UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended February 28, 1999 or
Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission file number 1-8484
HEILIG-MEYERS COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-0558861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12560 West Creek Parkway, Richmond, Virginia 23238
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (804) 784-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
Common Stock, $2.00 New York Stock Exchange
Par Value Pacific Exchange
Rights to purchase Preferred New York Stock Exchange
Stock, Series A, $10.00 Pacific Exchange
Par Value
Securities registered pursuant to Section 12(g)of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 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 the
filing requirements for at least the past 90 days. Yes X No .
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of May 27, 1999 was approximately $329,240,770.
This figure was calculated by multiplying (i) the closing sales price
of the registrant's common stock on the New York Stock Exchange on May 27, 1999
by (ii) the number of shares of the registrant's common stock not held by the
executive officers or directors of the registrant or any persons known to the
registrant to own more than five percent of the outstanding common stock of the
registrant. Such calculation does not constitute an admission or determination
that any such officer, director or holder of more than five percent of the
outstanding common stock of the registrant is in fact an affiliate of the
registrant.
As of May 27, 1999, there were outstanding 59,861,182 shares of the
registrant's common stock, $2.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its Annual Meeting of
Shareholders scheduled for June 16, 1999, are incorporated by reference into
Part III.
2
INDEX
PART 1
ITEM 1. BUSINESS Page
A. Introduction 4
B. Industry Segments 4
C. Nature of Business
General 5
Competition 5
D. Store Operations
General 6
Merchandising 7
Advertising and Promotion 7
Credit Operations 8
Distribution 9
Customer Service 9
E. Corporate Expansion 10
F. Other Factors Affecting the Business of Heilig-Meyers
Suppliers 11
Service Marks, Trademarks and Franchise Operations 11
Seasonality 11
Employees 11
Foreign Operations and Export Sales 11
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 13
ITEM 4. SUBMISSION of MATTERS to a VOTE of SECURITY HOLDINGS 13
PART II
ITEM 5. MARKET for REGISTRANT'S COMMON EQUITY and
RELATED STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA 16
ITEM 7. MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS 18
ITEM 7A. QUANTITATIVE and QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA 27
ITEM 9. CHANGES in and DISAGREEMENTS with ACCOUNTANTS
on ACCOUNTING and FINANCIAL DISCLOSURE 52
PART III
ITEM 10. DIRECTORS and EXECUTIVE OFFICERS of the REGISTRANT 52
ITEM 11. EXECUTIVE COMPENSATION 52
ITEM 12. SECURITY OWNERSHIP of CERTAIN BENEFICIAL OWNERS
and MANAGEMENT 52
ITEM 13. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, and
REPORTS on FORM 8-K 53
3
PART 1
ITEM 1. BUSINESS
A. Introduction
Heilig-Meyers Company (the "registrant"), which together with its
predecessors and subsidiaries, sometimes hereinafter referred to as the
"Company," is engaged primarily in the retail sale of home furnishings and
bedding. The Company's predecessors are numerous Virginia and North Carolina
corporations, the first of which was incorporated in 1940, and all of which were
merged into Heilig-Meyers Company, a North Carolina corporation, in March 1970,
which in turn was merged into the registrant, a Virginia corporation, in June
1972.
The Company has grown in recent years, in part, through a series of
acquisitions. Among the acquisitions are the February 1995 acquisition of
certain assets relating to the operations of 17 stores owned by Berrios
Enterprises of Caguas, Puerto Rico, the October 1996 acquisition of certain
assets relating to the 20 stores of J. McMahan's in Santa Monica, California and
the unrelated acquisition of certain assets relating to the 23 stores of
Self-Service Furniture Company of Spokane, Washington, the December 1996
acquisition of the Atlanta, Georgia-based Rhodes, Inc., a publicly traded home
furnishings retailer with, at the time of acquisition, 105 stores in 15 states,
and the February 1997 acquisition of certain assets relating to the 10 stores of
The RoomStore, Inc. of Fort Worth, Texas. The Company also acquired the assets
of the 19-store Star Furniture chain based in North Carolina in February 1997.
The Company acquired Mattress Discounters Corporation and a related corporation
in July 1997, with 169 stores in 10 states and Washington, D.C. The Company also
acquired The Bedding Experts, Inc. with 54 stores in Chicago, Illinois and the
surrounding area in January 1998. The Company also acquired the assets of 5 John
M. Smyth's Homemakers stores, a Chicago, Illinois furniture chain in January
1998, and the 24-store Hub Furniture chain based in Columbia, Maryland in
February 1998 which both currently operate under The RoomStore division. In
addition, the Company acquired substantially all of the operating assets and
liabilities of Guardian Protection Products in September 1998. The Rhodes,
RoomStore, and Mattress Discounters chains continue to operate under their
respective names and formats.
On March 24, 1999, the Company announced that in an effort to
substantially improve the overall financial position of the Company and to
refocus on its core home furnishings operation, a review of strategic
divestiture options of all non-core operating assets is being made. This review
includes the retention of third parties to advise on possible divestiture of the
Rhodes and Mattress Discounters divisions. On May 28, 1999, the Company entered
into a definitive agreement to sell substantially all of its interest in its
Mattress Discounters division. The transaction, which is subject to certain
closing conditions, is expected to close in the second quarter of fiscal 2000.
The Company will retain a 7% interest in Mattress Discounters. The cash proceeds
from the sale, net of transaction costs, are estimated at $206.7 million and
will be used to pay down debt. The Company has continued its evaluation of the
possible divestiture of all or part of its Rhodes division.
B. Industry Segments
The Company has significant operations aligned in four operating
divisions: Heilig-Meyers, The RoomStore, Rhodes and Mattress Discounters. For
the financial results of the Company's operating divisions, see Note 15 of Notes
to Consolidated Financial Statements in Item 8 of Part II found on page 47 of
this annual report.
The Company's "Heilig-Meyers" division is associated with the Company's
historical operations. The majority of the Heilig-Meyers stores operate in
smaller markets with a broad line of merchandise. The "Rhodes" division is
comprised of 97 stores as of April 30, 1999. The Rhodes division's retailing
strategy is selling quality furniture to a broad base of middle income
customers. Stores under "The RoomStore" division display and sell furniture in
complete room packages. The rooms are arranged by professional designers and
sell at a value if purchased as a group. The RoomStore also includes the 32
stores operating in Puerto Rico under the "Berrios" name, which like the
Heilig-Meyers stores, offer a broad line of furniture. The "Mattress
Discounters" division was acquired in fiscal 1998 and includes 236 stores as of
April 30, 1999. Mattress Discounters is the Nation's largest retail bedding
specialist. Stores are classified by operating format rather than by the name
under which a store is operated.
4
C. Nature of Business
General
The Company is the Nation's largest specialty retailer of furniture,
bedding and related items with 1,253 stores (as of April 30, 1999), 1,221 of
which are located in 35 states and Washington, D.C., with the remainder in
Puerto Rico. The Company's Heilig-Meyers stores are primarily located in small
towns and rural markets in the southern, mid-western and western Continental
United States. The 97 Rhodes stores are primarily located in the mid-sized
markets and metropolitan areas of 14 southern and midwestern states. The 107
stores of The RoomStore are primarily located in 7 states, including Texas,
Illinois and Maryland and in Puerto Rico. The 236 Mattress Discounters stores
are primarily located in 11 eastern states, Washington D.C., California and
Colorado.
The Company's operating strategies include: (1) offering a broad
selection of competitively priced home furnishings, including furniture and
accessories, and bedding, and in the Heilig-Meyers stores and in the Berrios
stores in Puerto Rico, consumer electronics, appliances, and other items such as
jewelry, small appliances and seasonal goods; (2) locating Heilig-Meyers stores
primarily in small towns and rural markets which are at least 25 miles from a
metropolitan market; (3) offering credit programs to provide flexible financing
to its customers; (4) utilizing centralized inventory and distribution systems
in strategic regional locations to support store inventory and merchandise
delivery operations; (5) emphasizing customer service and repair service for
consumer electronics and other mechanical items.
Competition
The retail home furnishings industry is a highly competitive and
fragmented market. The Company, as a whole, competes with large chains,
independent stores, discount stores, furniture stores, specialty stores and
others, some of which have financial resources greater than those of the
Company, and some of which derive revenues from the sale of products other than
home furnishings.
Due to volume purchasing, the Company believes it is generally able to
offer merchandise at equal or lower prices than its competitors, particularly
local independent and regional specialty furniture retailers. In addition,
Management believes that it offers a broader selection of merchandise than many
of its competitors.
The Company believes that locating its Heilig-Meyers stores in small
towns and rural markets provides an important competitive advantage. Currently,
approximately 80% of all Heilig-Meyers stores are located in towns with
populations under 50,000 that are more than 25 miles from a metropolitan market.
Competition in these small towns largely comes from locally owned store
operations, which generally lack the financial strength to compete effectively
with the Company. Consequently, the Company believes that its Heilig-Meyers
stores have the largest market share among home furnishings retailers in the
majority of their areas.
The RoomStore and Rhodes formats compete in mid-to-large metropolitan
markets and serve middle income customers. The Mattress Discounters stores also
operate in metropolitan markets.
Based on its experience, the Company believes its competitive
environment is comparable in all geographic regions in which it operates.
Therefore, the Company does not believe that a regional analysis of its
competitive market is meaningful at this time.
5
D. Store Operations
General
The Company's Heilig-Meyers stores generally range in size from 12,000
to 35,000 square feet, with the average being approximately 25,000 square feet.
A store's attached or nearby warehouse usually measures from 3,000 to 5,000
square feet. A typical store is designed to give the customer an urban shopping
experience in a rural location. During the last five years, the Company has
revised its Heilig-Meyers prototype store construction program. The Company
added 8 of these stores in fiscal 1997, 16 in fiscal 1998 and 3 in fiscal 1999.
The prototype stores are 27,000 square feet and feature the latest display
techniques and construction efficiencies. Certain features of these prototype
stores are incorporated into other locations through the Company's ongoing
remodeling program. The Company's existing store remodeling program, under which
stores are remodeled on a rotational basis, provides the Company's older stores
with a fresh look and up-to-date displays on a periodic basis. During fiscal
1999, the Company remodeled 26 existing stores and plans to remodel
approximately 20 existing stores in fiscal 2000. The existing Rhodes, The
RoomStore, and Mattress Discounters stores average approximately 34,000, 35,000,
and 4,000 square feet, respectively. The Company does not have significant
remodeling activities planned for these formats during fiscal 2000.
Each store unit is managed by an on-site manager responsible for
day-to-day store operations including, if offered in that store, installment
credit extension and collection. For executive management purposes, stores are
grouped by operating format. For operational purposes, stores are generally
grouped within their format by geographic market.
The Company has an in-house education program to train new employees in
its operations and to keep current employees informed of the Company's policies.
This training program emphasizes sales productivity, store administration, and
where applicable, credit extension and collection. The training program utilizes
the publication of detailed store manuals, internally produced training
videotapes and Company-conducted classes for employees. The Company also has an
in-store manager training program, which provides potential managers with
hands-on experience in all aspects of store operations. The Company's ongoing
education program is designed to provide a sufficient number of qualified
personnel for its stores.
In recent years, Heilig-Meyers has enhanced its operating systems to
increase the availability and effectiveness of management information. In fiscal
1995, the Company made improvements to inventory management by use of
just-in-time ordering and backhauling. In fiscal 1995, the Company completed the
installation of a new satellite system. This system provides immediate
communication between the Company's corporate headquarters and the Heilig-Meyers
stores and distribution centers. As a result, the Company believes customer
service has been improved by providing store management more timely access to
information related to product availability. This system also provided the means
for the Company to implement, for the Heilig-Meyers stores, its new inventory
reservation system and enhanced target marketing programs during fiscal 1997.
The Rhodes, The RoomStore, and Mattress Discounters formats have operating
systems in place that provide similar operating capabilities.
6
Merchandising
The Company's Heilig-Meyers merchandising strategy is to offer a broad
selection of competitively priced home furnishings, including furniture and
accessories, consumer electronics, appliances, bedding and other items such as
jewelry and seasonal goods. The RoomStore and Rhodes stores primarily sell
mid-price-point furniture and accessories, and bedding. The Mattress Discounters
stores are specialty bedding retailers and sell across the full spectrum of
bedding price points. During the three most recent fiscal years, the percentage
of store sales derived from the various merchandising categories were as follows
(by format):
1999 1998 1997
---- ---- ----
Heilig-Meyers Furniture:
Furniture and accessories 64% 60% 60%
Consumer electronics 7 9 10
Bedding 13 13 12
Appliances 7 7 8
Other (e.g. jewelry and
seasonal goods) 9 11 10
Rhodes:
Furniture and accessories 90 89 89
Bedding 10 11 11
The RoomStore:
Furniture and accessories 90 90 n/a
Bedding 10 10 n/a
Mattress Discounters:
Furniture and accessories 10 10 n/a
Bedding 90 90 n/a
The Company's stores carry a wide variety of items within each
merchandise category to appeal to individual tastes and preferences. The Company
believes this broad selection of products has enabled it to expand its customer
base and increase repeat sales to existing customers. By carrying seasonal
merchandise (heaters, air conditioners, lawn mowers, outdoor furniture, etc.) in
its Heilig-Meyers stores, the Company has been able to moderate the seasonal
fluctuations in its sales that are common to the industry and, in particular,
small towns.
While the basic merchandise mix within each operating format remained
fairly constant during fiscal 1999, the Company continued to refine its
merchandise selections to capitalize on variations in customer preferences.
During fiscal 1999, the Company continued to strengthen its vendor
relationships. In addition to providing purchasing advantages, these
relationships provide warehousing and distribution arrangements that improve
inventory management.
Advertising and Promotion
Direct mail circulars are a key part of the Company's marketing
program. The Company centrally designs its direct mail circulars for its
Heilig-Meyers stores, which accounted for approximately 38% of the Company's
Heilig-Meyers store advertising expenses in fiscal 1999. In fiscal 1999, the
Heilig-Meyers format distributed over 210 million direct mail circulars. This
included monthly circulars sent by direct mail to over fifteen million
households on the Heilig-Meyer's mailing list and special private sale circulars
mailed to approximately 1.3 million of these households each month, as well as
during special promotional periods. In its Rhodes stores, direct mailing
comprised approximately 20% of total advertising expenses in fiscal 1999, with
circulars being mailed to approximately six million households per promotion.
Included are amounts associated with the two color catalogues distributed by
Rhodes in the May-June and October-November time frame of fiscal 1999. Direct
mailing expenses accounted for approximately 15% of advertising expenses at The
RoomStore during fiscal 1999, with circulars being mailed to approximately
900,000 customers per month. Direct mailing expenses comprised approximately 40%
of total advertising expenses at Mattress Discounters during fiscal 1999, with
approximately fourteen million circulars mailed each month.
In addition to the Company's utilization of direct mail circulars,
television and radio commercials are produced for each format and aired in
virtually all of the Company's markets. Newspaper advertising is placed largely
at the store level. The Company also utilizes Spanish language television and
radio in selected markets with significant Hispanic populations. The Company
regularly conducts approximately 42 Heilig-Meyers store promotional events each
year. In addition to these events, individual stores periodically conduct
promotional events locally. The Company generally conducts promotions twice each
month in its The RoomStore format and weekly in its Rhodes and Mattress
Discounters formats.
7
During fiscal 1999, the Company continued to utilize market
segmentation techniques to identify prospective customers by matching their
demographics to those of existing customers. Management believes ongoing market
research and improved mailing techniques enhance the Company's ability to place
circulars in the hands of those potential customers most likely to make a
purchase. The Company believes that the availability as well as the terms of
credit are key determinants in the purchasing decision at its Heilig-Meyers
stores, and therefore, promotes credit availability by disclosing monthly
payment terms in those circulars.
Credit Operations
The Company believes that offering flexible credit options is an
important part of its business strategy, which provides a significant
competitive advantage. Because Heilig-Meyers installment credit is administered
at the store level, terms can generally be tailored to meet the customer's
ability to pay. Each Heilig-Meyers store has a credit manager who, under the
store manager's supervision, is responsible for extending and collecting that
store's accounts in accordance with corporate guidelines.
The Company believes its credit program fosters customer loyalty and
repeat business. Approximately 70% to 80% of sales in the Heilig-Meyers stores
have been made through the Company's installment credit program. Although the
Company extends credit for original terms up to 24 months, the average term of
installment contracts at origination for the fiscal year ended February 28,
1999, was approximately 18 months. The Company accepts major credit cards in all
of its stores and, in addition, offers a revolving credit program featuring its
private label credit cards. The Company promotes this program by direct mailings
to revolving credit customers of acquired stores and potential new customers in
targeted areas. For the first seven months of fiscal 1999, credit extension and
collection of Heilig-Meyers revolving accounts were handled centrally from the
Company's Credit Center located in Richmond, Virginia. In October 1998, the
Company completed a reorganization of the Heilig-Meyers revolving credit
program. At that point, a new third party was engaged to provide this credit
option and to service the accounts. The Company does not have any recourse
obligation related to these accounts.
The Company also offers revolving credit programs, which are
underwritten by third parties, in The RoomStore, Rhodes and Mattress Discounters
formats. The Company does not service or generally provide recourse on these
accounts. Credit applications, sales, and many payments on account are generally
processed electronically through the point-of-sale systems. Approximately 50% of
The RoomStore, 55% of Rhodes, and 10% of Mattress Discounters fiscal 1999 sales
were made through the revolving credit programs.
