<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
CHECK ONE
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the thirteen and twenty-six weeks ended April 3,
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 May 18, 1999.
10 shares of Common Stock, $.01 par value
<PAGE> 2
HECHINGER COMPANY
INDEX TO FORM 10-Q
THIRTEEN AND TWENTY-SIX WEEKS ENDED APRIL 3, 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 April 3, 1999, the Company operated 206 stores, primarily under the
Hechinger ("Hechinger"), Home Quarters Warehouse ("Home Quarters") and Builders
Square ("Builders Square") names. The 90 Builders Square and 56 Home Quarters
stores are located primarily in the Southern, Southeastern, Northern and
Midwestern parts of the United States. The 60 Hechinger stores are primarily
located in the Mid-Atlantic region.
In the last twelve months, the Company has remodeled 37 of its key stores in
seven of its markets. The new store model expands areas the Company believes are
most appealing to its customer base. As a part of the remodel process a new
format is introduced that features improved merchandise adjacencies, lighting
and signage. Merchandise offerings are strengthened to include, among other
things, a broad assortment of home appliances, a significantly expanded flooring
department and a convenience assortment of automotive supplies. The name of the
Hechinger and Builders Square stores that undergo this remodeling is also
changed to Home Quarters.
Subsequent to the end of the quarter, the Company completed the remodeling of
thirteen stores in the Detroit, Michigan market, eight stores in the St. Louis,
Missouri market, and one in suburban Baltimore, Maryland. Of the twenty-two
stores remodeled, fourteen Builders Square units and one Hechinger store were
renamed to Home Quarters.
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"). Year-to-date
1999 was 26 weeks compared with year-to-date 1998, which was 27 weeks.
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 (38) (16)
---- ----
At end of second quarter 206 255
=== ===
</TABLE>
The following table sets forth the net sales reported by the Company (in
millions):
<TABLE>
<CAPTION>
Total Comparable
Store Sales Store Sales
1999 1998 % Change % Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Second Quarter $508.5 $744.5 (32%) (20%)
Year-to-date $1,166.8 $1,667.3 (30%) (18%)
</TABLE>
The decrease in net sales resulted from decreased comparable store sales, the
fewer number of stores open during the periods in 1999 versus 1998, and the
year-to-date 1999 consisting of one week less than the year-to-date 1998. The
decrease in comparable store sales was due primarily to increased competition
during 1999.
For the second quarter of 1999, cost of sales was 104.5% of sales compared with
80.6% of sales for the corresponding period in the previous year. On a
year-to-date basis, cost of sales in 1999 was 93.0% of sales compared with 81.1%
of sales in the previous year. As a percent of sales, the 1999 results were
largely influenced by a $76.2 million charge, or 15.0% of sales for the second
quarter of 1999 and 6.5% of sales for the year-to-date, recorded in cost of
sales for the estimated inventory write-downs associated with the store
liquidations resulting from the Company's decision to close 34 stores during the
quarter (see Liquidity and Capital Resources discussion below). Additionally,
cost of sales increased due to increases in inventory shrink, and an increase in
buying and occupancy expenses as a percentage of sales this year compared with
the corresponding period in the prior year. The increase in the buying and
occupancy expense rate was due to the decrease in comparable store sales
(primarily as a result of increased competition) and therefore less leveraging
of these fixed costs.
For the second quarter of 1999, selling, general and administrative expenses
were 29.0% of sales compared with 21.2% of sales for the corresponding period
last year. On a year-to-date basis, selling,
<PAGE> 4
general and administrative expenses were 26.7% of sales compared with 20.2% of
sales for the corresponding period last year. As a percent of sales, the
increases in selling, general and administrative expenses were due primarily to
less leveraging of certain selling, general and administrative expenses as a
result of lower sales levels in 1999 compared with the corresponding periods
last year, non-capitalizable incremental costs related to the Company's
remodeling and merchandise reset programs, and costs related to the Company's
Year 2000 remediation effort.
