UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1999
or -------------------------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------------- -------------------
Commission file number #1-8484 .
---------------------------------------------
Heilig-Meyers Company .
- --------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-0558861
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12560 West Creek Parkway, Richmond, Virginia 23238 .
- --------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(804) 784-7300 .
- --------------------------------------------------------------------
(Registrant's telephone number, including area code)
.
- --------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of January 1, 2000.
60,676,773 shares of Common Stock, $2.00 par value.
HEILIG-MEYERS COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for
Three and Nine Months Ended November 30, 1999
and November 30, 1998 (Unaudited) 3
Consolidated Balance Sheets as of November 30, 1999
(Unaudited) and February 28, 1999 (Audited) 4
Consolidated Statements of Cash Flows for
Nine Months Ended November 30, 1999 and
November 30, 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure of
Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
2
PART I
ITEM 1. FINANCIAL STATEMENTS
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Sales $469,385 $654,694 $1,595,518 $1,844,849
Other income 59,519 73,515 195,539 227,306
-------- -------- ---------- ----------
Total revenues 528,904 728,209 1,791,057 2,072,155
-------- -------- ---------- ----------
Costs and Expenses:
Costs of sales 307,234 434,997 1,049,310 1,234,260
Selling, general and
administrative 174,360 233,550 591,586 664,781
Interest 12,136 19,121 50,428 57,247
Provision for doubtful
accounts 27,616 30,645 74,767 76,338
-------- -------- ---------- ----------
Total costs and
expenses 521,346 718,313 1,766,091 2,032,626
-------- -------- ---------- ----------
Gain (loss) on sale
and write-down of
assets held for sale -- -- (63,136) --
Earnings (loss) before
provision for income
taxes 7,558 9,896 (38,170) 39,529
Provision for income taxes 2,819 3,622 24,789 14,303
-------- --------- ---------- ----------
Net earnings (loss) $ 4,739 $ 6,274 $ (62,959) $ 25,226
======== ======== ========== ==========
Net earnings (loss) per share of common stock:
Basic $ 0.08 $ 0.11 $ (1.05) $ 0.43
======== ======== ========== ==========
Diluted $ 0.08 $ 0.10 $ (1.05) $ 0.42
======== ======== ========== ==========
Cash dividends per
share of common stock $ 0.02 $ 0.07 $ 0.16 $ 0.21
======== ======== ========== ==========
See notes to consolidated financial statements.
3
HEILIG-MEYERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
November 30, February 28,
1999 1999
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 8,682 $ 67,254
Accounts receivable, net 152,874 254,282
Retained interest in securitized
receivables at fair value 184,852 190,970
Inventories 357,128 493,463
Other current assets 98,610 124,305
Net assets held for sale 147,511 ---
---------- ----------
Total current assets 949,657 1,130,274
Property and equipment, net 295,141 400,686
Other assets 134,573 72,632
Excess costs over net assets acquired, net 143,740 344,160
---------- ----------
$1,523,111 $1,947,752
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 91,272 $ 210,000
Long-term debt due within
one year 6,374 167,486
Accounts payable 144,161 193,799
Accrued expenses 164,150 178,656
---------- ----------
Total current liabilities 405,957 749,941
---------- ----------
Long-term debt 536,120 547,344
Deferred income taxes 48,694 45,365
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
60,677 and 59,861, respectively) 121,354 119,722
Capital in excess of par value 240,871 242,346
Unrealized gain on investments 4,863 5,228
Retained earnings 165,252 237,806
---------- ----------
Total stockholders' equity 532,340 605,102
---------- ----------
$1,523,111 $1,947,752
========== ==========
See notes to consolidated financial statements.
4
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
November 30,
-------------------
1999 1998
---- ----
Cash flows from operating activities:
Net earnings (loss) $(62,959) $ 25,226
Adjustments to reconcile net
earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 42,090 43,402
Provision for doubtful accounts 74,767 76,338
Gain (loss), net of tax on sale and
write-down of net assets held for
sale 78,903 ---
Store closing charge payments (1,312) (7,665)
Other, net 586 (3,859)
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable (87,607) 45,304
Retained interest in securitized
receivables at cost 5,753 (28,190)
Other receivables (32,162) (23,982)
Inventories (35,038) 10,392
Prepaid expenses 16,894 22,601
Accounts payable 12,973 6,591
Accrued expenses (29,375) (8,831)
--------- ---------
Net cash provided (used)
by operating activities (16,487) 157,327
--------- ---------
Cash flows from investing activities:
Proceeds from sale of subsidiaries 278,664 ---
Additions to property and equipment (23,641) (48,685)
Disposals of property and equipment 5,491 18,911
Miscellaneous investments (15,152) (36,489)
--------- ---------
Net cash provided (used)
by investing activities 245,362 (66,263)
--------- ---------
Cash flows from financing activities:
Net decrease in notes payable (118,728) (85,000)
Payments of long-term debt (160,756) (23,728)
Issuance of common stock 1,632 142
Dividends paid (9,595) (12,453)
--------- ---------
Net cash used by
financing activities (287,447) (121,039)
--------- ---------
Net decrease in cash (58,572) (29,975)
Cash at beginning of period 67,254 48,779
--------- ---------
Cash at end of period $ 8,682 $ 18,804
========= =========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. The accompanying consolidated financial statements of Heilig-Meyers Company
(the "Company") have not been audited by independent accountants, except
for the balance sheet at February 28, 1999. These financial statements have
been prepared in accordance with regulations of the Securities and Exchange
Commission in regard to quarterly (interim) reporting. In the opinion of
management, the financial information presented reflects all adjustments,
comprised only of normal recurring accruals, which are necessary for a fair
presentation of the results for the interim periods. Significant accounting
policies and accounting principles have been consistently applied in both
the interim and annual consolidated financial statements. Certain notes and
the related information have been condensed or omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with
the Company's 1999 Annual Report on Form 10-K. The results for the third
quarter of fiscal year 2000 are not necessarily indicative of future
financial results.
