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, 2000 or
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---- 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 .
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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)
(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 November 1, 2000.
60,762,645 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 Months and Six Months Ended August 31, 2000
and August 31, 1999 3
Consolidated Balance Sheets as of August 31, 2000
and February 29, 2000 5
Consolidated Statements of Cash Flows for
Six Months Ended August 31, 2000 and
August 31, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 3. Default Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
HEILIG-MEYERS COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
------------------- --------------------
2000 1999 2000 1999
------------------- --------------------
Revenues:
Sales $ 373,482 $507,640 $ 792,268 $1,126,133
Other income 73,103 92,701 156,864 193,149
--------- -------- --------- ---------
Total revenues 446,585 600,341 949,132 1,319,282
Costs and expenses:
Costs of sales 296,969 362,261 599,184 792,226
Selling, general and
administrative 180,760 192,885 344,619 424,205
Provision for doubtful
accounts 17,245 23,279 37,892 47,151
--------- -------- --------- ---------
Total costs and
expenses 494,974 578,425 981,695 1,263,582
Other income (expense):
Interest income 2,645 839 5,339 839
Interest expense (*) (11,372) (19,396) (25,341) (39,131)
Gain (loss) on sale
of assets held for
sale (4,224) 50,554 (4,224) (63,136)
Reorganization items (575,594) -- (575,594) --
--------- -------- --------- ---------
(588,545) 31,997 (599,820) (101,428)
Earnings (loss) before
provision (benefit) for
income taxes and cumulative
effect of a change in
accounting principle (636,934) 53,913 (632,383) (45,728)
Provision (benefit) for
income taxes (56,905) 51,071 (55,281) 21,970
--------- -------- --------- ---------
Earnings (loss) before
cumulative effect of a
change in accounting
principle (580,029) 2,842 (577,102) (67,698)
Cumulative effect of a
change in accounting
principle, net of
income taxes (9,417) -- (27,431) --
--------- -------- --------- ---------
Net earnings (loss) $(589,446) $ 2,842 $(604,533) $ (67,698)
========= ======== ========= =========
3
<PAGE>
Three Months Ended Six Months Ended
August 31, August 31,
------------------ -------------------
2000 1999 2000 1999
------------------- -------------------
Net earnings (loss) per share of common stock:
Basic:
Earnings (loss) before cumulative
effect of a change in
accounting principle $ (9.55) $ 0.05 $ (9.51) $ (1.13)
Cumulative effect of change
in accounting principle (0.16) -- (0.45) --
-------- -------- -------- -------
$ (9.71) $ 0.05 $ (9.96) $ (1.13)
======== ======== ======== =======
Diluted:
Earnings (loss) before cumulative
effect of a change in
accounting principle $ (9.55) $ 0.05 $ (9.51) $ (1.13)
Cumulative effect of change
in accounting principle (0.16) -- (0.45) --
-------- -------- -------- -------
$ (9.71) $ 0.05 $ (9.96) $ (1.13)
======== ======== ======== =======
Cash dividends per share of
common stock $ 0.00 $ 0.07 $ 0.02 $ 0.14
======== ======== ======== =======
(*) Contractual interest for the three and six months ended August 31, 2000 was
$13,650 and $27,619, respectively. See Note B.
See Notes to Consolidated Financial Statements (Unaudited).
4
<PAGE>
HEILIG-MEYERS COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
(Unaudited)
August 31, February 29,
2000 2000
------ ------
ASSETS
Current assets:
Cash $ 26,714 $ 15,073
Accounts receivable, net 75,321 143,132
Retained interest in securitized
receivables at fair value -- 165,873
Inventories 304,109 343,750
Other current assets 65,783 116,792
Net assets held for sale -- 112,301
---------- ----------
Total current assets 471,927 896,921
---------- ----------
Property and equipment, net 234,721 296,375
Other assets 139,563 121,464
Excess costs over net assets acquired, net -- 142,925
---------- ----------
$ 846,211 $1,457,685
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise:
Current liabilities:
Notes payable $ -- $ 72,257
Long-term debt due within
one year -- 706
Accounts payable 5,142 125,464
Accrued expenses 94,615 131,845
Deferred income taxes -- 8,269
Deferred revenue 30,474 2,127
---------- ----------
Total current liabilities 130,231 340,668
---------- ----------
DIP Facilities 15,000 --
Long-term debt -- 535,982
Deferred income taxes -- 46,287
Liabilities subject to compromise 776,037 --
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $10 par value -- --
Common stock, $2 par value (250,000
shares authorized; shares issued
60,763 and 60,677, respectively) 121,525 121,354
Capital in excess of par value 240,871 240,871
Unrealized gain on investments -- 4,169
Retained earnings (deficit) (437,453) 168,354
---------- ----------
Total stockholders' equity (deficit) (75,057) 534,748
---------- ----------
$ 846,211 $1,457,685
========== ==========
See Notes to Consolidated Financial Statements (Unaudited).
5
<PAGE>
HEILIG-MEYERS COMPANY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
August 31,
-------------------------
2000 1999
---------- ---------
Cash flows from operating activities:
Net loss $(604,533) $(67,698)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 21,531 30,478
Provision for doubtful accounts 37,892 47,151
Store closing charge payments (473) (1,312)
Reorganization items 575,594 --
Loss, net of tax on sale of net
assets held for sale 4,224 78,903
Cumulative effect of a change in
accounting principle 27,431 --
Other, net -- (2,763)
Change in operating assets and
liabilities:
Accounts receivable (50,723) (49,503)
Retained interest in securitized
receivables at cost (41,879) (494)
Other receivables 6,505 (41,957)
Inventories 38,699 (39,713)
Prepaid expenses (5,523) 13,864
Deferred taxes (45,139) --
Accounts payable 27,461 148
Accrued expenses (2,241) (17,205)
---------- ----------
Net cash used by operating
activities (11,174) (50,101)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of subsidiaries 82,263 263,575
Additions to property and equipment (11,258) (15,578)
Disposals of property and equipment 4,100 5,109
Miscellaneous investments (12,619) (7,476)
---------- ----------
Net cash provided by
investing activities 62,486 245,630
---------- ----------
Cash flows from financing activities:
Net decrease in notes payable (32,118) (120,293)
Payments of long-term debt (11,981) (129,229)
Borrowings under DIP Facility 15,000 --
Debt structuring costs (9,469) --
Issuance of common stock 111 26
Dividends paid (1,214) (8,381)
---------- ----------
Net cash used by financing
activities (39,671) (257,877)
---------- ----------
Net increase (decrease) in cash 11,641 (62,348)
Cash at beginning of period 15,073 67,254
---------- ----------
Cash at end of period $ 26,714 $ 4,906
========== ==========
See Notes to Consolidated Financial Statements (Unaudited).
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. Chapter 11 Proceedings and Basis of Presentation
On August 16, 2000 (the "Petition Date"), Heilig-Meyers Company (the
"Company") and certain of its subsidiaries (collectively, the "Debtors")
filed voluntary petitions for reorganization under Chapter 11 ("Chapter
11"), Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code")
with the United States Bankruptcy Court ("Bankruptcy Court") for the
Eastern District of Virginia, case number 00-34533 (the "Chapter 11 Case").
The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code.
On the Petition Date, the Bankruptcy Court authorized the Company to pay
pre-petition and post-petition employee wages, salaries, benefits and other
employee obligations during its Chapter 11 Case. The Court also granted
interim approval of the debtor-in-possession financing agreement ("DIP
Facilities") for immediate use by the Company to continue operations, pay
employees, and purchase goods and services after the Petition Date.
On September 27, 2000, the Bankruptcy Court gave final approval to the
Company's DIP Facilities which provide for borrowings of up to $215.0
million and is available to provide funds to the Company for continuing
operations and to meet ongoing financial commitments to vendors and
employees during the Chapter 11 Case.
As of the Petition Date, actions to collect pre-petition indebtedness are
stayed. In addition, under the Bankruptcy Code the Debtors may assume or
reject executory contracts, including lease obligations. Parties affected
by these rejections may file claims with the Bankruptcy Court in accordance
with the reorganization process. Under the Bankruptcy Code, substantially
all pre-petition liabilities are subject to resolution if a plan of
reorganization is filed, voted upon by creditors and equity holders and
approved by the Bankruptcy Court.
Since the Petition Date, the Company has operated its business as a
debtor-in-possession under the Bankruptcy Code. The American Institute of
Certified Public Accountant's Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP
90-7") provides guidance for financial reporting by entities that have
filed petitions with the Bankruptcy Court and expect to reorganize under
Chapter 11.
Under SOP 90-7, the financial statements of an entity in a Chapter 11
reorganization proceeding should distinguish transactions and events that
are directly associated with the reorganization from those of operations of
the ongoing business as it evolves. Accordingly, SOP 90-7 requires that the
balance sheet separately classify pre-petition liabilities as those subject
to compromise. Pre-petition liabilities are reported on the basis of the
expected amount of such allowed claims, as opposed to the amount for which
those allowed claims may be settled. Revenues and expenses, realized gains
and losses, and provisions for losses resulting from the reorganization and
restructuring of the business are reported in the Consolidated Statement of
Operations separately as reorganization items.
