UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998
or -------------------------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------------- -------------------
Commission file number #1-8484 .
---------------------------------------------
Heilig-Meyers Company .
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(Exact name of registrant as specified in its charter)
Virginia 54-0558861
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12560 West Creek Parkway, Richmond, Virginia 23238 .
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(Address of principal executive offices) (Zip Code)
(804) 784-7300 .
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(Registrant's telephone number, including area code)
.
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(Former name, former address and former fiscal year, if changed since last
report.)
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 issuer's classes of
common stock, as of January 1, 1999.
59,777,405 shares of Common Stock, $2.00 par value.
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HEILIG-MEYERS COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for
Three and Nine Months Ended November 30, 1998
and November 30, 1997 (Unaudited) 3
Consolidated Balance Sheets as of November 30, 1998
(Unaudited) and February 28, 1998 (Audited) 4
Consolidated Statements of Cash Flows for
Nine Months Ended November 30, 1998 and
November 30, 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 19
Item 6. Exhibits and Reports on Form 8-K 20
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Sales $654,694 $602,004 $1,844,849 $1,606,205
Other income 73,515 76,464 227,306 228,799
-------- -------- ---------- ----------
Total revenues 728,209 678,468 2,072,155 1,835,004
-------- -------- ---------- ----------
Costs and Expenses:
Costs of sales 434,997 399,208 1,234,260 1,063,151
Selling, general and
administrative 233,550 233,566 664,781 613,367
Interest 19,121 16,494 57,247 48,023
Provision for doubtful
accounts 30,645 104,667 76,338 149,528
-------- -------- ---------- ----------
Total costs
and expenses 718,313 753,935 2,032,626 1,874,069
-------- -------- ---------- ----------
Earnings (loss) before
provision for
income taxes 9,896 (75,467) 39,529 (39,065)
Provision (benefit) for
income taxes 3,622 (26,345) 14,303 (12,983)
-------- --------- ---------- -----------
Net earnings (loss) $ 6,274 $(49,122) $ 25,226 $ (26,082)
======== ========= ========== ===========
Net earnings (loss) per share of common stock:
Basic $ 0.11 $ (0.87) $ 0.43 $ (0.47)
======== ========= ========== ===========
Diluted $ 0.10 $ (0.87) $ 0.42 $ (0.47)
======== ========= ========== ===========
Cash dividends per share of
common stock $ 0.07 $ 0.07 $ 0.21 $ 0.21
======== ======== ========== ==========
See notes to consolidated financial statements.
3
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HEILIG-MEYERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
November 30, February 28,
1998 1998
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 18,804 $ 48,779
Accounts receivable, net 267,378 392,765
Retained interest in securitized
receivables at fair value 208,670 182,158
Inventories 532,264 542,868
Other current assets 150,737 126,978
---------- ----------
Total current assets 1,177,853 1,293,548
Property and equipment, net 385,823 398,151
Other assets 65,818 55,321
Excess costs over net assets acquired, net 353,439 350,493
---------- ----------
$1,982,933 $2,097,513
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 175,000 $ 260,000
Long-term debt due within
one year 130,941 22,365
Accounts payable 210,209 203,048
Accrued expenses 179,442 216,738
---------- ----------
Total current liabilities 695,592 702,151
---------- ----------
Long-term debt 583,303 715,271
Deferred income taxes 69,834 70,937
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
59,765 and 58,808, respectively) 119,530 117,616
Capital in excess of par value 241,983 230,580
Unrealized gain on investments 3,508 4,548
Retained earnings 269,183 256,410
---------- ----------
Total stockholders' equity 634,204 609,154
---------- ----------
$1,982,933 $2,097,513
========== ==========
See notes to consolidated financial statements.
