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 August 31, 1999
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 .
- --------------------------------------------------------------------
(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 .
- --------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(804) 784-7300 .
- --------------------------------------------------------------------
(Registrant's telephone number, including area code)
.
- --------------------------------------------------------------------
(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 October 1, 1999.
67,676,676 shares of Common Stock, $2.00 par value.
<PAGE>
HEILIG-MEYERS COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for
Three and Six Months Ended August 31, 1999
and August 31, 1998 (Unaudited) 3
Consolidated Balance Sheets as of August 31, 1999
(Unaudited) and February 28, 1999 (Audited) 4
Consolidated Statements of Cash Flows for
Six Months Ended August 31, 1999 and
August 31, 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure of
Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Sales $507,640 $596,360 $1,126,133 $1,190,155
Other income 65,308 78,647 136,020 153,791
-------- -------- ---------- ----------
Total revenues 572,948 675,007 1,262,153 1,343,946
-------- -------- ---------- ----------
Costs and Expenses:
Costs of sales 334,868 405,831 735,097 799,263
Selling, general and
administrative 192,885 213,935 424,205 431,231
Interest 18,557 18,986 38,292 38,126
Provision for doubtful
accounts 23,279 22,494 47,151 45,693
-------- -------- ---------- ----------
Total costs and
expenses 569,589 661,246 1,244,745 1,314,313
-------- -------- ---------- ----------
Gain (loss) on sale
and write-down of
assets held for sale 50,554 -- (63,136) --
Earnings (loss) before
provision for income
taxes 53,913 13,761 (45,728) 29,633
Provision for income taxes 51,071 5,003 21,970 10,681
-------- --------- ---------- ----------
Net earnings (loss) $ 2,842 $ 8,758 $ (67,698) $ 18,952
======== ======== ========== ==========
Net earnings (loss) per share of common stock:
Basic $ 0.05 $ 0.15 $ (1.13) $ 0.32
======== ======== ========== ==========
Diluted $ 0.05 $ 0.15 $ (1.13) $ 0.32
======== ======== ========== ==========
Cash dividends per
share of common stock $ 0.07 $ 0.07 $ 0.14 $ 0.14
======== ======== ========== ==========
See notes to consolidated financial statements.
3
<PAGE>
HEILIG-MEYERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
August 31, February 28,
1999 1999
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 4,906 $ 67,254
Accounts receivable, net 148,654 254,282
Retained interest in securitized
receivables at fair value 191,999 190,970
Inventories 366,135 493,463
Other current assets 103,050 124,305
Net assets held for sale 161,519 ---
---------- ----------
Total current assets 976,263 1,130,274
Property and equipment, net 293,138 400,686
Other assets 133,786 72,632
Excess costs over net assets acquired, net 145,014 344,160
---------- ----------
$1,548,201 $1,947,752
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 89,707 $ 210,000
Long-term debt due within
one year 37,540 167,486
Accounts payable 138,147 193,799
Accrued expenses 160,417 178,656
---------- ----------
Total current liabilities 425,811 749,941
---------- ----------
Long-term debt 536,481 547,344
Deferred income taxes 56,194 45,365
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
59,874 and 59,861, respectively) 119,748 119,722
Capital in excess of par value 242,476 242,346
Unrealized gain on investments 5,763 5,228
Retained earnings 161,728 237,806
---------- ----------
Total stockholders' equity 529,715 605,102
---------- ----------
$1,548,201 $1,947,752
========== ==========
See notes to consolidated financial statements.
4
<PAGE>
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
August 31,
-------------------
1999 1998
---- ----
Cash flows from operating activities:
Net earnings (loss) $(67,698) $ 18,952
Adjustments to reconcile net
earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 30,478 27,819
Provision for doubtful accounts 47,151 45,696
Store closing charge payments (1,312) (3,548)
Gain (loss), net of tax on sale and
write-down of net assets held for
sale 78,903 ---
Other, net (2,763) (4,858)
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable (49,503) (10,115)
Retained interest in securitized
receivables at cost (494) 4,657
Other receivables (41,957) 414
Inventories (39,713) 1,666
Prepaid expenses 13,864 (1,579)
Accounts payable 148 (1,180)
Accrued expenses (17,205) (53)
--------- ---------
Net cash provided (used)
by operating activities (50,101) 77,871
--------- ---------
Cash flows from investing activities:
Proceeds from sale of subsidiaries 263,575 ---
Additions to property and equipment (15,578) (35,015)
Disposals of property and equipment 5,109 16,742
Miscellaneous investments (7,476) (50,914)
--------- ---------
Net cash provided (used)
by investing activities 245,630 (69,187)
--------- ---------
Cash flows from financing activities:
Net decrease in notes payable (120,293) (11,500)
Payments of long-term debt (129,229) (2,551)
Issuance of common stock 26 25
Dividends paid (8,381) (8,271)
--------- ---------
Net cash used by
financing activities (257,877) (22,297)
--------- ---------
Net decrease in cash (62,348) (13,613)
Cash at beginning of period 67,254 48,779
--------- ---------
Cash at end of period $ 4,906 $ 35,166
========= =========
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, 1999. 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 1999 Annual Report on Form 10-K. The results for the second
quarter of fiscal year 2000 are not necessarily indicative of future
financial results.
B. On May 28, 1999, the Company entered into a definitive agreement to sell
93% of its interest in its Mattress Discounters division, and on August 6,
the Company completed the transaction. Heilig-Meyers received approximately
$204 million in cash, subject to certain working capital adjustments,
pay-in-kind junior subordinated notes valued at $12.0 million and retained
a 7% equity interest in Mattress Discounters. The Company incurred costs
related to the transaction of approximately $8.9 million and assumed
liabilities of approximately $5.6 million. This transaction resulted in a
pre-tax gain of $135.2 million ($56.2 million net of tax).
On June 15, 1999, the Company entered into a definitive agreement to sell
its interest in its Rhodes division. The transaction was closed on July 13,
1999, with an effective date of July 1, 1999. Under the terms of the sale
agreement the Company received $60.0 million in cash, a $40 million 10%
pay-in-kind subordinated note receivable due 2004 (9.5% interest rate per
annum for periods where interest is paid in cash) and an option to acquire
a 10% equity interest in Rhodes Holdings, the acquiring entity. The Company
also has the option to acquire an additional 10% equity interest if certain
financial goals are achieved by Rhodes Holdings. The Company has agreed to
provide or guarantee a $20.0 million standby credit facility to Rhodes
after the closing, which may only be drawn on in certain circumstances
after utilization of availability under Rhodes' primary credit facility. In
addition, under terms of the agreement, Rhodes assumed approximately $10
million in capital lease obligations. During the first quarter ended May
31, 1999, the Company recorded a pre-tax charge to earnings of $113.7
million ($79.6 million net of tax) to write down its investment in Rhodes
to estimated net realizable value. During the second quarter ended August
31, 1999, this loss was adjusted to $104.6 million ($68.8 million net of
tax) to reflect the final terms of this transaction.
During the second quarter ended August 31, 1999, the Company announced its
intent to exit certain markets which are not considered to be part of the
Company's core operations. These markets include Chicago, Illinois,
Milwaukee, Wisconsin and non-continental U.S. operations. During the
quarter ended August 31, 1999, the Company recorded a pre tax charge of
$93.8 million ($66.3 million net of tax) to write down the associated
assets to their estimated fair value, less costs to sell. The assets
effected by this plan total approximately $161.5 million and are classified
as net assets held for sale on the August 31, 1999 balance sheet. The
Company began the execution of this plan in September 1999 with the sale of
assets related to 18 Heilig-Meyers Furniture stores in the Chicago and
Milwaukee markets. The Company expects the remaining dispositions to be
completed within the next 12 months. The net cash proceeds from these
divestitures will be used to pay down debt.