For the second quarter of 1999, interest expense was $21.5 million compared with
$18.2 million for the corresponding period last year. The increase was due
primarily to higher borrowings under the Company's revolving credit facility in
1999 compared with the corresponding period in the prior year, partially offset
by less interest on capital leases related to stores closed during 1998, and
less interest for corporate owned life insurance resulting from policies
surrendered in 1998. On a year-to-date basis, interest expense was $39.8 million
compared with $37.6 million for the corresponding period last year. The increase
was due primarily to higher borrowings under the Company's revolving credit
facility in 1999 compared with the corresponding period in the prior year,
partially offset by fewer weeks during the period (26 weeks in 1999 vs. 27 weeks
in 1998), less interest on capital leases related to stores closed during 1998,
and less interest for corporate owned life insurance resulting from policies
surrendered in 1998.
During the second quarter of 1999, the Company announced the closing of 34
stores, primarily underperforming locations and stores in remote geographic
locations, commenced the liquidation, and recorded a store closing charge of
$92.7 million. Of this charge, approximately $76.2 million represents the
write-down of the inventory in these stores to its estimated market value and is
therefore included in cost of sales for the period. The remaining charge of
$16.4 million relates primarily to estimated rents and other related costs of
the associated leaseholds until their estimated disposition dates, as well as a
write-down of fixed assets of approximately $1.3 million, partially offset by
proceeds expected to be received on the sale of the leases for certain of these
stores. Additionally, approximately $3.5 million of this charge represents
employee termination payments.
In the second quarter of 1998, the Company incurred $7.4 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. In the first half of
1998, the Company incurred $21.4 million of merger related expenses. No such
expenses were incurred in the first half of 1999.
No Federal income tax expense was recorded for the second quarter and
year-to-date periods ended April 3, 1999 or the corresponding periods of the
previous year. For the second quarter and year-to-date periods ended April 3,
1999, the Company recorded approximately $0.6 million and $1.3 million of state
income tax expense, respectively. For both the second quarter and year-to-date
periods ended April 4, 1998, the Company recorded approximately $1.3 million of
state income tax expense. 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)
<PAGE> 5
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 two-thirds
complete. During the quarter, a decision was made to remediate all
applications originally scheduled for replacement in 1999, which extended
the anticipated completion date for this phase. This phase of the project
was scheduled for completion in April 1999 and is currently scheduled for
completion in July 1999; this deferral will extend the Testing and
Implementation phase milestones.
- - Testing and Implementation. Testing design and execution continues, with
a revised scheduled completion date of September 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 in the process of reviewing its 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. During the quarter, the Company implemented a portion of
the contingency plan by scheduling the remediation of all applications
originally scheduled for replacement. Additionally, the Company is in the
process of refining and reviewing contingency plans for those business
functions that might be affected by the Year 2000 problem.
Year 2000 Costs
The Company incurred approximately $3.9 million and $5.8 million during the
second quarter and year-to-date periods ended April 3, 1999, respectively, for
the phases completed and in process to date. The Company estimates it will incur
approximately an additional $7 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.
Accounting Pronouncement. During 1998, the Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained
<PAGE> 6
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 $225.7
million and $87.2 million for the first half of 1999 and 1998, respectively. The
change was primarily the result of increased losses in 1999 in addition to a
decrease in accounts payable and accrued expenses. The decrease in accounts
payable and accrued expenses is largely due to vendors reducing their credit
exposure to the Company (see further discussion that follows) as well as
decreased levels of inventory.
Net cash flows used in investing activities were $11.0 million in the first half
of 1999 and were due to capital spending of $20.6 million, partially 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 $55.7 million in the first
half of 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 $216.4 million in the first half
of 1999 and were primarily the result of net proceeds from the revolving credit
facility of approximately $221.8 million and an increase in amounts due to
affiliates of $29.6 million, partially offset by $21.1 million of debt financing
costs paid in connection with amending the Company's credit agreements during
the first and second quarters, $12.1 million used to prepay a mortgage, and the
redemption of a portion of the 5-1/2% Convertible Subordinated Debentures. Net
cash flows from financing activities were $26.5 million for the first half of
1998, and were largely funded by $25.0 million of capital contributed by the
Company's parent as well as borrowings under the Company's senior secured
revolving credit facility.
Cash and cash equivalents were $0.8 million and $21.1 million at April 3, 1999
and October 3, 1998, respectively.
During the first quarter of 1999, the Company closed four Florida stores and
sold the associated leases and leaseholds. A net 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
year-to-date results in the accompanying Condensed Consolidated Financial
Statements. As of April 3, 1999, the Company has substantially discharged all
expenses related to the closing of these stores and the remaining accrual is
nominal.
