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, 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.)
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 January 1, 1998.
57,051,296 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, 1997
and November 30, 1996 (Unaudited) 3
Consolidated Balance Sheets as of November 30, 1997
(Unaudited), and February 28, 1997 (Audited) 4
Consolidated Statements of Cash Flows for
Nine Months Ended November 30, 1997 and
November 30, 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
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,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues:
Sales $602,004 $351,725 $1,606,205 $ 939,406
Other income 76,464 61,749 228,799 175,506
--------- -------- ---------- ---------
Total revenues 678,468 413,474 1,835,004 1,114,912
--------- -------- ---------- ---------
Costs and Expenses:
Costs of sales 399,208 228,111 1,063,151 613,032
Selling, general and
administrative 233,566 135,808 613,367 362,445
Interest 16,494 11,850 48,023 33,415
Provision for doubtful
accounts 104,667 23,004 149,528 60,027
--------- -------- ---------- ---------
Total costs
and expenses 753,935 398,773 1,874,069 1,068,919
--------- -------- ---------- ---------
Earnings (loss) before
provision for income taxes (75,467) 14,701 (39,065) 45,993
Provision (benefit)
for income taxes (26,345) 5,209 (12,983) 16,384
--------- ------- ---------- --------
Net earnings (loss) $(49,122) $ 9,492 $ (26,082) $ 29,609
========= ======== =========== ========
Net earnings (loss) per
share of common stock:
Primary and fully diluted $ (0.85) $ 0.19 $ (0.46) $ 0.60
========= ======== =========== ========
Cash dividends per share of
common stock $ 0.07 $ 0.07 $ 0.21 $ 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,
1997 1997
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 17,370 $ 14,959
Accounts receivable, net 646,964 596,959
Inventories 513,599 433,277
Other current assets 142,846 88,862
---------- ----------
Total current assets 1,320,779 1,134,057
Property and equipment, net 396,778 366,749
Other assets 53,146 42,262
Excess costs over net assets acquired, net 350,878 294,090
---------- ----------
$2,121,581 $1,837,158
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 252,900 $ 156,000
Long-term debt due within
one year 22,222 100,413
Accounts payable 229,880 160,857
Accrued expenses 204,062 166,650
---------- ----------
Total current liabilities 709,064 583,920
---------- ----------
Long-term debt 715,345 561,489
Deferred income taxes 50,098 49,128
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
56,787 and 54,414, respectively) 113,573 108,828
Capital in excess of par value 234,686 195,352
Unrealized gain on investments 9,367 10,797
Retained earnings 289,448 327,644
---------- ----------
Total stockholders' equity 647,074 642,621
---------- ----------
$2,121,581 $1,837,158
========== ==========
See notes to consolidated financial statements.
4
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
November 30,
-----------------
1997 1996
---- ----
Cash flows from operating activities:
Net earnings (loss) $ (26,082) $ 29,609
Adjustments to reconcile net
earnings (loss) to net cash used
by operating activities:
Depreciation and amortization 39,451 24,073
Provision for doubtful accounts 149,528 60,027
Other, net 3,023 406
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable (197,606) (161,199)
Other receivables (56,895) 249
Inventories (71,816) (32,164)
Prepaid expenses 517 (4,965)
Accounts payable 46,604 33,859
Accrued expenses 28,298 27,276
--------- ---------
Net cash used by
operating activities (84,978) (22,829)
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (10,826) (52,979)
Additions to property and equipment (59,463) (53,321)
Disposals of property and equipment 8,035 980
Miscellaneous investments (11,097) (9,139)
--------- ---------
Net cash used by investing
activities (73,351) (114,459)
--------- ---------
Cash flows from financing activities:
Net increase (decrease)
in notes payable 96,900 (36,250)
Proceeds from long-term debt 174,767 199,612
Payments of long-term debt (99,789) (22,666)
Issuance of common stock 976 709
Dividends paid (12,114) (10,276)
--------- ---------
Net cash provided
by financing activities 160,740 131,129
Net increase (decrease) in cash 2,411 (6,159)
Cash at beginning of period 14,959 16,017
--------- ---------
Cash at end of period $ 17,370 $ 9,858
========= =========
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 third quarter of
fiscal year 1998 are not necessarily indicative of future financial
results.
B. On October 15, 1997, the Board of Directors declared a cash dividend of
$0.07 per share which was paid on November 22, 1997, to stockholders of
record on November 5, 1997.