6
<PAGE>
C. On June 16, 1999, the Board of Directors declared a cash dividend of $0.07
per share which will be payable on August 21, 1999, to stockholders of
record on July 14, 1999.
D. Accounts receivable are shown net of the allowance for doubtful accounts
and unearned finance income. The allowance for doubtful accounts was
$46,435,000 and $42,475,000 and unearned finance income was $30,647,000 and
$31,775,000 at August 31, 1999, and February 28, 1999, respectively.
E. The Company made (received) net income tax payments (refunds) of $281,000
and $(9,942,000) during the three months ended August 31, 1999, and August
31, 1998, respectively.
F. The Company made interest payments of $41,550,000 and $38,639,000 during
the six months ended August 31, 1999, and August 31, 1998 respectively.
G. Total comprehensive income (loss) was $3,127,000 and ($67,163,000) for the
three and six months ended August 31, 1999 and total comprehensive income
was $6,955,000 and $17,149,000 for the three and six months ended August
31, 1998. The difference between net income (loss) and comprehensive income
(loss) is due to the change in the unrealized gain on investments, which
consists of retained interests in securitized receivables.
H. 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, 2000. 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.
I. During the six months ended August 31, 1999, the Company had significant
operations aligned in four operating formats: Heilig-Meyers, The RoomStore,
Rhodes and Mattress Discounters. The Company's Heilig-Meyers division is
associated with the Company's historical operations. The majority of the
Heilig-Meyers stores operate in smaller markets with a broad line of
merchandise. The RoomStore division includes the stores primarily operating
in Texas, Oregon, Maryland, Illinois and Virginia and the stores in
Puerto Rico operating under the "Berrios" name. The Rhodes retailing
strategy was selling quality furniture to a broad base of middle income
customers. The Mattress Discounters division is the Nation's largest
retail bedding specialist.
As discussed in Note B, the Company has completed the sale of its Rhodes
division and has also sold 93% of its interest in its Mattress Discounters
division. Therefore, results from the second quarter of 2000 include
operations of the Rhodes division through June 30, 1999 and the Mattress
Discounters division through August 6, 1999.
Results for the second quarter and six months ended August 31, 1999 also
include the results associated with operations that the Company plans to
divest. These include operations in the Chicago, Illinois, Milwaukee,
Wisconsin and non-continental U.S. markets, which are reported as part of
The RoomStore operating segment.
The Company evaluates performance based on earnings (loss) before interest
and income taxes (based on generally accepted accounting principles). The
Company generally accounts for intersegment sales and transfers at current
market prices as if the sales or transfers were to unaffiliated third
parties. General corporate expenses are allocated between the divisions.
7
<PAGE>
Pertinent financial data by operating segment for the three and six month
periods ended August 31, 1999 and 1998 are as follows:
Three Months Three Months
Ended Ended
August 31, August 31,
(Amounts in thousands) 1999 1998
---- ----
Revenues:
Heilig-Meyers $ 368,788 $ 377,000
The RoomStore 120,559 110,923
Rhodes 37,945 121,440
Mattress Discounters 45,656 65,644
---------- ----------
Total revenues from
external customers $ 572,948 $ 675,007
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ 14,782 $ 28,261
The RoomStore 3,753 3,586
Rhodes (1,558) (7,357)
Mattress Discounters 4,939 8,257
---------- ----------
Total earnings before
interest and taxes $ 21,916 $ 32,747
Gain on sale and write-
down of assets held for sale 50,554 --
Interest expense (18,557) (18,986)
----------- -----------
Consolidated earnings
before provision for
income taxes $ 53,913 $ 13,761
========== ==========
Depreciation and amortization expense:
Heilig-Meyers $ 10,616 $ 7,717
The RoomStore 1,677 1,212
Rhodes 848 3,203
Mattress Discounters 896 1,100
---------- ----------
Total depreciation and
amortization expense $ 14,037 $ 13,232
========== ==========
Capital Expenditures:
Heilig-Meyers $ 1,997 $ 13,452
The RoomStore 4,031 4,116
Rhodes 339 869
Mattress Discounters 236 748
---------- ----------
Total capital expenditures $ 6,603 $ 19,185
========== ==========
Total identifiable assets:
Heilig-Meyers $1,345,989 $1,376,732
The RoomStore 202,212 270,366
Rhodes -- 323,743
Mattress Discounters -- 99,215
---------- ----------
Total identifiable assets $1,548,201 $2,070,056
========== ==========
8
<PAGE>
Six Months Six Months
Ended Ended
August 31, August 31,
1999 1998
---- ----
Revenues:
Heilig-Meyers $ 751,241 $ 758,202
The RoomStore 244,131 221,837
Rhodes 160,048 239,150
Mattress Discounters 106,733 124,757
---------- ----------
Total revenues from
external customers $1,262,153 $1,343,946
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ 38,903 $ 54,620
The RoomStore 7,537 10,022
Rhodes (2,390) (11,314)
Mattress Discounters 11,650 14,431
---------- ----------
Total earnings before
interest and taxes $ 55,700 $ 67,759
Gain (loss) on sale and write-
down of assets held for sale (63,136) --
Interest expense (38,292) (38,126)
----------- -----------
Consolidated earnings (loss)
before provision for
income taxes $ (45,728) $ 29,633
=========== ==========
Depreciation and amortization expense:
Heilig-Meyers $ 21,177 $ 16,651
The RoomStore 3,272 2,554
Rhodes 3,918 6,440
Mattress Discounters 2,116 2,174
---------- ----------
Total depreciation and
amortization expense $ 30,483 $ 27,819
========== ==========
Capital Expenditures:
Heilig-Meyers $ 6,727 $ 22,462
The RoomStore 5,991 8,421
Rhodes 1,665 2,340
Mattress Discounters 1,195 1,792
---------- ----------
Total capital expenditures $ 15,578 $ 35,015
========== ==========
9
<PAGE>
I. 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:
MacSaver Financial Services, Inc.
Summarized Statements of Operations
(Amounts in thousands)
(Unaudited)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
------------------ ------------------
Net revenues $ 74,896 $ 72,799 $151,410 $143,694
Operating expenses 62,243 55,228 124,101 110,791
-------- -------- -------- --------
Earnings before taxes 12,653 17,571 27,309 32,903
-------- -------- -------- --------
Net earnings $ 8,224 $ 11,421 $ 17,751 $ 21,387
======== ======== ======== ========
MacSaver Financial Services, Inc.