4
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HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
November 30,
-------------------
1998 1997
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 25,226 $ (26,082)
Adjustments to reconcile net
earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 43,402 39,451
Provision for doubtful accounts 76,338 149,528
Store closing charge payments (7,665) -
Other, net (3,859) 3,023
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable 45,304 (197,606)
Retained interest in securitized
receivables at cost (28,190) -
Other receivables (23,982) (56,895)
Inventories 10,392 (71,816)
Prepaid expenses 22,601 517
Accounts payable 6,591 46,604
Accrued expenses (8,831) 28,298
--------- ---------
Net cash provided (used) by
operating activities 157,327 (84,978)
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired - (10,826)
Additions to property and equipment (48,685) (59,463)
Disposals of property and equipment 18,911 8,035
Miscellaneous investments (36,489) (11,097)
--------- ---------
Net cash used by investing
activities (66,263) (73,351)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in notes payable (85,000) 96,900
Proceeds from long-term debt - 174,767
Payments of long-term debt (23,728) (99,789)
Issuance of common stock 142 976
Dividends paid (12,453) (12,114)
--------- ---------
Net cash (used) provided
by financing activities (121,039) 160,740
--------- ---------
Net (decrease) increase in cash (29,975) 2,411
Cash at beginning of period 48,779 14,959
--------- ---------
Cash at end of period $ 18,804 $ 17,370
========= =========
See notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. The accompanying consolidated financial statements of Heilig- Meyers
Company (the Company) have not been audited by independent accountants,
except for the balance sheet at February 28, 1998. These financial
statements have been prepared in accordance with regulations of the
Securities and Exchange Commission in regard to quarterly (interim)
reporting. In the opinion of management, the financial information
presented reflects all adjustments, comprised only of normal recurring
accruals, which are necessary for a fair presentation of the results for
the interim periods. Significant accounting policies and accounting
principles have been consistently applied in both the interim and annual
consolidated financial statements. Certain notes and the related
information have been condensed or omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q. Therefore,
these financial statements should be read in conjunction with the Company's
1998 Annual Report on Form 10-K. The results for the third quarter of
fiscal year 1999 are not necessarily indicative of future financial
results.
B. On October 14, 1998, the Board of Directors declared a cash dividend of
$0.07 per share which was paid on November 21, 1998, to stockholders of
record on November 4, 1998.
C. Accounts receivable are shown net of the allowance for doubtful accounts
and unearned finance income. The allowance for doubtful accounts was
$57,021,000 and $60,306,000 and unearned finance income was $32,508,000 and
$46,980,000 at November 30, 1998, and February 28, 1998, respectively.
D. The Company made (received) net income tax payments (refunds) of
$(10,705,000) and $4,404,000 during the nine months ended November 30,
1998, and November 30, 1997, respectively.
E. The Company made interest payments of $51,242,000 and $39,973,000 during
the nine months ended November 30, 1998, and November 30, 1997,
respectively.
F. Effective March 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
This statement requires that the Company report the total non-owner changes
in equity for all periods displayed. Comprehensive income for the three and
nine month periods ended November 30, 1998 and 1997 are as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
--------------------------------------------------------------------------
Net income (loss) $ 6,274 $(49,122) $25,226 $(26,082)
Increase (decrease)
in unrealized
gain on
investments 763 -- (1,040) (1,430)
------- --------- -------- ---------
Comprehensive income
(loss) $ 7,037 $(49,122) $24,186 $(27,512)
======= ========= ======== =========
6
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G. In February 1998 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits", which is effective for fiscal years beginning
after December 15, 1997. The new statement will change disclosure
requirements related to pension and other postretirement benefit
obligations. The new statement will be implemented in fiscal 1999 and will
not impact the Company's consolidated financial position, results of
operations or cash flows. The effect of the new statement will be limited
to the form and content of disclosures.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 1999. The new statement requires that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires the changes in
the derivative's fair value to be recognized currently in earnings unless
specific hedge accounting criteria are met. The Company has not yet
determined the effect this statement will have on the consolidated
financial position or results of operations of the Company.
In March 1998 the AICPA issued Statement of Position("SOP")98-1,"Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use",
which is effective for fiscal years beginning after December 15, 1998. SOP
98-1 requires certain software development costs to be capitalized.
Generally, once the capitalization criteria of the SOP have been met,
external direct costs of materials and services used in the development of
internal-use software, payroll and payroll related costs for employees
directly involved in the development of internal-use software, and interest
costs incurred when developing software for internal use are to be
capitalized. Management does not expect the adoption of the SOP to have a
material effect on the Company's consolidated financial position, results
of operations or cash flows.
In April 1998 the AICPA issued SOP 98-5,"Reporting on the Costs of Start-Up
Activities", which is effective for fiscal years beginning after December
15, 1998. SOP 98-5 requires costs of start-up activities and organization
costs to be expensed as incurred. Management does not expect the adoption
of the SOP to have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
H. MacSaver Financial Services, Inc. ("MacSaver") is the Company's
wholly-owned subsidiary whose principal business activity is to obtain
financing for the operations of Heilig-Meyers and its other subsidiaries,
and, in connection therewith, MacSaver generally acquires and holds the
installment credit accounts generated by the Company's operating
subsidiaries. The payment of principal and interest associated with
MacSaver debt is guaranteed by the Company. The Company has not presented
separate financial statements and other disclosures concerning MacSaver
because management has determined that such information is not material to
the holders of the MacSaver debt securities guaranteed by the Company.
However, as required by the 1934 Act, the summarized financial information
concerning MacSaver is as follows:
7
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MacSaver Financial Services, Inc.