C. Accounts receivable are shown net of the allowance for doubtful accounts
and unearned finance income. The allowance for doubtful accounts was
$113,166,000 and $41,120,000 and unearned finance income was $59,576,000
and $44,356,000 at November 30, 1997, and February 28, 1997, respectively.
D. The Company made income tax payments of $108,000 and $16,204,000 during the
three months ended November 30, 1997, and November 30, 1996, respectively.
E. The Company made interest payments of $7,749,000 and $7,748,000 during the
three months ended November 30, 1997, and November 30, 1996, respectively.
F. On July 1, 1997, the Company acquired all of the outstanding capital stock
of Mattress Discounters Corporation and a related corporation ("Mattress
Discounters"). The Company issued 2,269,839 shares of common stock and
placed 264,550 shares of common stock in escrow to be released to the
former shareholders of Mattress Discounters if the acquired stores meet
certain earnings targets in the twelve months following the acquisition.
G. MacSaver Financial Services, Inc. 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 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 Statements of Operations
(Amounts in thousands)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
--------- ------- --------- --------
Net revenues $ 66,787 $39,521 $189,752 $114,242
Operating expenses 120,369 26,347 228,702 76,162
--------- ------- --------- --------
Earnings (loss)
before taxes (53,582) 13,174 (38,950) 38,080
--------- ------- --------- --------
Net earnings (loss) $(34,828) $ 8,563 $(25,317) $ 24,752
========= ======= ========= ========
MacSaver Financial Services
Summarized Balance Sheets
(Amounts in thousands)
November 30, February 28,
1997 1997
---------- ----------
(Unaudited) (Audited)
Current assets $ 50,496 $ 36,401
Accounts receivable, net 552,026 454,774
Due to affiliates 551,149 504,763
---------- ----------
Total Assets $1,153,671 $ 995,938
========== ==========
Current liabilities $ 61,501 $ 128,921
Long-term debt 700,000 545,000
Notes payable 252,900 156,000
Stockholder's equity 139,270 166,017
---------- ----------
Total Liabilities and Equity $1,153,671 $ 995,938
========== ==========
H. In February 1997, the Financial Accounting Standards Board (FASB)issued
Statement of 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 may, 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) (Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1997 1996 1997 1996
------------------ ---------------
Average shares outstanding
(basic earnings per share) 56,786 48,623 55,730 48,571
Stock option equivalents 651 369 800 841
Contingently issuable shares
considered outstanding 127 0 42 0
Average shares and
equivalents 57,564 48,992 56,572 49,412
(diluted earnings per share)
Basic EPS $(0.87) $0.20 $(0.47) $0.61
Diluted EPS $(0.85) $0.19 $(0.46) $0.60
7
I. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which will be effective for the
Company's fiscal year ended February 28, 1999. SFAS No. 131 redefines how
operating segments are determined and requires disclosure of certain
financial and descriptive information about a company's operating segments.
Management has not yet completed its analysis of which operating segments
it will report on.
J. On December 17, 1997, the Company announced a profit improvement plan. The
plan has three main components: (1) expense reductions; (2) restructuring
of certain aspects of the business; and (3) Heilig-Meyers store operating
initiatives. The plan resulted from a comprehensive review of Company
operations. As a result of this review, the plan calls for the closing of
approximately 60 Heilig-Meyers stores, downsizing and consolidation of
non-store office and support facilities, a reorganization of the
Heilig-Meyers private label credit card program, and the development of
operating initiatives to improve the performance of the Heilig-Meyers
stores.
The majority of the stores to be closed are located in larger markets where
it is more difficult for the Heilig-Meyers small-town format to be success-
ful and where the store's location and size are not adequate for conversion
to another format. The Company expects to incur a charge of approximately
$37.4 million during the fourth quarter of fiscal 1998 related to the store
closing plan. The Company recorded charges of approximately $14.3 million
during the third quarter of fiscal 1998 to cover estimated losses from the
installment accounts serviced by these stores.
The plan also calls for cost reductions in administrative office and
distribution center facilities, primarily through personnel reductions and
consolidations. Approximately $6.5 million was charged during the third
quarter of fiscal 1998 related to these actions. The Company expects to
incur a charge of approximately $11.0 million during the fourth quarter of
fiscal 1998 primarily related to severance arrangements. The reorganization
of the Heilig-Meyers private label credit card program resulted in third
quarter charges of approximately $15.0 million. During the third quarter of
fiscal 1998, the Company incurred a $50.0 million increase in the provision
for doubtful accounts as a result of increased estimates of write-offs
within the installment account portfolio, $38.0 million of which is related
to customer accounts in bankruptcy.