Summarized Balance Sheets
(Amounts in thousands)
August 31, February 28,
1999 1999
(Unaudited) (Audited)
---------- ----------
Current assets $ 67,068 $ 57,148
Accounts receivable, net 120,039 145,211
Retained interest in securitized
receivables at fair value 191,999 190,970
Due from affiliates 508,225 716,867
---------- ----------
Total Assets $ 887,331 $1,110,196
========== ==========
Current liabilities 55,463 173,727
Deferred income taxes 12,429 15,023
Notes payable 89,707 210,000
Long-term debt 535,000 535,000
Stockholder's equity 194,732 176,446
---------- ----------
Total Liabilities and Equity $ 887,331 $1,110,196
========== ==========
10
<PAGE>
J. The following table sets forth the computations of basic and diluted
earnings (loss) per share:
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
------------------ ----------------
(Amounts in thousands except per share data)
Numerator:
Net earnings (loss) $2,842 $ 8,758 $(67,698) 18,952
Denominator:
Denominator for basic
earnings per share -
average common shares
outstanding 59,949 59,077 59,905 58,945
Effect of potentially
dilutive stock options 37 494 -- 544
Effect of contingently
issuable shares
considered earned -- -- -- 132
------ ------ ------ ------
Denominator for diluted
earnings per share 59,986 59,571 59,905 59,621
Basic EPS $ 0.05 $ 0.15 $(1.13) $ 0.32
Diluted EPS 0.05 0.15 (1.13) 0.32
Options to purchase 4,806,000 and 3,481,000 shares of common stock at
prices ranging from $9.03 and $13.56 to $35.06 per share were
outstanding at August 31, 1999 and 1998, respectively, but were not
included in the computation of diluted earnings per share because they
would have been antidilutive.
K. 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. Amounts charged to the provision during the first and second
quarter of fiscal 2000 are as follows:
Amount
Utilized Remaining
Reserve as through Reserve as
of March 1, August 31, of August 31,
(Amounts in thousands, 1999 1999 1999
unaudited) ------------------------------------------
Severance $ 1,498 $ 890 $ 608
Lease & facility exit cost 3,294 422 2,872
------------------------------------------
Total $ 4,792 $ 1,312 $ 3,480
==========================================
The Company completed the store closings, office downsizing, and
private label credit card program reorganization associated with this
plan during fiscal 1999. The substantial majority of the remaining
reserves are expected to be utilized during fiscal 2000 with some
amounts related to long-term lease obligations extending beyond fiscal
2000.
11
<PAGE>
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, 1999.
On March 24, 1999, the Company announced that in an effort to substantially
improve the overall financial position of the Company and to refocus on its core
home furnishings operation, a review of strategic divestiture options of all
non-core operating assets was being made. The Heilig-Meyers division and certain
markets within The RoomStore division are considered as the Company's core
business.
On May 28, 1999, the Company announced that it had entered into a
definitive agreement to sell 93% of its interest in its Mattress Discounters
division, and on August 6, the Company completed the transaction. Heilig-Meyers
received approximately $204 million in cash, subject to certain working capital
adjustments, pay-in-kind junior subordinated notes valued at $12.0 million and
retained a 7% equity interest in Mattress Discounters. The Company incurred
costs related to the transaction of approximately $8.9 million and assumed
liabilities of approximately $5.6 million. This transaction resulted in a
pre-tax gain of $135.2 million ($56.2 million net of tax).
On June 15, 1999, the Company entered into a definitive agreement to sell
its interest in its Rhodes division. The transaction was closed on July 13,
1999, with an effective date of July 1, 1999. Under the terms of the sale
agreement the Company received $60.0 million in cash, a $40 million 10%
pay-in-kind subordinated note receivable due 2004 (9.5% interest rate per annum
for periods where interest is paid in cash) and an option to acquire a 10%
equity interest in Rhodes Holdings, the acquiring entity. The Company also has
the option to acquire an additional 10% equity interest if certain financial
goals are achieved by Rhodes Holdings. The Company has agreed to provide or
guarantee a $20.0 million standby credit facility to Rhodes after the closing,
which may only be drawn on in certain circumstances after utilization of
availability under Rhodes' primary credit facility. In addition, under terms of
the agreement, Rhodes assumed approximately $10 million in capital lease
obligations. During the first quarter ended May 31, 1999, the Company recorded a
pre-tax charge to earnings of $113.7 million ($79.6 million net of tax) to write
down its investment in Rhodes to estimated net realizable value. During the
second quarter ended August 31, 1999, the loss was adjusted to $104.6 million
($68.8 million net of tax) to reflect the final terms of this transaction.
During the second quarter ended August 31, 19999, the Company announced its
intent to exit certain markets which are not considered to be part of the
Company's core operations. These markets include Chicago, Illinois, Milwaukee,
Wisconsin and non-continental U.S. operations. During the quarter ended August
31, 1999, the Company recorded a pre tax charge of $93.8 million ($66.3 million
net of tax) to write down the associated assets to their estimated fair value,
less costs to sell. The assets effected by this plan total approximately $161.5
million and are classified as net assets held for sale on the August 31, 1999
balance sheet. The Company began the execution of this plan in September 1999
with the sale of assets related to 18 Heilig-Meyers Furniture stores in the
Chicago and Milwaukee markets. The Company expects the remaining dispositions to
be completed within the next 12 months. The net cash proceeds from these
divestitures will be used to pay down debt.
12
<PAGE>
RESULTS OF OPERATIONS
Revenues and Earnings
Revenues in those divisions which were under the Company's ownership for
the full quarter increased 0.3% to $489.3 million, compared to $487.9 million in
the prior year quarter. As a result of the sale of the Company's Rhodes and
Mattress Discounters divisions, total revenues for the quarter declined 15.1% to
$572.9 million from $675.0 million in the prior year, which included a full
three months activity for these divisions. Net earnings from operations for the
quarter ended August 31, 1999, were $2.2 million or $0.04 per share. Including
the net gain relating to the divestiture activity, the Company reported net
income of $2.8 million or $0.05 per share for the quarter ended August 31, 1999
compared to $0.15 per share in the prior year quarter. The results for the
quarter ended August 31, 1999 include a net gain of $0.6 million or $.01 per
share related to divestiture activity and write downs of assets held for sale.
For the six month period ended August 31, 1999, revenues in those divisions
which were under the Company's ownership for the full six months increased 1.6%
to $995.4 million, compared to $980.0 million for the six months ended August
31, 1998. As a result of the sales of the Company's Rhodes and Mattress
Discounters divisions, total revenues for the six month period declined to $1.26
billion from $1.34 billion for the same period in the prior year. For the six
month period ended August 31, 1999, the Company has incurred pre-tax costs of
$63.1 million ($78.9 million net of tax) associated with divestiture activities
and the write down of assets held for sale. Including these costs, the Company
reported a net loss of $67.7 million or $1.13 per share for the six month period
ending August 31, 1999. Absent these charges, net earnings for the six month
period ended August 31, 1999, were $11.2 million, or $0.19 per share, compared
to $19.0 million, or $0.32 per share in the prior year comparative period.
The following table shows a comparison of sales by division:
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
------------ ------------ ------------- ------------
(Sales amounts in millions)
% of % of % of % of
Sales Sales Sales Sales Sales Sales Sales Sales
------------ ------------ ------------ ------------
Heilig-Meyers $313.1 61.7% $313.3 52.5% $640.5 56.9% $633.6 53.2%
The RoomStore 112.9 22.2 101.7 17.1 228.2 20.2 203.6 17.1
Rhodes 36.0 7.1 115.9 19.4 150.8 13.4 228.4 19.2
Mattress
Discounters 45.6 9.0 65.5 11.0 106.6 9.5 124.6 10.5
------ ------ -------- --------
Total $507.6 $596.4 $1,126.1 $1,190.2
====== ====== ======== ========
Sales in those divisions which were under the Company's ownership for the
full second quarter of fiscal 2000 increased 2.7% to $426.0 million, compared to
$415.0 million for the quarter ended August 31, 1998. As a result of the sales
of the Company's Rhodes and Mattress Discounters divisions, sales declined 14.9%
to $507.6 million compared to sales of $596.4 million in the prior year quarter.