Revenue is recognized on installment and credit sales upon approval and
establishment of a delivery date, which does not differ materially from
recognition at time of shipment. The effect of sales returns prior to shipment
date has been immaterial. Finance charges are included in revenues on a monthly
basis as earned. During fiscal 1999, finance income amounted to $231,369,000, or
approximately 8.5% of total revenues. Because credit operations are integrated
with sales and store administration, management does not believe that an
accurate allocation of various costs and expenses of operations can be made
between retail sales and credit operations. Therefore, the Company is unable to
estimate accurately the contribution of its financing operations to net income.
The Company offers, but does not require, one or more of the following
credit insurance products at the time of a credit sale in all formats except
Mattress Discounters: property, life, disability and unemployment insurance. The
Company's employees enroll customers under a master policy issued by an
unrelated third-party insurer with respect to these credit insurance products.
8
Distribution
As of April 30, 1999, the Company operates eight Heilig-Meyers
distribution centers in the Continental U.S. These centers are located in
Orangeburg, South Carolina; Rocky Mount, North Carolina; Russellville, Alabama;
Mount Sterling, Kentucky; Thomasville, Georgia; Moberly, Missouri; Hesperia,
California; and Athens, Texas. The Company relocated the Fontana, CA
Distribution Center during fiscal 1998 to a larger, 400,000 square foot facility
located in Hesperia, CA. The new distribution center also contains the relocated
Fontana Service Center as well as an outlet store. Currently, the Company's
Heilig-Meyers distribution network has the capacity to service over 900 stores
in the Continental U.S. The Company also operates six Rhodes distribution
centers, which collectively have more than 870,000 square feet and include home
delivery operations in certain markets. The RoomStore has twelve distribution
centers, including two centers in Puerto Rico, which collectively have
approximately 1,600,000 square feet. Mattress Discounters has nine distribution
centers which collectively have approximately 390,000 square feet.
The Company utilizes several sophisticated design and management
techniques to increase the operational efficiency of its distribution network.
These include cantilever racking and computer-controlled random-access inventory
storage. Use of direct shipping and backhauling from vendors has also enhanced
distribution efficiency. Backhauling involves routing its trucks so that they
can transport purchased inventory from suppliers to the distribution centers
while returning from normal store deliveries. The Company backhauled
approximately 25% of its purchased inventory in the Heilig-Meyers stores during
fiscal 1999.
Typically, each of the Company's Heilig-Meyers stores is located within
250 miles of one of the eight distribution centers, each Rhodes store is within
100 miles of one of the six Rhodes distribution centers, each of The RoomStore
stores is located within 35 miles of the twelve The RoomStore distribution and
delivery centers, and each Mattress Discounters store is located within 30 miles
of the nine Mattress Discounters distribution and delivery centers. The Company
operates a fleet of trucks which generally delivers merchandise to each
Heilig-Meyers store at least twice a week. In the Rhodes, The RoomStore and
Mattress Discounters formats, which are located in larger cities, the Company
also utilizes centralized delivery centers for home delivery. The Company
believes the use of the distribution centers enables it to make available a
broader selection of merchandise, to reduce inventory requirements at individual
stores, to benefit from volume purchasing, to provide prompt delivery to
customers and to minimize freight costs.
Customer Service
The Company believes that customer service is an important element for
success in the retail furniture business and therefore provides a broad range of
services to its customers. These include home delivery and setup, as well as
liberal policies with respect to exchanges and returns. In addition, the Company
offers service agreements on certain merchandise sold in its stores. The Company
sells substantially all of its service policies to third parties and recognizes
service policy income on these at the time of sale. Revenue from service
policies and extended warranty contracts retained by the Company are deferred
and recognized over the life of the contract period.
In addition, the Company provides repair services on virtually all
consumer electronics and mechanical items sold in its Heilig-Meyers stores. The
Company operates Heilig-Meyers service centers in Fayetteville, North Carolina;
Moberly, Missouri; Hesperia, California and Athens, Texas. The Fayetteville
Service Center occupies approximately 32,000 square feet and has the capacity to
process 2,000 repairs a week. The Moberly Service Center occupies 35,000 square
feet adjacent to the Moberly, Missouri Distribution Center and has the capacity
to process 2,000 repairs a week. The Hesperia Service Center occupies 35,000
square feet and has the capacity to process 2,500 repairs a week. The Athens
Service Center occupies 30,000 square feet and has the capacity to process 2,000
repairs a week. The service centers provide service for all consumer electronic
items, most mechanical items (except major appliances, which are serviced
locally) and watches. The service centers are also authorized to perform repair
work under certain manufacturers' warranties. Service center trucks visit
Heilig-Meyers stores weekly, allowing one-week turnaround on most repair orders.
9
E. Corporate Expansion
The Company has grown from 570 stores at February 28, 1994, to 1,253
stores at April 30, 1999. Over this time period the Company has acquired new
operating formats as a result of the Rhodes, The RoomStore and Mattress
Discounters acquisitions.
The following table lists the Company's stores by state and format as
of April 30, 1999:
Heilig- The Mattress
State Meyers Rhodes RoomStore Discounters Total
Alabama 33 10 43
Arizona 15 15
California 82 73 155
Colorado 4 6 10
District of Columbia 2 2
Florida 35 20 6 61
Georgia 57 18 75
Idaho 4 4
Iowa 19 19
Illinois 25 2 21 50 98
Indiana 22 1 4 27
Kansas 1 1
Kentucky 30 3 33
Louisiana 20 20
Maryland 2 14 26 42
Massachusetts 18 18
Michigan 14 14
Mississippi 29 1 30
Missouri 29 6 35
Montana 2 2
Nevada 5 5
New Hampshire 3 3
New Mexico 10 10
North Carolina 109 11 120
Ohio 33 9 42
Oklahoma 11 11
Oregon 2 5 7
Pennsylvania 22 8 30
Puerto Rico 32 32
Rhode Island 1 1
South Carolina 44 6 50
Tennessee 53 7 60
Texas 33 25 58
Virginia 45 2 5 24 76
Washington 12 1 13
West Virginia 26 26
Wisconsin 4 1 5
--- --- --- ---- -----
813 97 107 236 1,253
=== === === ==== =====
Stores listed under the RoomStore format include:1)former Heilig-Meyers
stores in Illinois which have been converted to the RoomStore format, but
continue to operate under Heilig-Meyers signage, 2) 3 acquired stores in
Illinois that operate under the John M. Smyth's Homemakers name and 3) 32 stores
operated under the Berrios name. All of these stores are under the supervision
of the RoomStore management team.
10
Growth in the number of stores comes primarily from three sources:
acquisition of chains or independent stores, refurbishing of existing retail
space and new construction. During the fiscal year ended February 28, 1999, the
Company opened 52 stores and closed 56 stores for a net decrease of 4 stores. Of
the 52 new stores, 49 were operations begun by the Company in vacant existing
buildings and 3 were prototype stores built according to the Company's
specifications.
The Company constantly evaluates opportunities for further expansion of
its business. The Company plans to continue its slower, selective growth
strategy for the Heilig-Meyers division. In selecting new Heilig-Meyers
locations, the Company intends to follow its established strategy of generally
locating stores within 250 miles of a distribution center and in towns with
populations of 5,000 to 50,000 that are over 25 miles from the closest
metropolitan market. The Company believes that it has substantial growth
potential in certain of its other formats. Growth opportunities of The RoomStore
format is being evaluated. The Company plans to expand this format as the
appropriate markets are identified. As noted in the introduction, however, the
Company is evaluating the possible divestiture of the Rhodes division and has
entered into an agreement to sell substantially all of its interest in the
Mattress Discounters division.
F. Other Factors Affecting the Business of the Company
Suppliers
During the fiscal year ended February 28, 1999, the Company's ten
largest suppliers accounted for approximately 33% of consolidated merchandise
purchases. In the past, the Company has not experienced difficulty in obtaining
satisfactory sources of supply and believes that adequate alternative sources of
supply exist for the types of merchandise sold in its stores. Neither the
Company nor its officers or directors have an interest, direct or indirect, in
any of its suppliers of merchandise other than minor investments in publicly
held companies.
Service Marks, Trademarks and Franchise Operations
The marks "Heilig-Meyers", "MacSaver", "MacSaver, design of a
Scotsman", other marks acquired through various acquisitions and the Company's
distinctive logo are federally registered service marks of the Company. The
Company has registrations for numerous other trademarks and service marks
routinely used in the Company's business.
The mark "Berrios" is a federally registered service mark of the
Company. The Company has also applied for certain other trademarks and service
marks for use in connection with its stores in Puerto Rico.
The marks "Rhodes" and "The RoomStore" are federally registered service
marks of the Company which were acquired in fiscal year 1997.
The marks "Mattress Discounters" and "Bedding Experts" are federally
registered service marks of the Company which were acquired in fiscal year 1998.
These registrations can be kept in force in perpetuity through
continued use of the marks and timely applications for renewal.
Seasonality
Quarterly fluctuations in the Company's sales are insignificant.
Employees
As of April 30, 1999, the Company employed approximately 22,500 persons
full- or part-time in the Continental United States, of whom approximately
21,400 worked in the Company's stores, distribution centers and service centers,
with the balance in the Company's corporate offices. As of February 28, 1999,
the Company employed approximately 1,000 persons full- or part-time in Puerto
Rico, of whom approximately 900 worked in the stores and distribution center,
with the balance in the corporate office. The Company is not a party to any
union contract and considers its relations with its employees to be good.
Foreign Operations and Export Sales
The Company has no foreign operations and makes no export sales.
11
ITEM 2. PROPERTIES
As of April 30, 1999, 975 of the Company's stores are on a single
level, with floor space devoted to sales as well as a warehouse primarily for
merchandise being prepared for delivery and for items customers carry with them.
The Heilig-Meyers stores are typically located away from the center of town. The
remaining 278 stores generally are in older two- or three-level buildings in
downtown areas. Usually there is no warehouse space in these older buildings,
and the stores' warehouses are located in nearby buildings.
As of April 30, 1999, the Company owned 73 of its Heilig- Meyers, 11 of
its Rhodes stores and 1 of its Mattress Discounters stores, six of its
Heilig-Meyers and three of its Rhodes distribution centers and the Fayetteville,
North Carolina Service Center. The Company leases the remaining stores, the
remaining distribution centers, its corporate headquarters located at 12560 West
Creek Parkway, Richmond, Virginia and other office space. Rentals generally are
fixed without reference to sales volume, although some leases provide for
increased rent due to increases in taxes, insurance premiums or both. Some
renewal options are tied to changes in the Consumer Price Index. Total rental
payments for properties for the fiscal year ended February 28, 1999, were
approximately $137,900,000. Most vehicles, a majority of the distribution
centers' material handling equipment, and a majority of the Company's data
processing equipment are also leased. In addition, Mattress Discounters operates
a 102,000-square-foot mattress manufacturing facility in Maryland and a
54,000-square-foot mattress manufacturing facility in California. The Company
believes that its facilities are adequate at present levels of operations.
12
ITEM 3. LEGAL PROCEEDINGS
The Company previously reported involvement in two cases pending in state
court regarding non-filing fees charged by the Company on certain credit
transactions. Non-filing fees are used to obtain insurance in lieu of filing a
financing statement to perfect a security interest in connection with a credit
transaction. The plaintiffs in the cases are alleging that the Company's
charging of the non-filing fees violates certain state and federal statutes and
are seeking statutory damages and unspecified punitive damages. Eubanks v.
Heilig-Meyers Company and Heilig-Meyers Furniture Company (alleging violation of
Georgia statutes and seeking certification of a class of Georgia residents) was
filed on March 5, 1997 in Georgia State Court, subsequently removed to United
States District Court for the Southern District of Georgia, and on July 7, 1997,
remanded to the Superior Court of Liberty County, Georgia. On March 25, 1998,
the court in Eubanks entered an order dismissing the case. The Eubanks case was
refiled on June 23, 1998 and on March 23, 1999, the court in Eubanks entered an
order dismissing the case with prejudice. Wahl v. Heilig-Meyers Company and
Heilig-Meyers Furniture Company (alleging violations of Tennessee statutes and
seeking certification of a class of certain individuals who made purchase in the
Company's Tennessee stores) was filed on June 23, 1997 in Memphis, Tennessee
Chancery Court. The Company's motion to dismiss is pending in the Wahl case.
In addition, the Company is party to various legal actions and
administrative proceedings and subject to various claims arising in the ordinary
course of business, including claims relating to its charges in connection with
credit sales. Based on the best information presently available, the Company
believes that the disposition of these matters will not have a material adverse
impact on the financial statements of the Company.
ITEM 4. SUBMISSION of MATTERS to a VOTE of SECURITY HOLDERS
None.
13
Executive Officers of the Registrant
The following table sets forth certain information with respect to the
executive officers of the Company as of May 1, 1999:
Positions with the Company
or Occupation for the Past
Years with Five Years and Other
Name Age the Company Information
William C. DeRusha 49 30 Chairman of the Board since April
1986. Chief Executive Officer since
April 1984. Director since January
1983.
Donald S. Shaffer 52 - President since April 1999. Chairman
and Chief Executive Officer, Western
Auto Supply Company, a division of
Sears, Roebuck and Company from 1996
to 1999. President and Chief
Executive Officer, Sears Canada from
1994 to 1996.
James F. Cerza, Jr. 51 11 Executive Vice President, Heilig-
Meyers since April 1998. Executive
Vice President, Operations from June
1996 until April 1998. Executive Vice
President, from April 1995 to June
1996. Executive Vice President,
Operations from August 1989 to April
1995.
Irwin L. Lowenstein 63 2 Executive Vice President, Rhodes since
April 1997. Chairman of the Board,
Rhodes, Inc. from 1994 to December
1996. Chief Executive Officer, Rhodes,
Inc. from 1989 to December 1996.
President and Chief Operating Officer,
Rhodes, Inc. from 1973 to 1994.
James R. Riddle 57 14 Executive Vice President,
The RoomStore / Berrios since April
1998. Executive Vice President, from
April 1995 to April 1998. Executive
Vice President, Marketing from January
1988 to April 1995.
Patrick D. Stern 42 1 Executive Vice President,
The RoomStore / Berrios since April
1998. Executive Vice President, The
RoomStore from June 1997 to April
1998. Vice President, Merchandising,
Value City Furniture (retailer) from
April 1994 to April 1997. Vice
President, Sales and Marketing,
SilverOaks Furniture Manufacturing
prior to 1994.
Roy B. Goodman 41 18 Executive Vice President, Chief
Financial Officer since December 1998.
Senior Vice President, Chief Financial
Officer from July 1997 to December
1998. Senior Vice President, Finance
from April 1995 to July 1997. Vice
President, Secretary and Treasurer
prior to April 1995.
William J. Dieter 59 26 Senior Vice President, Accounting
since April 1986. Chief Accounting
Officer since 1975.
14
PART II
ITEM 5. MARKET for REGISTRANT'S COMMON EQUITY and RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock and Pacific
Exchanges under the symbol HMY. The table below sets forth the high and low
prices as reported on the New York Stock Exchange Composite Tape, and dividend
information for each of the last eight fiscal quarters.
Fiscal Year High Low Dividends
----------- ------ ----- ---------
1999
4th Quarter $ 8 7/16 $ 6 1/16 $ .07
3rd Quarter 11 1/4 5 5/8 .07
2nd Quarter 14 5/16 11 3/8 .07
1st Quarter 15 15/16 11 3/4 .07
1998
4th Quarter $ 15 3/4 $ 11 15/16 $ .07
3rd Quarter 17 3/16 12 9/16 .07
2nd Quarter 20 14 3/4 .07
1st Quarter 17 7/8 13 3/4 .07
There were approximately 3,300 shareholders of record as of February 28,
1999.
The Company has paid cash dividends in every year since fiscal 1976. The
Board of Directors intends to continue its present policy of paying regular
quarterly dividends when justified by the financial condition of the Company.
The amount of future dividends, if any, will depend upon general business
conditions, earnings, capital requirements and such other factors as the Board
may deem relevant. The Company's payment of dividends is restricted, under
certain covenants in loan agreements, to $74,576,000 plus 75% of net earnings
adjusted for dividend payouts subsequent to February 28, 1999.
Recent Sales of Unregistered Securities. During the past fiscal year, the
Company issued shares of its common stock in the transactions described below.
The sales of the securities were exempt from registration under the Securities
Act of 1933 ("the Act") for transactions not involving a public offering, based
on the fact that the private placements were made to accredited investors under
Rule 506 of Regulation D under the Act.
On September 1, 1998, the Company acquired substantially all of the
operating assets and liabilities of Guardian Protection Products ("Guardian") in
a transaction in which the shareholder of Guardian received 666,667 shares of
the Company's common stock. Unless the Company's common stock trades for at
least ten consecutive trading days during the period from September 1, 1998,
through August 31, 1999, at a per share price of $15.00 or more, additional
shares will be issued so that the acquisition price equals $10 million divided
by the average closing price per share for the Company's common stock for the
ten trading days ending on August 31, 1999, or such earlier date as may be
selected by the Company. 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.