During the second quarter of 1999, the Company announced the closing of 34
stores, primarily underperforming locations and stores in remote geographic
locations, commenced the liquidation, and recorded a store closing charge of
$92.7 million. Of this charge, approximately $76.2 million represents the
write-down of the inventory in these stores to its estimated market value and is
therefore included in cost of sales for the period. The remaining charge of
$16.4 million relates primarily to estimated rents and other related costs of
the associated leaseholds until their estimated disposition dates, as well as a
write-down of fixed assets of approximately $1.3 million, partially offset by
proceeds expected to be received on the sale of the leases for certain of these
stores. Additionally, approximately $3.5 million of this charge represents
employee termination payments. The Company has disposed of one of these
properties, has contracts for sale of twelve additional properties, and is in
final negotiations for the sale of four more properties. The Company believes
that the remaining accrual of $14.8 million as of April 3, 1999 is adequate to
cover future liabilities related to the closing and carrying costs of the
remaining closed stores, which the Company is actively marketing. However, this
estimate is based on a number of assumptions which are subject to uncertainty,
and which could change actual results in the future.
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-
<PAGE> 7
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 $37.0 million as of April 3, 1999 is adequate to cover
future liabilities related to the carrying cost of the closed stores, which the
Company is actively marketing.
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's 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.
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 (as defined below), 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 April 3, 1999, the Company's net worth was a
deficit of $65.9 million. Unless the Company's results improve or there is an
additional capital contribution, the Company would not be able to satisfy this
net worth requirement at the end of 1999. In this circumstance, the earliest the
Company would expect to be required to repurchase the properties would be
February 2000.
On March 18, 1999, the Company entered into an Amended and Restated Credit
Agreement with a new group of lenders (the "Amended and Restated Credit
Agreement") to provide the Company with a $700 million secured credit facility.
The facility provides additional borrowing capacity and greater flexibility with
respect to operating covenants than the Company's previous $600 million senior
secured revolving credit facility and $50 million short-term secured revolving
credit facility which were replaced by this agreement. The facility is
guaranteed by the Company, its parent, affiliates and subsidiaries,
collateralized by merchandise inventories and other assets and expires in March
2002. The amount available under the facility varies based on the Company's
eligible asset balance (as defined in the agreement).
The facility consists of two parts. Tranche A is a working capital revolving
credit facility with a maximum amount of $650 million, including a $125 million
letter of credit sub-limit. The borrowings under Tranche A bear interest at a
rate which is set for 12 months from closing at either a rate based on LIBOR
plus 2.75% or the Base Rate (as defined in the agreement) plus 0.75%, at the
Company's election. Thereafter the rates will vary depending on Excess
Availability and EBITDA (both as defined in the agreement) levels. Tranche B is
a term facility with a maximum amount of $50 million. The borrowings under
Tranche B bear interest of 18% per annum, 3% of which is deferred and
compounded. Tranches A and B have differing priority security interests in the
secured assets.
The Amended and Restated Credit Agreement contains certain covenants which limit
the annual amount of capital expenditures of the Company and, starting with June
30, 1999, requires the Company to maintain certain Minimum Excess Availability
(as defined in the agreement). In the event the Company falls below these
required excess availability levels, it will be subject to certain minimum
EBITDA and minimum accounts payable to inventory ratios (as defined in the
agreement). The Company is not otherwise subject to compliance with any
financial covenants under the agreement.
Approximately $16 million of financing fees related to the Amended and Restated
Credit Agreement had been paid or accrued as of April 3, 1999. These costs,
which are included in Other Assets in the
<PAGE> 8
accompanying Condensed Consolidated Financial Statements, will be amortized
over the 3-year term of the facility. The Company is also obligated to pay two
future annual fees of approximately $1.0 million, and a fee of 0.375% per annum
on any available borrowing under this facility.
As of April 3, 1999, the Company had outstanding borrowings of approximately
$594 million under the Amended and Restated Credit Agreement, and had
outstanding letters of credit of approximately $34 million under this facility.
The excess availability as of April 3, 1999 was approximately $68 million.
The remaining unamortized financing fees of approximately $20.3 million related
to the former $600 million senior secured revolving credit facility and $50
million short-term secured revolving credit facility were expensed during the
second quarter ended April 3, 1999, and are included in Loss on Early
Retirement of Debt in the accompanying Condensed Consolidated Financial
Statements.