8
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 64.1% to $678.5 million from
$413.5 million in the prior year. Approximately $219.7 million of this increase
can be attributed to the recently acquired Rhodes, The RoomStore and Mattress
Discounters operations. Excluding Rhodes, The RoomStore and Mattress
Discounters, total revenues for the quarter increased 10.9% from the prior year
primarily as a result of an increase in the number of Heilig-Meyers operating
units. The Company incurred a loss of $49.1 million (or a loss of $0.85 per
share) compared to earnings of $9.5 million (or earnings of $0.19 per share) in
the prior year. The Company incurred a loss of $26.1 million (or a loss of $0.46
per share) for the nine months ended November 30, 1997 compared to earnings of
$29.6 million (or earnings of $0.60 per share) in the prior year period. The
loss resulted primarily from the increase in the provision for doubtful accounts
as discussed in the profit improvement plan section below.
Sales for the third quarter of fiscal 1998 increased 71.2% to $602.0
million from $351.7 million in the third quarter of the prior year. For the nine
month period ended November 30, 1997, sales increased 71.0% to $1,606.2 million
from $939.4 million. Approximately $212.8 million and $515.6 million of this
increase resulted from the recently acquired Rhodes, The RoomStore and Mattress
Discounters operations for the third quarter and the nine months ended November
30, 1997, respectively. Excluding Rhodes, The RoomStore and Mattress
Discounters, total sales for the three and nine months ended November 30, 1997
increased 10.6% and 16.1%, respectively, from the prior year. The remaining
increase in sales for both periods was primarily attributable to an increase in
Heilig-Meyers operating units from November 30, 1996 to November 30, 1997, and a
comparable store sales increase of 1.8% and 2.7% for the three and nine months
ended November 30, 1997, respectively.
Through acquisitions, the Company now has five retail formats targeting
a wide range of markets. Sales for these formats were as follows:
Three Months Ended Nine months ended
November 30, 1997 November 30, 1997
------------------ -----------------
(Sales amounts in millions)
# of % of % of
Stores Sales Total Sales Total
------ ----- ----- ----- -----
Heilig-Meyers 864 $353.3 58.7 $ 999.6 62.2
Berrios 32 35.9 6.0 90.9 5.7
Rhodes 100 138.5 23.0 361.2 22.5
The RoomStore 23 27.2 4.5 71.4 4.4
Mattress Discounters 171 47.1 7.8 83.1 5.2
----- ------ ----- -------- -----
Total 1,190 $602.0 100.0 $1,606.2 100.0
===== ====== ===== ======== =====
Price changes had an immaterial impact on the overall sales increase
for the quarter. Management believes the consumer demand for home furnishings
9
remained relatively unchanged from the prior year quarter and that demand is
impacted by the high level of consumer debt.
As a percentage of sales, other income decreased during the third quarter
to 12.7% from 17.6% in the prior year quarter. For the nine months ended
November 30, 1997, other income decreased as a percentage of sales to 14.2% from
18.7% in the prior year. This decrease is primarily the result of the effect of
Rhodes, The RoomStore and Mattress Discounters operations, as these stores'
credit programs are maintained by a third party and, unlike the Heilig-Meyers
in-house program, do not produce finance income for the Company. Excluding the
results of Rhodes, The RoomStore and Mattress Discounters, other income
increased 0.4% of sales for the three months and was unchanged as a percentage
of sales for the nine months ended November 30, 1997.
The Company offers third party private label credit card programs to
customers of Rhodes and The RoomStore locations. The Company 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. Net servicing
income related to securitized receivables which have been sold to third parties
are included in other income.
Costs and Expenses
Costs of sales increased during the quarter to 66.3% of sales from
64.9% in the prior year quarter. For the nine month period ended November 30,
1997, costs of sales were 66.2% of sales as compared to 65.3% in the prior year.
These increases are the result of the liquidation of merchandise associated with
acquisitions, lower raw selling margins in the Heilig-Meyers stores, and reduced
leverage on distribution and occupancy costs, as a result of lower than expected
same store sales.
