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 May 31, 1997 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 .
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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.)
2235 Staples Mill Road, Richmond, Virginia 23230 .
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(Address of principal executive offices) (Zip Code)
(804) 359-9171 .
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(Registrant's telephone number, including area code)
.
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(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 1, 1997.
56,999,511 shares of Common Stock, $2.00 par value.
HEILIG-MEYERS COMPANY
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for
Three Months Ended May 31, 1997
and May 31, 1996 (Unaudited) 3
Consolidated Balance Sheets as of May 31, 1997
(Unaudited), and February 28, 1997 (Audited) 4
Consolidated Statements of Cash Flows for
Three Months Ended May 31, 1997 and
May 31, 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 13
2
PART I
ITEM 1. FINANCIAL STATEMENTS
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended
May 31,
------------------
1997 1996
-------- --------
Revenues:
Sales $489,040 $300,691
Other income 77,285 57,223
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Total revenues 566,325 357,914
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Costs and Expenses:
Costs of sales 319,982 193,714
Selling, general and
administrative 185,987 115,458
Interest 15,428 10,591
Provision for doubtful
accounts 22,928 18,943
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Total costs and expenses 544,325 338,706
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Earnings before provision for
income taxes 22,000 19,208
Provision for income taxes 8,239 6,837
-------- --------
Net earnings $ 13,761 $ 12,371
======== ========
Net earnings per share of common stock:
Primary and fully diluted $0.25 $0.25
======== ========
Cash dividends per share of
common stock $0.07 $0.07
======== ========
See notes to consolidated financial statements.
3
HEILIG-MEYERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
May 31, February 28,
1997 1997
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 21,848 $ 14,959
Accounts receivable, net 623,963 596,959
Inventories 443,259 433,277
Other current assets 80,918 88,862
---------- ----------
Total current assets 1,169,988 1,134,057
Property and equipment, net 394,429 366,749
Other assets 47,375 42,262
Excess costs over net assets acquired, net 294,517 294,090
---------- ----------
$1,906,309 $1,837,158
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 207,700 $ 156,000
Long-term debt due within
one year 91,895 100,413
Accounts payable 163,448 160,857
Accrued expenses 175,846 166,650
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Total current liabilities 638,889 583,920
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Long-term debt 560,912 561,489
Deferred income taxes 54,121 49,128
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
54,414 and 48,596, respectively) 108,830 108,828
Capital in excess of par value 195,374 195,352
Unrealized gain on investments 10,797 10,797
Retained earnings 337,386 327,644
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Total stockholders' equity 652,387 642,621
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$1,906,309 $1,837,158
========== ==========
See notes to consolidated financial statements.
4
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended
May 31,
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1997 1996
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Cash flows from operating activities:
Net earnings $ 13,761 $ 12,371
Adjustments to reconcile net
earnings to net cash used by
operating activities:
Depreciation and amortization 12,572 7,999
Provision for doubtful accounts 22,928 18,943
Other, net 116 (176)
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable (51,300) (42,555)
Other receivables 7,009 (2,139)
Inventories (8,372) (24,885)
Prepaid expenses 917 (3,797)
Accounts payable 2,591 26,550
Accrued expenses 13,587 3,462
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Net cash provided (used)
by operating activities 13,809 (4,227)
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Cash flows from investing activities:
Acquisitions, net of cash acquired (2,961) (2,088)
Additions to property and equipment (38,864) (15,251)
Disposals of property and equipment 2,174 353
Miscellaneous investments (5,879) (4,670)
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Net cash used by investing
activities (45,530) (21,656)
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Cash flows from financing activities:
Net increase in notes payable 51,700 31,300
Payments of long-term debt (9,095) (7,638)
Issuance of common stock 24 246
Dividends paid (4,019) (3,402)
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Net cash provided
by financing activities 38,610 20,506
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Net increase (decrease) in cash 6,889 (5,377)
Cash at beginning of period 14,959 16,017
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Cash at end of period $ 21,848 $ 10,640
========= ========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997. 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
1997 Annual Report on Form 10-K. The results for the first quarter of
fiscal year 1998 are not necessarily indicative of future financial
results.
B. On April 2, 1997, the Board of Directors declared a cash dividend of $0.07
per share which was paid on May 17, 1997, to stockholders of record on
April 23, 1997.
C. Accounts receivable are shown net of the allowance for doubtful accounts
and unearned finance income. The allowance for doubtful accounts was
$47,149,000 and $41,120,000 and unearned finance income was $46,596,000 and
$44,356,000 at May 31, 1997, and February 28, 1997, respectively.