For the six month period ended August 31, 1999, sales in those divisions which
were under the Company's ownership for the full six months increased 3.8% to
$868.7 million from $837.2 million. As a result of the sales of the Company's
Rhodes and Mattress Discounters divisions, sales for the six month period
declined 5.4% to $1,126.1 million from $1,190.2 million. The overall increase in
sales in the divisions under the Company's ownership for the full period was
primarily attributable to a comparable store sales increase of 0.7% and 1.9% for
the three and six months ended August 31, 1999, with the remainder due to an
increase in operating units from August 31, 1998 to August 31, 1999. Price
changes had an immaterial impact on the overall sales increase for the quarter.
13
<PAGE>
Other income for those divisions which were under the Company's ownership
for the full quarter decreased to 14.8% from 17.6% of sales in the prior year
quarter. For the six months ended August 31, 1999, other income for these
divisions decreased as a percentage of sales to 14.5% from 17.1% in the prior
year. On a consolidated basis, other income decreased to 12.9% for the quarter
from 13.2% in the prior year quarter. For the six month period other income
decreased to 12.1% from 12.9% in the prior year. These decreases are primarily
the result of sales growth in stores that do not offer the Company's in-house
installment credit program. The Heilig-Meyers division and certain stores in The
RoomStore division offer installment credit as a financing option to customers.
The following table shows other income as a percentage of divisional sales:
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
Heilig-Meyers 17.6% 20.3% 17.1% 19.7%
The RoomStore 6.8 9.1 7.0 9.0
Rhodes 5.4 4.8 6.1 4.7
Mattress
Discounters 0.0 0.2 0.1 0.2
Within the Heilig-Meyers format, other income decreased 2.7% as a
percentage of sales for the quarter and 2.6% of sales year-to-date. The decrease
is due to an increase in the amount of receivables that have been securitized
and the elimination of the previous revolving credit card program. Within The
RoomStore division, other income decreased as a percentage of sales 2.3% for the
quarter and 2.0% year-to-date due to an increase in stores that do not offer an
in-house installment program.
Costs and Expenses
Costs of sales for those divisions which were under the Company's ownership
for the full quarter decreased to 65.7% from 67.6% of sales in the prior year
quarter. For the six months ended August 31, 1999, costs of sales for these
divisions decreased as a percentage of sales to 64.8% from 66.5% in the prior
year. On a consolidated basis, cost of sales decreased to 66.0% for the quarter
from 68.1% in the prior year quarter. For the six month period ended August 31,
1999, cost of sales decreased to 65.3% from 67.2% in the prior year. The
following table shows the costs of sales as a percentage of divisional sales:
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
Heilig-Meyers 65.6% 67.6% 64.7% 66.6%
The RoomStore 66.3 67.8 65.2 66.1
Rhodes 75.3 73.2 70.6 72.2
Mattress
Discounters 63.2 61.8 62.2 62.4
The costs of sales in the Heilig-Meyers division decreased 2.0% as a
percentage of sales from the prior year quarter and 1.9% as a percentage of
sales from the prior year-to-date as a result of cost control efforts primarily
in the warehouse and delivery areas. The decrease in costs of sales in The
RoomStore division was primarily due to decreases in costs of sales in the
Puerto Rican stores.
14
<PAGE>
Selling, general and administrative expenses for those divisions which were
under the Company's ownership for the full quarter increased to 39.6% from 36.9%
of sales in the prior year quarter. For the six months ended August 31, 1999,
selling, general and administrative expenses for these divisions increased as a
percentage of sales to 39.1% from 37.4% in the prior year. On a consolidated
basis, selling, general and administrative expenses increased to 38.0% for the
quarter from 35.9% in the prior year quarter. For the six month period ended
August 31, 1999, selling, general and administrative expenses increased to 37.7%
from 36.2% in the prior year. The following table displays selling, general and
administrative expense as a percentage of the applicable division's sales:
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
Heilig-Meyers 41.3% 37.5% 40.3% 38.0%
The RoomStore 34.9 35.1 35.7 35.4
Rhodes 34.5 37.9 37.1 37.5
Mattress
Discounters 26.1 25.8 26.9 26.2
Selling, general and administrative expenses as a percentage of sales for
the Heilig-Meyers division increased 3.8% as a percentage of sales as compared
to the prior year quarter and 2.3% as a percentage of sales as compared to the
prior year six month period. This increase is due to the timing of certain
administrative expenses such as legal and professional fees as well as a
redistribution of store-level compensation from year end bonus programs to base
pay as compared to the prior year. Selling, general and administrative expenses
in The RoomStore division decreased 0.2% as a percentage of sales versus the
prior year quarter and increased 0.3% versus the prior year six month period.
The increases in expenses in The RoomStore division are primarily due to
increased advertising for new stores.
Interest expense was 3.7% and 3.2% of sales in the second quarters of
fiscal years 2000 and 1999, respectively with the effect of lower debt levels
being offset by higher interest rates. For the quarter, weighted average
long-term debt decreased to $627.0 million from $722.0 million in the prior year
second 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 and $129.2 million paydown of long-term debt in the first
and second quarters of fiscal 2000. Weighted average long-term interest rates
increased to 8.6% from 7.6% in the prior year. Weighted average short-term debt
decreased to $172.5 million from $258.7 million in the prior year. This decrease
was the result of the use of proceeds from divestitures to paydown notes
payable. Weighted average short-term interest rates increased to 7.1% from 6.4%
in the prior year. Interest expense increased 0.5% as a percentage of sales
compared to the prior year quarter due to higher interest rates. For the six
month period ended August 31, 1999, interest expense increased to 3.4% of sales
from 3.2% in the prior year.
The reduction in the sales contribution of the Rhodes and Mattress
Discounters divisions caused the provision for doubtful accounts to increase for
the second quarter, as a percentage of sales to 4.6% from 3.8% in the prior year
quarter. For the six month period ended August 31, 1999, the provision increased
to 4.2% from 3.8% in the prior year. For those stores offering installment
credit, the provision was 6.5% and 6.4% of sales for the second quarters of
fiscal years 2000 and 1999 and 6.4% for the six months ended August 31, 1999 and
1998.
As a result of divestiture activity, the effective income tax rate was
94.7% for the second quarter ended August 31, 1999. For the six months ended
August 31, 1999, the divestiture activity caused the provision for income taxes
to be an expense of $22.0 million on a pre-tax loss of $45.7 million. Because
the Company's tax basis in the Mattress Discounters division was minimal, the
sale of the division resulted in a tax gain significantly in excess of the gain
recorded for financial reporting purposes. Before divestiture activity, the
effective income tax rate from operations for the second quarter of fiscal 2000
was 34.7% compared to 36.4% for the second quarter of fiscal 1999. For the
six-month period ended August 31, 1999, the effective tax rate from operations
was 35.6% compared to 36.0% in the prior year.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its cash position $62.4 million to $4.9 million at
August 31, 1999 from $67.3 million at February 28, 1999.
Net cash from operating activities produced negative cash flows of $50.1
million, compared to an inflow of $77.9 million in the comparable period of the
prior year. The prior year amount includes a cash inflow of $59.3 million from
the sale of accounts receivable through the Company's asset securitization
program. 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 2000 quarters.
