UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
- ---
For the quarterly period ended August 31, 1998 or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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 October 1, 1998.
59,743,530 shares of Common Stock, $2.00 par value.
HEILIG-MEYERS COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings for
Three and Six Months Ended August 31, 1998
and August 31, 1997 (Unaudited) 3
Consolidated Balance Sheets as of August 31, 1998
(Unaudited), and February 28, 1998 (Audited) 4
Consolidated Statements of Cash Flows for
Six Months Ended August 31, 1998 and
August 31, 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
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 Six Months Ended
August 31, August 31,
---------- ----------
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Sales $596,360 $515,162 $1,190,155 $1,004,202
Other income 78,647 75,050 153,791 152,335
-------- -------- ---------- --------
Total revenues 675,007 590,212 1,343,946 1,156,537
-------- -------- ---------- ---------
Costs and Expenses:
Costs of sales 405,831 343,961 799,263 663,943
Selling, general and
administrative 213,935 193,815 431,231 379,802
Interest 18,986 16,101 38,126 31,529
Provision for doubtful
accounts 22,494 21,933 45,693 44,861
-------- -------- ---------- ---------
Total costs
and expenses 661,246 575,810 1,314,313 1,120,135
-------- -------- ---------- ---------
Earnings before provision for
income taxes 13,761 14,402 29,633 36,402
Provision for income taxes 5,003 5,123 10,681 13,362
-------- -------- ---------- --------
Net earnings $ 8,758 $ 9,279 $ 18,952 $ 23,040
======== ======== ========== ========
Net earnings per share of common stock:
Basic $ 0.15 $ 0.17 $ 0.32 $ 0.42
======== ======== ========== ========
Diluted $ 0.15 $ 0.16 $ 0.32 $ 0.41
======== ======== ========== ========
Cash dividends per share of
common stock $ 0.07 $ 0.07 $ 0.14 $ 0.14
======== ======== ========== ========
See notes to consolidated financial statements.
3
HEILIG-MEYERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
August 31, February 28,
1998 1998
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 35,166 $ 48,779
Accounts receivable, net 354,742 392,765
Retained interest in securitized
receivables at fair value 174,592 182,158
Inventories 539,648 542,868
Other current assets 168,472 126,978
---------- ----------
Total current assets 1,272,620 1,293,548
Property and equipment, net 389,176 398,151
Other assets 62,986 55,321
Excess costs over net assets acquired, net 345,274 350,493
---------- ----------
$2,070,056 $2,097,513
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 248,500 $ 260,000
Long-term debt due within
one year 151,159 22,365
Accounts payable 201,868 203,048
Accrued expenses 193,312 216,738
---------- ----------
Total current liabilities 794,839 702,151
---------- ----------
Long-term debt 583,926 715,271
Deferred income taxes 70,059 70,937
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
59,077 and 58,808, respectively) 118,154 117,616
Capital in excess of par value 233,242 230,580
Unrealized gain on investments 2,745 4,548
Retained earnings 267,091 256,410
---------- ----------
Total stockholders' equity 621,232 609,154
---------- ----------
$2,070,056 $2,097,513
========== ==========
See notes to consolidated financial statements.
4
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
August 31,
-----------------------
1998 1997
---- ----
Cash flows from operating activities:
Net earnings $ 18,952 $ 23,040
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation and amortization 27,819 26,804
Provision for doubtful accounts 45,696 44,861
Store closing charge payments (3,548) -
Other, net (4,858) 79
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable (10,115) (90,687)
Retained interest in securitized
receivables at cost 4,657 -
Other receivables 414 (10,801)
Inventories 1,666 (24,217)
Prepaid expenses (1,579) (5,489)
Accounts payable (1,180) 13,826
Accrued expenses (53) 2,205
--------- --------
Net cash provided (used) by
operating activities 77,871 (20,379)
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired - (8,386)
Additions to property and equipment (35,015) (68,123)
Disposals of property and equipment 16,742 3,208
Miscellaneous investments (50,914) (10,953)
--------- --------
Net cash used by investing
activities (69,187) (84,254)
--------- --------
Cash flows from financing activities:
Net (decrease) increase in notes payable (11,500) 37,805
Proceeds from long-term debt - 174,767
Payments of long-term debt (2,551) (99,545)
Issuance of common stock 25 1,167
Dividends paid (8,271) (8,120)
--------- ---------
Net cash (used) provided
by financing activities (22,297) 106,074
--------- --------
Net (decrease) increase in cash (13,613) 1,441
Cash at beginning of period 48,779 14,959
--------- --------
Cash at end of period $ 35,166 $ 16,400
========= ========
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, 1998. 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 1998 Annual Report on Form 10-K. The
results for the second quarter of fiscal year 1999 are not necessarily
indicative of future financial results.