15
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year 1999(1) 1998(1) 1997(1) 1996 1995
(Dollar amounts in thousands except per share data)
Operations Statement Data:
Sales $2,431,152 $2,160,223 $1,342,208 $1,138,506 $ 956,004
Annual growth in sales 12.5% 60.9% 17.9% 19.1% 32.1%
Other income $ 295,206 $ 309,513 $ 250,911 $ 220,843 $ 196,135
Total revenues 2,726,358 2,469,736 1,593,119 1,359,349 1,152,139
Annual growth in revenues 10.4% 55.0% 17.2% 18.0% 33.4%
Costs of sales $1,637,901 $1,451,560 $ 876,142 $ 752,317 $ 617,839
Gross profit margin 32.6% 32.8% 34.7% 33.9% 35.4%
Selling, general and
administrative expense $ 907,913 $ 828,105 $ 526,369 $ 436,361 $ 350,093
Interest expense 75,676 67,283 47,800 40,767 32,889
Provision for doubtful
accounts 107,916 181,645 80,908 65,379 45,419
Store closing and other
charges -- 25,530 -- -- --
Provision (benefit) for
income taxes (1,081) (29,244) 21,715 23,021 39,086
Effective income tax rate (35.5)% (34.7)% 35.1% 35.7% 36.9%
Net earnings (loss) $ (1,967) $ (55,143) $ 40,185 $ 41,504 $ 66,813
Earnings (loss) margin (0.1)% (2.6)% 3.0% 3.7% 7.0%
Net earnings (loss) per share:
Basic(2) $ (0.03) $ (0.98) $ 0.81 $ 0.85 $ 1.38
Diluted(2) (0.03) (0.98) 0.80 0.84 1.34
Cash dividends per share
of common stock 0.28 0.28 0.28 0.28 0.24
Balance Sheet Data:
Total assets $1,947,752 $2,097,513 $1,837,158 $1,288,960 $1,208,937
Average assets per store 1,559 1,674 1,946 1,800 1,869
Accounts receivable, net 254,282 392,765 380,879 518,969 538,208
Retained interest in
securitized receivables
at fair value 190,970 182,158 243,427 -- --
Inventories 493,463 542,868 433,277 293,191 253,529
Property and equipment, net 400,686 398,151 366,749 216,059 203,201
Additions to property and
equipment 87,505 70,921 84,137 40,366 49,101
Short-term debt 377,486 282,365 256,413 207,812 167,925
Long-term debt 547,344 715,271 561,489 352,631 370,432
Average debt per store 740 796 866 783 832
Stockholders' equity 605,102 609,154 642,621 518,983 490,390
Stockholders' equity
per share 10.11 10.36 11.81 10.69 10.10
16
SELECTED FINANCIAL DATA, cont.
Fiscal Year 1999(1) 1998(1) 1997(1) 1996 1995
(Dollar amounts in thousands except per share data)
Other Financial Data:
Working capital $380,333 $591,397 $550,137 $527,849 $554,096
Current ratio 1.5 1.8 1.9 2.4 2.9
Debt to equity ratio 1.53 1.64 1.27 1.08 1.10
Percentage of debt to debt
and equity 60.4% 62.1% 56.0% 51.9% 52.3%
Rate of return on average
assets(3) 2.3% (0.6)% 4.6% 5.4% 7.8%
Rate of return on average
equity (0.3)% (8.8)% 6.9% 8.2% 14.5%
Number of stores 1,249 1,253 944 716 647
Number of employees 23,352 24,374 19,131 14,383 13,063
Average sales per employee $ 103 $ 99 $ 84 $ 83 $ 81
Weighted average common shares outstanding (in thousands):
Basic 59,331 56,312 49,360 48,560 48,459
Diluted 59,331 56,312 50,146 49,604 49,954
Price range on common stock per share:
High $ 15 15/16 $ 20 $ 24 1/8 $ 27 1/4 $ 36
Low 5 5/8 11 15/16 12 5/8 13 1/2 23 1/4
Close 6 1/2 15 1/2 14 1/8 14 23 5/8
(1) Operations statement data include operating results of acquisitions
subsequent to the dates of acquisition. Balance sheet data include the financial
position of acquisitions as of fiscal year ends subsequent to the dates of
acquisition. See the description of such acquisitions in the Notes to
Consolidated Financial Statements.
(2) The earnings per share amounts prior to 1998 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." For further discussion of earnings per share and the impact of
Statement No. 128, see the Notes to Consolidated Financial Statements.
(3) Calculated using earnings before interest, net of tax.
17
ITEM 7. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and
RESULTS of OPERATIONS
Heilig-Meyers Company (the "Company") is the Nation's largest retailer of
furniture, bedding and related items and operates under four business segments:
Heilig-Meyers Furniture ("Heilig-Meyers"), Rhodes Furniture, The RoomStore and
Mattress Discounters. This combination of business segments (referred to as
"divisions") has been achieved over the last three fiscal years through
acquisitions and the reformatting of existing stores between segments.
The Heilig-Meyers division is considered the Company's core business. This
division locates its stores primarily in small towns and rural markets in the
southern, mid-western and western Continental United States. The Heilig-Meyers
Furniture division offers its customers the broadest selection of competitively
priced merchandise of the four divisions and approximately 70% to 80% of its
sales have been made through the Company's installment credit program.
The Rhodes division locates its stores primarily in mid-sized markets and
metropolitan areas of 15 southern, midwestern and western states. The Company
acquired the Rhodes division on December 31, 1996. In fiscal 1997, eight stores
and the related support facilities in the South Texas region were converted to
the RoomStore division. Management has completed a thorough review of the Rhodes
operations and has implemented a plan to improve the operating results going
forward. In the third quarter of fiscal 1999, the eight stores in Colorado,
which were not performing at an acceptable level, were divested. For
substantially all of fiscal 1999, the Rhodes division offered a merchandise
selection that was considered higher end and more upscale as compared to the
other divisions. The promotional strategy for Rhodes has been refocused in order
to strengthen and expand its middle-income customer base. Initiatives have been
implemented to provide a stronger focus on major media advertising, more
aggressive price points and event driven promotions.
The RoomStore division employs a room-packaging concept to value-conscious
families in large metropolitan markets and in Puerto Rico. The RoomStore
division originated with the acquisition of stores in the central Texas region
in February 1997 that operated under the RoomStore name. This division was
expanded through the conversion of stores acquired in January 1998 in the
Chicago area and in February 1998 in the Washington-Baltimore area.
Additionally, stores formerly operated as part of the Heilig-Meyers division in
Chicago and Puerto Rico were transferred to the RoomStore division in the fourth
quarter of fiscal 1998. The former Heilig-Meyers stores and the Puerto Rican
stores, which operate under the "Berrios" name, offer in-house installment
credit programs to their customers. Historical information presented in
managements discussion and analysis has been restated to reflect the current
division alignment.
Mattress Discounters, the Nation's largest specialty bedding retailer,
offers a broad selection of bedding and bedding related merchandise at a wide
range of price points to consumers at all income levels. These stores are
located in major urban markets across the Continental United States. This
division resulted from the acquisition of Mattress Discounters in July 1997, and
was expanded into the Chicago market in January 1998 with the acquisition of The
Bedding Experts, Inc.
On March 24, 1999, the Company announced that in an effort to substantially
improve the overall financial position of the Company and to refocus on its core
home furnishings operation, a review of strategic divestiture options of all
non-core operating assets is being made. This review includes the retention of
third parties to advise on possible divestiture of the Rhodes and Mattress
Discounters divisions. On May 28, 1999 the Company entered into a definitive
agreement to sell substantially all of its interest in its Mattress Discounters
division. The transaction, which is subject to certain closing conditions, is
expected to close in the second quarter of fiscal 2000. The Company will retain
a 7% interest in Mattress Discounters. The cash proceeds from the sale, net of
transaction costs, are estimated at $206.7 million and will be used to pay down
debt. The likelihood of completing the divestiture of all or part of the Rhodes
division will be dependent on several factors not controllable by Heilig-Meyers
management and is uncertain at this time. As such, the related assets of the
Rhodes division were considered "held for use" as of February 28, 1999 and are
presented on a consolidated basis. If an agreement to sell the Rhodes division's
is executed, the transaction may result in a loss and, depending on the terms of
such an agreement, the loss may be material to results of operations. Management
believes that, under a held for use classification, the Rhodes divison's future
undiscounted cash flows will be in excess of the related carrying value of its
assets as of February 28, 1999.
18
Results of Operations
For the twelve months ended February 28, 1999 (fiscal 1999), Heilig-Meyers
Company reported a net loss of $2.0 million or $.03 per share. This compares to
a net loss of $55.1 million, or $.98 per share for the year ended February 28,
1998 (fiscal 1998) and net income of $40.2 million, or $.81 per share, for the
year ended February 28, 1997 (fiscal 1997). The loss before benefit for income
taxes for fiscal 1999 decreased to .1% of sales from the loss before benefit for
income taxes of 3.9% of sales in the prior year, and was below the earnings
before income taxes of 4.6% of sales reported in fiscal 1997. Results of
operations expressed as a percentage of sales are as follows:
Fiscal Year
1999 1998 1997
---------------------------------------
Other income 12.1% 14.3% 18.7%
Costs of sales 67.4 67.2 65.3
Selling, general and
administrative expense 37.3 38.3 39.2
Interest expense 3.1 3.1 3.6
Provision for doubtful accounts 4.4 8.4 6.0
Store closing and other charges -- 1.2 --
Earnings (loss) before provision
(benefit) for income taxes (0.1) (3.9) 4.6
Provision (benefit) for income
taxes -- (1.4) 1.6
Net earnings (loss) (0.1) (2.6) 3.0
A significant component of the decrease in the loss reported in fiscal 1999
compared to fiscal 1998 relates to pre-tax charges of approximately $45.4
million recorded in fiscal 1998, which are more fully described below, and a
$73.7 million decrease in the provision for doubtful accounts. Also contributing
to the decrease was a $9.5 million increase in the earnings before interest and
income taxes of the Mattress Discounters division, which had twelve months of
operations in fiscal 1999 compared to seven months in fiscal 1998. The earnings
before interest and income taxes of the Rhodes division, however, decreased by
$38.5 million. The remainder of the change is primarily due to an increase in
interest expense and additional selling, general and administrative expenses
recorded by the Heilig-Meyers division related to costs associated with
corporate downsizing and early retirement benefits.
The Company recorded charges during the fourth quarter of fiscal 1998
related to a plan (the "Profit Improvement Plan") to close approximately 40
Heilig-Meyers stores, downsize office and support facilities, and reorganize the
Heilig-Meyers private label credit card program. In connection with this plan,
the Company recorded a pre-tax charge in the fourth quarter of fiscal 1998 of
approximately $25.5 million, or 1.2% of sales. Related initiatives caused raw
selling margins in the fourth quarter of fiscal 1998 to be negatively impacted
by approximately $5.1 million, or .2% of sales, due to inventory liquidations.
Also, approximately $14.8 million, or .7% of sales, in selling, general and
administrative expenses were incurred in the fourth quarter of fiscal 1998
related to asset write-downs and other reserves.
During fiscal 1999, the Company completed the store closing plan and the
reorganization of the private label credit card program. Of the $19.5 million
reserve balance in place at the end of fiscal 1998, $14.7 million was utilized
during fiscal 1999, with the remaining portion related to severance and lease
obligations that will extend into fiscal 2000. Included in the fiscal 1999
results are operating losses of approximately $5.8 million incurred as these
stores were closed in an orderly fashion. In the third quarter of fiscal 1999,
the Company's private label credit card program was reorganized through the
establishment of a new agreement with a third party to offer a revolving credit
financing option to certain of the Company's customers. The Company is not
responsible for servicing these accounts or for any related credit losses. The
elimination of the previous program does not have a material impact on the
Company's financial statements.
The net loss for fiscal 1998 of $55.1 million compared to earnings of $40.2
million for fiscal 1997. The decrease between years was caused primarily by the
charges recorded in the fourth quarter of fiscal 1998 discussed above, as well
as a $100.7 million increase in the provision for doubtful accounts. The
remaining decrease between the years is the result of the additional factors
noted in the discussion below.
19
Revenues
Sales for fiscal 1999 compared to the previous periods are shown below:
Fiscal Year
1999 1998 1997
------------------------------------------
Sales (in thousands) $2,431,152 $2,160,223 $1,342,208
Sales percentage increase
over prior period 12.5% 60.9% 17.9%
Portion of increase from
existing (comparable)
stores 3.0 2.8 (0.6)
Portion of increase from
new stores 9.5 58.1 18.5
The following table shows a comparison of sales by division for the last
three fiscal years:
Fiscal Year
1999 1998 1997
------------------------------------------------------------------
(Sales amounts in millions)
# of % of # of % of # of
Stores Sales Total Stores Sales Total Stores Sales Total
------------------------------------------------------------------
Heilig-Meyers 815 $1,296 53.3 833 $1,269 58.8 829 $1,262 94.1
Rhodes 96 457 18.8 102 479 22.2 105 78 5.8
The RoomStore 102 440 18.1 93 279 12.9 10 2 0.1
Mattress
Discounters 236 238 9.8 225 133 6.1 -- -- --
-----------------------------------------------------------------
Total 1,249 $2,431 100.0 1,253 $2,160 100.0 944 $1,342 100.0
=================================================================
As noted above, the overall growth rate in sales decreased in fiscal 1999
as compared to the two previous years. This trend is reflective of the current
operating strategy of limiting the new store growth in the Heilig-Meyers and
Rhodes divisions and the impact of acquisitions and new store growth in the
RoomStore and Mattress Discounters divisions. Sales in comparable stores, which
are stores that were open for at least 12 months, increased at a higher rate in
fiscal 1999 compared to the two previous years. The growth in total sales from
fiscal 1997 to fiscal 1998 is primarily attributable to the growth in operating
units through acquisitions. The impact of price changes on sales growth over the
last three fiscal years has been insignificant.
Other income
The Heilig-Meyers division and part of the RoomStore division offer
installment credit as a financing option to its customers. The substantial
majority of receivables generated by this program are transferred to a special
purpose entity and provide a source of financing to the Company through an asset
securitization program, which is more fully described in the notes to the
consolidated financial statements. Included in other income is the compensation
received by the Company for servicing these accounts, the finance and related
income earned on the accounts that have not been securitized, and other income
earned related to non-home furnishings merchandise. The remaining stores in the
RoomStore, Rhodes and Mattress Discounters divisions do not offer in-house
credit programs and, accordingly, make limited contributions to the other income
category.
On a consolidated basis, other income decreased to 12.1% of sales for
fiscal 1999 from 14.3% of sales in fiscal 1998 and 18.7% of sales for fiscal
1997. This trend is primarily a result of the growth in the divisions in which
the installment credit program is not offered. The following table shows other
income as a percentage of sales for each division:
Fiscal Year
1999 1998 1997
--------------------------------
Heilig-Meyers 18.2% 19.7% 19.6%
Rhodes 4.8% 6.2% 5.5%
The RoomStore 8.4% 10.9% 17.9%
Mattress Discounters .2% .2% --
20
The decrease in other income as a percentage of sales in fiscal 1999
compared to fiscal 1998 in the Heilig-Meyers division is due to an increase in
the amount of receivables that have been securitized and the elimination of the
previous revolving credit card program. Since the proceeds generated by the sale
of accounts under the securitization program are used to reduce debt levels, the
reduction in finance income is offset by lower interest expense. Additionally,
the loss of other income from the revolving credit program is substantially
offset by the elimination of administrative expenses associated with the
servicing of those accounts as well as fees and commissions earned under the new
revolving credit program.
The Rhodes division experienced a decrease in other income compared to the
last two fiscal years as a result of the repositioning effort in fiscal 1999. As
part of this change in strategy, less selling emphasis was place on
non-furniture sales. As a result of plans implemented in late fiscal 1999,
management expects other income generated in the Rhodes division to increase as
a percentage of sales in fiscal 2000.
The declining trend in other income as a percentage of sales in the
RoomStore division is a result of the increase in stores over the last three
years that do not offer an in-house installment credit program. The stores
acquired in central Texas in February 1997, in Chicago in January 1998, and in
the Washington-Baltimore area in February 1998 do not offer an in-house
installment credit program. Management expects other income as a percentage of
sales in this division to be consistent with the fiscal 1999 levels in the
future.
Costs and expenses
On a consolidated basis, costs of sales increased slightly in fiscal 1999
to 67.4% of sales from 67.2% of sales in fiscal 1998. Reduced costs of sales in
the Heilig-Meyers and Mattress Discounters divisions compared to the prior year
were offset by higher costs in the Rhodes and RoomStore divisions. The following
table shows costs of sales as a percentage of sales for each division:
Fiscal Year
1999 1998 1997
--------------------------------
Heilig-Meyers 66.3% 66.6% 66.0%
Rhodes 72.6% 70.5% 63.2%
The RoomStore 67.6% 65.9% 63.3%
Mattress Discounters 62.6% 63.7% --
The costs of sales in the Heilig-Meyers division include the impact of
liquidation sales held in stores closed during the year. The net effect of these
liquidation events increased cost of sales by approximately .2% of sales in
fiscal 1999. The remaining decrease in costs of sales was a result of cost
control efforts primarily in the delivery area.
As Rhodes was repositioned to the higher end merchandise assortment in the
first quarter of fiscal 1999, selling margins were negatively impacted as goods
from the previous assortment continued to be liquidated. Selling margins in this
division were further reduced during the repositioning period in order to spur
consumer demand, which was below managements expectation. As discussed in the
overview section, the Rhodes promotional strategy has been refocused in order to
expand its middle-income customer base. Based on this plan, management expects
the costs of sales in the Rhodes division to decrease in fiscal 2000.
The increase in costs of sales in the RoomStore division reflects the
growth in major metropolitan markets over the past three fiscal years.
Management expects these levels of cost, as a percentage of sales, to be
consistent in fiscal 2000.
Mattress Discounters reported lower costs of sales in fiscal 1999 compared
to fiscal 1998 as a result of improved buying power and increased sales of
private label merchandise.