D. The Company made income tax payments of $4,584,872 and $- during the three
months ended May 31, 1997, and May 31, 1996, respectively.
E. The Company made interest payments of $9,342,000 and $10,577,000 during the
three months ended May 31, 1997, and May 31, 1996, respectively.
F. MacSaver Financial Services, 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 aggregate principal amount of
installment credit accounts generated by the Company's operating
subsidiaries. The payment of principal and interest associated with this
debt is guaranteed by the Parent 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 Financial Services is as follows:
6
MacSaver Financial Services
Summarized Statement of Earnings
(Amounts in thousands)
(Unaudited)
Three Months Ended
May 31,
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1997 1996
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Net revenues $ 59,243 $ 22,836
Operating expenses 54,050 12,905
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Earnings before taxes 5,193 9,931
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Net earnings 3,375 6,455
======== ========
MacSaver Financial Services
Summarized Balance Sheet
(Amounts in thousands)
May 31, February 28,
1997 1997
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(Unaudited) (Audited)
Current assets $ 35,210 $ 36,401
Accounts receivable, net 499,409 454,774
Due to affiliates 510,681 504,763
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Total Assets $1,045,300 $ 995,938
========== ==========
Current liabilities 123,206 128,921
Long-term debt 545,000 545,000
Notes payable 207,700 156,000
Stockholder's equity 169,394 166,017
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Total Liabilities and Equity $1,045,300 $ 995,938
========== ==========
G. In February 1997, the Financial Accounting Standards Board issued
Statement on Financial Accounting Standards (SFAS) No. 128 on "Earnings
per Share". The Statement changes the computation, presentation and
disclosure requirements for earnings per share in financial statements
for periods ending after December 15, 1997. Basic earnings per share
will not include stock options as common stock equivalents and will,
therefore, be higher than previously reported primary earnings per
share. Diluted earnings per share will equal previously reported
primary earnings per share under the Company's current capital
structure. Pro forma disclosure of basic EPS and diluted EPS for the
current reporting period and comparable period in the prior year is as
follows (in thousands except per share data):
(Unaudited)
Three Months Ended
May 31,
1997 1996
----------------
Average shares outstanding
(basic earnings per share) 54,414 48,584
Stock option equivalents 833 1,096
Average shares and equivalents 55,247 49,680
(diluted earnings per share)
Basic EPS $0.25 $0.25
Diluted EPS $0.25 $0.25
7
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 Company's audited
consolidated financial statements and notes thereto for the fiscal year ended
February 28, 1997.
RESULTS OF OPERATIONS
Total revenues for the quarter rose 58.2% to $566.3 million from $357.9
million in the prior year. Of the increase between periods, $141.5 million
relates to the recent acquisitions of Rhodes and The RoomStore. Excluding Rhodes
and The RoomStore, total revenues for the quarter increased 18.7% from the prior
year. Net earnings increased 11.2% to $13.8 million (or $0.25 per share) from
$12.4 million (or $0.25 per share) in the prior year.
Sales for the first quarter of fiscal 1998 increased 62.6% to $489.0
million from $300.7 million in the first quarter of the prior year. The overall
increase in sales was primarily attributable to an increase in operating units
from May 31, 1996 to May 31, 1997, and a comparable store sales increase of 3.4%
for the three months ended May 31, 1997. The Company's Heilig-Meyers stores
provided 67% of total sales for the first quarter of fiscal 1998, or $325.7
million, representing a 17.7% increase in sales over the same period of the
prior year. The Company's 32 Puerto Rican stores, which operate under the
"Berrios" name, contributed $28.5 million, or 6% of total sales. Sales also
include the results from the recently acquired Rhodes and The RoomStore units.
During the quarter the conversion of 8 Rhodes units to The RoomStore format was
begun and is expected to be completed during the third quarter. The 99 Rhodes
stores contributed $111.5 million, or 23% of total sales. The 18 RoomStore units
contributed $19.1 million, or 4% of total sales. Price changes had an immaterial
impact on the overall sales increase for the quarter. Management believes the
consumer demand for home furnishings remained relatively unchanged from the
prior year quarter and that demand has been impacted by an overall rise
in consumer debt levels. As a result, the Company is anticipating modest same
store sales increases in the upcoming quarters.