Summarized Statements of Operations
(Amounts in thousands)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
----------------------------------------
Net revenues $ 74,010 $ 66,787 $217,704 $189,752
Operating expenses 62,060 120,369 172,851 228,702
-------- --------- -------- --------
Earnings (loss) before
taxes 11,950 (53,582) 44,853 (38,950)
-------- --------- -------- ---------
Net earnings (loss) $ 7,768 $(34,828) $ 29,155 $(25,317)
======== ========= ======== =========
MacSaver Financial Services, Inc.
Summarized Balance Sheets
(Amounts in thousands)
November 30, February 28,
1998 1998
----------- -----------
(Unaudited) (Audited)
Current assets $ 34,739 $ 29,545
Accounts receivable, net 154,732 295,405
Retained interest in securitized
receivables at fair value 208,670 182,158
Due from affiliates 672,182 645,291
---------- ----------
Total Assets $1,070,323 $1,152,399
========== ==========
Current liabilities $ 153,760 $ 48,951
Notes payable 175,000 260,000
Long-term debt 570,000 700,000
Stockholder's equity 171,563 143,448
---------- ----------
Total Liabilities and Equity $1,070,323 $1,152,399
========== ==========
8
<PAGE>
I. The following table sets forth the computations of basic and
diluted earnings (loss) per share:
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1998 1997 1998 1997
------------------ -----------------
(Amounts in thousands except per share data)
Numerator:
Net earnings (loss) $6,274 $(49,122) $25,226 $(26,082)
Denominator:
Denominator for basic
earnings (loss) per
share - average
common shares
outstanding 59,641 56,786 59,175 55,730
Effect of potentially
dilutive stock options 39 - 376 -
Effect of contingently
issuable shares
considered earned 773 - 346 -
------ ------ ------- ------
Denominator for diluted
earnings (loss) per
share 60,453 56,786 59,897 55,730
Basic EPS $ 0.11 $ (0.87) $ 0.43 $ (0.47)
Diluted EPS 0.10 (0.87) 0.42 (0.47)
Options to purchase 4,851,000 and 5,093,000 shares of common stock at
prices ranging from $9.03 and $5.52 to $35.06 per share were
outstanding at November 30, 1998 and 1997, respectively, but were not
included in the computation of diluted earnings (loss) per share
because they would have been antidilutive.
J. In the fourth quarter of fiscal 1998, the Company recorded a pre-tax charge
of approximately $25,530,000 related to specific plans to close
approximately 40 Heilig-Meyers stores, downsize office and support
facilities, and reorganize the Heilig-Meyers private label credit card
program. The charge reduced 1998 net earnings $16,683,000 or $.30 per
share. Amounts charged to the provision during the nine months ended
November 30, 1998 are as follows:
Amount
Utilized Remaining
Reserve as through Reserve as
of March 1, November 30, of November 30,
(Amounts in thousands, 1998 1998 1998
unaudited) -----------------------------------
Severance $ 6,648 $ 3,442 $ 3,206
Lease & facility exit cost 7,680 4,223 3,457
Fixed asset impairment 5,133 4,656 477
----------------------------------
Total $19,461 $12,321 $ 7,140
==================================
The Company expects to complete the store closings, office downsizing,
and private label credit card program reorganization within the current
9
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fiscal year. Accordingly, the substantial majority of the reserves are
expected to be utilized during fiscal 1999. Amounts related to certain
severance agreements and long-term lease obligations may extend beyond
fiscal 1999.
During the third quarter of fiscal 1999, the Company reversed $1.3
million of pretax reserves related to the severance component of the
Profit Improvement Plan. Management evaluated the reserves and
determined that the amount was no longer needed to settle the remaining
obligations.
K. On September 1, 1998, the Company acquired certain assets of Guardian
Protection Products ("Guardian"). The Company has issued 666,667 shares of
common stock related to the acquisition. Unless the Company's common stock
trades for at least ten consecutive trading days during the period from
September 1, 1998 through August 31, 1999 at a per share price of $15.00 or
more, additional shares will be issued so that the aggregate number of
shares issued in connection with the acquisition equals $10 million divided
by the average closing price per share for the Company's common stock for
the ten trading days ending on August 31, 1999 or such earlier date as may
be selected by the Company. The Company has also agreed to issue additional
shares to the former shareholder of Guardian in the event that certain
earnings targets are met over the next two years, however the aggregate
consideration will not exceed $14.5 million.
L. On September 17, 1998, the Company's operating facilities and systems in
Puerto Rico sustained major damage from Hurricane Georges. The Puerto Rico
operations usually account for less than 5% of the Company's sales. The
Company maintains insurance for both property damage and business
interruption applicable to its operations. The Company is still
investigating the damage, and all insurance claims are being evaluated. An
estimate of any loss or possible loss cannot be made at this time.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in Item 1 of this document, and with the audited
consolidated financial statements of Heilig-Meyers Company (the "Company") and
notes thereto for the fiscal year ended February 28, 1998.