The Company anticipates spending up to $32 million for capital expenditures in
1999. Based on preliminary results in the stores which have been remodeled, the
Company believes that the remodeling process has resulted in an increase in
store sales over otherwise expected results.
The Company's liquidity has been severely impacted by the Company's continuing
losses. Additionally, certain merchandise vendors have reduced their credit
exposure to the Company. The Company's liquidity depends on available borrowings
under the Amended and Restated Credit Agreement, which were approximately $68
million as of April 3, 1999 (and approximately $68 million as of May 8, 1999).
In addition, the Company does not expect that it will continue to meet the
Minimum Excess Availability covenant in the Amended and Restated Credit
Agreement at the beginning of July when the Inventory Advance Rate decreases
from 69% of Eligible Inventory to 65% of Eligible Inventory (all as defined in
the agreement), unless it substantially improves its operating results and
receives credit support from its merchandise vendors on terms more favorable
than current levels, as to which no assurance can be given. If the Company is
not able to comply with the Minimum Excess Availability covenant, and if the
Company is further not in compliance with the financial performance covenants of
the Amended and Restated Credit Agreement when those covenants become effective
on June 30, 1999, the Company will not be able to continue to borrow under this
agreement in the absence of a waiver of the covenant from the lenders or an
amendment of that agreement. Without a waiver or amendment, the Company would
need to seek alternative financing. No assurance can be given that the Company
would be able to obtain such a waiver, amendment, or alternative financing.
The Company has engaged the firm of Policano & Manzo, LLC as well as other
advisors to assist it in developing financial and operating plans and
alternatives. The Company is actively exploring these alternatives, which
include but are not limited to an evaluation of the actual and projected
profitability of individual stores and markets in which the Company believes it
has a core set of profitable stores, financial restructuring and other
alternatives. There can be no assurances that these efforts will be successful
or, if they are successful, that they will be sufficient to cure the Company's
liquidity situation. In addition, as described above, the Company may also be
obligated to repurchase real estate under the terms of certain sale and
leaseback transactions, which would require additional third-party financing, as
to which no assurances can be given.
On May 15, 1999, the Company had a scheduled semi-annual interest payment of
$4.7 million on its 9.45% Senior Debentures. The Company has elected to use the
30 day grace period provided for in the Senior Debentures. If the Company does
not make the required interest payment by the end of the grace period, the
Company will be in default and the Trustee under the Senior Debentures, or the
holders of 25% in principal amount of the debentures, may accelerate the
maturity date of the debentures. In addition, if the Company fails to make the
semi-annual interest payment and it is not cured within ten days, a default will
occur under certain sale-leaseback transactions, and a default may occur under
other contracts to which the Company is a party, which in turn may result in a
default under the Amended and Restated Credit Agreement, unless the Company is
able to obtain waivers of such defaults. In such event, the Company intends to
seek such waivers, although no assurance can be given that the Company will be
able to obtain such waivers.
The Company does not anticipate that the banks under the Amended and Restated
Credit Agreement will cease to make advances under the credit facility on the
basis of the failure of the Company to timely cure the failure to make the
required interest payment under the Senior Debentures or any resulting default
under the sale leaseback transactions or other contracts, although the Company
has no written commitment from such banks.
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 Company's ability
to maintain compliance with its debt agreements or to obtain further waivers,
amendments, or refinancing if necessary; the Company's ability to obtain
increased credit support and overall support from its merchandise vendors; the
strength and extent of new and existing competition; the Company's ability to
maintain competitive pricing in its markets; 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 dispose
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; general economic
conditions; housing turnover; interest rates; weather; and other factors
described from time to time in the Company's Securities and Exchange Commission
filings.
<PAGE> 9
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 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." On April 1, 1999, the complaint was dismissed
by the court at the request of both parties with no payment required by either
party.
The Company and its subsidiaries are also parties to legal proceedings and
claims arising in the ordinary course of business. Although the outcome of such
proceedings and claims cannot be determined with certainty, based upon
evaluation by legal counsel, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------ --------
<S> <C>
13 Condensed Consolidated Financial Statements
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated March 18, 1999 was to file a copy of the
press release to announce the completion of the Amended and Restated Credit
Agreement dated March 18, 1999 for the Company's $700 million secured credit
facility with BankBoston Retail Finance Inc. and to file a copy of the
agreement.