B. On May 28, 1999, the Company entered into a definitive agreement to sell
93% of its interest in its Mattress Discounters division, and on August 6,
the Company completed the transaction. Heilig-Meyers received approximately
$204 million in cash, subject to certain working capital adjustments,
pay-in-kind junior subordinated notes valued at $12 million and retained a
7% equity interest in Mattress Discounters. The Company incurred costs
related to the transaction of approximately $8.9 million and assumed
liabilities of approximately $5.6 million. This transaction resulted in a
pre-tax gain of $135.2 million ($56.2 million net of tax) which was
recorded in the second quarter ended August 31, 1999. Final resolution of
working capital adjustments is expected in the fourth quarter ended
February 29, 2000.
On June 15, 1999, the Company entered into a definitive agreement to sell
its interest in its Rhodes division. The transaction was closed on July 13,
1999, with an effective date of July 1, 1999. Under the terms of the sale
agreement the Company received $60 million in cash, a $40 million 10%
pay-in-kind subordinated note receivable due 2004 (9.5% interest rate per
annum for periods where interest is paid in cash) and an option to acquire
a 10% equity interest in Rhodes Holdings, the acquiring entity. The Company
also has the option to acquire an additional 10% equity interest if certain
financial goals are achieved by Rhodes Holdings. The Company has agreed to
provide or guarantee a $20 million standby credit facility to Rhodes after
the closing, which may only be drawn on in certain circumstances after
utilization of availability under Rhodes' primary credit facility. In
addition, under terms of the agreement, Rhodes assumed approximately $10
million in capital lease obligations. During the first quarter ended May
31, 1999, the Company recorded a pre-tax charge to earnings of $113.7
million ($79.6 million net of tax) to write down its investment in Rhodes
to estimated net realizable value. During the second quarter ended August
31, 1999, this loss was adjusted to $104.6 million ($68.8 million net of
tax) to reflect the final terms of this transaction.
During the second quarter ended August 31, 1999, the Company announced its
intent to exit certain markets which are not considered to be part of the
Company's core operations. These markets include Chicago, Illinois,
Milwaukee, Wisconsin and non-continental U.S. operations. During the
quarter ended August 31, 1999, the Company recorded a pre-tax charge of
$93.8 million ($66.3 million net of tax) to write down the associated
assets to their estimated fair value, less costs to sell, which totaled
approximately $161.5 million as of August 31, 1999. The Company began the
execution of this plan in September 1999 with the sale of assets related to
18 Heilig-Meyers Furniture stores in the Chicago and Milwaukee markets.
Approximately $15 million of net cash proceeds were generated during the
third quarter ended November 30, 1999 from the sale of these assets. The
remaining assets effected by this plan total approximately $147.5 million
and are classified as net assets held for sale on the November 30, 1999
balance sheet. The Company expects the remaining dispositions to be
completed within the next nine months. The net cash proceeds from these
divestitures will be used to pay down debt.
C. On September 22, 1999, the Board of Directors declared a cash dividend of
$0.02 per share which was paid on November 20, 1999, to stockholders of
record on November 3, 1999.
D. Accounts receivable are shown net of the allowance for doubtful accounts
and unearned finance income. The allowance for doubtful accounts was
$35,126,000 and $42,475,000 and unearned finance income was $12,096,000 and
$31,775,000 at November 30, 1999, and February 28, 1999, respectively.
6
E. The Company made (received) net income tax payments (refunds) of
$17,009,000 and $(10,705,000) during the nine months ended November 30,
1999, and November 30, 1998, respectively.
F. The Company made interest payments of $43,463,000 and $51,242,000 during
the nine months ended November 30, 1999, and November 30, 1998
respectively.
G. Total comprehensive income (loss) for the three and nine month periods
ended November 30, 1999 and 1998 is as follows:
Three Months Ended Nine Months Ended
November 30, November 30,
(Amounts in thousands) 1999 1998 1999 1998
------------------- -------------------
Net income (loss) $ 4,739 $6,274 $(62,959) $25,226
Increase (decrease)
in unrealized gain
on investments $ (900) $ 763 $ (365) $(1,040)
----------------- -----------------
Comprehensive income
(loss) $ 3,839 $7,037 $(63,324) $24,186
================= =================
The difference between net income (loss) and comprehensive income (loss) is
due to the change in the unrealized gain on investments, which consists of
retained interests in securitized receivables.
H. In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June 15, 2000. The new statement requires that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires the changes in
the derivatives fair value to be recognized currently in earnings unless
specific hedge accounting criteria are met. The Company has not yet
determined the effect this statement will have on the consolidated
financial position or results of operations of the Company.