Investing activities produced cash flows of $245.6 million during the six
months ended August 31, 1999 compared to negative cash flows of $69.2 million in
the prior year period. The increase in cash flows from investing activities is
primarily due to cash proceeds received from the sale of the Rhodes and Mattress
Discounters divisions, as well as a decrease in additions to property and
equipment during the period and a decrease in miscellaneous investments. Cash
used for miscellaneous investments during the six months ended August 31, 1998
includes deposits paid by the Company related to the change in lessor of certain
leased real estate and the purchase of previously leased equipment.
Financing activities produced negative cash flows of $257.9 million during
the six months ended August 31, 1999 compared to a negative cash flow of $22.3
million in the prior year period. The negative cash flow from financing
activities in the current year period is due to the payments of debt from the
proceeds of the sale of the Rhodes and Mattress Discounters divisions. 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 six
months ended August 31, 1999. As of August 31, 1999, 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 August 31, 1999, the
Company had a $200.0 million revolving credit facility in place, which expires
in July 2000. This facility includes ten banks and had $89.7 million outstanding
and $110.3 million unused as of August 31, 1999.
As a result of losses incurred during the second quarter of fiscal 2000,
the Company obtained amendments to its bank debt agreements in order to maintain
covenant compliance.
Total debt as a percentage of debt and equity was 55.6% at August 31, 1999,
compared to 60.4% at February 28, 1999. This decrease is primarily due to the
paydown of debt from proceeds of divested subsidiaries as well as the
reclassification of assets held for sale. The current ratio was 2.3X at August
31, 1999, compared to 1.5X at February 28, 1999. The current ratio also
increased due to the paydown of debt and the reclassification of assets held for
sale.
16
<PAGE>
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.
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 completed the
remediation stage for the critical systems of the Heilig-Meyers operations
during fiscal year 1999. Remediation for all other subsidiaries' critical
systems was completed in the second quarter of fiscal year 2000. The testing
stage for critical systems within the entire Company was also completed in the
second quarter of fiscal year 2000. The audit phase for this testing began in
the second quarter and will continue into the third quarter of fiscal year 2000.
The Company is in the last stages of inventorying and making an assessment of
its lower priority non-information technology systems. Managers of such systems
have contacted the appropriate third party vendors to determine their Year 2000
compliance.
Since the project's beginning in fiscal 1997, the Company has incurred
approximately $1.2 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 $1.69 million,
which will be expensed as incurred. Expected future expenditures can be broken
down as follows:
Dollars % of
Task: (in thousands) Total
----- -------------- -----
Auditing Remediation Efforts $ 700 42%
Internal Personnel Resources 640 38
Software Upgrades-Remediation/
Auditing/Testing 350 20
---------- ----
Total $1,690 100%
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 has obtained 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.
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.
17
<PAGE>
The Company is currently assessing the consequences of its Year 2000
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 ranked
suppliers based on how critical each supplier is believed to be to the Company's
operations. The Company requested a copy of the Year 2000 project plan under
which these suppliers are operating. The Company's Year 2000 project team has
reviewed these plans. If a supplier is deemed to be critical and has a project
plan that does not meet the Company's 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 third quarter of fiscal year 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, the Company's access to, and cost of, capital, and
the Company's ability to attract buyers and obtain satisfactory valuations for
certain assets held for sale. Payments under guarantees of Rhodes leases or
other obligations or the standby credit facility as a result of lower than
expected Rhodes operating results or defaults by Rhodes could impact the outcome
of forward looking statements. 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.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosure on this matter made in our
Report on Form 10-K for the year ended February 28, 1999. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in
the Registrant's Annual Report on Form 10-K for the year ended February 28,
1999.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Company's shareholders was held June 16, 1999.
(c)(i) The shareholders approved the ratification of the selection of Deloitte
and Touche LLP as accountants and auditors for the Company for the
current fiscal year. The ratification was approved by the following vote:
FOR - 50,330,069
AGAINST - 125,679
ABSTAIN - 64,293
(c)(ii) The shareholders of the Company elected a board of nine directors for
one-year terms. The elections were approved by the following vote:
Directors For Withheld
--------- --- --------
William C. DeRusha 48,522,355 1,999,538
Alexander Alexander 48,732,011 1,789,881
Robert L. Burrus, Jr. 48,735,497 1,786,396
Beverley E. Dalton 48,741,787 1,780,106
Charles A. Davis 48,733,601 1,788,292
Benjamin F. Edwards, III 48,737,419 1,784,474
Lawrence N. Smith 48,736,168 1,785,724
Eugene P. Trani 48,735,793 1,786,100
L. Douglas Wilder 48,515,614 2,006,278
(c)(iii) The shareholders approved the Company's Director Stock Ownership Plan.
The votes were cast as follows:
FOR - 46,767,041
AGAINST - 3,632,247
ABSTAIN - 120,752
(c)(iv) The shareholders disapproved the shareholder proposal. The votes were
cast as follows:
FOR - 14,403,031
AGAINST - 26,545,513
ABSTAIN - 755,501
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See INDEX TO EXHIBITS
(b) There were three Current Reports on Form 8-K filed during
the quarterly period ended August 31, 1999. On June 17,
1999, Registrant filed a Form 8-K in which it announced the
signing of a definitive agreement to transfer a controlling
interest in Mattress Discounters Corporation to an
investment group. The Registrant also announced the signing
of a definitive agreement to sell Rhodes, Inc. to an
investment group and reported results for the first quarter
ended May 31, 1999.
On July 28, 1999, Registrant filed a Form 8-K in which it
reported that Registrant had sold its interest in Rhodes,
Inc. and included pro forma financial statements related
thereto.
On August 23, 1999, Registrant filed a Form 8-K in which it
reported that Registrant had sold a controlling interest in
Mattress Discounters Corporation and included pro forma
financial statements related thereto.
INDEX TO EXHIBITS
Page
10.1 Registrant's Director Stock Ownership Paln as
amended effective July 1, 1999 22
10.2 Registrant's Severance Plan (1999 Amendment
and Restatement) 26
27. Financial Data Schedule 30
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: October 15, 1999 /s/Roy B. Goodman
----------------------------
Roy B. Goodman
Executive Vice President and
Principal Financial Officer
Date: October 15, 1999 /s/Thomas F. Crump
----------------------------
Thomas F. Crump
Senior Vice President,
Controller
21
Exhibit 10.1
HEILIG-MEYERS COMPANY
DIRECTOR STOCK OWNERSHIP PLAN
As Amended Effective July 1, 1999
HEILIG-MEYERS COMPANY (the "Company") hereby adopts the Heilig-Meyers
Company Director Stock Ownership Plan.
1. Purpose. The purpose of the Director Stock Ownership Plan is to
increase the level of ownership of the Company's common stock by non-employee
directors. The Plan replaces the practice of paying director retainer fees
solely in cash by paying at least 50% of such fees in Company common stock and
allowing directors to receive up to 100% of the fees in Company common stock all
as set forth in the Plan. The Plan has been adopted by the Board of Directors of
the Company subject to approval by the Company's shareholders. The Plan is
intended to conform to the provisions of Rule 16b-3 of the Securities Exchange
Act of 1934, as amended, or any replacement rule in effect from time to time.
2. Definitions. As used in the Plan, the following terms have the
meanings indicated:
(a) "Annual Meeting Date" means the date of the annual meeting
of the Company's shareholders at which directors are
elected.
(b) "Award" means the award of Company Stock under the Plan.
(c) "Award Date" means the first day on which the New York
Stock Exchange is open in the month immediately following
the Annual Meeting Date.