As a percentage of sales, other income decreased during the first quarter
to 15.8% from 19.0% in the prior year quarter. This decrease is primarily the
result of the effect of the Rhodes' and The RoomStore's operations, as these
stores' credit programs are maintained by a third party and, accordingly, do not
produce finance income for the Company. To a lesser extent, a higher level of
securitized accounts receivable as compared to the prior year also affected the
results. Excluding the results of Rhodes and The RoomStore, other income for the
first quarter represented 18.5% of sales.
The Company offers third party private label credit card programs to
customers of the Rhodes and The RoomStore locations and plans to continue its
program of periodically securitizing a portion of the installment accounts
receivable portfolio of its other stores. Proceeds from securitized accounts
receivable are generally used by the Company to lower debt levels. Interest
costs related to securitized receivables, which are based on the dollar value of
accounts receivable sold to third parties, are netted against finance income.
Costs and Expenses
Costs of sales increased during the quarter to 65.4% of sales from
64.4% in the prior year quarter. This increase was primarily the result of
8
higher distribution costs and lower raw selling margins as a percentage of
sales. A new distribution center in Athens, Texas began servicing stores in
March 1997 and was at approximately 40% capacity at the end of the first quarter
of fiscal 1998. The facility serviced approximately 50 stores during the quarter
while it is designed to service approximately 130 stores. Raw selling margins,
particularly in the Heilig-Meyers stores, were impacted by a shift in sales mix
to lower margin goods.
Selling, general and administrative expense decreased as a percentage of
sales to 38.0% from 38.4% in the prior year quarter. The decrease between years
was the result of leverage gained on the sales at the Rhodes and The RoomStore
units. The Rhodes and The RoomStore units have generally lower levels of
administrative costs as a percentage of sales than the Heilig-Meyers units as
these stores' revolving credit extension and collections are maintained by
third-party credit providers. However, the decrease caused by the Rhodes and The
RoomStore leverage was somewhat offset by the Heilig-Meyers stores' continued
commitment of additional resources to collection efforts which resulted in
higher salaries as a percentage of sales than the prior year quarter.
Advertising increased slightly as a percentage of sales due to increased
circular distribution.
Interest expense decreased to 3.2% of sales in the first quarter of fiscal
1997 from 3.5% of sales in the first quarter of the prior year. The decrease is
mainly due to leverage on the sales of Rhodes and The RoomStore, which were
purchased with common stock. For the quarter, weighted average long-term debt
increased to $641.5 million from $364.4 million in the prior year first quarter.
The Company issued approximately $300 million in public debt in the last half of
fiscal 1997 as part of the financing strategy discussed below. Weighted average
long-term interest rates remained consistent at 7.8% between periods. Weighted
average short-term debt decreased to $175.0 million from $180.6 million in the
prior year. Weighted average short-term interest rates increased to 6.0% from
5.7% in the prior year. The Company has focused on structuring its debt
portfolio to contain a higher percentage of long-term fixed rate debt. This
strategy is designed to minimize the Company's exposure to significant changes
in short-term interest rates.
The provision for doubtful accounts decreased for the first quarter, as a
percentage of sales, to 4.7% from 6.3% in the prior year quarter. The decrease
was the result of the operations of Rhodes and The RoomStore as these units do
not offer in-house credit. Excluding the effect of Rhodes and The RoomStore, the
provision was 6.4% of sales for the first quarter.
The effective income tax rate for the first quarter of fiscal 1998 was
37.5% compared to 35.6% for the first quarter of fiscal 1997. This increase is
due to higher effective tax rates of recently acquired operating subsidiaries
resulting from the carryover tax attributes of acquired assets and liabilities.
Management believes that the consolidated effective rate for the remainder of
the year will more closely align with the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its cash position $6.9 million to $21.8 million at
May 31, 1997, from $14.9 million at February 28, 1997, compared to a decrease of
$5.4 million in the comparable period a year ago.
9
Net cash inflow from operating activities was $13.8 million, compared to a
net cash outflow of $4.2 million in the comparable period of the prior year. As
the Company continued to expand its store base, cash flows used for investing
activities exceeded cash provided by operating activities for the first quarters
of fiscals 1998 and 1997. The Company traditionally produces minimal or negative
cash flow from operating activities because it extends in-house credit in its
Heilig-Meyers and Berrios stores. During the quarter, inventory levels increased
at a slower rate than the prior year quarter primarily due to the sale of
inventory from the recent acquisitions as well as the sales increase in the
quarter. There was a corresponding smaller increase in the Company's payable
accounts as a result of the lower levels of inventory purchases. 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 1998 quarters. However, the Company periodically sells accounts
receivable as a source of liquidity, providing additional positive cash flows
from operating activities.