B. On June 17, 1998, the Board of Directors declared a cash dividend of
$0.07 per share which was paid on August 22, 1998, to stockholders of
record on July 15, 1998.
C. Accounts receivable are shown net of the allowance for doubtful
accounts and unearned finance income. The allowance for doubtful
accounts was $61,003,000 and $60,306,000 and unearned finance income
was $41,275,000 and $46,980,000 at August 31, 1998, and February 28,
1998, respectively.
D. The Company made (received) income tax payments (refunds) of
$(9,942,000) and $4,296,000 during the six months ended August 31,
1998, and August 31, 1997, respectively.
E. The Company made interest payments of $38,639,000 and $32,227,000
during the six months ended August 31, 1998, and August 31, 1997,
respectively.
F. Effective March 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This statement requires that the Company report the total
non-owner changes in equity for all periods displayed. For the three
and six months ended August 31, 1998, comprehensive income was
$6,955,000 and $17,149,000, respectively, consisting of changes in the
unrealized gain on investments of $1,803,000. There were no such
changes for the three and six months ended August 31, 1997.
G. In February 1998 the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits",which is effective for fiscal years beginning
after December 15, 1997. The new statement will change disclosure
requirements related to pension and other postretirement benefit
obligations. The new statement will be implemented in fiscal 1999 and
will not impact the Company's consolidated financial position, results
of operations or cash flows. The effect of the new statement will be
limited to the form and content of disclosures.
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, 1999. The new statement requires that
every derivative instrument (including certain derivative instruments
6
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133 requires
the changes in the derivative's fair value to be recognized currently
in earnings unless specific hedge accounting criteria are met. The
Company has not yet determined the effect this statement will have on
the consolidated financial position or results of operations of the
Company.
In March 1998 the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", which is effective for fiscal years beginning after
December 15, 1998. SOP 98-1 requires certain software development costs
to be capitalized. Generally, once the capitalization criteria of the
SOP have been met, external direct costs of materials and services used
in development of internal-use software, payroll and payroll related
costs for employees directly involved in the development of
internal-use software, and interest costs incurred when developing
software for internal use are to be capitalized. Management does not
expect the adoption of the SOP to have a material effect on the
Company's consolidated financial position, results of operations or
cash flows.
In April 1998 the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which is effective for fiscal years beginning
after December 15, 1998. SOP 98-5 requires costs of start-up activities
and organization costs to be expensed as incurred. Management does not
expect the adoption of the SOP to have a material effect on the
Company's consolidated financial position, results of operations or
cash flows.
H. 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:
7
MacSaver Financial Services, Inc.
Summarized Statements of Earnings
(Amounts in thousands)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
---------- ----------
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 72,799 $ 63,722 $143,694 $122,965
Operating expenses 55,228 54,283 110,791 108,333
-------- -------- -------- --------
Earnings before taxes 17,571 9,439 32,903 14,632
-------- -------- -------- --------
Net earnings 11,421 6,136 21,387 9,511
======== ======== ======== ========
MacSaver Financial Services, Inc.
