
loss prevention. In the event the Company is unable to meet these covenants in
1999, it will be necessary to obtain a waiver from the lenders, amend the
Amended and Restated Credit Agreement, or arrange for alternative financing with
other lenders. There can be no assurance that the Company will be able to
consummate any such transaction, if necessary.
The Company was not in compliance with the EBITDA covenant as of January 2,
1999. Therefore, the Company obtained a waiver of this covenant from the
lenders. Upon completing its quarter ending April 3, 1999, the Company may not
be in compliance with the EBITDA covenant as of April 3, 1999 and has therefore
arranged with the lenders for a temporary waiver, which expires April 30, 1999,
with respect to such quarter.
As of January 2, 1999, the Company had outstanding borrowings of approximately
$504 million under the Amended and Restated Credit Agreement, and had issued
and outstanding letters of credit of $40 million under this facility. The
available borrowing as of January 2, 1999 was approximately $53 million, and
carried a commitment fee of 0.5% per year.
The Company anticipates spending up to $35 million for capital expenditures in
1999 and in 2000. 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, exclusive of any contingent repurchase of real estate under the
terms of certain sale and leaseback transactions noted above, which could
require arranging third-party financing for the properties.
<PAGE> 8
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 service 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, as well as Year 2000 issues facing its
vendors, lenders and others with whom the Company engages in substantial
business; the Company's ability to maintain compliance with its debt agreements
or to obtain further waivers or amendments if necessary; 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. No
significant activity occurred with respect to this filing during 1998 or thus
far in 1999.
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> 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------ --------
<S> <C>
13 Condensed Consolidated Financial Statements
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
None.
<PAGE> 10
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: February 22, 1999 HECHINGER COMPANY
-----------------
Registrant
/S/ Mark R. Adams
-----------------
Mark R. Adams
Executive Vice President, Chief Financial Officer
and General Counsel
<PAGE> 11
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THE THIRTEEN WEEKS ENDED JANUARY 2, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
13 Condensed Consolidated Financial Statements
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 13
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
JAN. 2, 1999 JAN. 3, 1998
(13 WEEKS) (14 WEEKS)
---------- ---------
<S> <C> <C>
REVENUES
Net sales $ 658,278 $ 922,807
Other 2,604 1,223
---------- ---------
Total Revenues 660,882 924,030
COSTS AND EXPENSES
Cost of sales 553,922 752,697
Selling, general and administrative expenses 164,381 178,422
Interest expense 18,316 19,379
Merger related expenses - 13,949
---------- ---------
Total Costs and Expenses 736,619 964,447
---------- ---------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (75,737) (40,417)
INCOME TAX EXPENSE 625 -
---------- ---------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (76,362) (40,417)
EXTRAORDINARY ITEM - GAIN ON EARLY RETIREMENT OF DEBT, NET 185 -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - (7,272)
---------- ---------
NET LOSS $ (76,177) $ (47,689)
========== =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 2
EXHIBIT 13
HECHINGER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
(UNAUDITED)
JAN. 2, 1999 OCT. 3, 1998
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 49,054 $ 21,116
Merchandise inventories 958,850 1,046,361
Due from affiliates, net 813 18,531
Other current assets 61,024 67,313
------------ -----------
Total Current Assets 1,069,741 1,153,321
ASSETS HELD FOR SALE 5,725 15,724
PROPERTY, FURNITURE AND EQUIPMENT, NET 279,345 287,702
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 48,845 49,265
LEASEHOLD ACQUISITION COSTS, NET 34,225 34,660
OTHER ASSETS 43,344 36,574
------------ -----------
TOTAL ASSETS $ 1,481,225 $ 1,577,246
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Revolving credit facility $ 504,000 $ 372,000
Current portion of long-term debt and capital lease obligations 28,465 28,875
Accounts payable and accrued expenses 358,894 495,323
Accrued costs for store closings 48,284 42,221
------------ -----------
Total Current Liabilities 939,643 938,419
LONG-TERM DEBT, LESS CURRENT PORTION 300,226 318,490
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 51,518 54,683
DEFERRED RENT 27,297 26,936
------------ -----------
Total Liabilities 1,318,684 1,338,528
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 163,213 163,213
Accumulated deficit (242,179) (166,002)
------------ -----------
Total Stockholder's Equity 162,541 238,718
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,481,225 $ 1,577,246
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 3
EXHIBIT 13
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
JAN. 2, 1999 JAN. 3, 1998
(13 WEEKS) (14 WEEKS)
------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (76,177) $ (47,689)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Store closing and other charges (984) (10,325)
Depreciation and amortization 12,092 13,741
Amortization of deferred debt issuance costs 1,121 1,243