Investing activities produced negative cash flows of $45.5 million during
the first quarter of fiscal 1998 compared to negative cash flows of $21.7
million in the prior year first quarter. The increase in negative cash flows
from investing activities is primarily due to an increase in additions to
property and equipment during the period. Cash used for additions to property
and equipment resulted from the opening of 26 new store locations and related
support facilities as well as the remodeling and improvement of existing and
acquired locations. The Company plans to open approximately 80 new Heilig-Meyers
stores during fiscal 1998 as well as continue its existing store remodeling
program. Capital expenditures will continue to be financed by cash flows from
operations and external sources of funds.
Financing activities produced positive cash flows of $38.6 million during
the first quarter of fiscal 1998 compared to a $20.5 million positive cash flow
in the prior year first quarter. The positive cash flow from financing
activities in both the current and prior year quarters was due to an increase in
notes payable. As of May 31, 1997, long-term notes payable with an aggregate
principal amount of $300.0 million have been issued to the public and are
outstanding under this facility. On June 24, 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. No securities have been issued under
this registration statement as of July 1, 1997. The Company has access to a
variety of external capital sources to finance asset growth and plans to
continue to finance accounts receivable, inventories and future expansion from
operating cash flows supplemented by other sources of capital. As of May 31,
1997, the Company had a $400.0 million revolving credit facility in place which
expires in July 2000. This facility includes fourteen banks and had $195.0
million outstanding and $205.0 million unused as of May 31, 1997. The Company
also had additional lines of credit with banks totaling $60.0 million of which
$47.3 million was unused as of May 31, 1997.
Total debt as a percentage of debt and equity was 56.9% at May 31,
1997, compared to 56.0% at February 28, 1997. The current ratio was 1.8 at May
31, 1997, compared to 1.9 at February 28, 1997. The decrease in the current
ratios and increase in total debt as a percentage of debt and equity from
February 28, 1997 to May 31, 1997 is primarily attributed to a $51.7 million
increase in notes payable.
10
Acquisition
On July 1, 1997, the Company acquired Mattress Discounters, a privately
held bedding retailer and manufacturer based in Upper Marlboro, Maryland. The
acquisition is being accounted for as a purchase and was accomplished through
the issuance of 2,269,839 shares of common stock. In addition, 264,550 shares of
common stock were placed in escrow to be paid to the former shareholders of
Mattress Discounters if the acquired stores meet certain earnings targets in the
twelve months subsequent to the acquisition. Mattress Discounters is the
nation's largest retail bedding specialist with revenues of approximately $175
million for its fiscal year ended December 28, 1996. As of July 1, 1997,
Mattress Discounters had 169 stores in ten states and Washington, D.C.
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 ability to realize cost savings and
other synergies from recent acquisitions as well as the Company's access to, and
cost of, capital. Other factors such as changes in tax laws, recessionary or
expansive trends in the Company's markets, 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.
11
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company previously reported involvement in certain cases regarding non-
filing fees charged by the Company on certain credit transactions as set forth
in the Company's Annual Report on Form 10-K for the fiscal year ended February
28, 1997. In addition, on June 23, 1997, Wahl v. Heilig-Meyers Company and
Heilig-Meyers Furniture Company was filed in Memphis, Tennessee Chancery Court.
The plaintiff in this case seeks certification of a class of certain
individuals who made purchases in the Company's Tennessee stores, alleges
violation of Tennessee statutes, and seeks statutory damages and unspecified
punitive damages.
12
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 May 31, 1997. On April 10,
1997, Registrant filed a Form 8-K in which it
reported the public offering on February 20, 1997 by
MacSaver Financial Services, Inc. of $100 million
aggregate principal amount of 7.40% Notes due
February 15, 2002, guaranteed as to payment of
principal and interest by Registrant.
INDEX TO EXHIBITS
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10. Contracts
a. Amended and Restated Guaranty by the Registrant,
dated as of May 9, 1997, of certain obligations
under the Amended and Restated Merchant Agreement
by and among Beneficial National Bank USA, HMY
RoomStore, Inc. and Rhodes, Inc., dated
as of May 9, 1997. 15
11. Computation of Per Share Earnings 18
27. Financial Data Schedule 19
13
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: July 11, 1997 /s/Roy B. Goodman
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Roy B. Goodman
Senior Vice President and
Principal Financial Officer
Date: July 11, 1997 /s/William J. Dieter
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William J. Dieter
Senior Vice President,
Accounting and Principal
Accounting Officer
14