Selling, general and administrative expenses increased as a percentage of
sales to 38.8% from 38.6% in the prior year quarter. An increase in salaries and
related expenses as a percentage of sales from the prior year quarter was
partially offset by the leverage gained on the sales by acquired units discussed
below. For the nine month period ended November 30, 1997, selling, general and
administrative expenses were 38.2% compared to 38.6% in the prior year. The
decrease between years was the result of leverage gained on the sales at the
Rhodes, The RoomStore and Mattress Discounters units. Compared to the prior year
period, the addition of these units has resulted in a lower administrative cost
structure generally due to the use of third-party credit providers. However, the
decrease between periods caused by the Rhodes, The RoomStore and Mattress
Discounters leverage was somewhat offset by a higher level of administrative
salaries within the Heilig-Meyers stores. Management is instituting a profit
improvement plan, discussed further below, which includes the objective of
reducing certain selling, general and administrative expenses in future periods.
Interest expense decreased to 2.7% of sales in the third quarter of fiscal
1998 from 3.4% of sales in the third quarter of the prior year. The decrease is
mainly due to leverage on the sales by Rhodes, The RoomStore and Mattress
Discounters, which were purchased with common stock. For the quarter, weighted
average long-term debt increased to $722.6 million from $550.9 million in the
prior year third quarter. The Company issued $175 million in public debt during
the second quarter. The Company also 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 for the third quarter decreased
to 7.7%, compared to 7.8% during the prior year period. Weighted average
short-term debt increased to $220.8 million from $106.8 million in the prior
10
year third quarter. Weighted average short-term interest rates increased to 6.0%
from 5.8% in the prior year. For the nine months ended November 30, 1997,
interest expense decreased to 3.0% of sales from 3.6% from the prior year
period. Previous actions by the Company have created a higher percentage of
long-term fixed rate debt, which is designed to minimize the Company's exposure
to significant changes in short-term interest rates.
The provision for doubtful accounts increased in the third quarter
ended November 30, 1997, as a percentage of sales, to 17.4% from 6.5% in the
prior year quarter. The provision for doubtful accounts increased to $104.7
million in the current third quarter from $23.0 million in the prior year
quarter. For the nine months ended November 30, 1997, the provision increased to
9.3% from 6.4% in the prior year. For the nine months ended November 30, 1997,
the provision for doubtful accounts was $149.5 million compared to $60.0 million
in the prior year nine month period. In response to the current credit
environment characterized by increased delinquencies and higher bankruptcies,
the Company has adjusted its estimates of write-offs, increasing the provision
for doubtful accounts an additional $50.0 million (or $0.56 per share and 8.3%
of sales) in the third quarter. The Company also recorded an additional $14.3
million related to estimated losses on installment accounts serviced by stores
that will be closed as part of the profit improvement plan. In addition, a $15.0
million charge was recorded as a result of the Company's plan to reorganize its
private label credit card program. The increase as a percentage of sales was
slightly offset by the operations of Rhodes, The RoomStore and Mattress
Discounters as these units primarily use third-party credit providers and,
accordingly, do not record significant provisions for doubtful accounts.
Excluding the effect of Rhodes, The RoomStore and Mattress Discounters, the
provision was 26.9% and 13.7% of sales for the third quarter and for the nine
months ended November 30, 1997, respectively.
The income tax benefit for the third quarter of fiscal 1998 was calculated
by applying a percentage of 34.9%. For the nine months ended November 30, 1997,
the income tax benefit was calculated by applying a percentage of 33.2%. For the
third quarter of fiscal 1997 and the nine months ended November 30, 1996 the
effective income tax rate was 35.4% and 35.6%, respectively. The decrease for
the three and nine months is due to the impact of the loss incurred during the
third quarter of fiscal 1998, offset by the higher effective tax rates of the
recently acquired operating subsidiaries. The higher rates result from the
carryover tax attributes of acquired assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its cash position $2.4 million to $17.4 million at
November 30, 1997, from $15.0 million at February 28, 1997, compared to a
decrease of $6.2 million in the comparable period a year ago.
Net cash outflow from operating activities was $85.0 million, compared to
a net cash outflow of $22.8 million in the comparable period of the prior year.
As the Company has expanded its store base, cash flows used for investing
activities exceeded cash provided by operating activities for the first nine
months of fiscal years 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 nine months ended
November 30, 1997, inventory levels increased at a higher rate than the prior
year period primarily due to the stocking of line-up inventory in the recently
acquired stores in order to support the merchandising plan. There was a related
increase in the Company's accounts payable as a result of the higher levels of
inventory purchases. Continued extension of credit and related increases in
11
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. The Company also saw
an increase in income tax benefits as a result of the losses recorded during the
quarter.