Selling, general and administrative expenses decreased to 37.3% of sales in
fiscal 1999 from 38.3% of sales in fiscal 1998 and 39.2% in fiscal 1997. The
following table displays selling, general and administrative expenses as a
percentage of the applicable divisions sales:
Fiscal Year
1999 1998 1997
--------------------------------
Heilig-Meyers 39.4% 41.1% 39.8%
Rhodes 38.7% 33.7% 25.4%
The RoomStore 34.9% 39.5% 40.5%
Mattress Discounters 27.9% 26.3% --
21
Selling, general and administrative expenses as a percentage of sales for
the Heilig-Meyers division in fiscal 1999 decreased approximately 1.1% of sales
from the prior year as a result of asset write-downs and other reserves recorded
in fiscal 1998 related to the Profit Improvement Plan. The remaining portion of
the decrease is the result of corporate downsizing actions taken in late fiscal
1998 and other cost cutting programs aimed at reducing discretionary spending.
The increase in selling, general and administrative expenses as a percentage of
sales in fiscal 1998 over fiscal 1997 was the result of the 1998 charges noted
above.
The Rhodes division experienced an increase in selling, general and
administrative expenses as a percentage of sales in fiscal 1999 compared to
fiscal 1998 primarily due to increased costs associated with the repositioning
initiative discussed above. Major components of these expenditures included
employee training programs, costs to develop color merchandise catalogs,
customer amenities and the sponsorship of a professional race car team.
Management has eliminated these programs and as a result expects selling,
general and administrative expenses in this division to be reduced by
approximately $10 million, or 2.2% of sales, on an annual basis.
The decreasing trend in selling, general and administrative expenses of the
RoomStore division, as a percentage of sales, reflects the lower cost structures
of the recent additions to this division. These operations generally have lower
cost structures because they do not administer installment credit programs.
Selling, general and administrative expenses as a percentage of sales in
the Mattress Discounters division increased over fiscal 1998 primarily as a
result of costs associated with new store growth.
Interest expense was 3.1% of sales in fiscal 1999 and 1998 and 3.6% of
sales in fiscal 1997. Weighted average long-term debt increased to $714.6
million in fiscal 1999 compared to $675.7 million in fiscal 1998 due to the
issuance of $175 million in public debt during the second quarter of fiscal 1998
and the paydown of approximately $22.4 million in the third quarter of fiscal
1999. Weighted average long-term interest rates for fiscal 1998 remained
relatively consistent at 7.7%, compared to 7.8% during the prior year. Weighted
average short-term debt increased to $235.0 million in fiscal 1999 from $229.2
million in fiscal 1998. Weighted average short-term interest rates also remained
consistent at 6.2% compared to 6.1% in the prior year. The decrease in interest
expense as a percentage of sales in fiscal 1998 compared to fiscal 1997 is
mainly due to leverage on the sales by Rhodes, The RoomStore and Mattress
Discounters, which were purchased with common stock.
The provision for doubtful accounts was 4.4% of sales in fiscal 1999
compared to 8.4% and 6.0% in fiscal 1998 and 1997, respectively. The decrease in
the provision for doubtful accounts as a percentage of sales in fiscal 1999
compared to fiscal 1998 is a result of charges totaling 4.1% of sales recorded
in fiscal 1998 that did not recur in fiscal 1999. In fiscal 1998, the Company
provided an additional $38.0 million for doubtful bankrupt accounts. The Company
also provided for increased write-offs of approximately $36.3 million related to
a more critical evaluation of accounts for write-off in fiscal 1998 and to cover
the impact of transferring the servicing of accounts from stores that were
designated to close. In addition, the Company provided $15.0 million in fiscal
1998 for an increase in estimated losses under the recourse provision of the
Heilig-Meyers private label credit card program that was planned for
reorganization. Excluding the charges described above, the decrease in the
provision as a percentage of sales from fiscal 1997 to fiscal 1998 resulted from
an increase in sales in the Rhodes, RoomStore and Mattress Discounters
divisions, which utilized third party credit and, therefore, do not incur credit
losses.
The volume of accounts declaring bankruptcy was $35.3 million in fiscal
1999 as compared to the prior two years of $34.4 million and $30.6 million.
Write-offs and repossession losses for the on-balance sheet portfolio for
fiscal years 1999, 1998 and 1997 were $68.8 million, $106.0 million and $70.4
million, respectively. Of these amounts, $4.3 million, $21.2 million and $6.9
million were for purchased accounts. Management believes that the allowance for
doubtful accounts at February 28, 1999, is adequate.
The Profit Improvement Plan implemented in fiscal 1998 has positively
impacted the portfolios credit loss performance. The stores that were closed in
the past two years included many of the poorest performers related to credit
losses. Management believes the elimination of these stores will continue to
positively impact credit losses going forward. The Company is continuing to
fully implement risk-based scoring models to provide local store management with
better tools in making credit decisions.
Provision for Income Taxes
The income tax benefit for fiscal 1999 was calculated by applying a
percentage of 35.5% compared to 34.7% in fiscal 1998. The income tax rate in
fiscal 1997 was 35.1%. The lower rate for fiscal 1998 compared to fiscal 1999
and fiscal 1997 was primarily due to the loss incurred during 1998. Overall, the
income tax rate has increased from the fiscal 1997 level as a result of the
carryover tax attributes of acquired assets and liabilities.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company increased its cash position $18.5 million to $67.3 million at
February 28, 1999 from $48.8 million at February 28, 1998, which was $33.8
million higher than the $15.0 million position at February 28, 1997.
Net cash inflow from operating activities during fiscal 1999 was $194.7
million, compared to an outflow of $22.8 million in fiscal 1998. The Company has
continued to slow the expansion of its store base, which has resulted in
improved cash flows provided by operating activities. Additionally, proceeds
from the sales of interests in the Company's installment accounts receivable
through the asset securitization program provided cash inflows of $159.3 million
in fiscal 1999 compared to $60.0 million in fiscal 1998. Absent proceeds from
securitizations, the Company traditionally produces minimal or negative cash
flow from operating activities because it extends in-house credit in its
Heilig-Meyers stores and certain RoomStore stores. During fiscal 1999,
installment accounts receivable increased at a slower rate than the prior year
period primarily due to the closing of certain Heilig-Meyers stores pursuant to
the Profit Improvement Plan. During fiscal 1999, inventory decreased compared to
an increase in the prior year period. The variation in the change in inventory
between years is primarily the result of the closing of certain Heilig-Meyers
stores pursuant to the Profit Improvement Plan, prior year purchases related to
newly acquired stores and generally lower inventory levels compared to the prior
year across all divisions.
Investing activities produced negative cash flows of $87.1 million during
the twelve months ended February 28, 1999 compared to negative cash flows of
$106.5 million in the prior year period. The decrease in negative cash flows
from investing activities resulted from a decrease in cash used for
acquisitions. Pursuant to the Profit Improvement Plan, management has taken
steps to slow the growth of the capital intensive Heilig-Meyers division and
lower overall spending on capital projects. Additions to property and equipment
during fiscal 1999 include the acquisition of properties and equipment totaling
$46.9 million that were previously leased under operating lease agreements.
During the prior year period cash used for additions to property and equipment
for fiscal 1998 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.
Financing activities produced negative cash flows of $89.1 million during
the twelve months ended February 28, 1999 compared to a $163.1 million positive
cash flow in the prior year period. The negative cash flow from financing
activities in the current year is due to the decrease in notes payable and
payments of long-term debt. 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 twelve months ended February 28, 1999. As of
February 28, 1999, long-term notes payable with an aggregate principal amount of
$175.0 million have been issued to the public under this Registration Statement.
As of February 28, 1999, the Company had a $400.0 million revolving credit
facility in place, which expires in July 2000. This facility includes ten banks
and had $210.0 million outstanding and $190.0 million unused as of February 28,
1999. Subsequent to February 28, 1999, this facility was reduced to $298.1
million. During the year, the Company had additional lines of credit with banks
that totaled $60.0 million. These lines of credit were eliminated during the
fourth quarter of fiscal 1999.
As a result of losses incurred during fiscal years 1999 and 1998, the
Company obtained amendments to its bank debt agreements in order to maintain
covenant compliance. The most recent amendment includes a revised covenant
package and a provision whereby the revolving credit facility commitment will be
reduced, on a dollar for dollar basis, with proceeds from asset sales until the
commitment is reduced to $200.0 million. In addition, current senior note
maturities of $95.5 million were extended and become payable in September 1999.
The Company expects to repay these notes with the proceeds from the sale of
assets or other financing activities.
Total debt as a percentage of debt and equity was 60.4% at February 28,
1999, 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 including securitizations to reduce notes
payable outstanding. The current ratio was 1.5X at February 28, 1999, compared
to 1.8X at February 28, 1998. The decrease in the current ratio from February
28, 1998 to February 28, 1999 is primarily attributed to the reclassification of
an additional $145.1 million from long-term notes payable to the current portion
as a result of the maturity of these amounts within the next twelve months.
23
OTHER INFORMATION
Year 2000 Issue
The Year 2000 issue arises because many computer programs use two digits
rather than four to define the applicable year. Using two digits could result in
system failure or miscalculations that cause disruptions of operations. In
addition to computer systems, any equipment with embedded technology that
involves date sensitive functions is at risk if two digits have been used rather
than four.
During fiscal year 1997, management established a team to oversee the
Company's Year 2000 date conversion project. The project is composed of the
following stages: 1) assessment of the problem, 2) prioritization of systems, 3)
remediation activities and 4) compliance testing. A plan of corrective action
using both internal and external resources to enhance or replace the systems for
Year 2000 compliance has been implemented. Internal resources consist of
permanent employees of the Company's Information Systems department, whereas
external resources are composed of contract programming personnel that are
directed by the Company's management. The team has continued to assess the
systems of subsidiaries as the Company has expanded. Management completed the
remediation stage for the critical systems of the Heilig-Meyers operations
during fiscal year 1999. Completion of remediation for all other subsidiaries
critical systems is expected in the second quarter of fiscal year 2000. The
testing stage for critical systems within the entire Company is planned for the
first and second quarters of fiscal year 2000. The Company is in the middle
stage of inventorying and 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 the project's beginning in fiscal 1997, the Company has incurred
approximately $1.2 million in expenses in updating its management information
system to alleviate potential Year 2000 problems. These expenditures represent
personnel costs related to software remediation of major impact systems. The
Company had previously initiated a hardware upgrade plan for desktop computers
that was independent of the Year 2000 issue, and, therefore, most hardware
upgrades were completed under this plan. The remaining expenditures are expected
to be approximately $1.69 million, which will be expensed as incurred. Expected
future expenditures can be broken down as follows:
(Amounts in thousands)
Task:
Hardware Remediation $ 700 42%
Internal Personnel Resources 640 38%
Software Upgrades-Remediation/
Auditing/Testing 350 20%
----------------
Total $1,690 100%
================
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 managements current estimates, which are derived utilizing numerous
assumptions. Such assumptions include, but are not limited to, the continued
availability of certain resources, the readiness of third-parties through their
own remediation plans, the absence of costs associated with implementation of
any contingency plan and the lack of acquisitions by the Company requiring
additional remediation efforts. These assumptions are inherently uncertain and
actual events could differ significantly from those anticipated.
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
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 is ranking suppliers based on how critical each
supplier is believed to be to the Company's operations. The Company is
requesting a copy of the Year 2000 project plan under which these suppliers are
operating. The Company's Year 2000 project team will review these plans. If a
supplier is deemed to be critical and has a project plan that does not meet the
24
Company's expectations for completion, the Company will examine all of the
circumstances and develop a contingency plan. Contingency plans may include the
identification and use of an alternate supplier of the product or service that
is Year 2000 compliant or the purchase of additional levels of inventory as a
precaution based on the Company's expected needs. Management expects to complete
its Year 2000 contingency planning during the second quarter of fiscal 2000.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report 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. See, e.g., "Managements Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and "Legal Proceedings." 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 customers 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, the Company's
ability to complete asset sales at reasonable valuations, the ability of the
investment group acquiring Mattress Discounters to obtain satisfactory financing
for their purchase of substantially all of the Company's interest in Mattress
Discounters, 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, its key vendors and service providers to effectively correct the Year
2000 issue, and inflation rates and regulations and laws which affect the
Company's ability to do business in its markets may also impact the outcome of
forward-looking statements.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates. The Company's policy is to manage interest rate risk
through the strategic use of fixed rate debt, variable rate debt, and interest
rate derivatives. As a means of reducing the risk of credit-related losses on
interest rate derivatives, the Company as a matter of policy only enters into
transactions with counterparties rates "A" or higher. Weighted average variable
rates are based on rates in effect at the most recent reset date. For interest
rate derivatives, the table presents notional amounts and weighted average
interest rates by contractual maturity dates. The fair value of the Company's
long-term, fixed rate debt is based on the discounted cash flow of the debt
using current rates and remaining maturities. The fair value of interest rate
derivative financial instruments is the estimated amount that the Company would
receive or pay upon termination of the agreements, based on estimates obtained
from counterparties. The carrying amounts of notes payable and long-term,
variable rate debt approximate fair value. All items described in the table
below are non-trading.
Fair Value
(Amounts in thousands) 2000 2001 2002 2003 2004 Thereafter Total at 2/28/99
- ----------------------------------------------------------------------------------------------------------------------
Liabilities:
Notes payable $210,000 -- -- -- -- -- $210,000 $210,000
Average interest rate 5.7% -- -- -- -- -- 5.7% --
Long-term debt
Fixed rate $130,000 -- $160,000 -- $200,000 $175,000 $655,000 $571,861
Average interest rate 10.04% -- 9.12% -- 7.88% 7.60% 8.59% --
Variable rate $ 35,745 $ 204 $ 89 $ 82 $ 82 $ 123 $ 36,325 $ 501
Average interest rate 7.2% 7.4% 7.1% 7.2% 6.7% 6.5% 7.2% --
Interest Rate Derivative
Financial Instruments
Relating to Debt:
Pay fixed/receive variable $ 74,000 -- -- -- -- -- $ 74,000 $ (824)
Average pay rate 7.6% -- -- -- -- -- -- --
Average receive rate 5.2% -- -- -- -- -- -- --
Interest Rate Derivative
Financial Instruments
Relating to Asset
Securitizations:
Pay fixed/receive variable $145,000 $100,000 -- -- -- -- $245,000 $ (2,270)
Average pay rate 6.9% 7.0% -- -- -- -- -- --
Average receive rate 5.0% 4.9% -- -- -- -- -- --
26
ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Fiscal Year 1999 1998 1997
------ ------ ------
Revenues:
Sales $2,431,152 $2,160,223 $1,342,208
Other income 295,206 309,513 250,911
---------- ---------- ----------
Total revenues 2,726,358 2,469,736 1,593,119
Costs and expenses:
Costs of sales 1,637,901 1,451,560 876,142
Selling, general and
administrative 907,913 828,105 526,369
Interest 75,676 67,283 47,800
Provision for doubtful accounts 107,916 181,645 80,908
Store closing and other charges -- 25,530 --
---------- ---------- ----------
Total costs and expenses 2,729,406 2,554,123 1,531,219
---------- ---------- ----------
Earnings (loss) before provision
(benefit) for income taxes (3,048) (84,387) 61,900
Provision (benefit) for income taxes (1,081) (29,244) 21,715
----------- ----------- ----------
Net earnings (loss) $ (1,967) $ (55,143) $ 40,185
=========== =========== ==========
Net earnings (loss) per share:
Basic $ (0.03) $ (0.98) $ 0.81
=========== =========== ==========
Diluted $ (0.03) $ (0.98) $ 0.80
=========== =========== ==========
Weighted average common shares outstanding:
Basic 59,331 56,312 49,360
Diluted 59,331 56,312 50,146
========== ========= ==========
Cash dividends per share of common
stock $ 0.28 $ 0.28 $ 0.28
========== ========== ==========
See notes to consolidated financial statements.