I. During the nine months ended November 30, 1999, the Company had significant
operations aligned in four operating formats: Heilig-Meyers, The RoomStore,
Rhodes and Mattress Discounters. The Company's Heilig-Meyers division is
associated with the Company's historical operations. The majority of the
Heilig-Meyers stores operate in smaller markets with a broad line of
merchandise. The RoomStore division includes the stores primarily operating
in Texas, Oregon, Maryland, Illinois, Virginia, and the stores in Puerto
Rico operating under the "Berrios" name. The Rhodes retailing strategy was
selling quality furniture to a broad base of middle income customers. The
Mattress Discounters division is the Nations largest retail bedding
specialist.
As discussed in Note B, the Company has completed the sale of its Rhodes
division, has sold 93% of its interest in its Mattress Discounters
division, has sold the assets related to 18 Heilig-Meyers Furniture stores
in the Chicago market, and has intentions to exit certain other markets. As
a result of this divestiture activity, the Company has presented two new
reportable segments: operations held for sale and the Chicago market, both
of which were previously reported in The RoomStore division. The Chicago
market includes the 18 Heilig-Meyers Furniture stores located in Chicago
and operations held for sale includes markets in the Chicago area and
non-continental U.S. operations. Results for the nine months ended November
30, 1999 include operations of the Rhodes division through June 30, 1999
and the Mattress Discounters division through August 6, 1999. Information
for prior periods has been restated to reflect these changes.
The Company evaluates performance based on earnings (loss) before interest
and income taxes (based on generally accepted accounting principles). The
Company generally accounts for intersegment sales and transfers at current
market prices as if the sales or transfers were to unaffiliated third
parties. General corporate expenses are allocated between the divisions.
7
Pertinent financial data by operating segment for the three and nine month
periods ended November 30, 1999 and 1998 are as follows:
Three Months Three Months
Ended Ended
November 30, November 30,
(Amounts in thousands) 1999 1998
Revenues: ---- ----
Heilig-Meyers $ 398,595 $ 404,279
The RoomStore 71,434 55,176
Operations held for sale 58,875 58,387
---------- ----------
528,904 517,842
Chicago market -- 15,541
Rhodes -- 134,794
Mattress Discounters -- 60,032
---------- ----------
Total revenues from
external customers $ 528,904 $ 728,209
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ 13,352 $ 22,604
The RoomStore 3,481 706
Operations held for sale 5,859 6,366
---------- ----------
22,692 29,676
Chicago market (2,998) (880)
Rhodes -- (5,265)
Mattress Discounters -- 5,486
---------- ----------
Total earnings before
interest and taxes $ 19,694 $ 29,017
Interest expense (12,136) (19,121)
---------- ----------
Consolidated earnings before
provision for income taxes $ 7,558 $ 9,896
========== ==========
Depreciation and amortization expense:
Heilig-Meyers $ 9,849 $ 9,710
The RoomStore 838 755
Operations held for sale 807 687
---------- ----------
11,494 11,152
Chicago market 113 148
Rhodes -- 2,925
Mattress Discounters -- 1,358
---------- ----------
Total depreciation and
amortization expense $ 11,607 $ 15,583
========== ==========
Capital Expenditures:
Heilig-Meyers $ 6,127 $ 6,254
The RoomStore 1,261 1,192
Operations held for sale 667 969
---------- ----------
8,055 8,415
Chicago market 8 627
Rhodes -- 2,333
Mattress Discounters -- 2,295
---------- ----------
Total capital expenditures $ 8,063 $ 13,670
========== ==========
Total identifiable assets:
Heilig-Meyers $1,287,023 $1,253,261
The RoomStore 88,577 74,758
Operations held for sale 147,511 216,761
---------- ----------
1,523,111 1,544,780
Chicago market -- 29,828
Rhodes -- 315,956
Mattress Discounters -- 92,369
---------- ----------
Total identifiable assets $1,523,111 $1,982,933
========== ==========
8
Nine Months Nine Months
Ended Ended
November 30, November 30,
1999 1998
---- ----
Revenues:
Heilig-Meyers $1,148,690 $1,162,481
The RoomStore 201,774 154,658
Operations held for sale 152,091 148,685
---------- ----------
1,502,555 1,465,824
Chicago market 21,721 47,598
Rhodes 160,048 373,944
Mattress Discounters 106,733 184,789
---------- ----------
Total revenues from
external customers $1,791,057 $2,072,155
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ 51,108 $ 77,224
The RoomStore 10,178 4,651
Operations held for sale 10,829 12,763
---------- ----------
72,115 94,638
Chicago market (5,981) (1,200)
Rhodes (2,390) (16,579)
Mattress Discounters 11,650 19,917
---------- ----------
Total earnings before
interest and taxes $ 75,394 $ 96,776
Gain (loss) on sale and write-
down of assets held for sale (63,136) --
Interest expense (50,428) (57,247)
---------- ----------
Consolidated earnings (loss)
before provision for
income taxes $ (38,170) $ 39,529
========== ==========
Depreciation and amortization expense:
Heilig-Meyers $ 30,817 $ 26,025
The RoomStore 2,341 2,034
Operations held for sale 2,342 1,962
---------- ----------
35,500 30,021
Chicago market 561 484
Rhodes 3,918 9,365
Mattress Discounters 2,111 3,532
---------- ----------
Total depreciation and
amortization expense $ 42,090 $ 43,402
========== ==========
Capital Expenditures:
Heilig-Meyers $ 11,182 $ 27,430
The RoomStore 4,321 5,339
Operations held for sale 3,964 5,243
---------- ----------
19,467 38,012
Chicago market 1,314 1,913
Rhodes 1,665 4,673
Mattress Discounters 1,195 4,087
---------- ----------
Total capital expenditures $ 23,641 $ 48,685
========== ==========
9
J. MacSaver Financial Services, Inc.("MacSaver") is the Company's wholly-owned
subsidiary whose principal business activity is to obtain financing for the
operations of Heilig-Meyers and its other subsidiaries, and, in connection
therewith, MacSaver generally acquires and holds the installment credit
accounts generated by the Company's operating subsidiaries. The payment of
principal and interest associated with MacSaver debt is guaranteed by the
Company. The Company has not presented separate financial statements and
other disclosures concerning MacSaver because management has determined
that such information is not material to the holders of the MacSaver debt
securities guaranteed by the Company. However, as required by the 1934 Act,
the summarized financial information concerning MacSaver is as follows:
MacSaver Financial Services, Inc.