A Current Report on Form 8-K dated March 1, 1999 was to file a copy of the press
release to announce that the Company had entered into a commitment letter with
BankBoston Retail Finance Inc. to provide the Company with $700 million secured
credit facility and the appointments of the Company's executive officers.
<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: May 18, 1999 HECHINGER COMPANY
-----------------
Registrant
/S/ Mark R. Adams
------------------
Mark R. Adams
President and Chief Executive Officer
(and principal accounting officer)
<PAGE> 11
HECHINGER COMPANY
INDEX TO EXHIBITS
FORM 10-Q FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED APRIL 3, 1999
- --------------------------------------------------------------------------------
EXHIBIT NO.
13 Condensed Consolidated Financial Statements
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 13
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
APR. 3, 1999 APR. 4, 1998 APR. 3, 1999 APR. 4, 1998
(13 WEEKS) (13 WEEKS) (26 WEEKS) (27 WEEKS)
---------------- ---------------- ---------------- ----------------
REVENUES
<S> <C> <C> <C> <C>
Net sales $ 508,540 $ 744,482 $ 1,166,818 $ 1,667,289
Other 726 426 3,330 1,649
---------------- ---------------- ---------------- ----------------
Total Revenues 509,266 744,908 1,170,148 1,668,938
COSTS AND EXPENSES
Cost of sales 531,526 600,302 1,085,448 1,352,999
Selling, general and administrative expenses 147,293 158,065 311,674 336,487
Interest expense 21,477 18,231 39,793 37,610
Store closing charge 16,433 - 16,433 -
Merger related expenses - 7,421 - 21,370
---------------- ---------------- ---------------- ----------------
Total Costs and Expenses 716,729 784,019 1,453,348 1,748,466
---------------- ---------------- ---------------- ----------------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (207,463) (39,111) (283,200) (79,528)
INCOME TAX EXPENSE 625 1,250 1,250 1,250
---------------- ---------------- ---------------- ----------------
LOSS BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (208,088) (40,361) (284,450) (80,778)
EXTRAORDINARY ITEM - LOSS ON EARLY
RETIREMENT OF DEBT, NET (20,334) - (20,149) -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - - - (7,272)
---------------- ---------------- ================ ================
NET LOSS $ (228,422) $ (40,361) $ (304,599) $ (88,050)
================ ================ ================ ================
</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)
APR. 3, 1999 OCT. 3, 1998
------------------------- -------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 838 $ 21,116
Merchandise inventories 884,352 1,046,361
Due from affiliates, net - 18,531
Other current assets 40,597 67,313
----------------- -----------------
Total Current Assets 925,787 1,153,321
ASSETS HELD FOR SALE 5,781 15,724
PROPERTY, FURNITURE AND EQUIPMENT, NET 276,975 287,702
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 48,425 49,265
LEASEHOLD ACQUISITION COSTS, NET 33,790 34,660
OTHER ASSETS 38,616 36,574
----------------- -----------------
TOTAL ASSETS $ 1,329,374 $ 1,577,246
================= =================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Revolving credit facility $ 593,798 $ 372,000
Current portion of long-term debt and capital lease obligations 28,465 28,875
Due to affiliates, net 8,012 -
Accounts payable and accrued expenses 332,246 495,323
Accrued costs for store closings 54,638 42,221
----------------- -----------------
Total Current Liabilities 1,017,159 938,419
LONG-TERM DEBT, LESS CURRENT PORTION 300,104 318,490
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 50,766 54,683
DEFERRED RENT 27,226 26,936
----------------- -----------------
Total Liabilities 1,395,255 1,338,528
STOCKHOLDER'S EQUITY (DEFICIT)
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 (470,601) (166,002)
----------------- -----------------
Total Stockholder's Equity (Deficit) (65,881) 238,718
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $ 1,329,374 $ 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>
APR. 3, 1999 APR. 4, 1998
(26 WEEKS) (27 WEEKS)
-----------------------------------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss $ (304,599) $ (88,050)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Store closing and other charges 72,166 (15,373)
Depreciation and amortization 24,378 25,580
Amortization of deferred debt issuance costs 2,390 2,373
Loss on early retirement of debt, net 20,149 -
Cumulative effect of change in accounting principle - 7,272
Gain on sale of leases, net (1,798) -
Other 609 1,850
CHANGES IN OPERATING ASSETS AND LIABILITIES
Merchandise inventories 95,876 (5,898)
Other current assets 27,272 (2,681)
Accounts payable and accrued expenses (162,176) (12,693)
Other - 406
-----------------------------------------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (225,733) (87,214)
-----------------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Proceeds from sale of assets held for sale 9,835 49,924