27
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
February 28, 1999 1998
------ ------
Assets:
Current assets:
Cash $ 67,254 $ 48,779
Accounts receivable, net 254,282 392,765
Retained interest in securitized
receivables at fair value 190,970 182,158
Inventories 493,463 542,868
Other current assets 124,305 126,978
---------- ----------
Total current assets 1,130,274 1,293,548
Property and equipment, net 400,686 398,151
Other assets 72,632 55,321
Excess costs over net assets acquired, net 344,160 350,493
---------- ----------
$1,947,752 $2,097,513
========== ==========
Liabilities And Stockholders' Equity:
Current liabilities:
Notes payable $ 210,000 $ 260,000
Long-term debt due within one year 167,486 22,365
Accounts payable 193,799 203,048
Accrued expenses 178,656 216,738
---------- ----------
Total current liabilities 749,941 702,151
Long-term debt 547,344 715,271
Deferred income taxes 45,365 70,937
Stockholders' equity:
Preferred stock, $10 par value -- --
Common stock, $2 par value (250,000
shares authorized; 59,861 and
58,808 shares issued and
outstanding, respectively) 119,722 117,616
Capital in excess of par value 242,346 230,580
Unrealized gain on investments 5,228 4,548
Retained earnings 237,806 256,410
---------- ----------
Total stockholders' equity 605,102 609,154
---------- ----------
$1,947,752 $2,097,513
========== ==========
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Number of Accumulated
Common Capital in Other Total
Shares Common Excess of Comprehensive Retained Stockholders'
Outstanding Stock Par Value Income Earnings Equity
- -------------------------------------------------------------------------------------------
Balances at
February 29, 1996 48,571 $ 97,143 $120,769 $ -- $301,071 $518,983
Net earnings -- -- -- -- 40,185 40,185
Unrealized gain
on investments -- -- -- 10,797 -- 10,797
--------
Comprehensive income 50,982
Cash dividends -- -- -- -- (13,612) (13,612)
Common stock issued
for acquisitions 5,791 11,582 73,842 -- -- 85,424
Exercise of stock
options, net 52 103 741 -- -- 844
----------------------------------------------------------------------
Balances at
February 28, 1997 54,414 108,828 195,352 10,797 327,644 642,621
Net loss -- -- -- -- (55,143) (55,143)
Change in
unrealized gain
on investments -- -- -- (6,249) -- (6,249)
--------
Comprehensive loss (61,392)
Cash dividends -- -- -- -- (16,249) (16,249)
Common stock issued
for acquisitions 4,279 8,558 34,578 -- -- 43,136
Exercise of stock
options, net 115 230 650 -- -- 880
Other -- -- -- -- 158 158
----------------------------------------------------------------------
Balances at
February 28, 1998 58,808 117,616 230,580 4,548 256,410 609,154
Net loss -- -- -- -- (1,967) (1,967)
Change in
unrealized gain
on investments -- -- -- 680 -- 680
--------
Comprehensive loss (1,287)
Cash dividends -- -- -- -- (16,637) (16,637)
Common stock issued
for acquisitions 931 1,862 11,336 -- -- 13,198
Exercise of stock
options, net 122 244 430 -- -- 674
----------------------------------------------------------------------
Balances at
February 28, 1999 59,861 $119,722 $242,346 $ 5,228 $237,806 $605,102
======================================================================
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Fiscal Year 1999 1998 1997
-----------------------------------------
Cash flows from operating activities:
Net earnings (loss) $ (1,967) $ (55,143) $ 40,185
Adjustments to reconcile net earnings (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 58,840 54,043 33,874
Provision for doubtful accounts 107,914 181,645 80,908
Store closing and other charges
provision -- 25,530 --
Store closing and other charges
payments (10,013) (1,452) --
Other, net (2,525) 2,616 588
Change in operating assets and
liabilities, net of the effects
of acquisitions:
Accounts receivable 25,342 (195,141) (4,331)
Sale of accounts receivable -- -- 60,500
Retained interest in securitized
receivables at cost (7,784) 50,533 (198,786)
Inventories 51,601 (77,115) (35,154)
Other current assets 10,050 (65,218) (11,749)
Accounts payable (9,819) 14,788 18,017
Accrued expenses (26,958) 42,106 12,948
-------------------------------------------
Net cash provided (used)
by operating activities 194,681 (22,808) (3,000)
-------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- (40,186) (58,842)
Additions to property and equipment (87,505) (70,921) (84,137)
Disposals of property and equipment 22,797 15,107 3,423
Miscellaneous investments (22,416) (10,467) (6,907)
-------------------------------------------
Net cash used by
investing activities (87,124) (106,467) (146,463)
-------------------------------------------
Cash flows from financing activities:
Issuance of stock 697 912 683
Proceeds from long-term debt -- 174,767 299,444
Increase (decrease) in notes
payable, net (50,000) 104,000 (34,000)
Payments of long-term debt (23,142) (100,335) (104,110)
Dividends paid (16,637) (16,249) (13,612)
-------------------------------------------
Net cash provided (used)
by financing activities (89,082) 163,095 148,405
-------------------------------------------
Net increase (decrease) in cash 18,475 33,820 (1,058)
Cash at beginning of year 48,779 14,959 16,017
-------------------------------------------
Cash at end of year $ 67,254 $ 48,779 $ 14,959
===========================================
See notes to consolidated financial statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Nature of Operations
Heilig-Meyers Company and subsidiaries (the "Company") is a retailer of
home furnishings that operated 1,249 stores as of February 28, 1999 of which
1,217 are located in 35 states and Washington, D.C. and 32 are located in Puerto
Rico. The Company has four primary retail formats operating as Heilig-Meyers
Furniture ("Heilig-Meyers"), Rhodes Furniture, The RoomStore and Mattress
Discounters. The Company's operating strategy includes offering a broad
selection of home furnishings and bedding. The Company offers third party
private label credit card programs to provide financing to its customers. The
Heilig-Meyers format also offers consumer electronics, appliances, and floor
coverings as well as an in-house installment credit program.
Principles of Consolidation
The consolidated financial statements include the accounts of Heilig-Meyers
Company and its subsidiaries, all of which are wholly owned. All material
intercompany balances and transactions have been eliminated.
Fiscal Year
Fiscal years are designated in the consolidated financial statements by the
calendar year in which the fiscal year ends. Accordingly, results for fiscal
years 1999, 1998 and 1997 represent the years ended February 28, 1999, February
28, 1998 and February 28, 1997, respectively. Certain amounts in the fiscal 1997
consolidated financial statements have been reclassified to conform to the
fiscal 1999 and 1998 presentation.
Segment Information
Effective December 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company has significant operations
aligned in four operating formats: Heilig-Meyers, The RoomStore, Rhodes and
Mattress Discounters divisions. Accordingly, data with respect to industry
segments has been reported separately herein.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable arise primarily from closed-end installment sales
contracts used by customers to finance purchases of merchandise and services
offered by the Company. These contracts are at fixed rates and terms with level
payments of principal and interest. In accordance with trade practice, payments
due after one year are included in current assets. Provisions for doubtful
accounts are made to maintain an adequate allowance to cover anticipated losses.
Credit operations are generally maintained at each store to evaluate the credit
worthiness of its customers and to manage the collection process. The Company
reviews customer accounts on an individual basis in reaching decisions regarding
methods of collection or write-off of doubtful accounts. Generally, accounts on
which payments have not been received for six months are charged to the
allowance for doubtful accounts. The Company generally requires down payments on
credit sales and offers credit insurance to its customers, both of which lessen
credit risk.
The Company also offers certain of its customers revolving credit through
private label credit facilities with various commercial banks. Where applicable,
provisions for recourse obligations are made to maintain an adequate allowance
to cover anticipated losses.
The Company operates its 1,249 stores throughout 35 states, Washington,
D.C., and Puerto Rico and, therefore, is not dependent on any given industry or
business for its customer base and has no significant concentration of credit
risk.
31
Retained Interest in Securitized Receivables
As part of its accounts receivable securitization program, the Company
transfers a portion of installment accounts receivable to a Master Trust
("Trust") in exchange for certificates representing undivided interests in such
receivables. The Company retains an undivided interest in the securitized
receivables through its ownership of the seller's certificate, which represents
both contractually required seller's interest and excess seller's interest in
the receivables in the Trust. Retained interests also include an interest-only
strip, which arises due to estimated excess cash flow from the Trust that
reverts to the Company. The Company continues to service the receivables in the
Trust.
Inventories
Merchandise inventories are stated at the lower of cost or market as
primarily determined by the average cost method. Inventory costs include certain
warehouse and handling costs.
Property and Equipment
Additions to property and equipment, other than capital leases, are
recorded at cost and, when applicable, include interest incurred during the
construction period. Capital leases are recorded at the lesser of fair value or
the discounted present value of the minimum lease payments. Depreciation is
computed by the straight-line method. Capital leases and leasehold improvements
are amortized by the straight-line method over the shorter of the estimated
useful life of the asset or the term of the lease. The estimated useful lives
are 7 to 45 years for buildings, 3 to 10 years for fixtures, equipment and
vehicles, and 10 to 15 years for leasehold improvements.
Excess Costs Over Net Assets Acquired
Excess costs over net assets acquired are being amortized over periods not
exceeding 40 years using the straight-line method. The Company evaluates excess
costs over net assets acquired for recoverability on the basis of whether
goodwill is fully recoverable from projected, undiscounted net cash flows from
operations of the related business unit. Impairment, should any occur, would be
recognized by a charge to operating results and a reduction in the carrying
value of excess costs over net assets acquired.
Stockholders' Equity
The Company is authorized to issue 250,000,000 shares of $2 par value
common stock. At February 28, 1999 and 1998, there were 59,861,000 and
58,808,000 shares outstanding, respectively. The Company is authorized to issue
3,000,000 shares of $10 par value preferred stock. To date, none of these shares
have been issued.
On February 10, 1998 the Board of Directors of the Company declared a
dividend distribution of one preferred share purchase right (a "Right") on each
outstanding share of Common Stock pursuant to a Shareholders' Rights Plan. The
action replaced a similar plan expiring in fiscal 1998. The Rights are
exercisable only after the attainment of, or the commencement of a tender offer
to attain, a specified ownership interest in the Company by a person or group.
When exercisable, each Right would entitle its holder to purchase one-hundredth
of a newly issued share of Cumulative Participating Preferred Stock, Series A,
par value $10.00 per share (the "Series A Preferred Stock") at an initial price
of $110, subject to adjustment. A total of 750,000 shares of Series A Preferred
Stock have been reserved. Each share of Series A Preferred Stock will entitle
the holder to 100 votes and has an aggregate dividend rate of 100 times the
amount paid to holders of the Common Stock. Upon occurrence of certain events,
each holder of a Right (other than those which are void pursuant to the terms of
the plan) will become entitled to purchase shares of Common Stock having a value
of twice the Right's then current exercise price in lieu of Series A Preferred
Stock.
32
New Accounting Standards
During fiscal year 1999, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which
requires presentation of total nonowner changes in equity for all periods
displayed. This information is displayed in the consolidated statements of
stockholders' equity.
During fiscal year 1999, the Company also adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The adoption of this statement did not affect the Company's
consolidated financial position, results of operations or cash flows, and is
limited to the form and content of its disclosures. This information is provided
in Note 15.
The Company also adopted SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," during fiscal 1999. This statement
changes disclosure requirements related to pension and other postretirement
benefit obligations. Adoption of this statement did not impact the Company's
consolidated financial position, results of operations or cash flows. The effect
of the new statement is 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 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 the 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.
Revenues and Costs of Sales
Sales revenue is generally recognized upon determination that merchandise
is in stock and establishment of a delivery date, and, if applicable, upon
approval of customer credit. Sales are presented net of returns. The effect of
sales returns prior to shipment date has been immaterial. Other income consists
primarily of finance and other income earned on accounts receivable. Finance
charges were $231,369,000, $231,612,000, and $209,491,000 during fiscal 1999,
1998 and 1997, respectively. Finance charges are included in revenues on a
monthly basis as earned. The Company sells substantially all of its service
policies to third parties and recognizes service policy income on these at the
time of sale. Revenue from service policies and extended warranty contracts
retained by the Company are deferred and recognized over the life of the
contract period. Costs of sales includes occupancy and delivery expenses.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding. Diluted earnings per share also includes the
effect of dilutive potential common shares outstanding during the period.
Dilutive potential common shares are additional common shares (dilutive stock
options) assumed to be earned.
33
Interest Rate Swap Agreements
The Company has entered into several interest rate swap agreements ("swap
agreements") as a means of managing its exposure to changes in interest rates.
These agreements in effect convert a portion of the Company's floating rate debt
and floating rate asset securitizations to fixed rates by exchanging floating
rate payments for fixed rate payments. The differential to be paid or received
on these agreements is accrued and is recognized as an adjustment to interest
expense. The related amount of payable to or receivable from counterparties is
recorded as an adjustment to accrued interest expense.
(2) Expansion
- --------------------------------------------------------------------------------
During fiscal years 1999 and 1998, the Company made the acquisitions
described below. All acquisitions, except for the Bedding Experts transaction,
have been accounted for by the purchase method, and accordingly, operations
subsequent to the respective acquisition dates have been included in the
accompanying financial statements. Pro forma results of operations for certain
acquisitions have not been presented because the effects were not significant.
Other acquisitions completed during fiscal years 1999 and 1998 are not discussed
below because they are not considered material to the consolidated financial
statements.
On September 1, 1998 the Company acquired substantially all of the
operating assets and liabilities of Guardian Protection Products ("Guardian") in
a transaction in which the shareholder of Guardian received 666,667 shares of
the Company's common stock. Unless the Company's common stock trades for at
least ten consecutive trading days during the period from September 1, 1998,
through August 31, 1999, at a per share price of $15.00 or more, additional
shares will be issued so that the acquisition price equals $10 million divided
by the average closing price per share for the Company's common stock for the
ten trading days ending on August 31, 1999, or such earlier date as may be
selected by the Company. 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 unamortized excess of purchase price over the fair
market value of the net assets acquired from Guardian, as of February 28, 1999
was $9,575,000.
During July 1997, the Company acquired all of the outstanding capital stock
of Mattress Discounters Corporation and a related corporation ("Mattress
Discounters") with 169 stores in 10 states and Washington, D.C. The initial
purchase price was valued at approximately $42,900,000. The Company issued
2,269,839 shares of its common stock at the time of closing and 264,550 shares
of common stock twelve months after the time of closing to the former
shareholders of Mattress Discounters, in accordance with the purchase agreement,
based on the achievement by the acquired stores of certain earnings targets. The
unamortized excess of purchase price over the fair market value of the net
assets acquired, as of February 28, 1999 was $58,136,000. Adjustments made to
the preliminary purchase price allocation were not material.
During January 1998, the Company acquired all of the outstanding capital
stock of Bedding Experts, Inc. with 54 stores in Chicago, Illinois and the
surrounding area. The Company issued 2,019,182 shares of its common stock in the
transaction valued at $25,000,000. The transaction was recorded as a
pooling-of-interests, however prior periods have not been restated as the effect
is not considered material to the consolidated financial statements.
During January 1998, the Company acquired certain assets related to 5
stores, 3 of which will remain in operation, of John M. Smyth's Homemakers
("Homemakers") in Chicago, Illinois. The purchase price of these assets was
approximately $11,959,000. The unamortized excess of purchase price over the
fair market value of the net assets acquired from Homemakers as of February 28,
1999 was not significant.
During February 1998, the Company acquired certain assets related to 24
stores of Reliable, Inc. of Columbia, Maryland. The purchase price of these
assets was approximately $18,164,000. The unamortized excess of purchase price
over the fair market value of the net assets acquired from Reliable, Inc. as of
February 28, 1999 was $4,939,000.
The Company amortizes the excess of purchase price over fair market value
of net assets acquired on a straight-line basis over periods not exceeding 40
years. The unamortized excess of purchase price over the fair value of the net
assets acquired for all acquisitions was $344,160,000 and $350,493,000, net of
accumulated amortization of $38,248,000 and $29,050,000, at February 28, 1999
and 1998, respectively.
34
(3) Store Closing & Other Charges
- --------------------------------------------------------------------------------
In the fourth quarter of fiscal 1998, the Company recorded a pre-tax charge
of $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. The pre-tax charge is summarized as follows:
Amount Remaining Amount Remaining
Utilized Reserve Utilized Reserve
through as of through as of
Pre-Tax February 28, February 28, February 28, February 28,
(Amounts in thousands) Charge 1998 1998 1999 1999
------------------------------------------------------------
Severance $ 8,100 $1,452 $ 6,648 $ 5,150 $1,498
Lease & facility exit cost 7,680 -- 7,680 4,386 3,294
Fixed asset impairment 7,250 2,117 5,133 5,133 --
Goodwill impairment 2,500 2,500 -- -- --
-----------------------------------------------------------
Total $25,530 $6,069 $19,461 $14,669 $4,792
===========================================================
The Company completed the store closings, office downsizing, and private
label credit card program reorganization associated with this plan during fiscal
1999. The substantial majority of the remaining reserves are expected to be
utilized during fiscal 2000 with some amounts related to long-term lease
obligations extending beyond fiscal 2000.
Operations of stores closed during fiscal 1999 generated a net loss of $5.8
million on sales of $4.8 million. These amounts are reported in the fiscal 1999
statement of operations.
Charges associated with actions taken during fiscal 1999 to close stores
and related support facilities totaled $2.1 million. Because these charges were
not associated with a comprehensive restructuring plan, this amount is reported
as selling, general and administrative expense in the fiscal 1999 statement of
operations.
(4) Accounts Receivable and Retained Interest in Securitized Receivables
- --------------------------------------------------------------------------------
Accounts receivable are shown net of an allowance for doubtful accounts and
unearned finance income. The allowance for doubtful accounts was $42,745,000 and
$60,306,000 and unearned finance income was $31,775,000 and $46,980,000 at
February 28, 1999 and 1998, respectively. Accounts receivable having balances
due after one year were $64,496,000 and $94,676,000 at February 28, 1999 and
1998, respectively.
As discussed in Note 1, the Company transfers a portion of its installment
accounts receivable to a Master Trust ("Trust") in exchange for certificates
representing undivided interests in such receivables. Certificates that have
been sold to third parties are as follows:
(Amounts in thousands) 1999 1998
- --------------------------------------------------------------
Series 1997-1
Senior class floating
rate certificates $100,000 $252,000
Series 1998-1
Class A 6.125% certificates 307,000 307,000
Class B 6.35% certificates 61,000 61,000
Floating rate collateral
indebtedness interest 32,000 32,000
Series 1998-2
Class A floating rate certificates 230,000 --
Class B floating rate certificates 50,000 --
Floating rate collateral
indebtedness interest 31,300 --
------------------------
$811,300 $652,000
========================
35
The rates in effect on the Series 1997-1 Senior class certificates were
5.2% and 6.1% as of February 28, 1999 and 1998, respectively. Unless extended,
the commitment termination date related to the Series 1997-1 certificates is
September 30,1999. The rates in effect on the Series 1998-1 floating rate
Collateral Indebtedness Interest were 6.3% and 6.5% as of February 28, 1999 and
1998 respectively. With respect to the Series 1998-1 certificates, the final
distribution date for the Class A certificates is scheduled to occur in December
2002, at which time the Class A certificate holders will begin to receive
principal payments. The final distribution date for the Class B certificates is
scheduled to occur in February 2003, at which time the Class B certificate
holders will begin to receive principal payments provided that Class A
certificates have been paid in full. The holder of the Collateral Indebtedness
Interest will receive principal payments beginning one month subsequent to the
final principal payment to Class B certificate holders. The rates in effect on
the Series 1998-2 Class A floating rate certificates, Class B floating rate
certificates, and the floating rate Collateral Indebtedness certificates were
5.5%, 5.7% and 6.4%, respectively, as of February 28, 1999. With respect to the
Series 1998-2 certificates, the final distribution date for the Class A
certificates is scheduled to occur in August 2001. The final distribution date
for the Class B certificates is scheduled to occur in October 2001 provided that
the Class A certificates have been paid in full. The holder of the Collateral
Indebtedness Interest will receive principal payments beginning one month
subsequent to the final payment to Class B certificate holders.