Summarized Balance Sheets
(Amounts in thousands)
August 31, February 28,
1998 1998
----------- ------------
(Unaudited) (Audited)
Current assets $ 45,308 $ 29,545
Accounts receivable, net 257,689 295,405
Retained interest in securitized
receivables at fair value 174,592 182,158
Due from affiliates 676,227 645,291
---------- ----------
Total Assets $1,153,816 $1,152,399
========== ==========
Current liabilities 172,284 48,951
Notes payable 248,500 260,000
Long-term debt 570,000 700,000
Stockholder's equity 163,032 143,448
---------- ----------
Total Liabilities and Equity $1,153,816 $1,152,399
========== ==========
8
I. The following table sets forth the computations of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
August 31, August 31,
1998 1997 1998 1997
------ ------ ------ ------
(Amounts in thousands except per share data)
Numerator:
Net earnings $8,758 $9,279 $18,952 $23,040
Denominator:
Denominator for basic
earnings per share -
average common shares
outstanding 59,077 56,003 58,945 55,208
Effect of potentially
dilutive stock options 494 914 544 874
Effect of contingently
issuable shares
considered earned - - 132 -
------ ------ ------ ------
Denominator for diluted
earnings per share 59,571 56,917 59,621 56,082
Basic EPS $ 0.15 $ 0.17 $ 0.32 $ 0.42
Diluted EPS 0.15 0.16 0.32 0.41
Options to purchase 3,481,000 and 2,741,000 shares of common stock at
prices ranging from $13.56 and $17.25 to $35.06 per share were
outstanding at August 31, 1998 and 1997, respectively, but were not
included in the computation of diluted earnings per share because they
would have been antidilutive.
J. 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. The charge reduced 1998 net earnings $16,683,000 or $.30 per
share. Amounts charged to the provision during the first and second
quarter of fiscal 1999 are as follows:
Amount
Utilized Remaining
Reserve as through Reserve as
of March 1, August 31, of August 31,
(Amounts in thousands) 1998 1998 1998
---- ---- ----
Severance $ 6,648 $1,561 $ 5,087
Lease & facility exit cost 7,680 1,989 5,691
Fixed asset impairment 5,133 4,626 507
---------------------------------
Total $19,461 $8,176 $11,285
=================================
The Company expects to complete the store closings, office downsizing,
and private label credit card program reorganization within the current
fiscal year. Accordingly, the substantial majority of the reserves are
9
expected to be utilized during fiscal 1999. Amounts related to certain
severance agreements and long-term lease obligations may extend beyond
fiscal 1999.
K. On September 1, 1998, the Company acquired certain assets of Guardian
Protection Products ("Guardian"). The Company issued 533,334 shares of
common stock and placed 133,333 shares of common stock in escrow to be
released to the former shareholder of Guardian if certain conditions
are met. If the Company's common stock does not trade at $15 per share
or more for 30 consecutive trading days during the six months
following closing, additional shares will be issued so that the
aggregate number of shares equals $10 million divided by the average
closing price per share for the Company's common stock for the ten
trading days before the six-month anniversary of the closing. The
Company has also agreed to issue additional shares to the former
shareholder of Guardian in the event that certain earnings targets are
met over the next two years, however the aggregate consideration will
not exceed $14.5 million.
L. On September 17, 1998, the Company's operating facilities and systems
in Puerto Rico sustained major damage from Hurricane Georges. The
Puerto Rico operations usually account for less than 5% of the
Company's sales. The Company maintains insurance for both property
damage and business interruption applicable to its operations. The
Company is still investigating the damage,and all insurance claims are
being evaluated. An estimate of any loss or possible loss cannot be
made at this time.
10
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, 1998.
RESULTS OF OPERATIONS
Profit Improvement Plan
In December 1997, the Company announced a Profit Improvement Plan (the
"Profit Improvement Plan") that has three main components: (1) expense
reductions; (2) restructuring of certain aspects of the business; and (3)
Heilig-Meyers store operating initiatives.
In connection with this Profit Improvement Plan, the Company has
completed its store closing plan, downsized administrative and support
facilities, committed to a new arrangement for the Heilig-Meyers private label
credit card program, and implemented programs to improve the overall performance
of the Heilig-Meyers stores. The Company expects to complete the reorganization
of the private label credit card program prior to the end of the third quarter.
Revenues and Earnings
Total revenues for the quarter rose 14.4% to $675.0 million from $590.2
million in the prior year. Rhodes, The RoomStore and Mattress Discounters
contributed approximately 39.4% or $265.9 million of the total revenues. Total
revenues for stores operated under the Heilig-Meyers format for the quarter
increased 2.6% from the prior year. Net earnings for the quarter decreased 5.6%
to $8.8 million (or $0.15 per share) from $9.3 million (or $0.16 per share) in
the prior year. Net earnings for the six months decreased 17.7% to $19.0 million
(or $0.32 per share) from $23.0 million (or $0.41 per share).