RESULTS OF OPERATIONS
Profit Improvement Plan
In December 1997, the Company announced a Profit Improvement Plan (the
"Profit Improvement Plan") that has three main components: (1) expense
reductions; (2) restructuring of certain aspects of the business; and (3)
Heilig-Meyers store operating initiatives.
In connection with this Profit Improvement Plan, the Company has
completed its store closing plan, downsized administrative and support
facilities, committed to a new arrangement for the Heilig-Meyers private label
credit card program, and implemented programs to improve the overall performance
of the Heilig-Meyers stores. The Company completed the reorganization of the
private label credit card program during the third quarter of fiscal 1999.
Revenues and Earnings
Total revenues for the quarter rose 7.3% to $728.2 million from $678.5
million in the prior year. Rhodes, The RoomStore and Mattress Discounters
contributed approximately 38.6% or $281.4 million of the total revenues. Total
revenues for stores operated under the Heilig-Meyers format for the quarter
increased 0.6% from the prior year. Net earnings for the quarter increased to
$6.3 million (or $0.10 per share) from a loss of $49.1 million (or a loss of
$0.87 per share) in the prior year. Net earnings for the nine months increased
to $25.2 million (or $0.42 per share) from a loss of $26.1 million (or a loss of
$0.47 per share).
Sales for the third quarter of fiscal 1999 increased 8.8% to $654.7
million from $602.0 million in the third quarter of the prior year. For the
nine-month period ended November 30, 1998, sales increased 14.9% to $1,844.8
million from $1,606.2 million. Rhodes, The RoomStore and Mattress Discounters
units contributed approximately 41.3% or $270.7 million of sales. The overall
increase in sales was primarily attributable to an increase in operating units
from November 30, 1997 to November 30, 1998, and a comparable store sales
increase of 2.4% and 2.7%, for the three and nine months ended November 30,
1998, respectively. Price changes had an immaterial impact on the overall sales
increase for the quarter. During the first quarter of fiscal 1999, the Rhodes
division began operating under a new merchandising and advertising format
designed to reposition the division to a higher-end retail format. Customer
response to this program during the introductory period has been below
expectation. As a result, the Company's sales were negatively impacted. The
merchandising and advertising plans at Rhodes have been modified to address
these results. The Company is also currently examining several strategic
alternatives regarding its Rhodes operations. The Company has engaged an
international investment banking firm to assist the Company in evaluating these
alternatives. The alternatives under consideration include a sale of the entire
Rhodes subsidiary or a combination of the sale of certain store assets; the
11
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conversion of selected stores to other formats of the Company; and the operation
of certain stores under the modified Rhodes concept with potential market exits
as leases expire. The analysis of these alternatives is expected to be complete
by the end of the fourth quarter of fiscal 1999. The Company already sold the
eight Rhodes stores operating in Colorado during the third quarter of fiscal
1999. These stores were operating at a loss and had sales for the current fiscal
year of $25.8 million.
Sales for the Company's four primary retail formats were as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
(Sales amounts in millions)
1998 1997 1998 1997
----------- ----------- ----------- -----------
% of % of % of % of
Sales Sales Sales Sales Sales Sales Sales Sales
------ ----- ------ ----- -------- ----- -------- -----
Heilig-Meyers $384.0 58.7 $376.5 62.5 $1,072.9 58.2 $1,057.4 65.8
Rhodes 128.7 19.7 138.5 23.0 357.1 19.4 361.2 22.5
The RoomStore 82.1 12.5 39.9 6.7 230.4 12.4 104.5 6.5
Mattress
Discounters 59.9 9.1 47.1 7.8 184.4 10.0 83.1 5.2
------ ------ -------- --------
Total $654.7 $602.0 $1,844.8 $1,606.2
====== ====== ======== ========
Store counts for the Company's four primary retail formats as of
November 30,:
1998 1997
---- ----
# of # of
Stores Stores
------ ------
Heilig-Meyers 846 871
Rhodes 95 100
The RoomStore 71 48
Mattress
Discounters 230 171
----- -----
Total 1,242 1,190
===== =====
As a percentage of sales, other income decreased during the third
quarter to 11.2% from 12.7% in the prior year quarter. For the nine months ended
November 30, 1998, other income decreased as a percentage of sales to 12.3% from
14.2% in the prior year. This decrease is primarily the result of the
concentration of total sales growth, compared to the prior year quarter, in The
RoomStore and Mattress Discounters formats. These formats utilize credit
programs maintained by a third party and, unlike the Heilig-Meyers in-house
program, generally do not produce finance income for the Company. Within the
Heilig-Meyers format, other income decreased as a percentage of sales 1.6% and
.3% of sales for the quarter and nine months ended November 30, 1998. The
decrease is due to a reduction of finance income as a result of the sale of the
Company's revolving credit program in September of 1998. The decrease is also
the result of relatively flat sales with a higher level of securitized
receivables compared to the prior period.