Summarized Statements of Operations
(Amounts in thousands)
(Unaudited)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1999 1998 1999 1998
------------------ ------------------
Net revenues $ 68,961 $ 74,010 $220,371 $217,704
Operating expenses 66,195 62,060 190,296 172,851
-------- -------- -------- --------
Earnings before taxes 2,766 11,950 30,075 44,853
-------- -------- -------- --------
Net earnings $ 1,798 $ 7,768 $ 19,549 $ 29,155
======== ======== ======== ========
MacSaver Financial Services, Inc.
Summarized Balance Sheets
(Amounts in thousands)
November 30, February 28,
1999 1999
(Unaudited) (Audited)
------------ ------------
Current assets $ 52,651 $ 57,148
Accounts receivable, net 107,280 145,211
Retained interest in securitized
receivables at fair value 184,852 190,970
Due from affiliates 510,298 716,867
---------- ----------
Total Assets $ 855,081 $1,110,196
========== ==========
Current liabilities 20,349 173,727
Deferred income taxes 12,830 15,023
Notes payable 91,272 210,000
Long-term debt 535,000 535,000
Stockholders equity 195,630 176,446
---------- ----------
Total Liabilities and Equity $ 855,081 $1,110,196
========== ==========
10
K. The following table sets forth the computations of basic and diluted
earnings (loss) per share:
Three Months Ended Nine Months Ended
November 30, November 30,
1999 1998 1999 1998
------------------ -----------------
(Amounts in thousands except per share data)
Numerator:
Net earnings (loss) $4,739 $ 6,274 $(62,959) $25,226
Denominator:
Denominator for basic
earnings per share
average common shares
outstanding 60,677 59,641 60,160 59,175
Effect of potentially
dilutive stock options -- 39 -- 376
Effect of contingently
issuable shares
considered earned -- 773 -- 346
------ ------ ------ ------
Denominator for diluted
earnings per share 60,677 60,453 60,160 59,897
Basic EPS $ 0.08 $0.11 $ (1.05) $0.43
Diluted EPS 0.08 0.10 (1.05) 0.42
Options to purchase 4,851,000 and 5,266,000 shares of common stock at
prices ranging from $5.13 and $9.03 to $35.06 per share were outstanding at
November 30, 1999 and 1998, respectively, but were not included in the
computation of diluted earnings per share because they would have been
antidilutive.
L. 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 nine months ended
November 30, 1999 are as follows:
Amount
Utilized Remaining
Reserve as through Reserve as
of March 1, November 30, of November 30,
(Amounts in thousands, 1999 1999 1999
unaudited) --------------------------------------------------
Severance $ 1,498 $ 890 $ 608
Lease & facility exit cost 3,294 422 2,872
--------------------------------------------------
Total $ 4,792 $ 1,312 $ 3,480
==================================================
The Company completed the store closings, office downsizing, and private
label credit card program reorganization associated with this plan during
fiscal 1999. The substantial majority of the remaining reserves are
expected to be utilized during fiscal 2000 with some amounts related to
long-term lease obligations extending beyond fiscal 2000.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in Item 1 of this document, and with the audited
consolidated financial statements of Heilig-Meyers Company (the "Company") and
notes thereto for the fiscal year ended February 28, 1999.
On March 24, 1999, the Company announced that in an effort to substantially
improve the overall financial position of the Company and to refocus on its core
home furnishings operation, a review of strategic divestiture options of all
non-core operating assets was being made. The Heilig-Meyers division and The
RoomStore division are considered the Company's core business.
On May 28, 1999, the Company announced that it had entered into a
definitive agreement to sell 93% of its interest in its Mattress Discounters
division, and on August 6, the Company completed the transaction. Heilig-Meyers
received approximately $204 million in cash, subject to certain working capital
adjustments, pay-in-kind junior subordinated notes valued at $12 million and
retained a 7% equity interest in Mattress Discounters. The Company incurred
costs related to the transaction of approximately $8.9 million and assumed
liabilities of approximately $5.6 million. This transaction resulted in a
pre-tax gain of $135.2 million ($56.2 million net of tax) which was recorded in
the second quarter ended August 31, 1999. Final resolution of working capital
adjustments is expected in the fourth quarter ended February 29, 2000.