The Company, through a bankruptcy-remote special purpose entity, retained
the remaining undivided interests in the Trust's receivables. This remaining
undivided interest is not available to the creditors of the Company. The Company
will continue to service all accounts in the Trust. No servicing asset resulted
because contractual rates are at estimated market rates and are considered
adequate compensation for servicing. The cost of retained interests are based on
an allocation of the total cost of accounts securitized in accordance with SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." Quoted market prices are not available for these
retained interests. The fair value of the contractually required and excess
seller's interest is based on the present value of future cash flows associated
with the underlying receivables. The fair value of the interest only strip is
based on the present value of estimated future cash flows to be received in
excess of contractually specified servicing fees less estimated losses,
discounted at 12% over the estimated remaining term of the underlying
receivables. Retained interests are carried at fair value and are summarized
below:
Unrealized Unrealized
(Amounts in thousands) Cost Gain Loss Fair Value
----------------------------------------------
February 28, 1999:
Contractually required
seller's interest $112,967 $ 5,163 $ -- $118,130
Excess seller's interest 41,071 -- -- 41,071
Interest-only strip 28,500 3,269 -- 31,769
----------------------------------------------
$182,538 $ 8,432 $ -- $190,970
==============================================
February 28, 1998:
Contractually required
seller's interest $110,193 $ 7,242 $ -- $117,435
Excess seller's interest 36,706 -- -- 36,706
Interest-only strip 27,925 92 -- 28,017
----------------------------------------------
$174,824 $ 7,334 $ -- $182,158
==============================================
36
(5) Property and Equipment
- --------------------------------------------------------------------------------
Property and equipment consists of the following:
1999 1998
--------------------
(Amounts in thousands)
Land and buildings $184,127 $135,857
Fixtures, equipment and vehicles 158,383 150,259
Leasehold improvements 249,238 254,363
Construction in progress 14,210 30,998
--------------------
605,958 571,477
Less accumulated depreciation 205,272 173,326
--------------------
$400,686 $398,151
====================
(6) Notes Payable and Long-Term Debt
- --------------------------------------------------------------------------------
The Company is currently in the fourth year of a five-year revolving credit
facility dated July 19, 1995. Comprised of ten banks, the facility had
$210,000,000 outstanding and $190,000,000 unused as of February 28, 1999.
Subsequent to the balance sheet date this facility which was $400,000,000 at
February 28, 1999 was reduced to $298,063,000. Going forward, the facility will
be reduced on a dollar for dollar basis with proceeds from asset sales until the
amount available reached $200.0 million. During fiscal 1999, the Company had
additional lines of credit with banks that totaled $60,000,000. These lines of
credit were eliminated during the fourth quarter of fiscal 1999. The Company's
maximum short-term borrowings were $288,500,000 during fiscal 1999 and
$342,100,000 during fiscal 1998. The average short-term debt outstanding for
fiscal 1999 was $235,018,000 compared to $229,213,000 for fiscal 1998. The
approximate weighted average interest rates were 6.2%, 6.1% and 5.8% in fiscal
1999, 1998 and 1997, respectively.
At February 28, 1999, the Company had $210,000,000 of outstanding
short-term borrowings compared to $260,000,000 at February 28, 1998. The average
interest rate on this debt was approximately 5.7% at February 28, 1999, and 6.2%
and 5.8% at February 28, 1998 and 1997, respectively. There were no compensating
balance requirements.
Long-term debt consists of the following:
1999 1998
-----------------------
(Amounts in thousands)
Shelf registration issues:
7.60% unsecured notes due 2007 $175,000 $175,000
7.88% unsecured notes due 2003 200,000 200,000
7.40% unsecured notes due 2002 100,000 100,000
Other issues:
Notes payable to insurance
companies and banks, maturing
through 2002, interest ranging
from 5.74% to 8.99%,unsecured 225,000 245,000
Notes, collateralizing industrial development revenue bonds, maturing through
2005, interest ranging from a floating rate of 67% of prime to an 8.50% fixed
rate 495 906
Term loans, maturing through
2007, interest ranging to 9.80%,
primarily collateralized by deeds
of trust 830 1,026
Capital lease obligations, maturing
through 2009, interest ranging
from 76% of prime to 12.80% 13,505 15,704
--------------------
714,830 737,636
Less amounts due within one year 167,486 22,365
--------------------
$547,344 $715,271
====================
37
Principal payments are due for the four years after February 28, 2000 as
follows: 2001, $1,053,000; 2002, $160,200,000; 2003, $209,000; and 2004,
$200,204,000. The aggregate net carrying value of property and equipment
collateralization at February 28, 1999, was $9,267,000. The Company has on file
a shelf registration to issue up to $400,000,000 of common stock, warrants and
debt securities. The $175,000,000 unsecured 7.60% notes due 2007 were issued
under the shelf registration with the remaining $225,000,000 unissued at
February 28, 1999. During fiscal 1997, the Company issued $200,000,000 unsecured
7.88% notes due 2003 and $100,000,000 unsecured 7.40% notes due 2002 under a
previous shelf registration.
Notes payable to insurance companies and banks contain certain restrictive
covenants. Under these covenants, the payment of cash dividends is limited to
$74,576,000 plus 75% of net earnings adjusted for dividend payouts subsequent to
February 28, 1999. Other covenants relate to the maintenance of working capital,
pre-tax earnings coverage of fixed charges, limitations on total and funded
indebtedness and maintenance of stockholders' equity. As a result of the losses
incurred during fiscal years 1999 and 1998, the Company obtained amendments to
its bank debt agreements in order to maintain covenant compliance.
Interest payments of $77,743,000, $65,404,000 and $46,710,000 net of
capitalized interest of $1,658,000, $3,762,000 and $2,360,000 were made during
fiscal 1999, 1998 and 1997, respectively.
(7) Income Taxes
- --------------------------------------------------------------------------------
The provision (benefit) for income taxes consists of the following:
1999 1998 1997
(Amounts in thousands)
--------------------------------
Current:
Federal $(12,711) $(21,250) $ 5,481
State (1,910) (4,911) 3,006
Puerto Rico (740) 2,238 2,160
--------------------------------
(15,361) (23,923) 10,647
Deferred:
Federal 8,138 (2,178) 7,758
State 4,951 ( 573) 1,618
Puerto Rico 1,191 (2,570) 1,692
--------------------------------
14,280 (5,321) 11,068
--------------------------------
$ (1,081) $(29,244) $21,715
================================
38
The income tax effects of temporary differences that gave rise to
significant portions of the net deferred tax liability as of February 28, 1999
and 1998, consist of the following:
1999 1998
(Amounts in thousands)
----------------------
Deferred tax assets:
Allowance for doubtful accounts $ 20,672 $ 20,613
Store closing and other charges 7,537 15,521
Accrued liabilities 13,318 12,400
Alternative minimum tax credit
carryforward 2,689 7,973
Federal tax credits 10,429 6,655
Net operating loss carryforward 26,539 1,977
Other 806 247
----------------------
81,990 65,386
----------------------
Deferred tax liabilities:
Excess costs over net assets
acquired 60,135 46,536
Accounts receivable 28,034 20,586
Depreciation 13,339 17,520
Asset securitizations 20,625 17,436
Inventory 9,107 9,264
Deferred revenues 6,598 8,962
Costs capitalized on constructed
assets 8,322 6,525
Other 6,045 3,580
----------------------
152,205 130,409
----------------------
$ 70,215 $ 65,023
======================
Balance sheet classification:
Other current assets $ -- $ 5,914
Other current liabilities 24,850 --
Deferred income tax liability 45,365 70,937
----------------------
$ 70,215 $ 65,023
======================
A reconciliation of the statutory federal income tax rate to the Company's
effective rate is provided below:
1999 1998 1997
---------------------------------
Statutory federal income
tax rate (35.0)% (35.0)% 35.0%
State income taxes, net of
federal income tax benefit (3.8) (2.8) 3.7
Tax credits (131.8) (4.9) (5.3)
Goodwill amortization and
other, net 135.1 8.0 1.7
---------------------------------
(35.5)% (34.7)% 35.1%
=================================
39
Federal and state income tax payments of $5,762,000, $8,427,000 and
$18,447,000 were made during fiscal 1999, 1998 and 1997, respectively. The
Company has an alternative minimum tax and other federal tax credit
carryforwards of approximately $2,690,000 and $10,429,000, respectively.
Additionally, the Company has a federal net operating loss carryforward of
approximately $36,872,000. The federal net operating loss and tax credit
carryforwards will expire fiscal year 2019.
(8) Retirement Plans
- --------------------------------------------------------------------------------
During 1999, the Company adopted FASB No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits," which revised the Company's
disclosure about pension and other postretirement benefit plans.
The Company has a qualified profit sharing and retirement savings plan,
which includes a cash or deferred arrangement under Section 401(k) of the
Internal Revenue Code (the "Code") and covers substantially all the Company's
employees. Eligible employees may elect to contribute specified percentages of
their compensation to the plan. The Company guarantees a dollar-for-dollar match
on the first two percent of the employee's compensation contributed to the plan.
The Company will make an additional matching contribution if and to the extent
that four percent of the Company's estimated consolidated income before taxes
exceeds the two percent dollar-for-dollar match described above. The Company
may, at the discretion of its Board of Directors, make additional Company
matching contributions subject to certain limitations. The plan may be
terminated at the discretion of the Board of Directors. If the plan is
terminated, the Company will not be required to make any further contributions
to the plan and participants will become 100% vested in any Company
contributions made to the plan. The plan expense recognized in fiscal 1999, 1998
and 1997 was $3,958,000, $3,052,000 and $2,507,000, respectively.
In addition, a non-qualified supplemental profit sharing and retirement
savings plan was established as of March 1, 1991, for the purpose of providing
deferred compensation for certain employees whose benefits and contributions
under the qualified plan are limited by the Code. The deferred compensation
expense recognized in fiscal 1999, 1998 and 1997 was $489,000, $445,000 and
$283,000, respectively.
The Company has an executive income continuation plan which covers certain
executive officers. The plan is intended to provide certain supplemental
pre-retirement death benefits and retirement benefits to its key executives. In
the event an executive dies prior to age 65 in the employment of the Company,
the executive's beneficiary will receive annual benefits of 100% of salary for a
period of two years and 50% of salary for a period of eight years. If the
executive retires at age 65, either the executive or his beneficiary will
receive an annual retirement benefit of 20% to 25% of the executive's salary
increased 4% annually for a period of 15 years. This plan has been funded
through the purchase of life insurance contracts covering the executives and
owned by the Company. For the fiscal year 1999, the Company recognized expense
of $540,000, and for fiscal years 1998 and 1997, there was no charge to
earnings.
As of February 28, 1999, the Company continued to operate separate employee
benefit plans covering certain groups of employees of Rhodes, which was acquired
on December 31, 1996. These plans include a qualified non-contributory defined
benefit plan, a non-qualified unfunded defined benefit plan, and a qualified
defined contribution savings plan. During fiscal 1998, these three plans were
amended in order to cease future benefit accruals and contributions. As of that
date, no new participants could be added.
40
The following tables represent activity in the Company's qualified defined
benefit plan:
1999 1998
(Amounts in thousands)
------------------------
Change in projected benefits obligation:
Projected benefit obligation at beginning of year $15,280 $14,811
Service cost -- 355
Interest cost 1,077 1,109
Actuarial loss (gain) 729 (199)
Benefits paid (1,188) (796)
---------------------
Projected benefit obligation at end of year $15,898 $15,280
=====================
Change in plan assets:
Fair value of plan assets at beginning of year $15,205 $13,020
Actual return on plan assets 1,590 2,316
Employer contribution -- 665
Benefits paid (1,188) (796)
---------------------
Fair value of plan assets at end of year $15,607 $15,205
=====================
Funded status $ (291) $ (75)
Unrecognized net transition asset (862) (1,059)
Unrecognized net actuarial loss 389 178
---------------------
Accrued benefit cost $ (764) $ (956)
=====================
Weighted-average assumptions as of February 28:
Discount Rate 7.25% 7.25%
Expected return on plan assets 7.25% 8.50%
Components of net periodic benefit cost:
Service cost $ -- $ 355
Interest cost 1,077 1,109
Expected return on plan assets (1,072) (1,100)
Amortization of transition asset (197) (197)
Amortization of prior service cost -- 5
---------------------
Charge (benefit) to operations $ (192) $ 172
=====================
Assets of the plan are generally invested in equities and fixed income
instruments.
The projected benefit obligation of the non-qualified pension plan totaled
$1,935,000 and $1,796,000 at February 28, 1999 and 1998, respectively. There are
no plan assets in the non-qualified plan due to the nature of the plan.
41
(9) Stock Options
- --------------------------------------------------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. In electing to
account for its stock options under APB 25, the Company is required by SFAS No.
123, "Accounting for Stock-Based Compensation" to provide pro forma information
regarding net income and earnings per share.
The 1983, 1990, 1994 and 1998 Stock Option Plans provide that key employees
of the Company are eligible to receive common stock options (at an exercise
price of no less than fair market value at the date of grant) and stock
appreciation rights. Under these plans, approximately 8,094,000 shares have been
authorized to be reserved for issuance. All options granted have ten-year terms.
Options granted during fiscal years 1999 and 1998 immediately vested and became
exercisable when granted. Previously granted options vest on a graduated basis
and become fully exercisable at the end of two years of continued employment.
Pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option valuation model with the following weighted-average
assumptions for fiscal 1999, 1998 and 1997, respectively: risk-free interest
rates of 5.2%, 6.5% and 6.1%; a dividend yield of 1.9%; volatility factors of
the expected market price of the Company's common stock of 48%, 46% and 41%; and
a weighted-average expected option life of 4.55, 3.61 and 3.48 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1999 1998 1997
(Amounts in thousands except per share data)
--------------------------------------------
Pro forma net income (loss) $(3,494) $(55,837) $37,072
Pro forma earnings (loss) per share:
Basic (.06) (.99) .75
Diluted (.06) (.99) .74
A summary of the Company's stock option activity and related information
for the years ended February 28, 1999, 1998 and 1997 follows:
Weighted
Average
Options Exercise Price
---------- --------------
Outstanding at March 1, 1996 4,431,904 $18.49
Granted 816,480 14.55
Exercised (51,500) 13.25
---------- -------
Outstanding at February 28, 1997 5,196,884 15.55
Granted 28,008 15.53
Exercised (116,435) 7.81
Forfeited (100,000) 15.63
---------- -------
Outstanding at February 28, 1998 5,008,457 15.98
Granted 385,030 6.72
Exercised (122,155) 5.52
Forfeited (44,862) 17.55
---------- -------
Outstanding at February 28, 1999 5,226,470 $15.53
========== =======
42
Range of $6.02 $10.01 $17.01 $27.01
Exercise to to to to
Prices $10.00 $17.00 $27.00 $35.06
------ ------ ------ ------
Options outstanding at
February 28, 1999 1,774,134 743,596 2,696,740 12,000
Weighted average remaining
contract life, outstanding
options 3.98 7.98 4.95 4.95
Weighted average exercise
price,outstanding options $ 8.42 $14.41 $20.43 $35.06
Options exercisable at
February 28, 1999 1,774,134 743,596 2,696,740 12,000
Weighted average exercise
price, exercisable options $ 8.42 $14.41 $20.43 $35.06
Options exercisable at year end and the respective weighted average
exercise prices were 5,226,470 at $15.53, 4,831,095 at $15.96 and 4,762,846 at
$15.50 for fiscal 1999, 1998 and 1997, respectively.
The weighted average fair values of options granted were $2.68, $5.82 and
$4.88 for fiscal 1999, 1998 and 1997, respectively.
(10) Commitments and Contingencies
- --------------------------------------------------------------------------------
Leases
The Company has entered into noncancellable lease agreements with initial
terms ranging from 1 to 25 years for certain stores, warehouses and the
corporate office. Certain leases include renewal options ranging from 1 to 10
years and/or purchase provisions, both of which may be exercised at the
Company's option. Most of the leases are gross leases under which the lessor
pays the taxes, insurance and maintenance costs. The following capital leases
are included in the accompanying consolidated balance sheets:
1999 1998
(Amounts in thousands)
----------------------
Land and buildings $12,098 $12,098
Fixtures and equipment 2,164 1,955
----------------------
14,262 14,053
Less accumulated depreciation
and amortization 7,095 5,219
----------------------
$ 7,167 $ 8,834
======================
Capitalized lease amortization is included in depreciation expense.