The Company's Condensed Consolidated Financial Statements have been
prepared on a going concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities and
commitments in the normal course of business. The Chapter 11 Case, related
circumstances, and the losses from operations, raise substantial doubt
about the Company's ability to continue as a going concern. The
appropriateness of reporting on the going concern basis is dependent upon,
among other things, confirmation of a plan of reorganization, future
profitable operations, and the ability to generate sufficient cash from
operations and financing sources to meet obligations. As a result of the
Chapter 11 Case and related circumstances, however, such realization of
assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter
7
<PAGE>
11, the Debtors may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the
accompanying Consolidated Financial Statements. Further, a plan of
reorganization could materially change the amounts reported in the
accompanying Consolidated Financial Statements. The Consolidated Financial
Statements do not include any adjustments relating to recoverability of the
value of recorded asset amounts and reclassifications of liabilities that
might be necessary as a consequence of a plan of reorganization.
At this time, it is not possible to predict the outcome, or the financial
impact on the Company, of the Chapter 11 Case. Unsecured claims may be
satisfied at less than 100% of their face value and the equity interests of
the Company's shareholders may have no value. The Company believes the DIP
Facilities should provide the Company with adequate liquidity to conduct
its business during the Chapter 11 proceedings. The Company continues to
evaluate its operations and store base in light of current and projected
operating conditions and the liquidity provided by the DIP Facilities. In
addition, the Company's liquidity, capital resources, results of operations
and ability to continue as a going concern are subject to known and unknown
risks and uncertainties, including those set forth above.
The Consolidated Balance Sheet at February 29, 2000 has been derived from
the audited Consolidated Financial Statements at that date. The interim
financial statements as of and for the three and six months ended August
31, 2000 are unaudited and 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, including 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
Annual Report on Form 10-K for the fiscal year ended February 29, 2000. The
results of operations for the second quarter ended August 31, 2000 are not
necessarily indicative of future financial results. Amounts in the
financial statements for the fiscal year ended February 29, 2000 have been
reclassified to conform to the 2001 presentation. These reclassifications
had no effect on previously reported net income.
B. Liabilities Subject to Compromise
Liabilities subject to compromise include liabilities incurred prior to the
Petition Date. These amounts represent the Company's best estimate of known
or potential claims to be resolved in connection with the Chapter 11 Case.
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. The
amounts below may be subject to future adjustment depending on Bankruptcy
Court action, further developments with respect to potential disputed
claims, determination as to the value of any collateral securing claims, or
other events. Additional liabilities subject to compromise may arise
subsequent to the Petition Date resulting from the rejections of additional
real estate leases and executory contracts by the Debtors. Payment terms
for these amounts, which are considered long-term liabilities at this time,
will be established in connection with the Chapter 11 Case.
(in thousands) August 31, 2000
---------------
Long-term debt $ 524,707
Notes payable 49,000
Accounts payable 147,783
Accrued expenses 54,547
---------
Total liabilities subject
to compromise $ 776,037
=========
8
<PAGE>
As a result of the Chapter 11 Case, no principal or interest payments will
be made on any pre-petition debt without Bankruptcy Court approval or until
a plan of reorganization defining the repayment terms has been approved by
the Bankruptcy Court and becomes effective. Contractual interest expense
not recorded on certain pre-petition debt totaled $2.3 million for the
three and six month periods ended August 31, 2000.
C. Borrowings
On May 25, 2000, the Company finalized the extension of its revolving
credit facility. The extended facility provided a committed amount of
$140.0 million and was set to expire in May 2001. In addition, the Company
pledged, within the terms of certain other long-term debt and revolving
credit agreements, certain non-inventory assets as partial security for the
extended facility. The amount outstanding under this pre-petition agreement
totaled $49.0 million as of August 31, 2000 and is presented in the
Consolidated Balance Sheet under liabilities subject to compromise.
On August 1, 2000, the Company elected to defer the scheduled August 1,
2000 interest payments on its MacSaver Financial Services 7.60% Unsecured
Notes due 2007 and MacSaver Financial Services 7.88% Unsecured Notes due
2003, and the scheduled August 15, 2000 interest payment on its MacSaver
Financial Services 7.40% Unsecured Notes due 2002. The related Note
Indentures provided for 30-day grace periods to make the interest payments.
The amount of interest deferred under these pre-petition agreements totaled
$18.2 million and is presented in the Consolidated Balance Sheet under
liabilities subject to compromise.
On August 1, 2000, Moody's Investors Service and Standard and Poor's
lowered their credit ratings on the senior unsecured debt of MacSaver
Financial Services, guaranteed by the Company, to Caa1 and D from Ba2 and
BB-, respectively, following the Company's announcement that it was
deferring interest payments scheduled for August 1, 2000 as described
above. On August 25, 2000, Moody's Investors Service further lowered its
rating to Ca from Caa1 as a result of the Chapter 11 Case.
On August 16, 2000, the Debtors entered into credit facilities totaling
$215.0 million consisting of a $160.0 million DIP Revolving Credit Facility
(the "Revolving Facility") and a $15.0 million DIP Term Facility (the "Term
Facility") (collectively the "DIP Facilities") with Fleet Retail Finance,
Inc. ("Fleet") as the administrative agent. On September 27, 2000, the
Bankruptcy Court issued a final order approving a limit of $200.0 million
for the Revolving Facility. Letter of Credit obligations under the
Revolving Facility are limited to $50.0 million. The DIP Facilities are
intended to provide the Company with the cash necessary to conduct its
operations and pay for merchandise shipments at normal levels during the
course of the Chapter 11 Case.
Loans made under the Revolving Facility bear interest, at the Company's
option, at a rate equal to either Fleet's prime lending rate plus 1.0% or
the applicable LIBOR plus 3.0%. The Term Facility bears interest at 16.5%.
The Company is required to pay an unused line fee of 0.5% on the unused
portion of the Revolving Facility commitment, and a standby letter of
credit fee of 3.0%. The Company paid financing fees of $4.3 million on the
closing date of the DIP Facilities and $0.7 million upon issuance of the
Bankruptcy Court's final order. These financing fees have been deferred and
are being amortized over the life of the DIP Facilities.
The maximum borrowings, excluding the term commitments, under the DIP
Facilities are limited to 85% of eligible inventory, a percentage to be
determined of eligible receivables, 60% of eligible real estate, and 25% of
eligible leasehold interests (all as defined in the DIP Facilities) less
applicable reserves. Availability under the DIP Facilities at August 31,
2000 was $138.1 million. The amounts borrowed as of August 31, 2000, under
the Revolving Facility and the Term Facility were $0 and $15.0 million,
respectively.
9
<PAGE>
The DIP Facilities are secured by a first lien and superpriority claim on
substantially all of the assets of the Company and its subsidiaries,
subject in certain cases to liens held by the pre-petition lenders on
certain accounts receivable, real estate, and general intangibles. Although
the DIP Facilities share their lien status, their priorities of repayment
are different. In the event of a liquidation, the Revolving Facility will
be repaid first from the proceeds of inventory, post-petition receivables
and pledged real estate. The Term Facility will be repaid from the proceeds
of (i) furniture, fixtures and equipment, and (ii) any remaining proceeds
from the aforementioned Revolving Facility assets after the Revolving
Facility has been paid in full. Under the DIP Facilities the Company is
obligated to furnish an acceptable business plan by December 22, 2000. A
minimum excess availability of $15.0 million must be maintained until the
acceptance of the business plan and thereafter, the minimum excess
availability will drop to the greater of $10.0 million of 10% of the
borrowing base. In addition, the DIP Facilities have certain restrictive
covenants limiting additional indebtedness, liens, sales of assets, and
capital expenditures. The Company is currently in the process of developing
a business plan which will be provided to Fleet. The DIP Facilities expire
on the earlier of August 16, 2002 or the date of substantial consummation
of a plan of reorganization that has been confirmed pursuant to order of
the Bankruptcy Court.
D. Reorganization Items
Reorganization items for the period ended August 31, 2000 have been
segregated from the results of normal operations and are disclosed
separately. The major components are as follows:
(in thousands) August 31, 2000
---------------
Store and distribution center
exit costs $ 160,308
Credit operations exit costs 303,640
Asset impairment 110,145
Professional fees 1,501
---------
Total reorganization items $ 575,594
=========
The store and distribution center closing costs consist of estimated losses
on the liquidation of inventory of $34,414,000, losses of $52,475,000 on
the sale of fixed assets, $6,275,000 for severance, the write-off of excess
costs over net assets acquired ("goodwill") totaling $56,722,000 associated
with the planned closing of approximately 302 stores and two distribution
centers, and $10,422,000 for estimated lease obligations relating to these
locations.
On September 14, 2000, the Court authorized the Company and/or its agents
to conduct certain store closings and approved the Company's agreement with
third parties as liquidation agents. The agents will conduct going out of
business ("GOB") sales designed to liquidate the inventory and fixed assets
related to approximately 300 of the stores identified for closure. The
Company expects the GOB sales to be completed by the end of December 2000.