On June 15, 1999, the Company entered into a definitive agreement to sell
its interest in its Rhodes division. The transaction was closed on July 13,
1999, with an effective date of July 1, 1999. Under the terms of the sale
agreement the Company received $60 million in cash, a $40 million 10%
pay-in-kind subordinated note receivable due 2004 (9.5% interest rate per annum
for periods where interest is paid in cash) and an option to acquire a 10%
equity interest in Rhodes Holdings, the acquiring entity. The Company also has
the option to acquire an additional 10% equity interest if certain financial
goals are achieved by Rhodes Holdings. The Company has agreed to provide or
guarantee a $20 million standby credit facility to Rhodes after the closing,
which may only be drawn on in certain circumstances after utilization of
availability under Rhodes' primary credit facility. In addition, under terms of
the agreement, Rhodes assumed approximately $10 million in capital lease
obligations. During the first quarter ended May 31, 1999, the Company recorded a
pre-tax charge to earnings of $113.7 million ($79.6 million net of tax) to write
down its investment in Rhodes to estimated net realizable value. During the
second quarter ended August 31, 1999, the loss was adjusted to $104.6 million
($68.8 million net of tax) to reflect the final terms of this transaction.
During the second quarter ended August 31, 1999, the Company announced its
intent to exit certain markets which are not considered to be part of the
Company's core operations. These markets include Chicago, Illinois, Milwaukee,
Wisconsin and non-continental U.S. operations. During the quarter ended August
31, 1999, the Company recorded a pre-tax charge of $93.8 million ($66.3 million
net of tax) to write down the associated assets to their estimated fair value,
less costs to sell, which totaled approximately $161.5 million as of August 31,
1999. The Company began the execution of this plan in September 1999 with the
sale of assets related to 18 Heilig-Meyers Furniture stores in the Chicago and
Milwaukee markets. Approximately $15 million of net cash proceeds were generated
by these sales during the third quarter ended November 30, 1999. The remaining
assets effected by this plan total approximately $147.5 million and are
classified as net assets held for sale on the November 30, 1999 balance sheet.
The Company expects the remaining dispositions to be completed within the next
nine months. The net cash proceeds from these divestitures will be used to pay
down debt.
12
RESULTS OF OPERATIONS
Revenues and Earnings
Revenues in those divisions which were under the Company's ownership for
the full quarter increased 2.1% to $528.9 million, compared to $517.8 million in
the prior year quarter. As a result of the divestitures of Rhodes, Mattress
Discounters, and 18 stores in the Chicago market, total revenues for the quarter
declined 27.4% to $528.9 million from $728.2 million in the prior year, which
included a full three months activity for these divisions. Net earnings from
operations for the quarter ended November 30, 1999, were $4.7 million or $0.08
per share compared to $6.3 million or $0.10 per share in the prior year quarter.
For the nine month period ended November 30, 1999, revenues in those
divisions which were under the Company's ownership for the full nine months
increased 2.5% to $1,502.6 million, compared to $1,465.8 million for the nine
months ended November 30, 1998. As a result of the divestitures of Rhodes,
Mattress Discounters, and 18 stores in the Chicago market, total revenues for
the nine month period declined to $1,791.1 million from $2,072.2 million for the
same period in the prior year. For the nine month period ended November 30,
1999, the Company has incurred pre-tax costs of $63.1 million ($78.9 million net
of tax) associated with divestiture activities and the write down of assets held
for sale. Including these costs, the Company reported a net loss of $62.9
million or $1.05 per share for the nine month period ending November 30, 1999.
Absent these charges, net earnings for the nine month period ended November 30,
1999, were $15.9 million, or $0.27 per share, compared to $25.2 million, or
$0.43 per share in the prior year comparative period.
The following table shows a comparison of sales by division:
Three Months Ended Nine Months Ended
November 30, November 30,
(Sales amounts in millions)
1999 1998 1999 1998
------------- ------------- ------------- -------------
% of % of % of % of
Sales Sales Sales Sales Sales Sales Sales Sales
------------- ------------- ------------- -------------
Heilig-Meyers $345.9 73.7% $347.0 53.0% $986.4 61.8% $980.7 53.2%
The RoomStore 70.5 15.0 54.0 8.2 199.3 12.5 152.1 8.2
Operations held
for sale 53.0 11.3 52.1 8.0 134.5 8.4 130.6 7.1
------------ ------------ ------------- -------------
469.4 100.0 453.1 69.2 1,320.2 82.7 1,263.4 68.5
Chicago market -- -- 13.0 2.0 17.9 1.1 39.9 2.2
Rhodes -- -- 128.7 19.7 150.8 9.5 357.1 19.3
Mattress
Discounters -- -- 59.9 9.1 106.6 6.7 184.4 10.0
------ ------ ------- -------
Total $469.4 $654.7 $1,595.5 $1,844.8
====== ====== ======== ========
Sales in those divisions which were under the Company's ownership for the
full third quarter of fiscal 2000 increased 3.6% to $469.4 million, compared to
$453.1 million for the quarter ended November 30, 1998. As a result of the
divestitures of Rhodes, Mattress Discounters, and 18 stores in the Chicago
market, total sales declined 28.3% to $469.4 million compared to sales of $654.7
million in the prior year quarter. For the nine month period ended November 30,
1999, sales in those divisions which were under the Company's ownership for the
full nine months increased 4.5% to $1,320.2 million from $1,263.4 million. As a
result of the divestitures of Rhodes, Mattress Discounters, and 18 stores in the
Chicago market, total sales for the nine month period declined 13.5% to $1,595.5
million from $1,844.8 million. The overall increase in sales in the divisions
under the Company's ownership for the full period was attributable to an
increase in operating units from November 30, 1998 to November 30, 1999, as well
as a comparable store sales increase of 0.6% and 2.0% for the three and nine
months ended November 30, 1999. Price changes had an immaterial impact on the
overall sales increase for the quarter.