Proceeds from surrender of corporate owned life insurance - 18,304
Purchase of net assets from BSQ - (14,406)
Property, furniture, equipment and other asset additions (20,629) (1,269)
Other (180) 3,132
-----------------------------------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (10,974) 55,685
-----------------------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from revolving credit facility 870,687 268,125
Payments on revolving credit facility (648,889) (256,970)
Contributed capital - 25,000
Increase (decrease) in amounts due to affiliates 29,619 (8,477)
Payments on retirement of debt (12,055) -
Payment of debt issuance costs (21,141) -
Other (1,792) (1,169)
-----------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 216,429 26,509
-----------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (20,278) (5,020)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 21,116 87,215
-----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 838 $ 82,195
=========================================
SUPPLEMENTAL INFORMATION
Cash payments for income taxes $ 2,770 $ 1,001
Cash payments for interest $ 36,353 $ 39,274
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
EXHIBIT 13
HECHINGER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(in thousands except share data)
<TABLE>
<CAPTION>
COMMON ADDITIONAL PAID CONTRIBUTED ACCUMULATED
STOCK, 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) - - - (304,599) (304,599)
-------------------------------------------------------------------------- ----------------
BALANCE, APR. 3, 1999 (UNAUDITED) $ - $ 241,507 $ 163,213 $ (470,601) $ (65,881)
========================================================================== ================
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
EXHIBIT 13
HECHINGER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED APRIL 3, 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 April 3, 1999, the Company operated 206 stores, primarily under the
Hechinger ("Hechinger"), Home Quarters Warehouse ("Home Quarters") and Builders
Square ("Builders Square") names. The 90 Builders Square and 56 Home Quarters
stores are located primarily in the Southern, Southeastern, Northern and
Midwestern parts of the United States. The 60 Hechinger stores are primarily
located in the Mid-Atlantic region.
Subsequent to the end of the quarter, the Company completed the remodeling of
thirteen stores in the Detroit, Michigan market, eight stores in the St. Louis,
Missouri market, and one store in suburban Baltimore, Maryland. Of the
twenty-two stores remodeled, fourteen Builders Square units and one Hechinger
store was renamed to Home Quarters.
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"). Year-to-date
1999 was 26 weeks compared with year-to-date 1998, which was 27 weeks.
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
13 and 26 weeks ended April 3, 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 year 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 the 1998
and cumulative amounts was an increase in 1998 net loss of approximately $6.9
million.
C. RESTATEMENT OF 1998
Net loss for the 13 weeks ended April 4, 1998 decreased from amounts previously
reported by the Company by $4.0 million due to a reduction in cost of sales of
approximately $5.2 million, partially offset by a charge to selling, general and
administrative expenses of approximately $1.2 million representing the effect of
a new leave program for Builders Square employees. The cost of sales reduction
is due primarily to the effect on inventory of markdowns included in the
beginning inventory as a result of the change in
<PAGE> 6
accounting principle adopted in 1998 (See Note B above), as well as an increase
in vendor allowances and rebates recognized.
Net loss for the 27 weeks ended April 4, 1998 increased from amounts previously
reported by the Company by $4.1 million due primarily to the $7.3 million
cumulative effect of the change in accounting for inventories (See Note B
above), and a charge to selling, general and administrative expenses of
approximately $5.2 million representing the effect of a new leave program for
Builders Square employees, partially offset by a reduction in cost of sales of
approximately $8.4 million, due primarily to the effect on inventory of
markdowns included in the beginning inventory as a result of the change in
accounting principle adopted in 1998 (See Note B above).
D. MERCHANDISE INVENTORIES
As of April 3, 1999 and October 3, 1998, inventories are stated at the lower of
cost or market, with cost determined using the last-in, first-out ("LIFO")
retail inventory method. If inventories were valued under the first-in,
first-out ("FIFO") method, which approximates replacement cost, inventories
would have been $3.6 million higher than reported at April 3, 1999. As of
October 3, 1998. 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.