Severance accruals were determined based on the Company's applicable salary
continuation plan and exclude any amounts that may be payable for work
performed during the GOB period including retention bonuses, if any. The
amount accrued for lease obligations represents the estimated potential
landlord claims as determined under the Bankruptcy Code.
10
<PAGE>
Credit operations exit costs consist primarily of valuation allowances
recorded to reduce the carrying amount of the Company's retained interest
in the securitization trust and owned customer accounts receivable
portfolios to their net realizable values. Note 5 to the Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the
fiscal year ended February 29, 2000 and Note K in this Form 10-Q describe
the Company's accounts receivable securitization program. The fair value of
the Company's interest-only strip receivable is based on the present value
of estimated future cash flows to be received by the Company in excess of
contractually specified servicing fees less estimated losses. Because
future cash collections will be used to pay off certificates issued by the
Trust, the estimated future cash flows related to the interest-only strip
have been reduced to zero. Accordingly, a charge of $19,817,000 was
recorded to write-off the carrying amount of the interest only strip as of
August 31, 2000. The fair value of the Company's retained interest in the
Trust is based on the present value of future cash flows associated with
the underlying receivables. Because the Company has discontinued its
installment credit program, the underlying receivable portfolio will be
liquidated by the Trust through account collections or sale of the
portfolio, the proceeds of which will be used to pay off the certificates
issued by the Trust. The Company's retained interest in the Trust is
subordinated to all other Trust certificates. The Company believes that the
amount realized from the portfolio under these circumstances will be
insufficient to provide any return of investment to the Company. Thus, a
full valuation allowance totaling $201,765,000 was recorded against the
carrying amount of the Company's retained interest in the asset
securitization Master Trust. Deferred securitization fees of $3,973,000
that were being carried on the balance sheet and amortized were also
written off.
The Company continues to carry owned accounts receivable consisting of
installment accounts not transferred to the Trust and revolving accounts
extended under its in-house private label program. Extension of credit was
ceased under the installment program on August 16, 2000 and was ceased
under the revolving program on October 18, 2000. Under a liquidation
scenario, that is, the collection of the remaining balances while
eliminating the customer's ability to utilize the account for future
purchases, management believes the portfolio will perform substantially
below historical levels. Furthermore, the Company plans to liquidate these
portfolios through a sale to third parties. Based upon the liquidation
scenarios, the Company recorded a $76,104,000 valuation allowance to reduce
the carrying amounts to estimated net realizable value (Note J). Also
included in this category is a $1,981,000 charge to reduce the carrying
amount of equipment used in the credit operations to net realizable value.
Asset impairment charges include the write-down of the Company's goodwill
and other assets to their net realizable value. The Company has continually
evaluated whether events and circumstances have occurred that would
indicate that the remaining balance of goodwill may not be recoverable. Due
to the Company's recent performance and the reorganization actions
undertaken by management, the Company performed an evaluation of the
carrying amount of remaining goodwill. This evaluation was based on whether
the remaining goodwill was fully recoverable from projected, undiscounted
future cash flows from operations of the related business units. In
connection with this evaluation, the Company recorded a loss on impairment
of goodwill of $83,981,000. Also, because the Company projects a
significant net operating loss carryforward for income tax purposes,
management expects to liquidate the Company's investment in tax-advantaged
investments in low-income housing partnerships. Accordingly, a $22,800,000
valuation allowance was recorded against these investments to reduce their
carrying amount to net realizable value. The Company also recorded a
$3,271,000 write-down of net receivables from its credit insurance and
service policy underwriter due to potential claims available to the
underwriter as a result of the reorganization actions.
The net reorganization items are based on information presently available
to the Company, however, the actual costs could differ materially from the
estimates. Additionally, other costs may be incurred which cannot be
presently estimated.
11
<PAGE>
E. Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements." This SAB provides additional guidance in applying generally
accepted accounting principles for revenue recognition in consolidated
financial statements. Effective March 1, 2000, the Company changed its
method of accounting to record merchandise sales upon delivery of
merchandise to customers, rather than prior to delivery in order to be
consistent with the provisions of SAB 101. The cumulative effect of this
change represents the deferral of previously recorded revenue, net of
direct costs, related to merchandise that had not been delivered to the
customer as of February 29, 2000. The cumulative effect of the accounting
change of $27,431,000 was reported net of income taxes of $9,417,000 in the
quarter ended May 31, 2000. The income tax effect was eliminated in the
quarter ended August 31, 2000 due to changes in the Company's tax accrual
discussed in Note L. As such, the cumulative effect of the accounting
change decreased net income by $9,417,000 or $0.16 per share and
$27,431,000 or $0.45 per share for the three and six months ended August
31, 2000, respectively.
F. Delivery and Service Revenue
In July 2000, the Financial Accounting Standards Board ("FASB") issued
Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for
Shipping and Handling Fees and Costs." This EITF requires that all amounts
billed to a customer in a sale transaction related to shipping and handling
be classified as revenue. The Company has reclassified the revenue
generated from delivery and service policies as a component of other income
rather than netted with cost of sales in order to be consistent with the
provisions of the EITF. Prior year amounts have been reclassified to
conform to this classification. The reclassification increased other income
and cost of sales by $27,393,000 and $57,129,000 for the prior quarter and
year-to-date periods, respectively. These reclassifications had no effect
on previously reported net income. With respect to the classification of
costs related to shipping and handling incurred by the seller, the EITF
determined that the classification of such costs is an accounting policy
decision that should be disclosed. The Company has historically classified
these costs in costs of sales.
G. New Accounting Standards
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which, as amended by SFAS No. 137, is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133
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.
H. Divestitures
On April 20, 2000, the sale of the Berrios division was completed. The
total value of the transaction was in excess of $120.0 million, before
transaction costs, including a subordinated note receivable with a face
value of $18.0 million and excess working capital of approximately $12.0
million. Proceeds from the sale are subject to adjustment pending the final
resolution of working capital settlement provisions. Proceeds were reduced
by $4.2 million in the second quarter ended August 31, 2000 as a result of
a purchase price adjustment based upon working capital accounts as of the
date of the sale.
12
<PAGE>
Since August 31, 1999, assets related to the three Homemakers stores have
been reported as net assets held for sale. Because of the uncertainty as to
whether the Company will be able to complete a sale of these assets within
a reasonably short period of time, these assets have been reclassified with
operating assets for the current and the prior year periods. The amount of
this reclassification was $13,616,000 at February 29, 2000.
I. Store Closing and Other Charges
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 2001 are as follows:
Amount
Utilized Remaining
Reserve as through Reserve as
(Amounts in thousands, of March 1, August 31, of August 31,
unaudited) 2000 2000 2000
--------------------------------------
Severance $ 639 $ 247 $ 392
Lease & facility exit
cost 1,542 226 1,316
--------------------------------------
Total $ 2,181 $ 473 $ 1,708
======================================
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 related
to long-term lease obligations which will be utilized beyond fiscal 2001.
These amounts are now classified as liabilities subject to compromise.
J. Accounts Receivable and Unearned Finance Income
See Note D for a discussion of the Company's owned accounts receivable
portfolios. The valuation allowance necessary to reduce the carrying amount
of these portfolios to estimated net realizable value was $108,873,000 at
August 31, 2000. The allowance for doubtful accounts was $26,453,000 as of
February 29, 2000. Unearned finance income was $10,148,000 and $12,266,000
at August 31, 2000, and February 29, 2000, respectively.
K. Retained Interest in Securitized Receivables
As discussed in Note 5 to the Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the fiscal year ended February 29,
2000, the Company transferred the substantial majority of its installment
accounts receivable to a Master Trust ("Trust") in exchange for
certificates representing undivided interests in such receivables.
Certificates with face amounts totaling $826,300,000 have been sold to
third parties.
The Company, through a bankrupt-remote special purpose entity, retained the
remaining undivided interests in the Trust's receivables. The total cost
basis of these retained interests as of August 31, 2000 was $221,582,000,
comprised of the following: contractually required seller's interest of
$110,665,000, excess seller's interest of $45,220,000, cash deposits in
collateral accounts of $45,880,000, and an interest-only strip of
$19,817,000. The Company recorded a $221,582,000 valuation allowance in the
second quarter ended August 31, 2000 to reduce the carrying amount of these
interests to their estimated net realizable value (Note D).
On August 16, 2000, the Company ceased its installment credit program and
will no longer transfer installment accounts receivable to the Trust. The
Company continued to service all accounts in the Trust until September 30,
2000.
13
<PAGE>
L. Income Taxes
The Company made income tax payments of $5,954,000 and $281,000 during the
three months ended August 31, 2000, and August 31, 1999, respectively. As
of August 31, 2000, the Company has a current income tax receivable of
approximately $11,681,000, which is included in other current assets on the
Consolidated Balance Sheet. The Company recorded a net deferred tax asset,
before a valuation allowance, of $198,156,000 for its cumulative net
operating loss and other deferred items for the six months ended August 31,
2000. The Company has recorded a full valuation allowance on this net
deferred tax asset as realization in future years is uncertain.