(d) "Beneficiary" is the person(s) and/or entity(ies)
designated by a Participant to receive the Participant's
Deferred Stock Account at the death of the Participant. If
no Beneficiary is designated, or if none of the designated
Beneficiary(ies) survive the Participant, the Beneficiary
shall be the Participant's surviving spouse, for married
Participants, or the Participant's estate, for unmarried
participants.
(e) "Board" means the Board of Directors of the Company.
(f) "Committee" means the Compensation Committee of the Board
that shall administer the Plan.
(g) "Company" means Heilig-Meyers Company, a Virginia
corporation, or any successor corporation.
(h) "Company Stock" means common stock of the Company. In the
event of a change in the capital structure of the Company
(as provided in Section 10), the shares resulting from
such a change shall be deemed to be Company Stock within
the meaning of the Plan.
(i) "Compensation" means the amount of retainer fees payable
to each Eligible Director with respect to services
rendered to the Company as a director during a Service
Period. Compensation does not include fees for attending
meetings of the Board or committees of the Board.
(j) "Deferred Stock" means shares of Company Stock deferred
pursuant to a deferral election under Section 8.
(k) "Deferred Stock Account" means an account maintained by
the Company or as part of the Trust established hereunder.
22
<PAGE>
(l) "Effective Date" means the date the Plan is approved by
the Company's shareholders.
(m) "Election Period" means the 120-day period immediately
preceding the first day of a Service Period, or such other
period as determined by the Committee. For the first
Service Period beginning with the Effective Date, the
Election Period shall be the period beginning on the
Effective Date and ending on the first Award Date. For the
first Service Period following a director's first election
to the Board, the Election Period shall be the period
beginning on the date of the director's election to the
Board and ending on the first Award Date after the
director's election.
(n) "Eligible Director" means a director who is not an
employee of the Company or a Subsidiary.
(o) "Fair Market Value" means, on the Award Date, the average
of the highest and lowest registered sales prices of the
Company Stock on the exchange on which the Company Stock
generally has the greatest trading volume.
(p) "Participant" means any Eligible Director entitled to
receive an Award under the Plan.
(q) "Plan" means this Heilig-Meyers Company Director Stock
Ownership Plan.
(r) "Rule 16b-3" means Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended. A reference
in the Plan to Rule 16b-3 shall include a reference to any
corresponding subsequent rule or any amendments to Rule
16b-3 enacted after the Effective Date.
(s) "Service Period" means the period beginning with the
Annual Meeting Date and ending on the day preceding the
next Annual Meeting Date.
(t) "Subsidiary" means an entity of which the Company owns 50%
or more of the total combined voting power of all classes
of stock.
(u) "Trust" means the Heilig-Meyers Company Director Deferred
Compensation Trust or an individual trust established for
the benefit of an Eligible Director.
3. Participation. All Eligible Directors shall automatically
participate in the Plan.
4. Stock. The Company has reserved an aggregate of 600,000 shares of
Company Stock for issuance pursuant to the Plan. The aggregate number is subject
to adjustment as provided in Section 10. In the event of a change in the capital
structure of the Company (as provided in Section 10), the shares resulting from
such change shall be deemed to be Company Stock within the meaning of the Plan.
The aggregate number of shares of Company Stock reserved shall be reduced by the
issuance of shares under the Plan.
5. Automatic Share Awards. As of each Award Date, each Participant will
receive the number of shares of Company Stock (rounded down to the nearest whole
share) determined by dividing (i) an amount equal to 50% of the Participant's
Compensation, by (ii) the Fair Market Value of the Company Stock.
6. Election of Additional Company Stock.
(a) During the Election Period related to each Service Period,
a Participant may elect to receive an additional percentage of the Participant's
Compensation in the form of Company Stock. The election may be for any
percentage of the Compensation above 50% up to 100%. The election shall be
irrevocable as to the Award for the Service Period and shall be made by filing a
written election with the Company during the Election Period.
23
<PAGE>
(b) If a Participant makes an election pursuant to Section
6(a), as of the next Award Date, the Participant will receive the number of
shares of Company Stock (rounded down to the nearest whole share) determined by
dividing (i) the elected percentage of the Participant's Compensation, by (ii)
the Fair Market Value of the Company Stock.
7. Provisions Relating to Company Stock. All Company Stock granted
under the Plan shall be subject to the provisions of this Section.
(a) Company Stock shall automatically be awarded under the
Plan as provided under Sections 5 and 6. If at any time there may not be
sufficient shares available under the Plan to permit automatic Awards, the
automatic Awards shall be reduced pro rata (to zero, if necessary) so as not to
exceed the number of shares then available under the Plan.
(b) When Company Stock is issued, a certificate representing
the shares of Company Stock awarded shall be registered in each Participant's
name or other evidence of ownership shall be provided to the Participant by the
Company's transfer agent.
8. Deferred Stock.
(a) During the Election Period prior to each Service Period, a
Participant may elect to defer receipt of part or all of the Participant's
Company Stock payable with respect to the Service Period. A Participant shall
designate a date on which payment shall be made. The deferral election shall be
irrevocable as to Awards for the Service Period and shall be made by filing a
written election with the Company during the Election Period.
(b) If a Participant makes an election pursuant to (a), the
Company shall credit to the Participant's Deferred Stock Account the number of
shares of Company Stock granted under the Award (the Deferred Stock). A
Participant's interest in such Deferred Stock Account may not be sold, assigned,
transferred, pledged, hypothecated or otherwise encumbered. At its discretion,
the Company may also transfer the same number of shares of Company Stock to the
Trust.
(c) When a cash dividend is paid on Company Stock, the
dividend shall be reinvested in additional shares of Company Stock that shall be
added to the Participant's Deferred Stock Account. Each Participant's Deferred
Stock Account shall be adjusted to take into account any stock dividends or
other non-cash distributions pursuant to Section 10 below.
(d) A Participant shall receive payment of the Deferred Stock
Account on the distribution date specified by the Participant. A Participant may
change the distribution date previously elected by filing a new election with
the Company. The new election shall not be effective until six months after the
Company receives it.
(e) If a Participant dies before receiving payment of the
Deferred Stock Account pursuant to subsection (d) above, the Beneficiary of the
Participant shall receive payment of the Deferred Stock Account in accordance
with the Participant's election.
(f) If a Participant or Beneficiary has the right to receive
payment of the Participant's Deferred Stock Account pursuant to subsection (d)
or (e) above, the Company shall distribute or cause the Trust to distribute to
the Participant or Beneficiary that number of whole shares of Company Stock that
is equal to the number of whole shares of Company Stock that are then credited
to the Participant's Deferred Stock Account. The shares of Company Stock so
distributed shall not be subject to the provisions described in Section 7.
9. Issuance of Company Stock. The Company shall not be required to
issue or deliver any certificate for shares of Company Stock before (i) approval
of the Plan by the Company's shareholders, (ii) the admission of such shares to
listing on any stock exchange on which the Company Stock may then be listed,
(iii) receipt of any required registration or other qualification of such shares
under any state or federal law or regulation that the Company's counsel shall
determine is necessary or advisable, and (iv) the Company is satisfied that all
applicable legal requirements have been complied with. The Company may place on
a certificate representing Company Stock any legend deemed necessary by the
Company's counsel to comply with federal or state securities laws. Until a
certificate has been issued in the Participant's name for the shares of Company
Stock acquired, the Participant shall possess no shareholder rights with respect
to the shares.