Investing activities produced negative cash flows of $73.4 million during
the nine months ended November 30, 1997 compared to negative cash flows of
$114.5 million in the prior year period. The change in cash flows from investing
activities is primarily due to a decrease in acquisitions from prior year. The
purchase of 20 stores of J. McMahan's of Santa Monica, CA and the 23 stores of
Self-Service Furniture Company of Spokane, WA occurred in the prior year third
quarter. Capital expenditures will continue to be financed by cash flows from
operations and external sources of funds. See the discussion concerning the
Company's future expansion plans under "Profit Improvement Plan" below.
Financing activities produced positive cash flows of $160.7 million during
the nine months ended November 30, 1997 compared to a $131.1 million positive
cash flow in the prior year period. The positive cash flow from financing
activities in both the current and prior year quarters was due to an increase in
long-term debt. There has also been an increase in short-term notes payable in
the current period. 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. As of November 30, 1997, long-term notes payable with an
aggregate principal amount of $175.0 million have been issued to the public and
are outstanding under this facility. As of November 30, 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 $215.0 million outstanding and
$185.0 million unused as of November 30, 1997. The Company also had additional
lines of credit with banks totaling $60.0 million of which $37.9 million was
unused as of November 30, 1997.
As a result of charges recorded in the current quarter and those
expected to be incurred in the fourth quarter under the profit improvement plan,
the Company obtained amendments to its bank debt agreements in order to maintain
covenant compliance. In addition, certain provisions of the Company's bond
indenture restrict the Company's ability to incur long-term debt for up to
fifteen months as a result of these charges. However, management believes that
the Company has adequate access to capital to finance accounts receivable,
inventories and other capital needs during this period.
Total debt as a percentage of debt and equity was 60.5% at November 30,
1997, compared to 56.0% at February 28, 1997. The current ratio remained
relatively flat at 1.9X as of November 30, 1997, compared to February 28, 1997.
The increase in total debt as a percentage of debt and equity from February 28,
1997 to November 30, 1997 is primarily attributed to the issuance of $175
million of long-term notes payable as well as the increase in short-term notes
payable during the period. The issuance was somewhat offset by the payment on
the maturity of long-term notes. The current period loss, which reduced retained
earnings, also resulted in the increase of total debt as a percentage of debt
and equity.
12
OTHER INFORMATION
Profit Improvement Plan
On December 17, 1997, the Company announced a profit improvement plan.
The plan has three main components: (1) expense reductions; (2) restructuring of
certain aspects of the business; and (3) Heilig-Meyers store operating
initiatives. The plan resulted from a comprehensive review of Company
operations. As a result of this review, the plan calls for the closing of
approximately 60 Heilig-Meyers stores, downsizing and consolidation of non-store
office and support facilities, a reorganization of the Heilig-Meyers private
label credit card program, and the development of operating initiatives to
improve the performance of the Heilig-Meyers stores.
The majority of the stores to be closed are located in larger markets
where it is more difficult for the Heilig-Meyers small-town format to be
successful and where the store's location and size are not adequate for
conversion to another format. The Company expects to incur a charge of
approximately $37.4 million during the fourth quarter of fiscal 1998 related to
the store closing plan. The Company recorded charges of approximately $14.3
million during the third quarter of fiscal 1998 to cover estimated losses from
the installment accounts serviced by these stores.
The plan also calls for cost reductions in administrative office
and distribution center facilities, primarily through personnel reductions and
consolidations. Approximately $6.5 million was charged during the third quarter
of fiscal 1998 related to these actions. The Company expects to incur a charge
of approximately $11.0 million during the fourth quarter of fiscal 1998
primarily related to severance arrangements. The reorganization of the
Heilig-Meyers private label credit card program resulted in third quarter
charges of approximately $15.0 million.
The core store operating initiatives include a plan to significantly
slow the growth of the Heilig-Meyers stores over the next year to allow for the
maturation of the recent store additions. Approximately 20 to 30 stores will be
relocated to higher-traffic areas. The initiatives also call for adjustments to
the merchandising and advertising strategies based on the remaining markets and
the strengthening of the inventory management programs. While management plans
to slow growth in the Heilig-Meyers division, it expects to pursue opportunities
in the Company's other formats. These opportunities will be in the formats which
are less capital intensive and are currently operating at higher levels of
return than the Heilig-Meyers division. The Company plans to adopt a rigorous
capital allocation process under which all expansion and capital projects will
be subjected to stringent return on investment criteria.