M. Interest
The Company made interest payments of $23,977,000 and $41,550,000 during
the six months ended August 31, 2000, and August 31, 1999, respectively.
On August 1, 2000, the Company elected to defer the scheduled August 1,
2000 interest payments on its MacSaver Financial Services 7.60% Unsecured
Notes due 2007 and MacSaver Financial Services 7.88% Unsecured Notes due
2003, and the scheduled August 15, 2000 interest payment on its MacSaver
Financial Services 7.40% Unsecured Notes due 2002. The related Note
Indentures provided for 30-day grace periods to make the interest payments.
The amount of interest deferred under these pre-petition agreements totaled
$18.2 million and is presented in the Consolidated Balance Sheet under
liabilities subject to compromise.
As a result of the Chapter 11 filing, no principal or interest payments
will be made on any pre-petition debt without Bankruptcy Court approval or
until a plan of reorganization defining the repayment terms has been
approved by the Bankruptcy Court and becomes effective. Contractual
interest expense not recorded on certain pre-petition debt totaled $2.3
million for the three and six month periods ended August 31, 2000.
N. Dividends
On June 21, 2000, the Board of Directors voted to eliminate the quarterly
dividend.
O. Comprehensive Earnings (Loss)
Total comprehensive earnings (loss) for the three and six month periods
ended August 31, 2000 and 1999 is as follows:
Three Months Ended Six Months Ended
August 31, August 31,
2000 1999 2000 1999
-------------------- --------------------
(Amounts in thousands)
Net earnings (loss) $(589,446) $ 2,842 $(604,533) $(67,698)
Increase (decrease) in
unrealized gain on
investments (4,133) 285 (4,169) 535
--------- -------- --------- --------
Comprehensive
earnings (loss) $(593,579) $ 3,127 $(608,702) $(67,163)
========= ======== ========= ========
The difference between net loss and comprehensive loss is due to the change
in the unrealized gain on investments. These consist of retained interests
in securitized receivables which were reduced to zero in the current year.
14
<PAGE>
P. Earnings (Loss) Per Share
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,
2000 1999 2000 1999
------------------ ----------------
(Amounts in thousands except per share data)
Numerator:
Earnings (loss) before
cumulative effect of a change
in accounting principle $(580,029) $ 2,842 $(577,102) $(67,698)
Cumulative effect of a change
in accounting principle (9,417) -- (27,431) --
--------- -------- --------- --------
Net loss $(589,446) $ 2,842 $(604,533) $(67,698)
Denominator:
Denominator for basic
earnings per share -
average common shares
outstanding 60,733 59,949 60,705 59,905
Effect of potentially
dilutive stock options -- 37 -- --
------- ------- ------- -------
Denominator for diluted
earnings per share 60,733 59,986 60,705 59,905
Basic EPS:
Earnings (loss) before cumulative
effect of a change in accounting
principle $ (9.55) $ 0.05 $ (9.51) $ (1.13)
Cumulative effect of a change in
accounting principle (0.16) -- (0.45) --
-------- -------- -------- --------
$ (9.71) $ 0.05 $ (9.96) $ (1.13)
Diluted EPS:
Earnings (loss) before cumulative
effect of a change in accounting
principle $ (9.55) $ 0.05 $ (9.51) $ (1.13)
Cumulative effect of a change in
accounting principle (0.16) -- (0.45) --
-------- -------- -------- --------
$ (9.71) $ 0.05 $ (9.96) $ (1.13)
Options to purchase 5,335,000 and 4,806,000 shares of common stock at
prices ranging from $3.06 and $9.03 to $35.06 per share were outstanding at
August 31, 2000 and August 31, 1999, respectively, but were not included in
the computation of diluted earnings per share because they would have been
antidilutive.
15
<PAGE>
Q. Segment Reporting
The Company has significant operations aligned in three operating formats:
Heilig-Meyers, The RoomStore, and Homemakers. As discussed in Note H, the
Company sold its Berrios division on April 20, 2000. During fiscal 2000 the
Company divested its Mattress Discounters and Rhodes divisions and sold the
assets related to 18 stores in the Chicago and Milwaukee markets. All of
the divested subsidiaries are classified as divested operations for
purposes of segment reporting.
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 54 stores operating primarily in Texas, Oregon, Maryland and
Virginia. The Homemakers division includes three stores in the Chicago
area.
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.
Pertinent financial data by operating segment for the three and six month
periods ended August 31, 2000 and 1999 are as follows:
Three Months Three Months
Ended Ended
August 31, August 31,
(Amounts in thousands) 2000 1999
---- ----
Revenues:
Heilig-Meyers $ 355,516 $ 392,197
The RoomStore 75,387 68,701
Homemakers 15,682 14,515
---------- ----------
446,585 475,413
Divested operations -- 124,928
---------- ----------
Total revenues from
external customers $ 446,585 $ 600,341
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ (45,147) $ 14,158
The RoomStore (1,596) 3,380
Homemakers (1,646) (951)
---------- ----------
(48,389) 16,587
Divested operations -- 5,329
---------- ----------
Total earnings (loss)
before interest and taxes (48,389) 21,916
Gain (loss) on sale of assets
held for sale (4,224) 50,554
Reorganization items (575,594) --
Interest expense, net (8,727) (18,557)
---------- ----------
Consolidated earnings (loss)
before provision (benefit) for
income taxes and cumulative
effect of a change in
accounting principle $ (636,934) $ 53,913
========== ==========
16
<PAGE>
Three Months Three Months
Ended Ended
August 31, August 31,
(Amounts in thousands) 2000 1999
---- ----
Depreciation and amortization expense:
Heilig-Meyers $ 9,828 $ 10,514
The RoomStore 912 757
Homemakers 130 73
---------- ----------
10,870 11,344
Divested operations -- 2,693
---------- ----------
Total depreciation and
amortization expense $ 10,870 $ 14,037
========== ==========
Capital expenditures:
Heilig-Meyers $ 4,815 $ 942
The RoomStore 1,796 1,960
Homemakers 339 1,027
---------- ----------
6,950 3,929
Divested operations -- 2,674
---------- ----------
Total capital expenditures $ 6,950 $ 6,603
========== ==========
Six Months Six Months
Ended Ended
August 31, August 31,
(Amounts in thousands) 2000 1999
---- ----
Revenues:
Heilig-Meyers $ 750,202 $ 798,522
The RoomStore 150,580 133,062
Homemakers 31,416 27,744
---------- ----------
932,198 959,328
Divested operations 16,934 359,954
---------- ----------
Total revenues from
external customers $ 949,132 $1,319,282
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ (30,820) $ 37,757
The RoomStore 81 6,697
Homemakers (2,669) (1,779)
---------- ----------
(33,408) 42,675
Divested operations 845 13,025
---------- ----------
Total earnings (loss)
before interest and taxes (32,563) 55,700
Gain (loss) on sale of assets
held for sale (4,224) (63,136)
Reorganization items (575,594) --
Interest expense, net (20,002) (38,292)
---------- ----------
Consolidated earnings (loss)
before provision (benefit) for
income taxes and cumulative
effect of a change in
accounting principle $ (632,383) $ (45,728)
========== ==========
17
<PAGE>
Six Months Six Months
Ended Ended
August 31, August 31,
(Amounts in thousands) 2000 1999
---- ----
Depreciation and amortization expense:
Heilig-Meyers $ 19,168 $ 20,963
The RoomStore 1,819 1,503
Homemakers 258 137
---------- ----------
21,245 22,603
Divested operations 286 7,875
---------- ----------
Total depreciation and
amortization expense $ 21,531 $ 30,478
========== ==========
Capital expenditures:
Heilig-Meyers $ 8,291 $ 6,391
The RoomStore 2,479 3,060
Homemakers 459 278
---------- ----------
11,229 9,729
Divested operations 29 5,849
---------- ----------
Total capital expenditures $ 11,258 $ 15,578
========== ==========
Total identifiable assets:
Heilig-Meyers $ 754,401 $1,319,515
The RoomStore 78,546 85,567
Homemakers 13,264 13,616
---------- ----------
846,211 1,418,698
Divested operations -- 129,503
---------- ----------
Total identifiable assets $ 846,211 $1,548,201
========== ==========
R. MacSaver Financial Services, Inc.
On August 16, 2000 (the "Petition Date"), the Company and certain of its
subsidiaries (collectively, the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 ("Chapter 11"), Title 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") with the United States
Bankruptcy Court ("Bankruptcy Court") for the Eastern District of Virginia,
case number 00-34533 (the "Chapter 11 Case"). The Debtors are currently
operating their businesses as debtors-in-possession pursuant to the
Bankruptcy Code.
18
<PAGE>
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.
Debtor-in-Possession
Summarized Statements of Operations
(Amounts in thousands)
(Unaudited)
Three Months Ended Six Month Ended
August 31, August 31,
2000 1999 2000 1999
------------------- -------------------
Net revenues $ 55,030 $ 74,896 $ 123,436 $151,410
Operating expenses 42,266 62,243 94,603 124,101
--------- -------- --------- --------
Earnings before reorganization
items and taxes 12,764 12,653 28,833 27,309
Reorganization expense 221,582 -- 221,582 --
--------- -------- --------- --------
Earnings (loss) before taxes (208,818) 12,653 (192,749) 27,309
--------- -------- --------- --------
Net earnings (loss) $(199,213) $ 8,244 $(188,768) $ 17,751
========= ======== ========= ========
MacSaver Financial Services, Inc.