Sales for the second quarter of fiscal 1999 increased 15.8% to $596.4
million from $515.2 million in the second quarter of the prior year. For the
six-month period ended August 31, 1998, sales increased 18.5% to $1,190.2
million from $1,004.2 million. Rhodes, The RoomStore and Mattress Discounters
units contributed approximately 43.0% or $256.3 million of sales. The overall
increase in sales was primarily attributable to an increase in operating units
from August 31, 1997 to August 31, 1998, and a comparable store sales increase
of 3.7% and 3.1% for the three and six months ended August 31, 1998. During the
first quarter of fiscal 1999, the Rhodes division began operating under a new
merchandising and advertising format designed to reposition the division to a
higher-end retail format. Customer response to this program during the
introductory period has been below expectation. As a result, the Company's sales
were negatively impacted. Price changes had an immaterial impact on the overall
sales increase for the quarter.
Sales for the Company's four primary retail formats were as follows:
11
Three Months Ended Six Months Ended
August 31, August 31,
------------------------- --------------------------
(Sales amounts in millions)
1998 1997 1998 1997
----------- ----------- ----------- -----------
% of % of % of % of
Sales Sales Sales Sales Sales Sales Sales Sales
----- ----- ----- ----- ----- ----- ----- -----
Heilig-Meyers $340.1 57.0 $332.7 64.6 $688.8 57.9 $681.0 67.8
Rhodes 115.9 19.4 111.2 21.5 228.4 19.2 222.7 22.2
The RoomStore 74.9 12.6 35.2 6.9 148.4 12.4 64.5 6.4
Mattress
Discounters 65.5 11.0 36.1 7.0 124.6 10.5 36.0 3.6
------ ------ -------- --------
Total $596.4 $515.2 $1,190.2 $1,004.2
====== ====== ======== ========
Store counts for the Company's four primary retail formats as of August
31,:
1998 1997
---- ----
# of # of
Stores Stores
------ ------
Heilig-Meyers 847 859
Rhodes 101 99
The RoomStore 69 43
Mattress
Discounters 229 171
----- -----
Total 1,246 1,172
===== =====
As a percentage of sales, other income decreased during the second
quarter to 13.2% from 14.6% in the prior year quarter. For the six months ended
August 31, 1998, other income decreased as a percentage of sales to 12.9% from
15.2% in the prior year. This decrease is primarily the result of the
concentration of total sales growth, compared to the prior year quarter, in The
RoomStore and Mattress Discounters formats. These formats utilize credit
programs maintained by a third party and, unlike the Heilig-Meyers in-house
program, generally do not produce finance income for the Company. Within the
Heilig-Meyers format, the increase in other income was limited to .5% and .4% of
sales for the quarter and six months ended August 31, 1998, respectively due to
flat sales and a higher level of securitized receivables as compared to the
prior year period.
The Company plans to continue its program of periodically securitizing
a portion of the installment accounts receivable portfolio of its stores
operating under the Heilig-Meyers format. Proceeds from securitized accounts
receivable are generally used by the Company to lower debt levels. Net servicing
income related to securitized receivables that have been sold to third parties
is included in other income.
Costs and Expenses
Costs of sales increased during the quarter to 68.1% of sales from
66.8% in the prior year quarter. For the six-month period ended August 31, 1998,
costs of sales were 67.2% of sales compared to 66.1% in the prior year. These
increases were primarily the result of lower raw selling margins by the Rhodes
format. As noted above, customer response to the new Rhodes merchandising and
advertising format was below expectation during the second quarter. As a result,
sales were weighted towards goods that carry lower margins or goods that have
been dropped from the merchandise line-up which were marked at discounted
prices.
Selling,general and administrative expense decreased as a percentage of
sales to 35.9% from 37.6% in the prior year quarter. The decrease between
quarters was the result of sales leverage gained from total sales growth in The
RoomStore and Mattress Discounters formats. The Rhodes, The RoomStore and
12
Mattress Discounters units generally have 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.