The Company plans to continue its program of periodically securitizing
a portion of the installment accounts receivable portfolio of its stores
operating under the Heilig-Meyers format. Proceeds from securitized accounts
receivable are generally used by the Company to lower debt levels. Net servicing
income related to securitized receivables that have been sold to third parties
is included in other income.
Costs and Expenses
Costs of sales remained relatively flat during the quarter at 66.4% of
sales compared to 66.3% in the prior year quarter. For the nine-month period
ended November 30, 1998, costs of sales increased to 66.9% of sales from 66.2%
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in the prior year. These increases were primarily the result of lower raw
selling margins at the Company's Rhodes format. As noted above, customer
response to the new Rhodes merchandising and advertising format was below
expectation during the nine months ended November 30, 1998. As a result, sales
were weighted towards goods that carry lower margins or goods that have been
dropped from the merchandise line-up which were sold at discounted prices. The
merchandising and advertising plans at Rhodes have been modified to address
these results.
Selling, general and administrative expense decreased as a percentage of
sales to 35.7% from 38.8% in the prior year quarter. The decrease between
quarters was the result of sales leverage gained from total sales growth in The
RoomStore and Mattress Discounters formats. The Rhodes, The RoomStore and
Mattress Discounters units generally have lower levels of administrative costs
as a percentage of sales than the Heilig-Meyers units as these stores' revolving
credit extension and collections are maintained by third-party credit providers.
The decrease for the quarter is also related to expense control and lower
advertising. A reversal of $1.3 million of the previously recorded severance
accrual related to the store closing component of the Profit Improvement Plan
adopted in the fourth quarter of fiscal 1998 was also made during the quarter.
This reversal was made based on the determination that these estimated amounts
would not be paid. The prior year quarter includes expenses of $6.5 million
related to the cost reductions in administrative office and distribution center
facilities, primarily through personnel reductions and consolidations. For the
nine month period ended November 30, 1998, selling, general and administrative
expenses were 36.0% of sales compared to 38.2% in the prior year. The decrease
between periods is also the result of a reduction in the salaries and related
expenses as a percentage of sales at the stores and in the administrative
functions of the Heilig-Meyers format. Lower salary and related expenses are the
result of initiatives put in place in conjunction with the Profit Improvement
Plan. In December of 1998, certain senior executives elected to retire early
from their responsibilities at the Company. The senior executives were Troy
Peery, President and Chief Operating Officer; Joseph Jenkins, Executive Vice
President, Mattress Discounters; and George "Buck" Thornton, Executive Vice
President, Rhodes. The Company expects several additional early retirements to
be completed in the fourth quarter of fiscal 1999. Related to these early
retirements, the Company expects to incur charges of approximately $8.0 million
in the fourth quarter of fiscal 1999.
Interest expense was 2.9% and 2.7% of sales in the third quarters of
fiscal years 1999 and 1998, respectively. For the quarter, weighted average
long-term debt decreased to $708.8 million from $722.6 million in the prior year
third quarter. The decrease in long-term debt levels between years is a result
of repayments made on $20.0 million of private placement debt in the third
quarter of fiscal 1999. Weighted average long-term interest rates decreased to
7.6% from 7.7% in the prior year. Weighted average short-term debt increased to
$254.0 million from $220.8 million in the prior year. Weighted average
short-term interest rates increased to 6.1% from 6.0% in the prior year. For the
nine-month period ended November 30, 1998, interest expense increased to 3.1% of
sales from 3.0% in the prior year. Interest expense remained relatively flat as
a percentage of sales to the prior year period due to sales leverage gained from
the Mattress Discounters units, which were purchased with common stock in July
1997 and January 1998.
The provision for doubtful accounts decreased for the third quarter, as a
percentage of sales, to 4.7% from 17.4% in the prior year quarter. For the
nine-month period ended November 30, 1998, the provision decreased to 4.1% from
9.3% in the prior year. The decrease was attributable to the Company recording
$79.3 million in additional reserves and write-offs during the third quarter of
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the prior year. The prior year charge included $50.0 million (or $0.57 per share
and 8.3% of sales) to adjust the provision for estimated write-offs in response
to the credit environment, characterized by increased delinquencies and higher
bankruptcies. The prior year charge also included $14.3 million related to the
estimated losses for stores closed as part of the Profit Improvement Plan and
$15.0 million as part of the Company's plan to reorganize its private label
credit card program. For those stores offering installment credit, the provision
was 7.7% and 26.9% of sales for the three months, and 6.9% and 13.7% for the
nine months ended November 30, 1998 and 1997, respectively.