13
Other income for those divisions which were under the Company's ownership
for the full quarter decreased to 12.7% from 14.3% of sales in the prior year
quarter. For the nine months ended November 30, 1999, other income for these
divisions decreased as a percentage of sales to 13.8% from 16.0% in the prior
year. These decreases are primarily the result of sales growth in stores that do
not offer the Company's in-house installment credit program. The Heilig-Meyers
division and certain stores within operations held for sale offer installment
credit as a financing option to customers. On a consolidated basis, other income
increased to 12.7% for the quarter from 11.2% in the prior year quarter due to
the divestiture of the Rhodes and Mattress Discounters disivions. For the nine
month period other income remained flat at 12.3%. The following table shows
other income as a percentage of divisional sales:
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
1999 1998 1999 1998
------------------------- -------------------------
Heilig-Meyers 15.2% 16.5% 16.5% 18.5%
The RoomStore 1.3 2.2 1.2 1.7
Operations held
for sale 11.2 12.0 13.1 13.8
Chicago market -- 20.1 21.3 19.3
Rhodes -- 4.7 6.1 4.7
Mattress
Discounters -- 0.2 0.1 0.2
Within the Heilig-Meyers format, other income decreased 1.3% as a
percentage of sales for the quarter and 2.0% of sales year-to-date. The decrease
is due to an increase in the amount of receivables that have been securitized
and the elimination of the previous revolving credit card program in September
1998. Within The RoomStore division, other income decreased as a percentage of
sales 0.9% for the quarter and 0.5% year-to-date due to the concentration of
total sales growth compared to the prior year.
Costs and Expenses
Costs of sales for those divisions which were under the Company's ownership
for the full quarter decreased to 65.4% from 65.8% of sales in the prior year
quarter. For the nine months ended November 30, 1999, costs of sales for these
divisions decreased as a percentage of sales to 65.5% from 66.2% in the prior
year. On a consolidated basis, cost of sales decreased to 65.5% for the quarter
from 66.4% in the prior year quarter. For the nine month period ended November
30, 1999, cost of sales decreased to 65.8% from 66.9% in the prior year. The
following table shows the costs of sales as a percentage of divisional sales:
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
1999 1998 1999 1998
------------------------ -------------------------
Heilig-Meyers 65.2% 65.5% 65.6% 66.2%
The RoomStore 68.1 70.7 67.8 68.9
Operations held
for sale 62.5 63.0 62.0 62.6
Chicago market -- 67.2 66.2 69.8
Rhodes -- 70.8 70.6 71.7
Mattress
Discounters -- 61.6 62.2 62.1
The costs of sales in the Heilig-Meyers division decreased 0.3% as a
percentage of sales from the prior year quarter and 0.6% as a percentage of
sales from the prior year-to-date as a result of cost control efforts primarily
in the warehouse and delivery areas. The decrease in costs of sales in The
RoomStore division was primarily due to an increase in raw selling margins.
Selling, general and administrative expenses for those divisions which were
under the Company's ownership for the full quarter increased to 36.6% from 35.4%
of sales in the prior year quarter. For the nine months ended November 30, 1999,
selling, general and administrative expenses for these divisions increased as a
percentage of sales to 37.4% from 36.6% in the prior year. On a consolidated
basis, selling, general and administrative expenses increased to 37.1% for the
quarter from 35.7% in the prior year quarter. For the nine month period ended
November 30, 1999, selling, general and administrative expenses increased to
14
37.1% from 36.0% in the prior year. The following table displays selling,
general and administrative expense as a percentage of the applicable division's
sales:
Three Months Ended Nine Months Ended
November 30, November 30, November 30, November 30,
1999 1998 1999 1998
------------------------ -------------------------
Heilig-Meyers 38.6% 36.8% 39.0% 37.6%
The RoomStore 28.2 30.2 28.3 29.8
Operations held
for sale 34.4 32.1 39.0 36.9
Chicago market -- 49.1 75.5 44.9
Rhodes -- 38.0 37.1 37.7
Mattress
Discounters -- 29.4 26.9 27.2
Selling, general and administrative expenses as a percentage of sales for
the Heilig-Meyers division increased 1.8% as a percentage of sales as compared
to the prior year quarter and 1.4% as a percentage of sales as compared to the
prior year nine month period. This increase is primarily attributable to
increases in employee and casualty insurance expense and the loss of sales
leverage on other fixed costs due to lower than planned sales growth. Selling,
general and administrative expenses in The RoomStore division decreased 2.0% as
a percentage of sales versus the prior year quarter and decreased 1.5% versus
the prior year nine month period. The decreases in The RoomStore division are
primarily due to sales leverage gained from total sales growth.