Cumulative effect of change in accounting principle - 7,272
Gain on sale of leases, net (1,797) -
Other 176 421
CHANGES IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories 86,369 90,593
Other current assets 7,577 (11,519)
Accounts payable and accrued expenses (135,867) (125,581)
------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (107,490) (81,844)
------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Proceeds from sale of assets held for sale 9,835 49,924
Property, furniture, equipment and other asset additions (10,394) (22)
Other (88) 2,708
------------------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (647) 52,610
------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 200,000 162,125
Payments on revolving credit facility (68,000) (153,970)
Decrease in amounts due from affiliates 22,585 -
Payments on retirement of debt (12,055) -
Debt financing costs (5,364) -
Other (1,091) (772)
------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 136,075 7,383
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,938 (21,851)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,116 87,215
------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 49,054 $ 65,364
========================
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 2,007 $ -
Cash payments for interest $ 18,689 $ 21,890
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
EXHIBIT 13
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands except share data)
<TABLE>
<CAPTION>
COMMON STOCK, ADDITIONAL PAID CONTRIBUTED ACCUMULATED
PAR $.01 IN CAPITAL CAPITAL DEFICIT TOTAL
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPT. 27, 1997 $ - $ 241,507 $ 108,058 $ (73,097) $ 276,468
Capital contribution - - 55,155 - 55,155
Net loss - - - (92,905) (92,905)
---------------------------------------------------------------------
BALANCE, OCT. 3, 1998 - 241,507 163,213 (166,002) 238,718
Net loss (unaudited) - - - (76,177) (76,177)
---------------------------------------------------------------------
BALANCE, JAN. 2, 1999 (UNAUDITED) $ - $ 241,507 $ 163,213 $ (242,179) $ 162,541
=====================================================================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
EXHIBIT 13
HECHINGER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED JANUARY 2, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
A. BASIS OF PRESENTATION
Hechinger Company, a Delaware corporation (together with its direct and indirect
subsidiaries, the "Company"), is a leading specialty retailer of products and
services for the care, repair, remodeling and maintenance of the home and
garden. At January 2, 1999, the Company operated 240 stores, primarily under the
Hechinger ("Hechinger"), Home Quarters Warehouse ("Home Quarters") and Builders
Square ("Builders Square"). The 121 Builders Square stores are located primarily
in the Southern, Southeastern, Northern and Midwestern parts of the United
States. The 63 Hechinger stores are primarily located in the Mid-Atlantic
region; and the 56 Home Quarters stores are primarily located in the
Southeastern, Northeastern and Midwestern parts of the United States.
The Company's fiscal year ends on the Saturday closest to September 30. The
fiscal year ended October 3, 1998 was 53 weeks ("1998"), compared with the
fiscal year ending October 2, 1999, which has 52 weeks ("1999").
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation. The Company's
business is seasonal and its annual results of operations depend to a
significant extent on the results of operations during the spring and summer
months.
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 weeks ended January 2, 1999 are not necessarily indicative of the
results to be expected for the fiscal year ending October 2, 1999.
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 fiscal year ended
October 3, 1998.
B. CHANGE IN ACCOUNTING PRINCIPLE
During the quarter ended October 3, 1998, and effective as of September 28,
1997, the Company changed its method of applying the last-in, first-out ("LIFO")
accounting method for inventories of its Hechinger and Home Quarters stores to
the retail method.
The cumulative effect of this change on the amount of retained earnings as of
September 28, 1997 of approximately $7.3 million (before and after tax effect)
has been included in net loss for the year ended October 3, 1998. The effect of
this change was a decrease in 1998 loss before extraordinary item and change in
accounting principle of approximately $0.4 million. The net effect of 1998 and
cumulative amounts was an increase in 1998 net loss of approximately $6.9
million.
C. RESTATEMENT OF FIRST QUARTER OF 1998
Net loss for the 14 weeks ended January 3, 1998 increased from amounts
previously reported by the Company by $8.1 million due primarily to the $7.3
million cumulative effect of the change in accounting for inventories (See Note
B above), a charge to selling, general and administrative expenses of
approximately $4.0 million representing the effect of a new leave program for
Builders Square employees, and a
<PAGE> 6
reduction in cost of sales of approximately $3.2 million for the effect of
markdowns included in the beginning inventory under the retail inventory method
adopted in 1998.
D. MERCHANDISE INVENTORIES
As of January 2, 1999, inventories are stated at the lower of cost or market,
with cost determined using the LIFO retail inventory method. As of January 2,
1999, LIFO inventories approximated the value that would have been reported
under the FIFO method. 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 retail prices at that time.