Debtor-in-Possession
Summarized Balance Sheets
(Amounts in thousands)
(Unaudited)
August 31, February 29,
2000 2000
---------------------------
Current assets $ 35,933 $ 53,333
Accounts receivable, net 34,441 119,953
Retained interest in securitized
receivables at fair value -- 165,873
Due from affiliates 499,457 485,639
-------- --------
Total Assets $569,831 $824,798
======== ========
Current liabilities $ 16 $ 5,764
Deferred income taxes -- 12,370
Notes payable -- 72,257
Long-term debt -- 535,000
Liabilities subject to compromise 563,346 --
Stockholder's equity 6,469 199,407
-------- --------
Total Liabilities and Equity $569,831 $824,798
======== ========
19
<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 included in the Company's Annual Report on Form 10-K for the
fiscal year ended February 29, 2000.
Certain statements included below 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 obtain secondary sources of financing for its customers,
the costs and effectiveness of promotional activities, the impact from
debtor-in-possession financing, the impact from outsourcing credit operations,
and lowering overhead and infrastructure costs. The Company's ability to obtain
court approval for making payments relating to certain ongoing operating
activities may also impact the outcome of the 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, 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.
On March 24, 1999, the Company announced that a review of strategic
divestiture options of all non-core operating assets was being made in order to
refocus on the Company's core home furnishings operations. During the fiscal
year ended February 29, 2000, the Company completed the divestiture of its
Rhodes and Mattress Discounters divisions and sold the assets related to 18
stores in the Chicago and Milwaukee markets.
This divestiture program was substantially completed on April 20, 2000 with
the sale of substantially all the assets of the Company's Puerto Rican division.
This division operated 33 stores under the trade name Berrios. The total
estimated value of the transaction was in excess of $120.0 million, before
transaction costs, including a subordinated note receivable with a face value of
$18.0 million and excess working capital of approximately $12.0 million.
Proceeds from the sale are subject to adjustment pending the final resolution of
working capital settlement provisions. Proceeds were reduced by $4.2 million in
the second quarter ended August 31, 2000 as a result of a purchase price
adjustment based upon working capital accounts as of the date of sale.
20
<PAGE>
On August 1, 2000, the Company announced it would defer scheduled interest
payments on certain indebtedness and would utilize the applicable grace period
for these payments to evaluate the Company's strategic alternatives and its
short and long term liquidity needs. The Company undertook this evaluation in
view of a variety of factors, including disappointing operating results during
the second quarter, increased probability that the Company's long-term senior
unsecured debt rating would be further downgraded, resources needed to implement
its credit and merchandise initiatives, prospects that refinancing for its
long-term debt and receivable securitizations would not be available on
reasonable terms, inability to obtain alternative financing sources, and
potential covenant compliance issues under its pre-petition revolving credit
facility resulting from accrual of severance obligations and anticipated second
quarter results being below expectations. As a result of this evaluation, the
Company decided to file for reorganization under Chapter 11 in order to
facilitate a financial restructuring and improve its operations. As part of its
evaluation, the Company concluded that its installment credit program and
servicing of future installment credit accounts was not a viable portion of its
business. In view of the decision to terminate its installment credit program,
along with cost factors associated with operating stores in certain markets, the
Company identified 302 store locations and two regional distribution centers for
closure.
On August 16, 2000 (the "Petition Date"), Heilig-Meyers Company and certain
of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for
reorganization under Chapter 11 ("Chapter 11"), Title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court
("Bankruptcy Court") for the Eastern District of Virginia, case number 00-34533
(the "Chapter 11 Case"). The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code.
The Company's Consolidated Financial Statements have been prepared on a
going concern basis which contemplate continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The Chapter 11 filing, related circumstances, and the losses from
operations, raise substantial doubt about the Company's ability to continue as a
going concern. The appropriateness of reporting on the going concern basis is
dependent upon, among other things, confirmation of a plan of reorganization,
future profitable operations, and the ability to generate sufficient cash from
operations and financing sources to meet obligations. As a result of the Chapter
11 Case and related circumstances, however, such realization of assets and
liquidation of liabilities is subject to significant uncertainty. While under
the protection of Chapter 11, the Debtors may sell or otherwise dispose of
assets and liquidate or settle liabilities for amounts other than those
reflected in the accompanying Consolidated Financial Statements. Further, a plan
of reorganization could materially change the amounts reported in the
accompanying Consolidated Financial Statements. The Consolidated Financial
Statements do not include any adjustments relating to recoverability of the
value of recorded asset amounts and reclassifications of liabilities that might
be necessary as a consequence of a plan of reorganization.
At this time, it is not possible to predict the outcome, or the financial
impact on the Company, of the Chapter 11 Case. Unsecured claims may be satisfied
at less than 100% of their face value and the equity interests of the Company's
shareholders may have no value. The Company believes the Debtor-in-Possession
Credit Facilities ("DIP Facilities") should provide the Company with adequate
liquidity to conduct its business during the Chapter 11 proceedings. However,
the Company's liquidity, capital resources, results of operations and ability to
continue as a going concern are subject to known and unknown risks and
uncertainties, including those set forth above. The Company continues to
evaluate its operations and store base in light of current and projected
operating conditions and the liquidity provided by the DIP Facilities.
Historical business segment information presented in management's
discussion and analysis has been restated to reflect the current operating
segments.
21
<PAGE>
RESULTS OF OPERATIONS
The following table outlines the results of operations for the three
and six months ended August 31 for fiscal years 2001 and 2000, and 2000 pro
forma results.
(in thousands)
Three Months Ended Six Months Ended
August 31, August 31,
-------------------------- ----------------------------
Pro forma Pro forma
2000 1999 1999 2000 1999 1999
-------------------------- ----------------------------
Revenues:
Sales $373,482 $507,640 $402,337 $792,268 $1,126,133 $817,138
Other income 73,103 92,701 82,117 156,864 193,149 166,209
-------- -------- -------- -------- ---------- --------
Total revenues 446,585 600,341 484,454 949,132 1,319,282 983,347
Costs and expenses:
Costs of sales 296,969 362,261 291,565 599,184 792,226 583,652
Selling, general
and administrative 180,760 192,885 152,328 344,619 424,205 311,583
Provision for doubtful
accounts 17,245 23,279 20,864 37,892 47,151 42,124
--------- -------- -------- --------- ---------- --------
Total costs and
expenses 494,974 578,425 464,757 981,695 1,263,582 937,359
Other income (expense):
Interest income 2,645 839 1,994 5,339 839 3,549
Interest expense (11,372) (19,396) (11,254) (25,341) (39,131) (23,834)
Gain (loss) on sale
of assets held for
sale (4,224) 50,554 -- (4,224) (63,136) --
Reorganization items (575,594) -- -- (575,594) -- --
-------- ------- -------- -------- ---------- --------
(588,545) 31,997 (9,260) (599,820) (101,428) (20,285)
Earnings (loss) before
provision (benefit) for
income taxes and cumulative
effect of a change in
accounting principle (636,934) 53,913 10,437 (632,383) (45,728) 25,703
Provision (benefit) for
income taxes (56,905) 51,071 3,749 (55,281) 21,970 9,228
-------- -------- -------- -------- ---------- --------
Earnings (loss) before
cumulative effect of a
change in accounting
principle (580,029) 2,842 6,688 (577,102) (67,698) 16,475
Cumulative effect of a
change in accounting
principle (9,417) -- -- (27,431) -- --
---------- -------- ------- --------- --------- --------
Net earnings (loss) $(589,446)$ 2,842 $ 6,688 $(604,533) $ (67,698)$ 16,475
========= ======== ======== ========= ========= ========
The unaudited pro forma amounts above give effect to divestitures made by
the Company, the estimated impact of the change in accounting principle, and the
reclassification of delivery and service policy revenue as described below.
22
<PAGE>
During the fiscal year ended February 29, 2000, the Company completed the
divestitures of the Rhodes division, the Mattress Discounters division and 18
stores in the Chicago and Milwaukee markets and sold its interest in Guardian
Products, Inc. On April 20, 2000 the sale of the Berrios division was completed.
The pro forma Consolidated Statements of Operations for the three and six months
ended August 31, 1999 is presented as if the divestitures that were completed
during fiscal year 2000 had been completed prior to the beginning of the fiscal
year. Additionally, the pro forma financial information is presented as if the
Berrios divestiture had been completed on April 20, 1999. The effect of the
related pro forma adjustments reduced the previously reported total revenues by
$123.2 million and $338.3 million for the three and six months ended August 31,
1999, respectively. The pro forma adjustments increased the previously reported
net earnings by $1.9 million and $82.8 million for the three and six months
ended August 31, 1999, respectively.