Interest expense was 2.6% and 2.9% of sales in the third quarters of
fiscal years 2000 and 1999, respectively with the effect of lower debt levels
being partially offset by higher interest rates. For the quarter, weighted
average long-term debt decreased to $557.7 million from $708.8 million in the
prior year third quarter. The decrease in long-term debt levels between years is
a result of repayments made on $20.0 million of private placement debt in the
third quarter of fiscal 1999 and $129.2 million paydown of long-term debt in the
first and second quarters of fiscal 2000. Weighted average long-term interest
rates increased to 8.2% from 7.6% in the prior year. Weighted average short-term
debt decreased to $103.4 million from $254.0 million in the prior year. This
decrease was the result of the use of proceeds from divestitures to paydown
notes payable. Weighted average short-term interest rates increased to 7.2% from
6.1% in the prior year. For the nine month period ended November 30, 1999,
interest expense increased to 3.2% of sales from 3.1% in the prior year.
The reduction in the sales contribution of Rhodes, Mattress Discounters and
the 18 stores in the Chicago market caused the provision for doubtful accounts
to increase for the third quarter, as a percentage of sales to 5.9% from 4.7% in
the prior year quarter. For the nine month period ended November 30, 1999, the
provision increased to 4.7% from 4.1% in the prior year. For those stores
offering installment credit, the provision was 6.9% and 7.7% of sales for the
third quarters of fiscal years 2000 and 1999 and 6.6% and 6.9% for the nine
months ended November 30, 1999 and 1998.
The effective income tax rate was 37.3% for the third quarter ended
November 30, 1999. For the nine months ended November 30, 1999, the divestiture
activity caused the provision for income taxes to be an expense of $24.8 million
on a pre-tax loss of $38.2 million. Because the Company's tax basis in the
Mattress Discounters division was minimal, the sale of the division resulted in
a tax gain significantly in excess of the gain recorded for financial reporting
purposes. Before divestiture activity, the effective income tax rate from
operations for the nine-month period ended November 30, 1999 was 36.1% compared
to 36.2% in the prior year. The Company continues to analyze and evaluate
alternative strategies available to estimate its tax basis in divested assets.
The results of such analysis are expected to be completed in the fourth quarter
ending February 29, 2000.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its cash position $58.6 million to $8.7 million at
November 30, 1999 from $67.3 million at February 28, 1999.
Net cash from operating activities produced negative cash flows of $16.5
million during the nine months ended November 30, 1999, compared to an inflow of
$157.3 million in the comparable period of the prior year. The prior year amount
includes a cash inflow of $100.0 million from the sale of accounts receivable
through the Company's asset securitization program. Continued extension of
credit and related increases in customer accounts receivable will likely produce
minimal or negative cash flow from operations in the upcoming fiscal 2000
quarter.
Investing activities produced cash flows of $245.4 million during the nine
months ended November 30, 1999 compared to negative cash flows of $66.3 million
in the prior year period. The increase in cash flows from investing activities
is primarily due to cash proceeds received from the sale of Rhodes, Mattress
Discounters, and the 18 stores in the Chicago market, as well as a decrease in
additions to property and equipment during the period and a decrease in
miscellaneous investments. Cash used for miscellaneous investments during the
nine months ended November 30, 1998 includes deposits paid by the Company
related to the change in the lessor of certain leased real estate.
Financing activities produced negative cash flows of $287.4 million during
the nine months ended November 30, 1999 compared to a negative cash flow of
$121.0 million in the prior year period. The increase in negative cash flows
from financing activities in the current year period is due to the payments of
debt from the proceeds of the sale of Rhodes, Mattress Discounters, and the 18
stores in the Chicago market. In June 1997, the Company and a wholly-owned
subsidiary filed a joint Registration Statement on Form S-3 with the Securities
and Exchange Commission relating to up to $400.0 million aggregate principal
amount of securities. There were no issuances of debt pursuant to the joint
Registration Statement during the nine months ended November 30, 1999. As of
November 30, 1999, long-term notes payable with an aggregate principal amount of
$175.0 million securities have been issued to the public under this Registration
Statement. As of November 30, 1999, the Company had a $200.0 million revolving
credit facility in place, which expires in July 2000. This facility includes ten
banks and had $91.2 million outstanding and $108.8 million undrawn as of
November 30, 1999.
As a result of the losses incurred during the current fiscal year due to
the write down of assets held for sale, the Company amended certain debt
agreements in the third quarter in order to maintain covenant compliance.
Total debt as a percentage of debt and equity was 54.3% at November 30,
1999, compared to 60.4% at February 28, 1999. This decrease is primarily due to
the paydown of debt from proceeds of divested subsidiaries as well as the write
down of assets held for sale. The current ratio was 2.3X at November 30, 1999,
compared to 1.5X at February 28, 1999. The increase in the current ratio is due
to the paydown of debt and the reclassification of assets held for sale.
16
OTHER INFORMATION
Year 2000 Issue
The Year 2000 issue arises because many computer programs use two digits
rather than four to define the applicable year. Using two digits could result in
system failure or miscalculations that cause disruptions of operations. In
addition to computer systems, any equipment with embedded technology that
involves date sensitive functions is at risk if two digits have been used rather
than four.
During fiscal year 1997, management established a team to oversee the
Company's Year 2000 date conversion project. The project is composed of the
following stages: 1) assessment of the problem, 2) prioritization of systems, 3)
remediation activities and 4) compliance testing. A plan of corrective action
using both internal and external resources to enhance or replace the systems for
Year 2000 compliance has been implemented. Internal resources consist of
permanent employees of the Company's Information Systems department, whereas
external resources are composed of contract programming personnel that are
directed by the Company's management. The team has continued to assess the
systems of subsidiaries as the Company has expanded. Management completed the
remediation stage for the critical systems of the Heilig-Meyers operations
during fiscal year 1999. Remediation for all other subsidiaries' critical
systems was completed in the second quarter of fiscal year 2000. The testing
stage for critical systems within the entire Company was also completed in the
second quarter of fiscal year 2000. The audit phase for this testing began in
the second quarter and continued into the third quarter of fiscal year 2000.