The decrease for the quarter is also due to expense control, lower advertising,
and a gain on the disposal of an asset. For the six month period ended August
31, 1998, selling, general and administrative expenses were 36.2% compared to
37.8% in the prior year. The decrease between periods is also the result of a
reduction in the salaries and related expenses as a percentage of sales at the
stores and in the administrative functions of the Heilig-Meyers format. Lower
salary and related expenses are the result of initiatives put in place in
conjunction with the Profit Improvement Plan.
Interest expense was 3.2% and 3.1% of sales in the second quarters of
fiscal years 1999 and 1998, respectively. For the quarter, weighted average
long-term debt increased to $722.0 million from $608.1 million in the prior year
second quarter. The increase in long-term debt levels between years is a result
of a $175 million long-term debt issuance in July 1997. Weighted average
long-term interest rates decreased to 7.6% from 7.9% in the prior year. Weighted
average short-term debt increased to $258.7 million from $248.5 million in the
prior year. Weighted average short-term interest rates increased to 6.4% from
6.1% in the prior year. Interest expense remained relatively flat as a
percentage of sales to the prior year period due to sales leverage gained from
the Mattress Discounters units, which were purchased with common stock in July
1997 and January 1998. For the six-month period ended August 31, 1998, interest
expense increased to 3.2% of sales from 3.1% in the prior year.
The provision for doubtful accounts decreased for the second quarter, as a
percentage of sales, to 3.8% from 4.3% in the prior year quarter. For the
six-month period ended August 31, 1998, the provision decreased to 3.8% from
4.5% in the prior year. The decrease was the result of the total sales volume
growth in divisions that do not offer in-house credit. The provision was 6.4% of
sales for the second quarters of fiscal years 1999 and 1998 and for the six
months ended August 31, 1999 and 1997 for those stores offering installment
credit.
The effective income tax rate for the second quarter of fiscal 1999 was
36.4% compared to 35.6% for the second quarter of fiscal 1998. For the six-month
period ended August 31, 1998, the effective income tax rate was 36.0% compared
to 36.7% in the prior year. The year-to-date decrease is due to the effect on
the six months ended August 31, 1997 by higher effective tax rates of acquired
operating subsidiaries resulting from the carryover tax attributes of acquired
assets and liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its cash position $13.6 million to $35.2 million at
August 31, 1998, from $48.8 million at February 28, 1998, compared to an
increase of $1.4 million in the comparable period a year ago.
Net cash inflow from operating activities was $77.9 million, compared to
an outflow of $20.4 million in the comparable period of the prior year. The
Company has continued to slow the expansion of its store base, which has
resulted in improved cash flows provided by operating activities. The Company
participated in an asset securitization in the second quarter of fiscal 1999
resulting in cash inflows from the sale of receivables of $59.3 million. As a
result of the securitization, cash flows provided by operating activities
exceeded cash flows used by investing activities for the six months ended August
31, 1998. The Company traditionally produces minimal or negative cash flow from
operating activities because it extends in-house credit in its Heilig-Meyers and
13
certain RoomStore stores. During the six months ended August 31, 1998,
installment accounts receivable increased at a slower rate than the prior year
quarter primarily due to the closing of certain Heilig-Meyers stores pursuant to
the Profit Improvement Plan. 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 1999 quarters. However, the Company
expects to continue to periodically sell accounts receivable as a source of cash
flows from operating activities. During the six months ended August 31, 1998,
inventory decreased slightly compared to an increase in the prior year period.
The change in inventory between years is primarily the result of the closing of
certain stores pursuant to the Profit Improvement Plan and prior year purchases
related to acquisitions.
Investing activities produced negative cash flows of $69.2 million during
the six months ended August 31, 1999 compared to negative cash flows of $84.3
million in the prior year period. The decrease in negative cash flows from
investing activities is primarily due to a decrease in acquisitions and
additions to property and equipment during the period. The Company has slowed
the growth of its Heilig-Meyers format in accordance with the Profit Improvement
Plan. During the prior year period cash used for additions to property and
equipment for the six months ended August 31, 1997 resulted from the opening of
36 new Heilig-Meyers store locations and related support facilities as well as
the remodeling and improvement of existing and acquired locations. Capital
expenditures will continue to be financed by cash flows from operations and
external sources of funds. Cash used for miscellaneous investments during the
six months ended August 31, 1998 includes deposits paid by the Company related
to the change in lessor of certain leased real estate and the purchase of
previously leased equipment which the Company plans to sell and lease back in
the third quarter of fiscal 1999.