24
<PAGE>
10. Effect of Stock Dividends and Other Changes in Capital Structure.
Appropriate adjustments shall be made automatically to the number and kind of
shares to be issued under the Plan, and any other relevant provisions of the
Plan if there are any changes in the Company Stock by reason of a stock
dividend, stock split, combination of shares, spin-off, reclassification,
recapitalization, merger, consolidation or other change in the Company's capital
stock (including, but not limited to, the creation or issuance to shareholders
generally of rights, options or warrants for the purchase of common stock or
preferred stock of the Company). If the adjustment would produce fractional
shares, the fractional shares shall be eliminated by rounding to the nearest
whole share. Any such adjustments shall neither enhance nor diminish the rights
of a Participant.
11. Administration of the Plan. The Committee shall be responsible for
the proper implementation of the Plan. The Committee shall not exercise any
discretion with respect to the administration of the Plan. The Committee shall
have all powers vested in it by the terms of the Plan. Any decision of the
Committee with respect to the Plan shall be final and conclusive. The Committee
may act only by a majority of its members in office, except that the members may
authorize any one or more of their number or any officer of the Company to
execute and deliver documents on behalf of the Committee. The Committee may
consult with counsel, who may be counsel to the Company, and shall not incur any
liability for action taken in good faith in reliance upon the advice of counsel.
12. Expiration and Termination of the Plan. Company Stock shall be
awarded under the Plan until the Plan is terminated by the Board or until such
earlier date when termination of the Plan shall be required by law. If not
sooner terminated, the Plan shall terminate automatically on the tenth
anniversary of the Effective Date.
13. Amendments. The Board may from time to time make such changes in
and additions to the Plan as it may deem appropriate; provided that no change
shall be made that increases the total number of shares reserved for issuance
under the Plan (except pursuant to Section 10), unless such change is authorized
by the shareholders of the Company. The Board may unilaterally amend the Plan as
it deems appropriate to ensure compliance with Rule 16b-3. Except as provided in
the preceding sentence, the termination of the Plan or any change or addition to
the Plan shall not, without the consent of any Participant who is adversely
affected thereby, alter any Awards previously made to the Participant pursuant
to the Plan.
14. Rights Under the Plan. Participation in the Plan and the right to
receive Company Stock under the Plan shall not give a Participant any
proprietary interest in the Company, or any Subsidiary or any of their assets,
nor ensure that the Participant will be nominated for election to the Board in
the future.
15. Notice. All notices and other communications required or permitted
to be given under the Plan shall be in writing and shall be deemed to have been
duly given if delivered personally or mailed first class, postage prepaid, as
follows: (a) if to the Company, at its principal business address, to the
attention of the Secretary; (b) if to any Participant, at the last address of
the Participant known to the sender at the time the notice or other
communication is sent.
16. Governing Law/Interpretation. Generally, the Plan shall be governed
by the laws of the Commonwealth of Virginia. The terms of this Plan are also
subject to all present and future rulings of the Securities Exchange Commission
with respect to Rule 16b-3. If any provision of the Plan would cause the Plan to
fail to meet the requirements of Rule 16b-3, then that provision of the Plan
shall be void and of no effect.
25
Exhibit 10.2
HEILIG-MEYERS COMPANY
SEVERANCE PLAN
1999 Amendment and Restatement
Introduction
The Board of Directors of Heilig-Meyers Company (the "Board") believes
that, in the event of a threat or occurrence of a bid to acquire or change
control of Heilig-Meyers Company or to effect a business combination, it is in
the best interest of the Heilig-Meyers Company and its present and future
shareholders that the business of the Company (as defined below) be continued
with a minimum of disruption, and that such objective will be achieved if
employees who materially contribute to the successful operations of the Company
are given assurances of employment security so they will not be distracted by
personal uncertainties and risks created during such period; and
The Board further believes that the giving of such assurances by the
Company will (a) secure the continued services of key operational and management
employees in the performance of both their regular duties and such extra duties
as may be required of them during such period of uncertainty, (b) permit the
Company to rely on such employees to manage the affairs of the Company during
any such period with less concern for their personal risks, and (c) provide the
Company with the ability to attract new key employees as needed; and
In order to accomplish these objectives, Heilig-Meyers Company has
adopted this amended and restated Severance Plan:
1. Definitions:
(a) Cause. Addiction to alcohol or a controlled substance,
willful criminal conduct involving moral turpitude (including, but not limited
to, theft, embezzlement or sexual harassment) regardless of whether proven or
admitted, conduct which brings (or, if known, would bring) discredit to the
Company or an employee of the Company, and the willful violation of published
Company policies governing employee conduct in the workplace.
(b) Change of Control. "Change of Control" means:
(i) The acquisition, other than from Heilig, by any
individual, entity or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of 20% or more of either the
then outstanding shares of common stock of Heilig or the combined
voting power of the then outstanding voting securities of Heilig
entitled to vote generally in the election of directors, but excluding
for this purpose, any such acquisition by Heilig or any of its
subsidiaries, or any employee benefit plan (or related trust) of Heilig
or its subsidiaries, or any corporation with respect to which,
following such acquisition, more than 50% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by the individuals and
entities who were the beneficial owners, respectively, of the common
stock and voting securities of Heilig immediately prior to such
acquisition in substantially the same proportion as their ownership,
immediately prior to such acquisition, of the then outstanding shares
of common stock of Heilig or the combined voting power of the then
outstanding voting securities of Heilig entitled to vote generally in
the election of directors, as the case may be; or
26
<PAGE>
(ii) Individuals who, as of the date hereof,
constitute the Board (as of the date hereof the "Incumbent Board")
cease for any reason to constitute at least a majority of the Board,
provided that any individual becoming a director subsequent to the date
hereof whose election or nomination for election by Heilig's
shareholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the Directors of Heilig
(as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act); or
(iii) Approval by the stockholders of Heilig of a
reorganization, merger or consolidation, in each case, with respect to
which the individuals and entities who were the respective beneficial
owners of the common stock and voting securities of Heilig immediately
prior to such reorganization, merger or consolidation do not, following
such reorganization, merger or consolidation, beneficially own,
directly or indirectly, more than 50% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such reorganization, merger or consolidation, or a complete
liquidation or dissolution of Heilig or of its sale or other
disposition of all or substantially all of the assets of Heilig.
(c) Company: Heilig and each subsidiary of Heilig.
(d) Effective Date: September 15, 1989.
(e) Heilig: Heilig-Meyers Company.
(f) Participant: All employees of the Company holding the
title of Assistant Vice President or above (other than the Chairman, the
President, and the three most senior executive vice-presidents, all of whom are
entitled to severance payments under their respective executive employment
agreements), all officers of the Company (whether elected or appointed), area
supervisors, store managers, distribution center managers, service center
managers, directors of management information systems, director of internal
audit, director of taxes, assistant controllers, assistant to the treasurer,
clearance center managers, fixture center managers, maintenance center managers
and all full-time employees of the Company (employees who regularly work forty
hours or more per week) who have completed ten years or more of service
(provided such service requirement is met on a date a benefit becomes payable
under Section 4); and provided, further, that no employee who becomes entitled
to a severance payment under an executive employment agreement with the Company
shall be considered a Participant under this Plan.