Accordingly, interim LIFO calculations are based on management's estimates of
expected year-end inventory levels and retail prices. Interim results are
subject to the final year-end LIFO inventory valuation.
E. STORE CLOSING AND OTHER CHARGES
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 its non-operating properties, in 1997 the Company
revised its estimate and recorded an additional store closing charge of $42.7
million for the estimated continuing carrying costs for non-operating
properties, consisting primarily of rents and other related costs. The
reductions to the accrual in 1999 and 1998 represent the net operating costs of
non-operating properties, along with lease termination fees for certain
non-operating properties. The Company believes that the remaining accrual of
$38.8 million as of January 2, 1999 is adequate to cover future liabilities
related to the carrying cost of the closed stores, which the Company is actively
marketing.
During first quarter 1999, the Company closed four Florida stores, sold the
associated leases and leaseholds, and is in the process of liquidating
inventory and vacating the stores. A gain on this sale of approximately $1.8
million, representing the excess of sales proceeds over estimated expenses of
closing these stores, is included in other income in the accompanying Condensed
Consolidated Financial Statements. The Company believes that the remaining
accrual of $6.2 million as of January 2, 1999 is adequate to cover remaining
expenses related to the closing of these stores.
Management reviews the ongoing performance of, and future prospects for, its
stores and its markets in conjunction with its planning process. In situations
where remarketing leases and/or selling owned stores may potentially represent a
preferable use of Company resources, management is committed to investigating
these options in order to enhance store, market and Company results. The
financial statement impact, if any, of store closings is recorded when a
decision is finalized and criteria for accrual have been met. (See Note L,
Subsequent Events.)
The Store Closing Charges were based on certain estimates and as a result, the
actual amounts could vary from these estimates.
F. REVOLVING CREDIT FACILITY
In order to provide additional availability for seasonal purchases, remodeling
and merchandise reset activity, as well as to provide additional flexibility and
address concerns with regard to quarterly EBITDA requirements during the first
half of 1999, the Company entered into an amendment of the Credit Agreement and
entered into a supplemental revolving facility in the amount of $50 million.
On December 31, 1998, the Company amended the Credit Agreement (the "Amended and
Restated Credit Agreement"), increasing the advance rate against "Eligible
Inventory" (the "borrowing base") for a period of time. The increased advance
rate begins to decrease in April 1999, until resuming the original advance rate
on June 21, 1999. The Amended and Restated Credit Agreement is guaranteed by the
<PAGE> 7
Company, collateralized by merchandise inventories and other assets and expires
in September 2002, and contains certain additional financial covenants and
increased interest rates. The borrowings under the Amended and Restated Credit
Agreement bear interest at a rate which fluctuates based on (i) the greatest of
(a) Prime Rate, (b) the Base CD Rate (as defined) plus 1.0%, or (c) the Federal
Funds rate plus 0.5%; plus an additional 1.25% or (ii) LIBOR plus 2.75%. In
addition, the Company pays a fee at the rate of 0.5% per annum on any available
borrowing. Financing fees aggregating approximately $5.4 million paid in
conjunction with this transaction are included in Other Assets in the
accompanying Condensed Consolidated Financial Statements.
Also on December 31, 1998, the Company concurrently entered into a short-term
secured revolving credit facility (the "Supplemental Agreement") which permits
borrowings of up to an additional $50 million. The Supplemental Agreement
expires on June 30, 1999 and provides funds during periods when there is
insufficient availability under the borrowing base of the Amended and Restated
Credit Agreement. Borrowings under the Supplemental Agreement bear interest at
the same rate and are generally under the same terms as the Amended and Restated
Credit Agreement.
In connection with the Supplemental Agreement, GEI II, the majority shareholder
of Centers Holdings, Inc., the Company's indirect parent, and Kmart agreed to
repurchase from the lenders 20% and 80%, respectively, of the outstanding
amounts of such supplemental credit, up to the amount of $10 million and $40
million, respectively, in case of an event of default, as defined. The Company
agreed to pay GEI II and Kmart fees equal to 1.0% of their repurchase
commitments under this agreement. Should the Company borrow any amount under the
Supplemental Agreement, Kmart's warrant to purchase shares of the common stock
of Centers Holdings increases from 210,000 to 245,000 shares, representing
approximately 31.6% of the common stock of Centers Holdings issued and
outstanding after giving effect to the warrant.