Effective March 1, 2000, the Company changed its method of accounting for
revenue to record merchandise sales upon delivery to the customer. The pro forma
consolidated statement of operations for the three and six months ended August
31, 1999 is prepared as if the change in accounting principle had been adopted
prior to the beginning of the fiscal year. The related pro forma adjustments
increased the previously reported total revenues by $9.0 million and $7.4
million for the three and six months ended August 31, 1999, respectively. The
pro forma adjustments increased the previously reported net earnings by $2.0
million and $1.3 million for the three and six months ended August 31, 1999,
respectively.
The Company has also reclassified revenue generated from delivery and
service policies as a component of other income rather than netted with cost of
sales to be consistent with the consensus reached in Emerging Issues Task Force
Issue No. 00-10. The adjustment to other income and cost of sales for this
change in classification was $27.4 million and $57.1 million for the prior
quarter and year to date periods, respectively. These reclassifications had no
effect on previously reported net income.
The unaudited pro forma Consolidated Statements of Operations were prepared
by the management of Heilig-Meyers based upon historical and other financial
information. The pro forma statements do not purport to be indicative of the
results of operations which would have occurred had the dispositions or the
accounting change been made prior to the beginning of the periods presented.
Revenues and Earnings
Total revenues for the quarter ended August 31, 2000 decreased 7.8% to
$446.6 million versus pro forma revenues of $484.5 million in the prior year
quarter. The net loss for the quarter ended August 31, 2000, was $589.4 million
or $9.71 per share versus pro forma net earnings of $6.7 million or $0.11 per
share in the prior year period.
Total revenues for the six month period ended August 31, 2000, decreased
3.5% to $949.1 million versus pro forma revenues of $983.3 million for the six
months ended August 31, 1999. Including a one-time non-cash reduction in
earnings of $27.4 million, or $0.45 per share, to adjust for the cumulative
effect of a change in accounting principle and $575.6 million related to
reorganization items, the Company incurred a net loss for the six months ended
August 31, 2000 of $604.5 million or $9.96 per share. The net loss before the
cumulative effect of an accounting change was $577.1 million, or $9.51 per share
for the six months ended August 31, 2000, compared to pro forma net earnings of
$16.5 million, or $0.28 per share in the comparable period of the prior year.
23
<PAGE>
The following table shows a comparison of sales by division:
(Sales amounts in millions)
Three Months Ended Six Months Ended
August 31, August 31,
Pro Forma Pro Forma
2000 1999 2000 1999
------------- ------------- ------------- -------------
% of % of % of % of
Sales Total Sales Total Sales Total Sales Total
------------- ------------- ------------- -------------
Heilig-Meyers $286.1 76.6 $322.8 80.2 $603.4 76.2 $647.1 79.2
The RoomStore 72.0 19.3 66.6 16.6 144.1 18.2 130.2 15.9
Homemakers 15.4 4.1 12.9 3.2 30.5 3.8 25.7 3.2
373.5 100.0 402.3 100.0 778.0 98.2 803.0 98.3
Divested operations -- -- -- -- 14.3 1.8 14.1 1.7
------ ----- ------ ----- ------ ----- ------ -----
Total $373.5 100.0 $402.3 100.0 $792.3 100.0 $817.1 100.0
====== ===== ====== ===== ====== ===== ====== =====
Total sales for the quarter decreased 7.2% to $373.5 million compared to
pro forma sales of $402.3 million in the prior year quarter. For the six month
period ended August 31, 2000, sales decreased 3.0% to $792.3 million from pro
forma sales of $817.1 million in the prior year period. The decrease in sales
for both the three and six-month periods ended August 31, 2000 compared to the
prior year periods is primarily attributable to the elimination of the Company's
installment credit program on August 16, 2000 and the announcement of the plan
to close approximately 302 stores and two distribution centers on that same date
and decreases in comparable store sales in the Heilig-Meyers division in June
and July.
On September 13, 2000, the Bankruptcy Court approved an Interim Merchant
Agreement ("the Interim Agreement") between the Company and Household Bank (SB),
N.A. ("Household"), which established a new private label credit card program.
The initial term of the Interim Agreement, as amended, expires on December 27,
2000. The Company and Household are currently negotiating the terms of a longer
term agreement. However, the Household credit program is not expected to offer
credit on the same criteria as the former installment credit program, thus
management believes that for the remainder of fiscal 2001 and the first two
quarters of fiscal 2002, sales in the Heilig-Meyers Furniture stores will
continue to perform at lower levels than the prior year on a comparable store
basis. The Company continues to pursue and evaluate opportunities to provide
additional financing alternatives to its customers that would be incremental to
the Household program.
The increases in sales for the RoomStore division for the second quarter
and the year-to-date period are primarily attributable to an increase of four
new operating units compared to the prior year. The sales increases for the
Homemakers division were primarily the result of comparable store sales growth.
24
<PAGE>
For the quarter ended August 31, 2000, other income decreased to 19.6% of
sales from 20.4% of sales on a pro forma basis in the prior year quarter. For
the six months ended August 31, 2000, other income decreased as a percentage of
sales to 19.8% from 20.3% on a pro forma basis in the prior year period. The
following table shows other income as a percentage of divisional sales:
Three Months Ended Six Months Ended
Pro Forma Pro Forma
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
--------------------- ----------------------
Heilig-Meyers 23.8% 24.6% 23.9% 24.5%
The RoomStore 5.8% 3.1% 5.8% 3.3%
Homemakers 4.6% 5.0% 4.7% 5.0%
------ ------ ------ ------
19.6% 20.4% 19.8% 20.4%
Divested subsidiaries -- -- 18.7% 16.9%
------ ------ ------ ------
Consolidated 19.6% 20.4% 19.8% 20.3%
====== ====== ====== ======
Within the Heilig-Meyers format, other income decreased 0.8% as a
percentage of sales for the quarter and 0.6% of sales year-to-date on a pro
forma basis. These decreases are due to a reduction in finance income as a
result of the termination of the Company's installment credit program on August
16, 2000. Going forward, management expects the termination of the installment
credit program to result in a significant decline in finance income as compared
to historical levels.
Costs and Expenses
Costs of sales for the quarter ended August 31, 2000 increased to 79.5% of
sales compared to 72.5% of sales on a pro forma basis in the prior year quarter.
For the six month period ended August 31, 2000, cost of sales increased to 75.6%
from 71.4% of sales in the prior year on a pro forma basis. The following table
shows the costs of sales as a percentage of divisional sales:
Three Months Ended Six Months Ended
Pro Forma Pro Forma
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
--------------------- ----------------------
Heilig-Meyers 81.8% 72.7% 77.3% 71.9%
The RoomStore 72.2% 70.9% 71.5% 69.7%
Homemakers 71.1% 82.0% 72.5% 78.1%
------ ------ ------ ------
79.5% 72.5% 76.0% 71.8%
Divested subsidiaries -- -- 54.3% 57.3%
------ ------ ------ ------
Consolidated 79.5% 72.5% 75.6% 71.4%
====== ====== ====== ======
The costs of sales in the Heilig-Meyers division increased 9.1% as a
percentage of sales from the prior year quarter and 5.4% as a percentage of
sales from the prior year-to-date percentage on a pro forma basis as a result of
the loss of sales leverage on certain fixed expenses as well as increased costs
primarily in the warehouse and delivery areas, a portion of which was related to
higher fuel costs. The Company closed two of its distribution centers located in
Hesperia, California and Thomasville, Georgia in September 2000 to more closely
align its distribution infrastructure and cost with the continuing store base.
The increases in the costs of sales percentages for The RoomStore division were
primarily due to increases in rent and occupancy expenses. The decreases in the
costs of sales percentages for the Homemakers division were primarily due to
decreases in distribution and warehousing labor.
25
<PAGE>
Selling, general and administrative expenses increased to 48.4% of sales
for the quarter from 37.9% of sales on a pro forma basis in the prior year
quarter. For the six month period ended August 31, 2000, selling, general and
administrative expenses increased to 43.5% from 38.1% of sales on a pro forma
basis in the prior year period. The following table displays selling, general
and administrative expenses as a percentage of the applicable division's sales:
Three Months Ended Six Months Ended
Pro Forma Pro Forma
August 31, August 31, August 31, August 31,
2000 1999 2000 1999
--------------------- ----------------------
Heilig-Meyers 51.9% 40.2% 45.8% 39.9%
The RoomStore 35.5% 27.0% 33.9% 28.9%
Homemakers 43.4% 35.1% 41.0% 36.4%
------ ------ ------ ------
48.4% 37.9% 43.4% 38.0%
Divested subsidiaries -- -- 47.9% 43.8%
------ ------ ------ ------
Consolidated 48.4% 37.9% 43.5% 38.1%
====== ====== ====== ======
Selling, general and administrative expenses for the Heilig-Meyers division
increased 11.7% as a percentage of sales as compared to the prior year quarter
and 5.9% as a percentage of sales as compared to the prior year-to-date period
on a pro forma basis. As noted above, sales volume declined as a result of the
termination of the installment credit program. However, substantially all of the
fixed costs of administering the program continued through the end of the second
quarter, resulting in a loss of sales leverage. Actions were taken in late
August and in September 2000 which management believes will eliminate a
significant portion of the administrative costs associated with that program. In
addition, $7.9 million in severance related expense was accrued in the quarter
ended August 31, 2000 related to the departure of the Company's former chairman
and chief executive officer in July 2000. The RoomStore division experienced an
increase of 8.5% and 5.0% in selling, general and administrative expenses as a
percentage of sales as compared to the prior year quarter and year-to-date
periods, respectively primarily due to increased salaries and related expenses
as well as increased contract delivery. The increases in selling, general and
administrative expenses in the Homemakers division are primarily due to
increases in advertising and contract delivery.