Future minimum lease payments under capital leases and operating leases
having initial or remaining noncancellable lease terms in excess of one year at
February 28, 1999, are as follows:
Capital Leases Operating Leases
Fiscal Years (Amounts in thousands)
---------------------------
2000 $ 3,521 $ 160,360
2001 3,516 153,204
2002 3,010 143,557
2003 2,965 133,534
2004 2,229 112,044
After 2004 2,912 587,404
--------------------------
Total minimum lease payments $18,153 $1,290,103
==========
Less:
Executory costs 77
Imputed interest 4,571
-------
Present value of minimum
lease payments $13,505
=======
43
Total rental expense under operating leases for fiscal 1999, 1998 and 1997
was $165,005,000, $138,128,000 and $83,888,000, respectively. Contingent rentals
and sublease rentals are negligible.
Payments to affiliated entities under capital and operating leases were
$269,000 for fiscal 1999, which included payments to limited partnerships in
which the Company has equity interests. Lease payments to affiliated entities
for fiscal 1998 and 1997 were $327,000 and $314,000, respectively.
Litigation
The Company is party to various legal actions and administrative
proceedings and subject to various claims arising in the ordinary course of
business. Based on the best information presently available, the Company
believes that the disposition of these matters will not have a material effect
on the financial statements.
(11) Derivative Financial Instruments
- --------------------------------------------------------------------------------
The Company uses derivative financial instruments in the form of interest
rate swap agreements primarily to manage the risk of unfavorable movements in
interest rates. These convert floating rate notes payable to banks and floating
rates on asset securitization agreements to fixed rates. The notional amounts of
these swap agreements at February 28, were as follows:
1999 1998
(Amounts in thousands)
-----------------------
On notes payable and other $ 74,000 $168,300
On securitized receivables 145,000 185,000
Interest rates that the Company paid per the swap agreements related
primarily to notes payable were fixed at an average rate of 7.6% and 7.0% at
February 28, 1999 and 1998, respectively. The variable rates received per these
agreements were tied to LIBOR or commercial paper rates and averaged 5.2% and
5.7% at February 28, 1999 and 1998, respectively. All of these agreements expire
in fiscal 2000.
Interest rates that the Company paid on swap agreements related to
securitized receivables were fixed at an average rate of 6.9% and 6.8% at
February 28, 1999 and 1998, respectively. The variable rates received per these
agreements were tied to LIBOR and averaged 5.0% and 5.7% at February 28, 1999
and 1998, respectively. The remaining terms for these agreements are up to
approximately one year.
Resulting changes in interest are recorded as increases or decreases to
interest expense. The accrued interest liability is correspondingly increased or
decreased.
The Company believes its risk of credit-related losses resulting from
nonperformance by a counterparty is remote. The amount of any such loss would be
limited to a small percentage of the notional amount of each swap. As a means of
reducing this risk, the Company as a matter of policy only enters into
transactions with counterparties rated "A" or higher.
The Company does not mark its swaps to market and therefore does not record
a gain or loss with interest rate changes. Gains on disposals of swaps are
recognized over the remaining life of the swap. Losses on disposals, which there
have been none to date, would be recognized immediately.
All swaps are held for purposes other than trading.
44
(12) Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
The estimated fair values of financial instruments have been determined by
using available market information. The estimates are not necessarily indicative
of the amounts the Company could realize in a current market exchange. The use
of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The estimated fair values of the Company's financial instruments at
February 28, 1999 and 1998 are as follows:
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
(Amounts in thousands) Amount Value Amount Value
Assets:
Cash $ 67,254 $ 67,254 $ 48,779 $ 48,779
Accounts receivable, net 254,282 254,282 392,765 392,765
Retained interest in
securitized receivables 190,970 190,970 182,158 182,158
Liabilities:
Accounts payable 193,799 193,799 203,048 203,048
Notes payable 210,000 210,000 260,000 260,000
Long-term debt 701,325 572,362 721,932 725,997
Off-balance-sheet financial
instruments:
Interest rate swap agreements:
Assets -- -- -- 86
Liabilities -- 3,095 -- 6,570
The following methods and assumptions were used to estimate the fair value
for each class of financial instruments shown above:
Cash and Accounts Receivable
The carrying amount approximates fair value because of the short-term
maturity of these assets.
Retained Interest in Securitized Receivables
The carrying amount approximates fair value, based upon customer payment
experience and discounted at the market rate.
Accounts Payable and Notes Payable
The carrying amount approximates fair value because of the short-term
maturity of these liabilities.
Long-Term Debt
The fair value of the Company's long-term debt is based on the discounted
cash flow of that debt, using current rates and remaining maturities.
Interest Rate Swap Agreements
The fair value of the Company's interest rate swap agreements is the
estimated amount that the Company would receive or pay upon termination of the
agreements, based on estimates obtained from the counterparties. These
agreements are not held for trading purposes, but rather to hedge interest rate
risk.
45
(13) Earnings (Loss) Per Share
- --------------------------------------------------------------------------------
The Company was required to adopt in the fourth quarter of fiscal 1998 SFAS
No. 128, "Earnings Per Share," which superceded APB Opinion No. 15. Earnings
(loss) per share for all periods presented have been restated to reflect the
adoption of SFAS No. 128. SFAS No. 128 requires companies to present basic and
diluted earnings (loss) per share, instead of primary and fully diluted earnings
(loss) per share. Basic earnings (loss) per share is computed by dividing the
net earnings (loss) by the weighted average number of shares outstanding.
Diluted earnings (loss) per share reflects the potential dilution that could
occur if options or other contingencies to issue common stock were exercised.
The following is a reconciliation of the number of shares (denominator)
used in the basic and diluted earnings (loss) per share computations:
(Amounts in thousands except 1999 1998 1997
per share data) --------------------------------
Numerator:
Net earnings (loss) $ (1,967) $(55,143) $ 40,185
Denominator:
Denominator for
basic earnings (loss)
per share - average
common shares
outstanding 59,331 56,312 49,360
Effect of potentially
dilutive stock options -- -- 786
Denominator for
diluted earnings
(loss) per share 59,331 56,312 50,146
Basic EPS $ (0.03) $ (0.98) $ 0.81
Diluted EPS (0.03) (0.98) 0.80
The computation for fiscal 1999 does not assume the conversion of
outstanding options to purchase 5,226,000 shares of common stock at prices
ranging from $6.02 to $35.06, with expiration dates between February 2000 and
February 2009 and 911,000 contingently issuable shares, since the result would
be antidilutive due to the loss from operations. Options to purchase 5,008,000
shares of common stock at prices ranging from $5.52 to $35.06, with expiration
dates between January 1999 and June 2007 and 265,000 contingently issuable
shares were outstanding during fiscal 1998, however, were excluded from the
diluted EPS calculation since the result would be antidilutive due to the loss
from operations. Options to purchase 1,723,000 shares of common stock at prices
ranging from $20.29 to $35.06, with expiration dates between February 2003 and
August 2004, were outstanding during fiscal 1997, however, were excluded from
the diluted EPS calculation because the options' exercise prices were greater
than the average market price of the common shares.
46
(14) Quarterly Financial Data (Unaudited)
- --------------------------------------------------------------------------------
The following is a summary of quarterly financial data for fiscal 1999 and
1998:
Three months ended May 31 August 31 November 30 February 28
- --------------------------------------------------------------------------------
(Amounts in thousands except per share data)
1999
Revenues $668,939 $675,007 $728,209 $654,203
Gross profit(1) 200,363 190,529 219,697 182,662
Earnings (loss) before taxes 15,872 13,761 9,896 (42,577)
Net earnings (loss) 10,194 8,758 6,274 (27,193)
Earnings (loss) per share of common stock(2):
Basic 0.17 0.15 0.11 (0.45)
Diluted 0.17 0.15 0.10 (0.45)
Cash dividends per share of
common stock 0.07 0.07 0.07 0.07
1998
Revenues $566,325 $590,212 $678,468 $634,732
Gross profit(1) 169,058 171,201 202,796 165,609
Store closing and other charges -- -- -- 25,530
Earnings (loss) before taxes 22,000 14,402 (75,467) (45,322)
Net earnings (loss) 13,761 9,279 (49,122) (29,061)
Earnings (loss) per share of common stock(2):
Basic 0.25 0.17 (0.87) (0.50)
Diluted 0.25 0.16 (0.87) (0.50)
Cash dividends per share of
common stock 0.07 0.07 0.07 0.07
(1) Gross profit is sales less costs of sales.
(2) Total of quarterly earnings (loss) per common share may not equal the annual
amount because net income (loss) per common share is calculated independently
for each quarter.
(15) Segment Information
- --------------------------------------------------------------------------------
Effective December 1, 1998, the Company adopted the provisions of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company has significant operations aligned in four
operating formats: Heilig-Meyers, The RoomStore, Rhodes and Mattress Discounters
divisions.
The Company's Heilig-Meyers division is associated with the Company's
historical operations. The majority of the Heilig-Meyers stores operate in
smaller markets with a broad line of merchandise. The Rhodes division comprises
the 96 stores operating under the "Rhodes" name. The Rhodes retailing strategy
is selling quality furniture to a broad base of middle income customers. Stores
operating under The RoomStore division include the 70 stores primarily operating
in Texas, Oregon, Maryland and Illinois and the 32 stores in Puerto Rico
operating under the "Berrios" name. The Mattress Discounters division is the
Nation's largest retail bedding specialist.
47
The accounting policies of the segments are the same as those described in
Note 1 to the Consolidated Financial Statements. The Company evaluates
performance based on earnings (loss) before interest and income taxes (based
upon generally accepted accounting principles). The Company generally accounts
for intersegment sales and transfers at current market prices as if the sales or
transfers were to unaffiliated third parties. General corporate expenses are
allocated between the divisions.
(Amounts in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Revenues:
Heilig-Meyers $1,531,766 $1,518,415 $1,333,468
Rhodes 479,620 509,474 82,409
The RoomStore 476,324 309,664 177,242
Mattress Discounters 238,648 132,183 --
---------- ---------- ----------
Total revenues from external
customers $2,726,358 $2,469,736 $1,593,119
========== ========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ 66,634 $ (17,648) $ 88,660
Rhodes (29,279) 9,181 2,944
The RoomStore 12,855 3,705 18,096
Mattress Discounters 22,971 13,479 --
Intersegment earnings (loss) (553) (291) --
---------- ---------- ----------
Total earnings (loss) before
interest and taxes $ 72,628 $ 8,426 $ 109,700
---------- ---------- ----------
Store closing and other charges -- (25,530) --
Interest expense (75,676) (67,283) (47,800)
---------- ---------- ----------
Consolidated earnings (loss)
before provision (benefit)
for income taxes $ (3,048) $ (84,387) $ 61,900
========== ========== ==========
Depreciation expense:
Heilig-Meyers $ 35,774 $ 32,739 $ 30,226
Rhodes 12,468 13,998 2,116
The RoomStore 5,836 4,909 1,532
Mattress Discounters 4,762 2,397 --
---------- ---------- ----------
Total depreciation expense $ 58,840 $ 54,043 $ 33,874
========== ========== ==========
Capital expenditures:
Heilig-Meyers $ 57,486 $ 51,871 $ 79,369
Rhodes 12,784 3,381 869
The RoomStore 12,086 14,046 3,899
Mattress Discounters 5,149 1,623 --
---------- ---------- ----------
Total capital expenditures $ 87,505 $ 70,921 $ 84,137
========== ========== ==========
Total identifiable assets:
Heilig-Meyers $1,292,770 $1,417,834 $1,383,912
Rhodes 287,595 331,845 261,895
The RoomStore 269,906 254,801 191,351
Mattress Discounters 97,481 93,033 --
---------- ---------- ----------
Total identifiable assets $1,947,752 $2,097,513 $1,837,158
========== ========== ==========
48
(16) MacSaver Financial Services
- --------------------------------------------------------------------------------
MacSaver Financial Services ("MacSaver"), is the Company's wholly-owned
subsidiary whose principal business activity is to obtain financing for the
operations of the Company, and in connection therewith, MacSaver generally
acquires and holds the aggregate principal amount of installment credit accounts
generated by the Company's operating subsidiaries, and issues and carries
substantially all of the Company's notes payable and long-term debt. MacSaver
also transfers the substantial majority of its installment accounts receivable,
through a wholly-owned subsidiary, to a Master Trust which issues certificates
representing undivided interests in such certificates (See Notes 1 and 4).
Substantially all of the net revenues generated by MacSaver are pursuant to
operating agreements with the Company and certain of its wholly-owned
subsidiaries. In June 1997, the Company and MacSaver filed a joint Registration
Statement on Form S-3 with the Securities and Exchange Commission relating to up
to $400,000,000 aggregate principal amount of securities.
MacSaver has issued $175,000,000 in aggregate principal amount of its notes
at 7.60% due 2007. In fiscal 1997, MacSaver issued $300,000,000 in aggregate
principal amount of its notes under a previous Registration Statement filed
jointly by the Company and MacSaver; $200,000,000 at 7.88% due 2003 and
$100,000,000 at 7.40% due 2002. These notes are unconditionally guaranteed as to
payment of principal and interest 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 holders of
the debt securities. However, as required by the 1934 Act, the summarized
financial information concerning MacSaver is as follows:
MacSaver Financial Services Summarized Statements of Operations
Twelve months ended February 28,
1999 1998 1997
--------------------------------
(Amounts in thousands)
Net revenues $302,418 $267,386 $158,306
Operating expenses 252,699 292,493 102,706
--------------------------------
Earnings (loss) before
taxes 49,719 (25,107) 55,600
--------------------------------
Net earnings (loss) $ 32,317 $(16,320) $ 36,140
================================
MacSaver Financial Services Summarized Balance Sheets
February 28,
1999 1998
----------------------
(Amounts in thousands)
Current assets $ 57,151 $ 29,545
Accounts receivable, net 145,211 295,405
Retained interest in securitized
receivables at fair value 190,967 182,158
Due from affiliates 714,372 645,291
----------------------
Total assets $1,107,701 $1,152,399
======================
Current liabilities $ 186,255 $ 48,951
Notes payable 210,000 260,000
Long-term debt 535,000 700,000
Stockholders' equity 176,446 143,448
----------------------
Total liabilities and
stockholders' equity $1,107,701 $1,152,399
======================
49
(17) Subsequent Event
- --------------------------------------------------------------------------------
On May 28, 1999, the Company entered into a definitive agreement to sell
substantially all of its interest in its Mattress Discounters division to an
investment group, including certain key managers of Mattress Discounters, led by
Bain Capital, a Boston based capital investment group. The sale price is
approximately $225.5 million, subject to final adjustment, including net cash
proceeds of approximately $206.7 million. The transaction, which is subject to
certain closing conditions, is expected to close in the second quarter of fiscal
2000 and result in a gain, net of income taxes, of approximately $68.0 million,
or $1.12 per share. The Company will retain a 7% interest in Mattress
Discounters. The net cash proceeds will be used to pay down debt.
The Company has continued its evaluation of the possible divestiture of all
or part of its Rhodes division. Because of the uncertainties surrounding the
ability of the Company to consummate a sale of the Rhodes division within the
fiscal year ending February 29, 2000, the related assets of the Rhodes division
were considered "held for use" as of February 28, 1999 and are presented on a
consolidated basis. If an agreement to sell the Rhodes division is executed, the
transaction may result in a loss and, depending on the terms of such an
agreement, the loss may be material to results of operations. Management
believes that, under a held for use classification, the Rhodes division's future
undiscounted cash flows will be in excess of the related carrying value of its
assets as of February 28, 1999.
50
Independent Auditors' Report
To the Stockholders and Board of Directors
Heilig-Meyers Company
Richmond, Virginia
We have audited the accompanying consolidated balance sheets of
Heilig-Meyers Company and subsidiaries as of February 28, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended February 28, 1999.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a)2. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Heilig-Meyers Company and
subsidiaries as of February 28, 1999 and 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended February 28, 1999 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Richmond, Virginia
March 24, 1999, except for note 17, as to which the date is June 1, 1999.
51
ITEM 9. CHANGES in and DISAGREEMENTS with ACCOUNTANTS on ACCOUNTING and
FINANCIAL DISCLOSURE
None.
PART III
With the exception of the information incorporated by reference from the
Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form 10-K,
the Company's Proxy Statement dated May 19, 1999 (the "1999 Proxy Statement"),
is not to be deemed filed as a part of this Report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the section entitled "Election of Directors"
appearing on pages 2-4 of the 1999 Proxy Statement.
The information concerning the Company's executive officers required by
this Item is incorporated by reference to the section in Part I hereof entitled
"Executive Officers of the Registrant."
The information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 required by this Item is incorporated by reference to the
section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing on page 6 of the 1999 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
sections entitled "Executive Compensation" appearing on pages 7-8 of the 1999
Proxy Statement, "Executive Supplemental Retirement Plan" and "Executive
Severance Plan" appearing on pages 14-15 of the 1999 Proxy Statement, and
"Director's Compensation" and "Compensation Committee Interlocks and Insider
Participation" appearing on pages 15-16 of the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section entitled "Election of Directors" appearing on pages 2-5 of the 1999
Proxy Statement and "Principal Shareholders" appearing on page 18 of the 1999
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by the item is incorporated by reference to the
section entitled "Certain Transactions" appearing on pages 16-17 of the 1999
Proxy Statement and the last paragraph under the section entitled "Election of
Directors - Nominees" on page 5.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, and REPORTS on FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Heilig-Meyers
Company and Subsidiaries included in the registrant's 1999 Annual
Report to Shareholders are included in item 8 herein:
Independent Auditors' Report
Consolidated Balance Sheets -
February 28, 1999 and 1998
Consolidated Statements of Operations -
Year Ended February 28, 1999,
Year Ended February 28, 1998, and
Year Ended February 28, 1997
Consolidated Statements of Stockholders' Equity -
Year Ended February 28, 1999,
Year Ended February 28, 1998, and
Year Ended February 28, 1997
Consolidated Statements of Cash Flows -
Year Ended February 28, 1999,
Year Ended February 28, 1998, and
Year Ended February 28, 1997
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules: The financial statement
schedule required by this item is listed below.