The effective income tax rate for the third quarter of fiscal 1999 was
36.6% compared to an income tax benefit of 34.9% for the third quarter of fiscal
1998. For the nine-month period ended November 30, 1998, the effective income
tax rate was 36.2% compared to an income tax benefit of 33.2% in the prior year.
The increase is due to the impact of the loss incurred during the third quarter
of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its cash position $30.0 million to $18.8 million at
November 30, 1998, from $48.8 million at February 28, 1998, compared to an
increase of $2.4 million in the comparable period a year ago.
Net cash inflow from operating activities was $157.3 million, compared to
an outflow of $85.0 million in the comparable period of the prior year. The
Company has continued to slow the expansion of its store base, which has
resulted in improved cash flows provided by operating activities. The Company
participated in asset securitizations in the second and third quarters of fiscal
1999 resulting in cash inflows from the sales of receivables of $59.3 million
and $100.0 million, respectively. As a result of the securitizations, cash flows
provided by operating activities exceeded cash flows used by investing
activities for the nine months ended November 30, 1998. The Company
traditionally produces minimal or negative cash flow from operating activities
because it extends in-house credit in its Heilig-Meyers and certain RoomStore
stores. During the nine months ended November 30, 1998, installment accounts
receivable increased at a slower rate than the prior year period primarily due
to the closing of certain Heilig-Meyers stores pursuant to the Profit
Improvement Plan. Continued extension of credit and related increases in
customer accounts receivable will likely produce minimal or negative cash flow
from operations in the upcoming fiscal 1999 quarters. However, the Company
expects to continue to periodically sell accounts receivable as a source of cash
flows from operating activities. During the nine months ended November 30, 1998,
inventory decreased compared to an increase in the prior year period. The
variation in the change in inventory between years is primarily the result of
the closing of certain Heilig-Meyers stores pursuant to the Profit Improvement
Plan and prior year purchases related to newly acquired stores.
Investing activities produced negative cash flows of $66.3 million during
the nine months ended November 30, 1998 compared to negative cash flows of $73.4
million in the prior year period. The decrease in negative cash flows from
investing activities is primarily due to a decrease in acquisitions and
additions to property and equipment during the period. Pursuant to the Profit
Improvement Plan, management has taken steps to slow the growth of the capital
intensive Heilig-Meyers format and lower overall spending on capital projects.
During the prior year period cash used for additions to property and equipment
for the nine months ended November 30, 1997 resulted from the opening of 36 new
Heilig-Meyers store locations and related support facilities as well as the
remodeling and improvement of existing and acquired locations. Capital
expenditures will continue to be financed by cash flows from operations and
14
<PAGE>
external sources of funds. Cash used for miscellaneous investments during the
nine months ended November 30, 1998 includes deposits paid by the Company
related to the change in the lessor of certain leased real estate.
Financing activities produced negative cash flows of $121.0 million during
the nine months ended November 30, 1998 compared to a $160.7 million positive
cash flow in the prior year period. The negative cash flow from financing
activities in the current year quarter is due to the decrease in notes payable
and payments of long-term debt. In June 1997, the Company and a wholly-owned
subsidiary filed a joint Registration Statement on Form S-3 with the Securities
and Exchange Commission relating to up to $400.0 million aggregate principal
amount of securities. There were no issuances of debt pursuant to the joint
Registration Statement during the nine months ended November 30, 1998. As of
November 30, 1998, long-term notes payable with an aggregate principal amount of
$175 million securities have been issued to the public under this Registration
Statement. As of November 30, 1998, the Company had a $400.0 million revolving
credit facility in place, which expires in July 2000. This facility includes
eleven banks and had $175.0 million outstanding and $225.0 million unused as of
November 30, 1998. The Company also had additional lines of credit with banks
totaling $50.0 million, all of which was unused as of November 30, 1998. These
additional lines of credit will be reduced to $35 million during the fourth
quarter of fiscal 1999.
As a result of charges recorded in fiscal 1998 under the Profit Improvement
Plan, the Company obtained amendments to its bank debt agreements in order to
maintain covenant compliance. In addition, certain provisions of the Company's
bond indenture had restricted the Company's ability to incur long-term debt
until certain covenant restrictions are met. These bond indenture provisions
were met as of November 30,1998 and the restrictions were eliminated. The
Company may be required to obtain further amendments to its bank debt agreements
during the fourth quarter of fiscal 1999 in order to continue to maintain
covenant compliance. Based upon discussions with certain of the Company's bank
lenders, management believes that any required amendments will be obtained by
the end of the fourth quarter of fiscal 1999.