The Amended and Restated 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 Amended and Restated Credit Agreement limits
the annual amount of capital expenditures of the Company and, beginning with the
period ending December 31, 1998, requires the Company to maintain minimum
quarterly EBITDA (as defined) at increasing levels.
In order to meet the amended quarterly EBITDA covenants, the Company must
improve its operating results in the second half of the current fiscal year as
compared to 1998. In the event the Company is unable to meet these covenants in
1999, it will be necessary to obtain a waiver from the lenders, amend the
Amended and Restated Credit Agreement, or arrange for alternative financing with
other lenders. There can be no assurance that the Company will be able to
consummate any such transaction, if necessary.
The Company was not in compliance with the EBITDA covenant as of January 2,
1999. Therefore, the Company obtained a waiver of this covenant from the
lenders. Upon completing its quarter ending April 3, 1999, the Company may not
be in compliance with the EBITDA covenant as of April 3, 1999 and has therefore
arranged with the lenders for a temporary waiver, which expires April 30, 1999,
with respect to such quarter.
As of January 2, 1999, the Company had outstanding borrowings of approximately
$504 million under the Amended and Restated Credit Agreement, and had issued
and outstanding letters of credit of $40 million under this facility. The
available borrowing as of January 2, 1999 was approximately $53 million, and
carried a commitment fee of 0.5% per year.
G. LONG-TERM DEBT
During the first quarter of 1999, the Company disposed of an asset held for sale
and, primarily with the net proceeds of $9.8 million from the sale, paid down
the related mortgage by $11.9 million. Additionally, the Company redeemed $0.3
million of its 5-1/2% Convertible Subordinated Debentures, which resulted in the
recognition of an after-tax extraordinary gain of $0.2 million.
<PAGE> 8
H. TAXES ON INCOME
No Federal income tax expense was recorded for the first quarter of 1999 or the
corresponding period of the previous year. During the first quarter of 1999, 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 rates for 1999 and 1998 differ from the statutory rate as a result
of the effect of the valuation allowance on the deferred tax assets resulting
from each period's loss. As of October 3, 1998, the Company had net operating
loss carryforwards for Federal income tax purposes of approximately $80.7
million (net of approximately $97.0 million which will not be utilized by the
Company pursuant to Section 382 limitations), substantially all of which is
subject to a $5.5 million annual limitation resulting from the Company's
September 1997 ownership change.
I. 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 as disclosed in its annual audited
financial statements. 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. In this event, the Company would be
required to utilize borrowing available under the Amended and Restated Credit
Agreement, if any, and/or arrange third-party financing for the properties,
subject to capital expenditure and other limitations. There can be no assurance
that the Company will be able to consummate any such transaction, if necessary.
As of January 2, 1999, the Company's net worth was $162.5 million. Unless the
Company's results improve or there is an additional capital contribution, the
Company may not be able to satisfy this requirement at the end of 1999.
J. 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. No
significant activity occurred with respect to this filing during 1998 or thus
far in 1999.
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.
K. BUSINESS CONSOLIDATION COSTS
In first quarter of 1998, the Company incurred $13.9 million of merger related
expenses primarily associated with eliminating duplicate overhead functions
related to Builders Square's operations, including costs associated with the
integration of information technology systems. This effort was completed by the
end of 1998.
L. SUBSEQUENT EVENTS
In February 1999, the Company made a decision to close 34 stores, primarily
underperforming locations and stores in remote geographic locations. A
substantial charge related to these closings will be recorded in the second
quarter of 1999, representing losses on liquidation of inventory, store closing
costs including severance, and carrying costs of closed locations. The Company
has incurred costs of approximately $2
<PAGE> 9
million per store in connection with recent store closings. The Company is
currently negotiating the sale of leases for 15 of these locations and is
vigorously pursuing disposition of the remaining locations. The length of time
the Company expects to hold each of the properties before disposition, as well
as the expected gain or loss on disposition, will have a significant effect on
the store closing charge.
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 49,054
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 958,850
<CURRENT-ASSETS> 1,069,741
<PP&E> 279,345<F1>
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<TOTAL-ASSETS> 1,481,225
<CURRENT-LIABILITIES> 939,643
<BONDS> 300,226
0
0
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<OTHER-SE> 162,541
<TOTAL-LIABILITY-AND-EQUITY> 1,481,225
<SALES> 658,278
<TOTAL-REVENUES> 660,882
<CGS> 553,922
<TOTAL-COSTS> 718,303
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<INCOME-PRETAX> (75,737)
<INCOME-TAX> 625
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<NET-INCOME> (76,177)
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<FN>
<F1>Property, furniture and equipment, net of accumulated depreciation
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