2. Employment. If Participant is in the employ of the Company on the
date on which a Change of Control occurs (the "Change of Control Date") the
Company will continue to employ Participant and Participant will remain in the
employ of the Company, for the period commencing on the Change of Control Date
and ending on the second anniversary of such date (the "Employment Period"), to
exercise such authority and perform such duties as are commensurate with the
authority being exercised and duties being performed by the Participant
immediately prior to the Change of Control Date, which services shall be
performed at the location where the Participant was employed immediately prior
to the Change of Control Date.
3. Compensation and Benefits. During the Employment Period, the Company
will (i) continue to pay the Participant a salary at not less than the level
applicable to Participant on the Change of Control Date, (ii) pay the
Participant bonuses in amounts not less in amount than those paid during the
12-month period preceding the Change of Control Date, and (iii) continue
employee benefit programs as to Participant at levels in effect on the Change of
Control Date (but subject to such reductions as may be required to maintain such
plans in compliance with applicable federal law regulating employee benefit
programs).
27
<PAGE>
4. Termination of Employment.
(a) If during the Employment Period (i) Participant's
employment is terminated by the Company for any reason (other than for cause) or
(ii) there is a material reduction in Participant's compensation or benefits, or
a material adverse change in Participant's status, working conditions or
management responsibilities, or if Participant is required to change the
locality of his employment (other than a change in management responsibilities
or place of employment based on sound business practices followed by companies
in the retail industry and not inconsistent with Company policies in effect on
the Change of Control Date), and Participant voluntarily terminates his or her
employment within 60 days of any event or the last in a series of events
described in (ii), then Participant shall be entitled to receive, subject to the
provisions of (c) and (d) below, a lump sum payment equal to 200% of
Participant's "base amount," as determined under (b) below. The lump sum payment
shall be subject to and reduced by all applicable federal and state withholding
taxes and shall be paid to the Participant within 30 business days after his
termination of employment. If Participant terminates his employment prior to the
Change of Control Date or during the Employment Period, and the events described
in (i) or (ii) have not occurred, his rights under this Plan shall terminate.
(b) The Participant's "base amount" for purposes of this
paragraph shall be his base salary and bonuses paid to him during the 12-month
period preceding his termination of employment pursuant to paragraph (a). If
Participant has not been employed for a 12-month period, his "base amount" shall
be his annualized base salary at the highest rate in effect prior to his
termination of employment plus bonuses paid to Participant prior to the date of
his termination of employment.
(c) The amount payable to Participant under (a) shall be
reduced to the extent necessary so that the amounts payable to Participant under
this Plan, when added to (i) any amounts he becomes entitled to receive under
any other compensation arrangement maintained by the Company which become
payable upon or as a result of the exercise by Participant of rights which are
contingent on a Change of Control, and (ii) the value of rights that arise or
are accelerated as a result of a Change of Control event described in paragraph
(a) (such as, for example, the accelerated right to exercise stock options), but
only to the extent the value of such payments or rights described in (i) and
(ii) would be considered a "parachute payment," do not equal or exceed 300% or
the then permissible percentage of the Participant's "base amount," whichever is
less, for determining whether the Participant has received an "excess parachute
payment." For purposes of this subsection (c), the terms "parachute payment,"
"base amount" and "excess parachute payment" shall have the meaning given to
those terms under Internal Revenue Code section 280G and applicable regulations
thereunder.
(d) If at the time the events occur described in (a)(i) or
(ii) entitling Participant to the payment provided for in paragraph (a) there
also exists an employment agreement or other compensatory arrangement between
Participant and the Company pursuant to which Participant becomes entitled to
receive, as a result of a Change of Control, a payment (or series of payments),
the payment provided for in (a) shall be reduced (but not below zero) by the
payment (or present discounted value of a series of payments) under such
employment agreement or other compensatory arrangement.
(e) In determining the present discounted value of a series of
payments to be taken into account under this Section 4, a rate equal to 120% of
the applicable federal rate (determined under Internal Revenue Code section
1274(d)) compounded semi-annually, shall be used.
(f) If Participant becomes entitled to a payment under this
Plan, the Company shall compute the proper amount. In applying the limitations
of Internal Revenue Code section 280G, and applicable regulations and rulings
thereunder, the Company shall apply a good faith interpretation that is most
likely to avoid the imposition of the excise tax on Participant and ensure the
deductibility of payments by the Company.
5. Enforcement by Participant. If litigation shall be brought by the
Company or by a Participant in good faith to enforce or interpret any provision
of this Plan, or if Participant shall have to institute litigation brought in
good faith to enforce any of his rights under the Plan, the Company shall
indemnify Participant for his reasonable attorney's fees and disbursements
incurred in any such litigation.
28
<PAGE>
6. Confidentiality. Participant recognizes that he has or will have
access to and may participate in the origination of non-public confidential
information and will owe a fiduciary duty with respect to such information to
the Company. Confidential information includes, but is not limited to, trade
secrets, supplier information, pricing information, internal corporate planning,
Company secrets, methods of marketing, methods of showroom selection and
operation, ideas and plans for development, historical financial data and
forecasts, long range plans and strategies, and any other data or information of
or concerning the Company that is not generally known to the public or in the
industry in which the Company is engaged. Participant agrees that from the date
of this Plan and throughout the Employment Period he will, except as
specifically authorized by the Company in writing, maintain in strict confidence
and will not use or disclose, other than disclosure made in the ordinary course
of business or to other employees of the Company, any confidential information
belonging to the Company. If Participant shall breach the terms of Section 6,
all of his rights under this Plan shall terminate.
7. Governing Law. This Plan shall be construed according to the laws
of the Commonwealth of Virginia, to the extent not preempted by applicable
federal law.
8. Amendment. This Plan may be amended by Heilig at any time, except
that no amendment shall be made after a Change of Control has occurred without
the written consent of the Participants.
9. Binding Effect. This Plan shall be binding on Heilig, its
successors, and assigns. Should there be a consolidation or merger of Heilig
with or into another corporation, or a purchase of all or substantially all of
the assets of Heilig by another entity, the surviving or acquiring corporation
will succeed to the rights and obligations of Heilig under this Plan.
10. Term. This Plan shall be effective from the Effective Date and for
twenty-four (24) months thereafter, and shall continue in effect from year to
year thereafter unless Heilig notifies Participants 30 days in advance of an
anniversary of the Effective Date that the Plan shall terminate. If a Change of
Control occurs, this Plan shall terminate twenty-four (24) months after the
Change of Control Date.
29
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
THE SCHEDULE CONTAINS SUMMARY FINANCIAL 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> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-END> AUG-31-1999
<CASH> 4,906
<SECURITIES> 191,999 <F1>
<RECEIVABLES> 195,089
<ALLOWANCES> 46,435
<INVENTORY> 366,135
<CURRENT-ASSETS> 976,263
<PP&E> 464,584
<DEPRECIATION> 166,914
<TOTAL-ASSETS> 1,548,201
<CURRENT-LIABILITIES> 425,811
<BONDS> 536,481
0
0
<COMMON> 119,748
<OTHER-SE> 409,967
<TOTAL-LIABILITY-AND-EQUITY> 1,548,201
<SALES> 507,640
<TOTAL-REVENUES> 572,948
<CGS> 334,868
<TOTAL-COSTS> 334,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 23,279
<INTEREST-EXPENSE> 18,557
<INCOME-PRETAX> 53,913
<INCOME-TAX> 51,071
<INCOME-CONTINUING> 2,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,842
<EPS-BASIC> 0.05 <F2>
<EPS-DILUTED> 0.05
<FN>
<F1> Represents retained interest in securitized receivables
<F2> Represents basic earnings per share
</FN>
</TABLE>