Total debt as a percentage of debt and equity was 58.4% at November 30,
1998, compared to 62.1% at February 28, 1998. The decrease in total debt as a
percentage of debt and equity is primarily the result of the use of cash
generated from operating activities including securitizations to reduce notes
payable outstanding. The current ratio was 1.7X at November 30, 1998, compared
to 1.8X at February 28, 1998. The decrease in the current ratio from February
28, 1998 to November 30, 1998 is primarily attributed to the reclassification of
$130 million from long-term notes payable to the current portion as a result of
the maturity of these amounts within the next twelve months.
OTHER INFORMATION
Year 2000 Issue
The Year 2000 issue arises because many computer programs use two
digits rather than four to define the applicable year. Using two digits could
result in system failure or miscalculations that cause disruptions of
operations. In addition to computer systems, any equipment with embedded
technology that involves date sensitive functions is at risk if two digits have
been used rather than four.
15
<PAGE>
During fiscal year 1997, management established a team to oversee the
Company's Year 2000 date conversion project. The project is composed of the
following stages: 1) assessment of the problem, 2) prioritization of systems, 3)
remediation activities and 4) compliance testing. A plan of corrective action
using both internal and external resources to enhance or replace the systems for
Year 2000 compliance has been implemented. Internal resources consist of
permanent employees of the Company's Information Systems department, whereas
external resources are composed of contract programming personnel that are
directed by the Company's management. The team has continued to assess the
systems of subsidiaries as the Company has expanded. Management expects to
complete the remediation stage for the critical systems of the Heilig-Meyers
operations during fiscal year 1999. Completion of remediation for all other
subsidiaries' critical systems is expected in the first quarter of fiscal year
2000, which ends May 31, 1999. The testing stage for the entire Company is
planned for the first quarter of fiscal year 2000. The Company is in the early
stages of making an assessment of its non-information technology systems (such
as telephone and alarm systems). Managers of such systems have been instructed
to contact the appropriate third party vendors to determine their Year 2000
compliance.
Since the project's beginning in fiscal 1997, the Company has incurred
approximately $.9 million in expenses in updating its management information
system to alleviate potential year 2000 problems. These expenditures represent
personnel costs related to software remediation of major impact systems. The
Company had previously initiated a hardware upgrade plan for desktop computers
that was independent of the Year 2000 issue, and, therefore, most hardware
upgrades were completed under this plan.
The remaining expenditures are expected to be approximately $1.5
million, which will be expensed as incurred. Expected future expenditures can be
broken down as follows:
Dollars
Task: (in thousands) %
----- -------------- -
Auditing Remediation Efforts $ 105 7%
Hardware Remediation 915 61%
Internal and External Personnel Resources 315 21%
Software Upgrades/Remediation/Testing 165 11%
------------------------------
Total $1,500 100%
The remaining cost of the Company's Year 2000 Project and the dates on
which the Company plans to complete the Year 2000 compliance program are based
on management's current estimates, which are derived utilizing numerous
assumptions. Such assumptions include, but are not limited to, the continued
availability of certain resources, the readiness of third-parties through their
own remediation plans, the absence of costs associated with implementation of
any contingency plan, and the lack of acquisitions by the Company requiring
additional remediation efforts. These assumptions are inherently uncertain and
actual events could differ significantly from those anticipated.
The team is communicating with other companies, on which the Company's
systems rely and is planning to obtain compliance letters from these entities.
There can be no assurance, however, that the systems of these other companies
will be converted in a timely manner, or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
16
<PAGE>
Management believes the Year 2000 compliance issue is being addressed
properly by the Company to prevent any material adverse operational or financial
impacts. However, if such enhancements are not completed in a timely manner, the
Year 2000 issue may have a material adverse impact on the operations of the
Company. The Company is currently assessing the consequences of its Year 2000
project not being completed on schedule or its remediation efforts not being
successful. Management is developing contingency plans to mitigate the effects
of problems experienced by the Company, key vendors or service providers related
to the Year 2000. Management is ranking suppliers based on how critical each
supplier is believed to be to the Company's operations. The Company is
requesting a copy of the Year 2000 project plan under which these suppliers are
operating. The Company's Year 2000 project team will review these plans. If a
supplier is deemed to be critical and has a project plan that does not meet our
expectations for completion, the Company will examine all of the circumstances
and develop a contingency plan. Contingency plans may include the identification
and use of an alternate supplier of the product or service that is Year 2000
compliant or the purchase of additional levels of inventory as a precaution
based on the Company's expected needs. Management expects to complete its Year
2000 contingency planning during the first quarter of fiscal 2000.