Financing activities produced negative cash flows of $22.3 million during
the six months ended August 31, 1998 compared to a $106.1 million positive cash
flow in the prior year period. The negative cash flow from financing activities
in the current year quarter was due to the decrease in notes payable. In June
1997, the Company and a wholly-owned subsidiary filed a joint Registration
Statement on Form S-3 with the Securities and Exchange Commission relating to up
to $400.0 million aggregate principal amount of securities. There were no
issuances of debt pursuant to the joint Registration Statement during the six
months ended August 31, 1998. As of August 31, 1998, long-term notes payable
with an aggregate principal amount of $175 million securities have been issued
to the public under this Registration Statement. As of August 31, 1998, the
Company had a $400.0 million revolving credit facility in place, which expires
in July 2000. This facility includes eleven banks and had $248.5 million
outstanding and $151.5 million unused as of August 31, 1998. The Company also
had additional lines of credit with banks totaling $50.0 million, all of which
was unused as of August 31, 1998.
As a result of charges recorded in fiscal 1998 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
until certain covenant restrictions are met. Management expects to meet these
covenant restrictions in the fourth quarter of fiscal 1999. Management believes
that the Company has adequate access to capital to finance accounts receivable,
inventories and other capital needs during this period. Pursuant to the Profit
Improvement Plan, management has taken steps to slow the growth of the capital
intensive Heilig-Meyers format and lower overall spending on capital projects.
14
Total debt as a percentage of debt and equity was 61.3% at August 31,
1998, compared to 62.1% at February 28, 1998. The decrease in total debt as a
percentage of debt and equity is primarily the result of the use of cash
generated from operating activities to reduce notes payable outstanding. The
current ratio was 1.6X at August 31, 1998, compared to 1.8X at February 28,
1998. The decrease in the current ratio from February 28, 1998 to August 31,
1998 is primarily attributed to the reclassification of $130 million from
long-term notes payable to the current portion as a result of the maturity of
these amounts within the next twelve months.
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. The team has continued to assess the
systems of subsidiaries as the Company has expanded. Management expects to
complete the remediation stage for the critical systems of the Heilig-Meyers
operations during fiscal year 1999. Completion of remediation for all other
subsidiaries' critical systems is expected in the first quarter of fiscal year
2000. The testing stage for the entire Company is planned for the first quarter
of fiscal year 2000. The Company is in the early stages of making an assessment
of its non-information technology systems (such as telephone and alarm systems).
Managers of such systems have been instructed to contact the appropriate third
party vendors to determine their Year 2000 compliance.
Since fiscal 1997, the Company has incurred approximately $.8 million
in expenses in updating its management information system to alleviate potential
year 2000 problems. The remaining expenditures are expected to be approximately
$1.0 million, which will be expensed as incurred. The remaining cost of the
Company's Year 2000 Project and the dates on which the Company plans to complete
the Year 2000 compliance program are based on management's current estimates,
which are derived utilizing numerous assumptions including the continued
availability of certain resources, and are inherently uncertain.
The team is communicating with other companies, on which the Company's
systems rely and is planning to obtain compliance letters from these entities.
There can be no assurance, however, that the systems of these other companies
will be converted in a timely manner, or that any such failure to convert
by another company would not have an adverse effect on the Company's systems.
Management believes the Year 2000 compliance issue is being addressed
properly by the Company to prevent any material adverse operational or financial
impacts. However, if such enhancements are not completed in a timely manner, the
Year 2000 issue may have a material adverse impact on the operations of the
Company. The Company is currently assessing the consequences of its Year 2000
project not being completed on schedule or its remediation efforts not being
15
successful. Management is developing contingency plans to mitigate the effects
of problems experienced by the Company, key vendors or service providers related
to the Year 2000. Management expects to complete its Year 2000 contingency
planning during the first quarter of fiscal 2000.