Since the project's beginning in fiscal 1997, the Company has incurred
approximately $3.0 million in expenses in updating its management information
system to alleviate potential year 2000 problems. These expenditures represent
personnel costs related to software remediation of major impact systems,
auditing costs, software upgrade costs, software testing costs, and contingency
planning costs. The Company had previously initiated a hardware upgrade plan for
desktop computers that was independent of the Year 2000 issue, and, therefore,
most hardware upgrades were completed under this plan.
The team has communicated with other companies, on which the Company's
systems rely and has obtained compliance letters from these entities. There can
be no assurance, however, that the systems of these other companies will be
converted in a timely manner, or that any such failure to convert by another
company would not have an adverse effect on the Company's systems.
The Company has assessed the consequences of its Year 2000 remediation
efforts not being successful. Management has developed contingency plans to
mitigate the effects of problems experienced by the Company, key vendors or
service providers related to the Year 2000. Management ranked suppliers based on
how critical each supplier is believed to be to the Company's operations. The
Company requested a copy of the Year 2000 project plan under which these
suppliers are operating. The Company's Year 2000 project team has reviewed these
plans. To date the Company has not experienced any problems due to the Year 2000
issue. Management believes the Year 2000 compliance issue has been addressed
properly by the Company to prevent any material adverse operational or financial
impacts.
17
FORWARD-LOOKING STATEMENTS
Certain statements included above are not based on historical facts, but
are forward-looking statements. These statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy. These statements
reflect the Company's reasonable judgments with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the customer's willingness, need
and financial ability to purchase home furnishings and related items, the
Company's ability to extend credit to its customers, the costs and effectiveness
of promotional activities, the Company's access to, and cost of, capital, and
the Company's ability to attract buyers and obtain satisfactory valuations for
certain assets held for sale. Payments under guarantees of Rhodes leases or
other obligations or the standby credit facility as a result of lower than
expected Rhodes operating results or defaults by Rhodes could impact the outcome
of forward looking statements. Other factors such as changes in tax laws,
consumer credit and bankruptcy trends, recessionary or expansive trends in the
Company's markets, the ability of the Company, its key vendors and service
providers to effectively correct the Year 2000 issue, and inflation rates and
regulations and laws which affect the Company's ability to do business in its
markets may also impact the outcome of forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosure on this matter made in our
Report on Form 10-K for the year ended February 28, 1999. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in
the Registrants Annual Report on Form 10-K for the year ended February 28, 1999.
18
PART II
Item 1. Legal Proceedings
The Company previously reported involvement in two cases pending in state
court regarding non-filing fees charged by the Company on certain credit
transactions. Non-filing fees are used to obtain insurance in lieu of filing a
financing statement to perfect a security interest in connection with a credit
transaction. The plaintiffs in the cases alleged that the Company's charging of
the non-filing fees violated certain state and federal statutes and sought
statutory damages and unspecified punitive damages. Wahl v. Heilig-Meyers
Company and Heilig-Meyers Furniture Company (alleging violations of Tennessee
statutes and seeking certification of a class of certain individuals who made
purchases in the Company's Tennessee stores) was filed on June 23, 1997 in
Memphis, Tennessee Chancery Court. On March 23, 1999, the court in Wahl entered
an order dismissing the case with prejudice. Eubanks v. Heilig-Meyers Company
and Heilig-Meyers Furniture Company (alleging violation of Georgia statutes and
seeking certification of a class of Georgia residents) was filed on March 5,
1997 in Georgia State Court, subsequently removed to United States District
Court for the Southern District of Georgia, and on July 7, 1997, remanded to the
Superior Court of Liberty County, Georgia. On March 25, 1998, the court in
Eubanks entered an order dismissing the case. The Eubanks case was refiled on
June 23, 1998 and on November 18, 1999, the court in Eubanks granted summary
judgment in favor of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See INDEX TO EXHIBITS
(b) There was one Current Report on Form 8-K filed during the
quarterly period ended November 30, 1999. On September 27, 1999,
Registrant filed a Form 8-K in which it reported that the Company
was exiting certain furniture stores located in the Chicago,
Illinois and Milwaukee, Wisconsin markets. The Registrant also
reported results for the second quarter ended August 31, 1999.
INDEX TO EXHIBITS
Exhibit
Number Description Page
------- -------------------------------------------------------
3 Bylaws of the Registrant 21
10.1 Amendment No. 8 dated as of September 24, 1999
to the Credit Agreement dated as of July 18,
1995 among MacSaver Financial Services, Inc.,
Heilig-Meyers Company, Wachovia Bank, N.A. and
Bank of America, N.A. 26
10.2 Employment Agreement between Donald S. Shaffer
and Heilig-Meyers Company dated as of September
22, 1999 30
27 Financial Data Schedule 38
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Heilig-Meyers Company
(Registrant)
Date: January 14, 2000 /s/Roy B. Goodman
----------------------------
Roy B. Goodman
Executive Vice President and
Principal Financial Officer
Date: January 14, 2000 /s/Thomas F. Crump
----------------------------
Thomas F. Crump
Senior Vice President,
Controller
20