Independent Auditors' Report on Schedule II included in Item 8
herein.
Schedule II - Valuation and Qualifying Accounts
Schedules other than those listed above have been omitted because
they are not applicable or are not required or because the required
information is included in the financial statements or notes
thereto.
(a) 3. Exhibits required to be filed by Item 601 of Regulation S-K.
See INDEX TO EXHIBITS
(b) Reports on Form 8-K Filed During Last Quarter of Year Ended
February 28, 1999.
There were three Current Reports on Form 8-K filed during the
last quarter of the fiscal year ended February 28, 1999. On
December 3, 1998, Registrant filed a Form 8-K in which it
reported that Troy A. Perry, Jr., President and Chief Operating
Officer, would retire from the Company and its Board of Directors
effective March 1, 1999. On December 8, 1998, Registrant filed an
8-K in which it reported November 1998 sales. On December 17,
1998, Registrant filed a Form 8-K in which it reported the
results for the third quarter of fiscal 1999 and announced the
retirement of certain officers.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: June 1, 1999 by /s/William C. DeRusha
----------------------------
William C. DeRusha
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: June 1, 1999 /s/William C. DeRusha
---------------------
William C. DeRusha
Chairman of the Board
Principal Executive Officer
Director
Date: June 1, 1999 /s/Roy B. Goodman
-----------------
Roy B. Goodman
Executive Vice President
Principal Financial Officer
Date: June 1, 1999 /s/William J. Dieter
--------------------
William J. Dieter
Senior Vice President,
Accounting and Principal
Accounting Officer
Date: June 1, 1999 /s/Alexander Alexander
-----------------------
Alexander Alexander, Director
Date: June 1, 1999 /s/Robert L. Burrus, Jr.
------------------------
Robert L. Burrus, Jr., Director
Date: June 1, 1999 /s/Beverley E. Dalton
---------------------
Beverley E. Dalton, Director
Date: June 1, 1999 /s/Charles A. Davis
----------------------
Charles A. Davis, Director
Date: June 1, 1999
-----------------------------
Benjamin F. Edwards, III, Director
Date: June 1, 1999 /s/Alan G. Fleischer
--------------------
Alan G. Fleischer, Director
54
Date: June 1, 1999 /s/Nathaniel Krumbein
------------------------
Nathaniel Krumbein, Director
Date: June 1, 1999 /s/Hyman Meyers
-------------------
Hyman Meyers, Director
Date: June 1, 1999 /s/S. Sidney Meyers
--------------------
S. Sidney Meyers, Director
Date: June 1, 1999 /s/Lawrence N. Smith
---------------------
Lawrence N. Smith, Director
Date: June 1, 1999 /s/Eugene P. Trani
------------------
Eugene P. Trani, Director
Date: June 1, 1999 /s/L. Douglas Wilder
--------------------
L. Douglas Wilder, Director
55
HEILIG-MEYERS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Column A Column B Column C Column D Column E
- -------- --------- ------------------- ------------------------------ ---------
Write-off
Balance at Charged Charged and Purchased Sold Balance
Beginning To Costs To Other Repossession Accounts Accounts at Close
Description of Period & Expenses Accounts Losses Receivable Receivable of Period
Allowance for
Doubtful Accounts:
Year Ended
February 28,
1999 $60,306 $108,216 $ 3,470 (A) $ 68,779 $ 4,295(C) $47,947 $42,745
$(8,226)(B)
Year Ended
February 28,
1998 $41,120 $181,136 $ 1,817(A) $106,029 $21,156(C) $38,148 $60,306
$ 1,566(B)
Year Ended
February 28,
1997 $54,714 $ 80,908 $ 1,330(A) $ 70,438 $ 6,912(C) $33,940 $41,120
$15,458(B)
(A) Represents recoveries on accounts previously written off.
(B) Allowance applicable to purchased accounts receivable.
(C) Deductions from reserve applicable to purchased accounts receivable, as
follows:
1999 1998 1997
-------- -------- ------
Write-offs of Uncollectible Accounts $ 4,295 $21,156 $ 6,912
56
Index to Exhibits
3. Articles of Incorporation and Bylaws.
a. Registrant's Restated Articles of Incorporation, as amended,
filed as Exhibit 3a to Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998, is hereby
incorporated by this reference.
b. Registrant's Amended and Restated Bylaws, filed as Exhibit 3a
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended November 30, 1997, are incorporated herein by this
reference.
4. Instruments defining the rights of security holders, including
indentures.
a. The long-term debt as shown on the consolidated balance sheet
of the Registrant at February 28, 1999 includes various
obligations each of which is evidenced by an instrument
authorizing an amount that is less than 10% of the total
assets of the Registrant and its subsidiaries on a
consolidated basis. The documents evidencing these obligations
are accordingly omitted pursuant to Regulation S-K, Item
601(b)(4)(iii) and will be furnished to the Commission upon
request.
10. Contracts
a. Three leases dated as of December 27, 1976 between Hyman
Meyers, Agent, and the Registrant, filed as Exhibit 10(a)(2)
and Exhibit 10(a)(4) - Exhibit 10(a)(5) to Registrant's Annual
Report on Form 10-K for the fiscal year ended February 28,
1989 (No. 1-8484), are incorporated herein by this reference.
b. The following Agreement filed as Exhibit 10(b) to Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1991(No. 1-8484) is incorporated herein by this reference:
(1) Lease dated as of January 1, 1980 between Hyman Myers,
Agent, and the Registrant.
c. The following Agreements (originally filed as exhibits to
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1982) were refiled as Exhibits 10(c)(1)-(3) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1993 (No. 1-8484) and are incorporated
herein by reference:
(1) Executive Employment and Deferred Compensation
Agreement made January 12, 1982 between Hyman
Meyers and the Registrant. *
(2) Executive Employment and Deferred Compensation
Agreement made January 12, 1982 between S.
Sidney Meyers and the Registrant. *
57
(3) Executive Employment and Deferred Compensation
Agreement made January 12, 1982 between
Nathaniel Krumbein and the Registrant. *
d. Intentionally omitted.
e. The following Agreements filed as Exhibits 19(a) through 19(c)
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1984 (No. 1-8484) are incorporated herein by
this reference:
(1) Agreement made as of May 4, 1984 to amend Executive
Employment and Deferred Compensation Agreement
between Hyman Meyers and Registrant.*
(2) Agreement made as of May 4, 1984 to amend Executive
Employment and Deferred Compensation Agreement
between S. Sidney Meyers and Registrant.*
(3) Agreement made as of May 4, 1984 to amend Executive
Employment and Deferred Compensation Agreement
between Nathaniel Krumbein and Registrant.*
f. Agreement made as of September 15, 1989 to amend Executive
Employment and Deferred Compensation Agreement between Hyman
Meyers and Registrant filed as Exhibit 10(i) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1990 (No. 1-8484) is incorporated herein by
this reference.*
g. Agreement made as of September 15, 1989 to amend Executive
Employment and Deferred Compensation Agreement between S.
Sidney Meyers and Registrant filed as Exhibit 10(j) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1990 (No. 1-8484) is incorporated herein by
this reference.*
h. Agreement made as of September 15, 1989 to amend Executive
Employment and Deferred Compensation Agreement between
Nathaniel Krumbein and Registrant filed as Exhibit 10(k) to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1990 (No. 1-8484)is incorporated
herein by this reference.*
i. Deferred Compensation Agreement between Robert L. Burrus, Jr.
and the Registrant filed as Exhibit 10(o) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1987(No.1-8484) is incorporated herein by this reference.*
j. Amendment dated September 15, 1989 to the Deferred
Compensation Agreement between Robert L. Burrus, Jr. and the
Registrant filed as Exhibit 10(m) to Registrant's Annual
Report on Form 10-K for the fiscal year ended February 28,
1990(No.1-8484) is incorporated herein by this reference.*
k. Deferred Compensation Agreement between Lawrence N. Smith and
the Registrant filed as Exhibit 10(p) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1987 (No. 1-8484) is incorporated herein by this
reference.*
l. Amendment dated September 15, 1989 to Deferred Compensation
Agreement between Lawrence N. Smith and the Registrant filed
as Exhibit 10(o) to Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1990 (No. 1-8484) is
incorporated herein by this reference.*
58
m. Deferred Compensation Agreement between George A. Thornton,
III and the Registrant filed as Exhibit 10(q) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1987 (No. 1-8484) is incorporated herein by
this reference.*
n. Amendment dated September 15, 1989 to Deferred Compensation
Agreement between George A. Thornton, III and the Registrant
filed as Exhibit 10(q) to Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1990 (No. 1-8484)
is incorporated herein by this reference.*
o. Employees Supplemental Profit-Sharing and Retirement Savings
Plan, adopted effective as of March 1, 1991, amended and
restated effective as of January 1, 1999.*
p. Registrant's 1983 Stock Option Plan, as amended, filed as
Exhibit C to Registrant's Proxy Statement dated May 9, 1988
(No. 1-8484) for its Annual Meeting of Stockholders held on
June 22, 1988 is incorporated herein by this reference.*
q. Amendments to registrant's 1983 Stock Option Plan, as amended,
filed as Exhibit 10(t) to Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1990 (No. 1-8484)
is incorporated herein by this reference.*
r. Registrant's 1990 Stock Option Plan, as amended, filed as
Exhibit 10(t) to Registrant's Annual Report on Form 10-K for
the fiscal year ended February 28, 1993 (No. 1-8484) is
incorporated herein by this reference.*
s. Registrant's 1994 Stock Option Plan, as amended, filed as
Exhibit A to Registrant's Proxy Statement dated May 3, 1994
(No. 1-8484) for its Annual Meeting of Stockholders held on
June 15, 1994 is incorporated herein by this reference.*
t. Registrant's Executive Severance Plan effective as of
September 15, 1989 filed as Exhibit 10(v) to Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1990 (No. 1-8484) is incorporated herein by this
reference.*
u. Form of Executive Supplemental Retirement Agreement between
the Registrant and each of William C. DeRusha and Troy A.
Peery, Jr. dated January 1, 1996 filed as Exhibit 10(y) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1997 (No. 1-8484) is incorporated herein by
this reference. *
v. Form of Executive Supplemental Retirement Agreement between
the Registrant and each of James F. Cerza, Jr. and James R.
Riddle dated January 1, 1996 filed as Exhibit 10(z) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1997 (No. 1-8484) is incorporated herein by
this reference. *
w. Form of Executive Supplemental Retirement Agreement between
the Registrant and William J. Dieter dated January 1, 1996
filed as Exhibit 10(aa) to Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1997 (No. 1-8484)
is incorporated herein by this reference. *
x. Employment Agreement made as of November 1, 1996 between
William C. DeRusha and the Registrant filed as Exhibit 10(bb)
to Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1997 (No. 1-8484) is incorporated herein by
this reference. *
59
y. Employment Agreement made as of November 1, 1996 between Troy
A. Peery, Jr. and the Registrant filed as Exhibit 10(cc) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1997 (No. 1-8484) is incorporated herein by
this reference. *
z. The following Agreements filed as Exhibits 10 (ii) through 10
(kk) to the Registrant's Annual Report on Form 10-K for fiscal
year ended February 28, 1991 (No. 1-8484) are incorporated
herein by this reference:
(1) Employment Agreement dated April 10, 1991 between
James C. Cerza, Jr. and the Registrant.*
(2) Employment Agreement dated April 10, 1991 between
James R. Riddle and the Registrant.*
aa. Carve Out Life Insurance Plan filed as Exhibit 10(ff) to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1993 (No. 1-8484) is incorporated herein
by this reference.*
bb. Amendment, dated as of August 18, 1993, to the Heilig-
Meyers Company Severance Plan filed as exhibit 10(hh)
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended February 28, 1994 (No. 1-8484) is incorporated
herein by this reference.*
cc. 1988 Deferred Compensation Agreement for Outside Directors
between George A. Thornton, III and the Registrant filed as
exhibit 10(ii) to the Registrant's Annual Report on Form
10-K for the fiscal year ended February 28, 1994 (No. 1-8484)
is incorporated herein by this reference.*
dd. Amendment, dated as of April 18, 1994, to the 1986
Heilig-Meyers Company Deferred Compensation Agreement for
Outside Director between George A. Thornton, III and the
Registrant filed as exhibit 10(jj) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended February 28,
1994 (No. 1-8484) is incorporated herein by this reference.*
ee. Amendment, dated as of April 18, 1994, to the 1990 Heilig
Meyers Company Deferred Compensation Agreement for Outside
Director between George A. Thornton, III and the Registrant
filed as exhibit 10(kk) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended February 28, 1994 (No.
1-8484) is incorporated herein by this reference.*
ff. Letter Agreement, dated August 26, 1993, amending employment
agreement between James R. Riddle and the Registrant filed as
exhibit 10(mm) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1994 (No. 1-8484) is
incorporated herein by this reference.*
gg. Letter Agreement, dated August 26, 1993, amending employment
agreement between James F. Cerza and the Registrant filed as
exhibit 10(nn) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended February 28, 1994 (No. 1-8484) is
incorporated herein by this reference.*
60
hh. $400,000,000 Credit Agreement dated July 18, 1995 (the
"Credit Facility") among MacSaver Financial Services, Inc., as
Borrower; the Registrant, as Guarantor; and Wachovia Bank of
Georgia, N.A., as Administrative Agent, as amended by the
First Amendment and Restatement of Credit Agreement dated May
14, 1996 filed as exhibit 10 (pp) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended February 29,
1996 (No. 1-8484) is incorporated herein by this reference.
ii. Policy issued by Life Insurance Company of North America,
dated March 1, 1989 covering the Rhodes, Inc. Employee
Disability Plan, filed with the Commission as Exhibit 10.38 to
Rhodes, Inc.'s Annual Report on Form 10-K for the year ended
February 28, 1991 (No. 0-08966) is incorporated herein by this
reference.*
jj. Form of Compensation (change in control) Agreement between
Irwin L. Lowenstein and Rhodes, Inc., filed with the
Commission as Exhibit 10.7 to Rhodes, Inc.'s Annual Report on
Form 10-K for the year ended February 28, 1995 (No. 1-09308)
is incorporated herein by this reference.*
kk. Amended and Restated Merchant Agreement by and between
Beneficial National Bank USA, HMY RoomStore, Inc. and Rhodes,
Inc., dated as of May 9, 1997 filed as Exhibit 10(qq) to
Registrant's Annual Report on Form 10-K for the fiscal year
ended February 28, 1997 (No. 1-8484) is incorporated herein by
this reference.
ll. Compensation Agreement entered into between Rhodes, Inc. and
Joel T. Lanham, filed with the Commission as Exhibit 10.10 to
Rhodes, Inc.'s. Annual Report on Form 10-K for the year ended
February 29, 1996 (No. 1-09308) is incorporated herein by this
reference.*
mm. Compensation Agreement entered into between Rhodes, Inc. and
Joel H. Dugan, filed with the Commission as Exhibit 10.11 to
Rhodes, Inc.'s Annual Report on Form 10-K for the year ended
February 29, 1996 (No. 1-09308) is incorporated herein by this
reference.*
nn. First Amendment and Restatement of Credit Agreement dated as
of May 14, 1996, filed as Exhibit 10(oo) to Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1998, is incorporated herein by this reference.
oo. Second Amendment and Restatement of Credit Agreement dated as
of January 8, 1997, filed as Exhibit 10(pp) to Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1998, is incorporated herein by this reference.
pp. Third Amendment and Restatement of Credit Agreement dated as
of May 23, 1997, filed as Exhibit 10(qq) to Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1998, is incorporated herein by this reference.
qq. Amendment No. 4 to the Credit Facility, dated as of November
30, 1997 filed as Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended November 30, 1997,
is incorporated herein by this reference.
rr. Amendment No. 5 to the Credit Facility dated as of April 22,
1998, filed as Exhibit 10(ss) to Registrant's Annual
Report on Form 10-K for the fiscal year ended February 28,
1998, is incorporated herein by this reference.
ss. 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, filed as Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended May 31, 1997, is
incorporated herein by this reference.
61
tt. Rhodes Inc. Supplemental Employees Pension Plan, effective as
of March 1, 1995, filed as Exhibit 10(uu) to Registrant's
Annual Report on Form 10-K for the fiscal year ended February
28, 1998, is incorporated herein by this reference.
uu. Amendment No. 6 to the Credit Facility dated as of February
24, 1999.
vv. Amendment No. 7 to the Credit Facility dated as of April 15,
1999.
ww. Agreement of Lease commencing November 1, 1990 between Hyman
Meyers, Agent and the Registrant.
xx. Agreement of Lease commencing November 1, 1990 between Hyman
Meyers, Agent and the Registrant.
yy. Lease dated August 30, 1986 between Meyers-Thornton Investment
Co. and Registrant.
zz. Agreement of Lease dated December 16, 1997 between Meyers-
Thornton Investment Co. and Registrant.
aaa. Lease dated August 30, 1986 between Meyers-Thornton Investment
Co. and Registrant.
21. Subsidiaries of Registrant.
23. Consents of experts and counsel.
a. Consent of Deloitte & Touche LLP to incorporation by
reference of Accountants' Reports into Registrant's
Registration Statements on Forms S-8 and S-3.
27. Financial Data Schedule
* Management contract or compensatory plan or arrangement of the Company
required to be filed as an exhibit.
62