Interest expense increased to 3.0% of sales compared to 2.8% of sales in
the prior year quarter on a pro forma basis. As a result of the Chapter 11
filing, the Company did not record contractual interest expense of $2.3 million
for the three and six months ended August 31, 2000. For the quarter, weighted
average long-term debt decreased to $429.8 million from $627.0 million in the
prior year second quarter. The decrease in long-term debt levels between years
is a result of the use of proceeds from divestitures to paydown long-term debt.
As of August 31, 2000, $524.7 million of pre-petition long-term debt is
classified as liabilities subject to compromise. Weighted average long-term
interest rates decreased to 8.2% from 8.6% in the prior year. Weighted average
short-term debt decreased to $16.8 million from $172.5 million in the prior
year. Weighted average short-term interest rates increased to 9.2% from 7.1% in
the prior year. For the six month period interest expense increased to 3.2% of
sales from 2.9% of sales in the prior year on a pro forma basis.
The provision for doubtful accounts for the second quarter of fiscal 2001
was 4.6% of sales compared to 5.2% of sales on a pro forma basis in the prior
year quarter. For the six month period ended August 31, 2000, the provision
decreased to 4.8% of sales from 5.2% of sales on a pro forma basis from the
prior year-to-date period. For those stores offering installment credit, the
provision was 6.3% and 6.5% of sales for the second quarters of fiscal years
2001 and 2000 on a pro forma basis, respectively. As noted above and in Note J
to the Consolidated Financial Statements, the Company stopped extending credit
under its installment credit program on August 16, 2000, and has terminated its
in-house revolving credit card program as of October 18, 2000. The Company plans
to liquidate the remaining installment accounts receivable and the revolving
portfolios through a sale to a third party. The Company recorded a valuation
allowance to reduce the carrying amount of these portfolios to their estimated
net realizable values. Management expects that these portfolios will be
liquidated at their net realizable values and that future bad debt expense will
be substantially decreased compared to historic levels.
26
<PAGE>
Reorganization items for the period ended August 31, 2000 have been
segregated from the normal results of operations and are disclosed separately.
The major components are as follows:
(in thousands) August 31, 2000
---------------
Store and distribution center
exit costs $ 160,308
Credit operations exit costs 303,640
Asset impairment 110,145
Professional fees 1,501
---------
Total reorganization items $ 575,594
=========
The store and distribution center closing costs consist of estimated losses
on the liquidation of inventory of $34,414,000, losses of $52,475,000 on the
sale of fixed assets, $6,275,000 for severance, the write-off of excess costs
over net assets acquired ("goodwill") totaling $56,722,000 associated with the
planned closing of approximately 302 stores and two distribution centers, and
$10,422,000 for estimated lease obligations relating to these locations.
On September 14, 2000, the Court authorized the Company and/or its agents
to conduct certain store closings and approved the Company's agreement with
third parties as liquidation agents. The agents will conduct going out of
business ("GOB") sales designed to liquidate the inventory and fixed assets
related to approximately 300 of the stores identified for closure. The Company
expects the GOB sales to be completed by the end of December 2000. Severance
accruals were determined based on the Company's applicable salary continuation
plan and exclude any amounts that may be payable for work performed during the
GOB period including retention bonuses, if any. The amount accrued for lease
obligation represents the estimated potential landlord claims as determined
under the Bankruptcy Code.
Credit operations exit costs consist primarily of valuation allowances
recorded to reduce the carrying amount of the Company's retained interest in the
securitization trust and owned customer accounts receivable portfolios to their
net realizable values. Note 5 to the Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2000
and Note K in the Notes to the Consolidated Financial Statements in this Form
10-Q describe the Company's accounts receivable securitization program. The fair
value of the Company's interest-only strip receivable is based on the present
value of estimated future cash flows to be received by the Company in excess of
contractually specified servicing fees less estimated losses. Because future
cash collections will be used to pay off certificates issued by the Trust, the
estimated future cash flows related to the interest-only strip have been reduced
to zero. Accordingly, a charge of $19,817,000 was recorded to write-off the
carrying amount of the interest only strip as of August 31, 2000. The fair value
of the Company's retained interest in the Trust is based on the present value of
future cash flows associated with the underlying receivables. Because the
Company has discontinued its installment credit program, the underlying
receivable portfolio will be liquidated by the Trust through account collections
or sale of the portfolio, the proceeds of which will be used to pay off the
certificates issued by the Trust. The Company's retained interest in the Trust
is subordinated to all other Trust certificates. The Company believes that the
amount realized from the portfolio under these circumstances will be
insufficient to provide any return of investment to the Company. Thus, a full
valuation allowance totaling $201,765,000 was recorded against the carrying
amount of the Company's retained interest in the asset securitization Master
Trust. Deferred securitization fees of $3,973,000 that were being carried on the
balance sheet and amortized were also written off.
The Company continues to carry owned accounts receivable consisting of
installment accounts not transferred to the Trust and revolving accounts
extended under its in-house private label program. Extension of credit was
ceased under the installment program on August 16, 2000 and was ceased under the
revolving program on October 18, 2000. Under a liquidation scenario, that is,
the collection of the remaining balances while eliminating the customer's
ability to utilize the account for future purchases, management believes the
portfolio will perform substantially below historical levels. Furthermore, the
Company plans to liquidate these portfolios through a sale to third parties.
Based upon the liquidation scenarios, the Company recorded a $76,104,000
valuation allowance to reduce the carrying amounts to estimated net realizable
value (Note J). Also included in this category is a $1,981,000 charge to reduce
the carrying amount of equipment used in the credit operations to net realizable
value.
27
<PAGE>
Asset impairment charges include the write-down of the Company's goodwill
and other assets to their net realizable value. The Company has continually
evaluated whether events and circumstances have occurred that would indicate
that the remaining balance of goodwill may not be recoverable. Due to the
Company's recent performance and the reorganization actions undertaken by
management, the Company performed an evaluation of the carrying amount of
remaining goodwill. This evaluation was based on whether the remaining goodwill
was fully recoverable from projected, undiscounted future cash flows from
operations of the related business units. In connection with this evaluation,
the Company recorded a loss on impairment of goodwill of $83,981,000. Also,
because the Company projects a significant net operating loss carryforward for
income tax purposes, management expects to liquidate the Company's investment in
tax-advantaged investments in low-income housing partnerships. Accordingly, a
$22,800,000 valuation allowance was recorded against these investments to reduce
their carrying amount to net realizable value. The Company also recorded a
$3,271,000 write-down of net receivables from its credit insurance and service
policy underwriter due to potential claims available to the underwriter as a
result of the reorganization actions.
The net reorganization items are based on information presently available
to the Company, however, the actual costs could differ materially from the
estimates. Additionally, other costs may be incurred which cannot be presently
estimated.
The Company recorded a net deferred tax asset, before a valuation
allowance, for its cumulative net operating loss and other deferred items for
the six months ended August 31, 2000. The Company has recorded a full valuation
allowance on the amount of the net tax asset as realization in future years is
uncertain. As a result of the valuation allowance, the effective income tax rate
for the second quarter of fiscal 2001 was 8.8% compared to the prior year pro
forma rate of 35.9% and the prior year actual income tax rate of 94.7%. For the
six-month period ended August 31, 2000, the effective tax rate was 8.4% compared
to the prior year pro forma rate of 35.9%. The higher rate in the prior year is
due to divestiture activity. 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.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Note A to the Consolidated Financial Statements, on August
16, 2000, the Company and certain of its subsidiaries filed petitions for
reorganization under Chapter 11, Title 11 of the United States Bankruptcy Code.
The Company will continue to conduct business in the ordinary course as
debtor-in-possession under the protection of the Bankruptcy Court.
Requirements for the payment of unsecured debt, accounts payable and other
liabilities that arose prior to the Chapter 11 filing are in most cases stayed
while the Company is under the protection of the Bankruptcy Court. The
Bankruptcy Court has issued orders authorizing the payment of pre-petition and
post-petition employee wages, salaries and benefits during the Chapter 11 Case.
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, 2000. As of August 31, 2000, long-term notes
payable with an aggregate principal amount of $175 million have been issued to
the public under this Registration Statement.
As a result of losses incurred during fiscal years 2000 and 1999, the
Company amended its bank debt agreements during fiscal years 2000 and 1999 in
order to maintain covenant compliance.