During the third quarter of fiscal 1998, the Company incurred a $50.0
million increase in the provision for doubtful accounts as a result of increased
estimates of write-offs within the installment account portfolio, $38.0 million
of which is related to customer accounts in bankruptcy. The Company plans to add
consumer credit expertise to the senior management team and to further develop
risk profiling, bankruptcy scoring and risk based pricing models for the
installment program.
The Company anticipates that the majority of the reserves related to
this plan will be utilized during the fourth quarter of fiscal 1998 and first
quarter of fiscal 1999 as elements of the plan are completed. Amounts related to
long-term property and lease commitments will continue to be utilized subsequent
to this time period. The overall cash impact of the plan is expected to be
positive as cash received from the sale of certain assets and from income tax
benefits is expected to significantly exceed cash expenditures which will
consist primarily of employee severance and payments under lease obligations.
13
Year 2000 Issue
During fiscal year 1997, management established a team to oversee the
Company's year 2000 date conversion project. After conducting its assessment of
all systems, management implemented a plan of corrective action using both
internal and external resources to enhance the systems for Year 2000 compliance.
Management expects to complete the project during fiscal year 1999, and does not
anticipate the amounts required to be expensed as part of the corrective plan to
have a material effect on the Company's financial position or results of
operations. The team is communicating with other companies on which the
Company's systems rely and is planning to obtain compliance letters from these
entities. However, there can be no assurance that the systems of these other
companies will be converted in a timely manner or that any such failure to
convert by another company would not have an adverse effect on the Company's
systems. Management believes the Year 2000 compliance issue is being addressed
properly by the Company to prevent any material adverse operational or financial
impacts. However, if such enhancements are not completed timely, the Year 2000
issue may have a material adverse impact on the operations of the Company.
Expansion
On January 2, 1998, the Company acquired Bedding Experts, a
privately held bedding retailer based in Chicago, Illinois. The acquisition was
accounted for as a pooling of interests and was accomplished through the
issuance of approximately 2,019,000 shares of common stock. Bedding Experts had
revenues of approximately $40.0 million for its fiscal year ended 12/31/96. As
of January 2, 1998, Bedding Experts had 54 stores in the Chicago area.
On July 1, 1997, the Company acquired Mattress Discounters, a privately
held bedding retailer and manufacturer based in Upper Marlboro, Maryland. The
acquisition was 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.
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 consumer debt and bankruptcy
trends 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.
14
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 in the
Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1997
and the Company's quarterly reports on Form 10-Q for the quarters ended May 31,
1997 and August 31, 1997. Among the cases reported were the following cases
pending in United States District Court: Kirby et al v. Heilig-Meyers Furniture
Company and Heilig-Meyers Company (Middle District of Alabama), Faulkner v.
Heilig-Meyers Company (Northern District of Illinois), Eubanks v. Heilig-Meyers
Company and Heilig-Meyers Furniture Company (Southern District of Georgia), and
Via v. Heilig-Meyers Company and Heilig-Meyers Furniture Company (Western
District of Virginia). On December 3, 1997, Faulkner was transferred to the
United States District Court for the Middle District of Alabama and consolidated
with Kirby. On July 7, 1997, Eubanks was remanded to the Superior Court of
Liberty County, Georgia. On October 29, 1997, the Court in Via granted the
Company's motion for summary judgment.
15
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See INDEX TO EXHIBITS
(b) The Company filed no reports on Form 8-K for the
quarter ended November 30, 1997.
INDEX TO EXHIBITS
Page
3. Articles of Incorporation
a. Registrant's Bylaws as Amended and
Restated December 3, 1997 18
10. a. Amendment No. 4 to the $400,000,000 Credit
Agreement dated July 18, 1995 among MacSaver
Financial Services, Inc., as Borrower; the
Registrant, as Guarantor; and Wachovia Bank of
Georgia, N.A., as Administrative Agent. 24
11. Computation of Per Share Earnings 27
27. Financial Data Schedule 28
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Heilig-Meyers Company
(Registrant)
Date: January 13, 1998 /s/Roy B. Goodman
---------------- -----------------
Roy B. Goodman
Senior Vice President and
Principal Financial Officer
Date: January 13, 1998 /s/William J. Dieter
---------------- --------------------
William J. Dieter
Senior Vice President,
Accounting and Principal
Accounting Officer
17