As of April 3, 1999, inventories are stated at the lower of cost or market, with
cost determined using the LIFO retail inventory method. If inventories were
valued under the first-in, first-out method ("FIFO") method, which approximates
replacement cost, inventories would have been $3.6 million higher than reported
at April 3, 1999. 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
During the first quarter of 1999, the Company closed four Florida stores and
sold the associated leases and leaseholds. A net 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 the income caption
"Other" in the year-to-date results in the accompanying Condensed Consolidated
Financial Statements. As of April 3, 1999, the Company has substantially
discharged all expenses related to the closing of these stores and the remaining
accrual is nominal.
During the second quarter of 1999, the Company announced the closing of 34
stores, primarily underperforming locations and stores in remote geographic
locations, commenced the liquidation, and recorded a store closing charge of
$92.7 million. Of this charge, approximately $76.2 million represents the
write-down of the inventory in these stores to its estimated market value and is
therefore included in cost of sales for the period. The remaining charge of
$16.4 million relates primarily to estimated rents and other related costs of
the associated leaseholds until their estimated disposition dates, as well as a
write-down of fixed assets of approximately $1.3 million, partially offset by
proceeds expected to be received on the sale of the leases for certain of these
stores. Additionally, approximately $3.5 million of this charge represents
employee termination payments. The Company has disposed of one of these
properties, has contracts for sale of twelve additional properties, and is in
final negotiations for the sale of four more properties. The Company believes
that the remaining accrual of $14.8 million as of April 3, 1999 is adequate to
cover future liabilities related to the closing and carrying costs of the
remaining closed stores, which the Company is actively marketing. However, this
estimate is based on a number of assumptions which are subject to uncertainty,
and which could change actual results in the future. Prior to commencing
liquidation in February 1999, these stores generated revenue of approximately
$72 million and $96 million for the first quarter of 1999 and 1998,
respectively, while generating operating losses of approximately $9 million and
$3 million, respectively. Additionally, these stores generated revenue of
approximately $14 million and $23 million for the month of January 1999 and
1998, respectively, while generating operating losses of approximately $4
million and $1 million, 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 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,
<PAGE> 7
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 $37.0 million as
of April 3, 1999 is adequate to cover future liabilities related to the carrying
cost of the closed stores, which the Company is actively marketing.
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.
The store closing charges and the amount of the remaining accruals are based on
certain estimates and as a result, the actual amounts could vary from these
estimates.
F. REVOLVING CREDIT FACILITY
On March 18, 1999, the Company entered into an Amended and Restated Credit
Agreement with a new group of lenders (the "Amended and Restated Credit
Agreement") to provide the Company with a $700 million secured credit facility.
The facility provides additional borrowing capacity and greater flexibility with
respect to operating covenants than the Company's previous $600 million senior
secured revolving credit facility and $50 million short-term secured revolving
credit facility which were replaced by this agreement. The facility is
guaranteed by the Company, its parent, affiliates and subsidiaries,
collateralized by merchandise inventories and other assets and expires in March
2002. The amount available under the facility varies based on the Company's
eligible asset balance (as defined in the agreement).
The facility consists of two parts. Tranche A is a working capital revolving
credit facility with a maximum amount of $650 million, including a $125 million
letter of credit sub-limit. The borrowings under Tranche A bear interest at a
rate which is set for 12 months from closing at either a rate based on LIBOR
plus 2.75% or the Base Rate (as defined in the agreement) plus 0.75%, at the
Company's election. Thereafter the rates will vary depending on Excess
Availability and EBITDA (both as defined in the agreement) levels. Tranche B is
a term facility with a maximum amount of $50 million. The borrowings under
Tranche B bear interest of 18% per annum, 3% of which is deferred and
compounded. Tranches A and B have differing priority security interests in the
secured assets.
The Amended and Restated Credit Agreement contains certain covenants which limit
the annual amount of capital expenditures of the Company and, starting with June
30, 1999, requires the Company to maintain certain Minimum Excess Availability
(as defined in the agreement). In the event the Company falls below these
required excess availability levels, it will be subject to certain minimum
EBITDA and minimum accounts payable to inventory ratios (as defined in the
agreement). The Company is not otherwise subject to compliance with any
financial covenants under the agreement.