On May 25, 2000, the Company finalized the extension of its revolving
credit facility. The extended facility provided a committed amount of $140.0
million and was set to expire in May 2001. In addition, the Company pledged,
within the terms of certain other long-term debt and revolving credit
agreements, certain non-inventory assets as partial security for the extended
facility. The amount outstanding under this pre-petition agreement totaled
$524.6 million as of August 31, 2000 and is presented in the Consolidated
Balance Sheet under liabilities subject to compromise.
28
<PAGE>
On August 1, 2000, the Company elected to defer the scheduled August 1,
2000 interest payments on its MacSaver Financial Services 7.60% Unsecured Notes
due 2007 and MacSaver Financial Services 7.88% Unsecured Notes due 2003, and the
scheduled August 15, 2000 interest payment on its MacSaver Financial Services
7.40% Unsecured Notes due 2002. The related Note Indentures provided for 30-day
grace periods to make the interest payments. The amount of interest deferred
under these pre-petition agreements totaled $18.2 million and is presented in
the Consolidated Balance Sheet under liabilities subject to compromise.
On August 1, 2000, Moody's Investors Service and Standard and Poor's
lowered their credit ratings on the senior unsecured debt of MacSaver Financial
Services, guaranteed by the Company, to Caa1 and D from Ba2 and BB-,
respectively, following the Company's announcement that it was deferring
interest payments scheduled for August 1, 2000 as described above. On August 25,
2000, Moody's Investors Service further lowered its rating to Ca from Caa1 as a
result of the Chapter 11 Case.
On August 16, 2000, the Debtors entered into credit facilities totaling
$215.0 million consisting of a $200.0 million DIP Revolving Credit Facility (the
"Revolving Facility") and a $15.0 million DIP Term Facility (the "Term
Facility") (collectively the "DIP Facilities") with Fleet Retail Finance, Inc.
("Fleet") as the administrative agent. On September 27, 2000, the Bankruptcy
Court issued a final order approving a limit of $200.0 million for the Revolving
Facility. Letter of Credit obligations under the Revolving Facility are limited
to $50.0 million. The DIP Facilities are intended to provide the Company with
the cash necessary to conduct its operations and pay for merchandise shipments
at normal levels during the course of the Chapter 11 Case.
Loans made under the Revolving Facility bear interest, at the Company's
option, at a rate equal to either Fleet's prime lending rate plus 1.0% or the
applicable LIBOR plus 3.0%. The Term Facility bears interest at 16.5%. The
Company is required to pay an unused line fee of 0.5% on the unused portion of
the Revolving Facility commitment, and a standby letter of credit fee of 3.0%.
The Company paid financing fees of $4.3 million on the closing date of the DIP
Facilities and $0.7 million upon issuance of the Bankruptcy Court's final order.
These financing fees have been deferred and are being amortized over the life of
the DIP Facilities.
The maximum borrowings, excluding the term commitments, under the DIP
Facilities are limited to 85% of eligible inventory, a percentage to be
determined of eligible receivables, 60% of eligible real estate, and 25% of
eligible leasehold interests (all as defined in the DIP Facilities) less
applicable reserves. Availability under the DIP Facilities at August 31, 2000
was $138.1 million. The amounts borrowed as of August 31, 2000, under the
Revolving Facility and the Term Facility were $0 and $15.0 million,
respectively.
The DIP Facilities are secured by a first lien and superpriority claim on
substantially all of the assets of the Company and its subsidiaries, subject in
certain cases to liens held by the pre-petition lenders on certain accounts
receivable, real estate, and general intangibles. Although the DIP Facilities
share their lien status, their priorities of repayment are different. In the
event of a liquidation, the Revolving Facility will be repaid first from the
proceeds of inventory, post-petition receivables and pledged real estate. The
Term Facility will be repaid from the proceeds of (i) furniture, fixtures and
equipment, and (ii) any remaining proceeds from the aforementioned Revolving
Facility assets after the Revolving Facility has been paid in full. Under the
DIP Facilities the Company is obligated to furnish an acceptable business plan
by December 22, 2000. A minimum excess availability of $15.0 million must be
maintained until the acceptance of the business plan and thereafter, the minimum
excess availability will drop to the greater of $10.0 million of 10% of the
borrowing base. In addition, the DIP Facilities have certain restrictive
covenants limiting additional indebtedness, liens, sales of assets, and capital
expenditures. The Company is currently in the process of developing the business
plan to be provided to Fleet. The DIP Facilities expire on the earlier of August
16, 2002 or the date of substantial consummation of a plan of reorganization
that has been confirmed pursuant to order of the Bankruptcy Court.
29
<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 29, 2000. 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 29,
2000.
30
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
As reported in its report on Form 8-K dated August 31, 2000, on August 16,
2000, the Company and certain of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11, Title 11 of the United States Code with the
United States Bankruptcy Court for the Eastern District of Virginia in Richmond,
Virginia.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
As a result of filing the Chapter 11 Case, no principal or interest
payments will be made on certain indebtedness incurred by the Company prior to
August 16, 2000, including the MacSaver Financial Services 7.60% Unsecured
Notes, the MacSaver Financial Services 7.88% Unsecured Notes, and the MacSaver
Financial Services 7.40% Unsecured Notes, until a plan of reorganization
defining the payment terms has been approved by the Bankruptcy Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Company's shareholders was held June 21, 2000.
(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 - 50,415,037
AGAINST - 189,114
ABSTAIN - 629,550
(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 49,222,397 2,011,304
Donald S. Shaffer 49,317,801 1,915,900
Robert L. Burrus, Jr. 49,123,678 2,110,023
Beverley E. Dalton 49,306,047 1,927,654
Benjamin F. Edwards, III 49,151,651 2,082,050
Robert M. Freeman 49,317,239 1,916,462
Lawrence N. Smith 49,299,697 1,934,004
Eugene P. Trani 49,299,151 1,934,550
L. Douglas Wilder 49,260,857 1,972,844
31
<PAGE>
ITEM 5. OTHER INFORMATION
On August 21, 2000, the New York Stock Exchange ("the Exchange") announced
that trading in the Company's Common Stock would be suspended immediately and
that it would move to delist the shares of the Company from the Exchange, as a
result of the Company's petition for bankruptcy protection. On August 23, 2000,
the Company's Common Stock began trading on the Over-The-Counter System under
the ticker symbol HMYRQ, which has subsequently been changed to HMYRE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. See INDEX TO EXHIBITS
There were three Current Reports on Form 8-K filed during the
quarterly period ended August 31, 2000. On July 24, 2000,
Registrant filed a Form 8-K in which it attached and
incorporated by reference the July 24, 2000 press release
issued by the Registrant announcing that Donald S. Shaffer had
been appointed President and Chief Executive Officer.
On August 1, 2000, Registrant filed a Form 8-K in which it
attached and incorporated by reference the August 1, 2000
press release issued by the Registrant announcing that the
Company would defer certain interest payments scheduled for
August 2000 and that the Company had engaged an investment
banking firm to assist the Company in exploring strategic
alternatives.
On August 31, 2000, Registrant filed a Form 8-K in which it
announced that the Company had filed a voluntary Chapter 11
reorganization petition and that the Company had entered into
a $215 million debtor-in-possession financing facility.
32
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Page
-----------------------------------------------------------------------------
10. Material Contracts
a. Employment Agreement dated July 21, 2000 between
Donald S. Shaffer and Registrant.* 35
b. Debtor-in-Possession Credit Agreement dated as of
August 16, 2000 among Registrant, Heilig-Meyers
Furniture Company ("HMFC"), Heilig-Meyers Furniture
West, Inc.("H-M Furniture"), HMY Roomstore, Inc.
("RoomStore"), HMY Star, Inc. ("Star"), MacSaver
Financial Services, Inc. ("MacSaver"), the Lenders
Party to this agreement, Fleet National Bank, Fleet
Retail Finance Inc. ("Fleet Retail"), Back Bay
Capital Funding, LLC, Citicorp USA, Inc. and
FleetBoston Robertson Stephens Inc. (the "DIP
Credit Agreement"). 43
c. First Amendment to DIP Credit Agreement dated
September 26, 2000 among Fleet Retail, the Lenders,
Registrant, HMFC, H-M Furniture, RoomStore, Star
and MacSaver. 115
d. Second Amendment to DIP Credit Agreement dated
October 24, 2000 among Fleet Retail, the Lenders,
Registrant, HMFC, H-M Furniture, RoomStore, Star
and MacSaver. 118
e. Interim Merchant Agreement dated September 13, 2000
between Household Bank (SB), N.A. and Registrant. 122
f. Amendment to Interim Merchant Agreement dated
November 14, 2000 between Household Bank (SB), N.A.
and Registrant 137
27. Financial Data Schedule 138
*Management contract or compensatory plan or arrangement of the
Company required to be filed as an exhibit.
33
<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: November 27, 2000 /s/Paige H. Wilson
--------------------------------
Paige H. Wilson
Executive Vice President, Chief
Financial Officer
(principal financial officer)
Date: November 27, 2000 /s/Ronald L. Barden
--------------------------------
Ronald L. Barden
Senior Vice President, Controller
(principal accounting officer)
34