FORWARD-LOOKING STATEMENTS
Certain statements included above are not based on historical facts,
but are forward-looking statements. These statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy. These statements
reflect the Company's reasonable judgments with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the customer's willingness, need
and financial ability to purchase home furnishings and related items, the
Company's ability to extend credit to its customers, the costs and effectiveness
of promotional activities and format realignments, the Company's ability to
realize cost savings and other synergies from recent acquisitions as well as the
Company's access to, and cost of, capital. Other factors such as changes in tax
laws, consumer credit and bankruptcy trends, recessionary or expansive trends in
the Company's markets, the ability of the Company, its key vendors and service
providers to effectively correct the Year 2000 issue, and inflation rates and
regulations and laws which affect the Company's ability to do business in its
markets may also impact the outcome of forward-looking statements.
17
<PAGE>
PART II
Item 1. Legal Proceedings
The Company previously reported involvement in certain cases regarding
non-filing fees charged by the Company on certain credit transactions as set
forth in the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998 including Kirby et al v. Heilig-Meyers Furniture Company and
Heilig-Meyers Company. In November 1998, the Company entered a settlement
agreement in the Kirby case, subject to certain conditions including a fairness
hearing scheduled for March 12, 1999. The settlement is not expected to have a
material adverse impact on the Company's financial statements.
18
<PAGE>
Item 2. Changes in Securities.
(c) On September 1, 1998, the Company acquired certain assets of Guardian
Protection Products ("Guardian") in a transaction in which the shareholder
of Guardian received 533,334 shares of the Company's Common Stock and an
additional 133,333 shares of the Company's Common Stock were placed in
escrow. The shares in escrow were released to the former shareholder of
Guardian in November of 1998. Unless the Company's common stock trades for
at least ten consecutive trading days during the period from September 1,
1998 through August 31, 1999 at a per share price of $15.00 or more,
additional shares will be issued so that the aggregate number of shares
issued in connection with the acquisition equals $10 million divided by the
average closing price per share for the Company's common stock for the ten
trading days ending on August 31, 1999 or such earlier date as may be
selected by the Company. The Company has also agreed to issue additional
shares to the former shareholder of Guardian in the event that certain
earnings targets are met over the next two years, however the aggregate
purchase price will not exceed $14.5 million. The sale of the foregoing
shares were exempt from registration under the Securities Act of 1933 (the
"Act") as transactions not involving a public offering, based on the fact
that the shares were sold to an accredited investor under Rule 506 of
Regulation D under the Act.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See INDEX TO EXHIBITS
(b) There were two Current Reports on Form 8-K filed
during the quarterly period ended November 30, 1998.
On September 9, 1998, Registrant filed a Form 8-K in
which it attached and incorporated by reference the
September 8, 1998 press release issued by the
Registrant reporting August sales and other
information.
On September 18, 1998, Registrant filed a Form 8-K in
which it attached and incorporated by reference the
September 16, 1998 press release reporting results
for the second quarter ended August 31, 1998.
INDEX TO EXHIBITS
Page
----
27. Financial Data Schedule 22
20
<PAGE>
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.
Heilig-Meyers Company
(Registrant)
Date: January 13, 1999 /s/Roy B. Goodman
-----------------
Roy B. Goodman
Executive Vice President and
Principal Financial Officer
Date: January 13, 1999 /s/William J. Dieter
--------------------
William J. Dieter
Senior Vice President,
Accounting and Principal
Accounting Officer
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
THE SCHEDULE CONTAINS SUMMARY FINANANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> NOV-30-1998
<CASH> 18,804
<SECURITIES> 208,670 <F1>
<RECEIVABLES> 324,399
<ALLOWANCES> 57,021
<INVENTORY> 532,264
<CURRENT-ASSETS> 1,177,853
<PP&E> 585,788
<DEPRECIATION> 199,965
<TOTAL-ASSETS> 1,982,933
<CURRENT-LIABILITIES> 695,592
<BONDS> 583,303
0
0
<COMMON> 119,530
<OTHER-SE> 514,674
<TOTAL-LIABILITY-AND-EQUITY> 1,982,933
<SALES> 1,844,849
<TOTAL-REVENUES> 2,072,155
<CGS> 1,234,260
<TOTAL-COSTS> 1,234,260
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 76,338
<INTEREST-EXPENSE> 57,247
<INCOME-PRETAX> 39,529
<INCOME-TAX> 14,303
<INCOME-CONTINUING> 25,226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,226
<EPS-PRIMARY> 0.43 <F2>
<EPS-DILUTED> 0.42
<FN>
<F1> Represents retained interest in securitized receivables
<F2> Represents basic earnings per share
</FN>
</TABLE>