Approximately $16 million of financing fees related to the Amended and Restated
Credit Agreement had been paid or accrued as of April 3, 1999. These costs,
which are included in Other Assets in the accompanying Condensed Consolidated
Financial Statements, will be amortized over the 3-year term of the facility.
The Company is also obligated to pay two future annual fees of approximately
$1.0 million, and a fee of 0.375% per annum on any available borrowing under
this facility.
As of April 3, 1999, the Company had outstanding borrowings of approximately
$594 million under the Amended and Restated Credit Agreement, and had
outstanding letters of credit of approximately $34 million under this facility.
The excess availability as of April 3, 1999 was approximately $68 million.
<PAGE> 8
The remaining unamortized financing fees of approximately $20.3 million related
to the former $600 million senior secured revolving credit facility and $50
million short-term secured revolving credit facility were written off during the
13 weeks ended April 3, 1999, and are included in Loss on Early Retirement of
Debt in the accompanying Condensed Consolidated Financial Statements.
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.
On May 15, 1999, the Company had a scheduled semi-annual interest payment of
$4.7 million on its 9.45% Senior Debentures. The Company has elected to use the
30 day grace period provided for in the Senior Debentures. If the Company does
not make the required interest payment by the end of the grace period, the
Company will be in default and the Trustee under the Senior Debentures, or the
holders of 25% in principal amount of the debentures, may accelerate the
maturity date of the debentures. In addition, if the Company fails to make the
semi-annual interest payment and it is not cured within ten days, a default
will occur under certain sale-leaseback transactions, and a default may occur
under other contracts to which the Company is a party, which in turn may result
in a default under the Amended and Restated Credit Agreement, unless the
Company is able to obtain waivers of such defaults. In such event, the Company
intends to seek such waivers, although no assurance can be given that the
Company will be able to obtain such waivers. The Company does not anticipate
that the banks under the Amended and Restated Credit Agreement will cease to
make advances under the credit facility on the basis of the failure of the
Company to timely cure the failure to make the required interest payment under
the Senior Debentures or any resulting default under the sale leaseback
transactions or other contracts, although the Company has no written commitment
from such banks.
H. TAXES ON INCOME
No Federal income tax expense was recorded for the second quarter and
year-to-date periods ended April 3, 1999 or the corresponding periods of the
previous year. For the second quarter and year-to-date periods ended April 3,
1999, the Company recorded approximately $0.6 million and $1.3 million of state
income tax expense, respectively. For both the second quarter and year-to-date
periods ended April 4, 1998, the Company recorded approximately $1.3 million of
state income tax expense. 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 April 3, 1999, the Company's net worth was a deficit of $65.9 million.
Unless the Company's results improve or there is an additional capital
contribution, the Company would not be able to satisfy this requirement at the
end of 1999. In this circumstance, the earliest the Company would expect to be
required to repurchase the properties would be February 2000.
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 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." On April 1, 1999, the complaint was dismissed
by the court at the request of both parties with no payment required by either
party.
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
K. BUSINESS CONSOLIDATION COSTS
In the second quarter of 1998, the Company incurred $7.4 million of merger
related expenses primarily associated with the elimination of duplicate overhead
functions related to Builders Square's operations, including costs connected
with the integration of information technology systems. In the first half of
1998, the Company incurred $21.4 million of these merger related expenses. This
effort was completed by the end of 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> APR-03-1999
<CASH> 838
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 884,352
<CURRENT-ASSETS> 925,787
<PP&E> 276,975
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,329,374
<CURRENT-LIABILITIES> 1,017,159
<BONDS> 300,104
0
0
<COMMON> 0
<OTHER-SE> (65,881)
<TOTAL-LIABILITY-AND-EQUITY> 1,329,374
<SALES> 1,166,818
<TOTAL-REVENUES> 1,170,148
<CGS> 1,085,448
<TOTAL-COSTS> 1,397,122
<OTHER-EXPENSES> 16,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,793
<INCOME-PRETAX> (283,200)
<INCOME-TAX> 1,250
<INCOME-CONTINUING> (284,450)
<DISCONTINUED> 0
<EXTRAORDINARY> (20,149)
<CHANGES> 0
<NET-INCOME> (304,599)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