FORWARD-LOOKING STATEMENTS
Certain statements included above are not based on historical facts,
but are forward-looking statements. These statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy. These statements
reflect the Company's reasonable judgments with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the customer's willingness, need
and financial ability to purchase home furnishings and related items, the
Company's ability to extend credit to its customers, the costs and effectiveness
of promotional activities and format realignments, 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, consumer credit and bankruptcy trends, recessionary or expansive trends in
the Company's markets, the ability of the Company 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.
16
PART II
Item 1. Legal Proceedings
The Company reported in its Quarterly Report on Form 10-Q for the quarter ended
May 31, 1998 that Eubanks v. Heilig-Meyers Company and Heilig-Meyers Furniture
Company (alleging violation of Georgia statutes and seeking certification of a
class of Georgia residents and which had been previously dismissed), was refiled
on June 23, 1998 in the Superior Court of Liberty County, Georgia. The Company
previously reported involvement in certain other 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,
1998.
17
Item 2. Changes in Securities.
(c) On September 1, 1998, the Company acquired certain assets of Guardian
Protection Products ("Guardian") in a transaction in which the
shareholders of Guardian received 533,334 shares of the Company's
Common Stock and an additional 133,333 shares of the Company's Common
Stock were placed in escrow. The shares in escrow are to be released
to the former shareholder of Guardian if certain conditions are met.
If the Company's common stock does not trade at $15 per share or more
for 30 consecutive trading days during the six months following
closing, additional shares will be issued so that the aggregate number
of shares equals $10 million divided by the average closing price per
share for the Company's common stock for the ten trading days before
the six-month anniversary of the closing. The Company has also agreed
to issue additional shares to the former shareholder of Guardian in
the event that certain earnings targets are met over the next two
years, however the aggregate purchase price will not exceed $14.5
million. The sale of the foregoing shares were exempt from
registration under the Securities Act of 1933 (the "Act") as
transactions not involving a public offering, based on the fact that
the shares were sold to an accredited investor under Rule 506 of
Regulation D under the Act.
18
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the Company's shareholders was held June
17, 1998.
(c)(i) The shareholders approved the ratification of the selection of
Deloitte & Touche LLP as accountants and auditors for the
Company for the current fiscal year. The ratification was
approved by the following vote:
FOR - 48,339,379
AGAINST - 87,076
ABSTAIN - 332,707
(c)(ii) The shareholders of the Company elected a board of fourteen
directors for one-year terms. The elections were approved by
the following vote:
Directors For Withheld
--------- --- --------
William C DeRusha 42,606,313 6,152,849
Troy A. Peery, Jr. 42,594,106 6,165,057
Alexander Alexander 42,605,630 6,153,532
Robert L. Burrus, Jr. 42,590,231 6,168,931
Beverley E. Dalton 42,611,010 6,148,152
Charles A. Davis 42,560,332 6,198,831
Benjamin F. Edwards III 42,614,327 6,144,835
Alan G. Fleischer 42,556,254 6,202,908
Nathaniel Krumbein 42,556,203 6,202,960
Hyman Meyers 42,557,172 6,201,991
S. Sidney Meyers 42,562,340 6,196,823
Lawrence N. Smith 42,614,256 6,144,906
Eugene P. Trani 42,559,579 6,199,583
L. Douglas Wilder 42,532,659 6,226,503
(c)(iii) The shareholders approved the adoption of the Company's 1998
Stock Incentive Plan. The votes were cast as follows:
FOR - 38,750,005
AGAINST - 9,624,761
ABSTAIN - 384,394
19
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 during the
quarterly period ended August 31, 1998.
INDEX TO EXHIBITS
Page
----
27. Financial Data Schedule 22
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Heilig-Meyers Company
(Registrant)
Date: October 12, 1998 /s/Roy B. Goodman
-----------------
Roy B. Goodman
Senior Vice President and
Principal Financial Officer
Date: October 12, 1998 /s/William J. Dieter
--------------------
William J. Dieter
Senior Vice President,
Accounting and Principal
Accounting Officer
21