UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
or -------------------------------------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------------- -------------------
Commission file number #1-8484 .
---------------------------------------------
Heilig-Meyers Company .
- --------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-0558861
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12560 West Creek Parkway, Richmond, Virginia 23238 .
- --------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(804) 784-7300 .
- --------------------------------------------------------------------
(Registrant's telephone number, including area code)
.
- --------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 1, 1999.
59,874,085 shares of Common Stock, $2.00 par value.
HEILIG-MEYERS COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for
Three Months Ended May 31, 1999 and May 31, 1998
(Unaudited) 3
Consolidated Balance Sheets as of May 31, 1999
(Unaudited) and February 28, 1999 (Audited) 4
Consolidated Statements of Cash Flows for
Three Months Ended May 31, 1999 and
May 31, 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosure of
Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
2
PART I
ITEM 1. FINANCIAL STATEMENTS
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended
May 31,
------------------
1999 1998
---- ----
Revenues:
Sales $618,492 $593,795
Other income 70,711 75,144
-------- --------
Total revenues 689,203 668,939
-------- --------
Costs and Expenses:
Costs of sales 400,229 393,432
Selling, general and
administrative 231,320 217,296
Interest 19,733 19,140
Provision for doubtful accounts 23,872 23,199
-------- --------
Total costs and expenses 675,154 653,067
-------- --------
Write-down of assets held
for sale (113,690) --
Earnings (loss) before provision for
income taxes (99,641) 15,872
Provision (benefit) for income taxes (29,101 5,678
-------- ---------
Net earnings (loss) $(70,540) $ 10,194
======== =========
Net earnings (loss) per share of common stock:
Basic $ (1.18) $ 0.17
======== =========
Diluted $ (1.18) $ 0.17
======== =========
Cash dividends per share of
common stock $ 0.07 $ 0.07
======== ========
See notes to consolidated financial statements.
3
HEILIG-MEYERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
May 31, February 28,
1998 1999
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 20,649 $ 67,254
Accounts receivable, net 252,205 254,282
Retained interest in securitized
receivables at fair value 192,184 190,970
Inventories 396,845 493,463
Other current assets 98,773 124,305
Net assets held for sale 159,857 ---
---------- ----------
Total current assets 1,120,513 1,130,274
Property and equipment, net 320,712 400,686
Other assets 104,995 72,632
Excess costs over net assets acquired, net 196,126 344,160
---------- ----------
$1,742,346 $1,947,752
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 201,358 $ 210,000
Long-term debt due within
one year 131,193 167,486
Accounts payable 147,368 193,799
Accrued expenses 154,875 178,656
---------- ----------
Total current liabilities 634,794 749,941
---------- ----------
Long-term debt 536,766 577,344
Deferred income taxes 40,129 45,365
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
59,861 and 59,861, respectively) 119,722 119,722
Capital in excess of par value 242,380 242,346
Unrealized gain on investments 5,478 5,228
Retained earnings 163,077 237,806
---------- ----------
Total stockholders' equity 530,657 605,102
---------- ----------
$1,742,346 $1,947,752
========== ==========
See notes to consolidated financial statements.
4
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Three Months Ended
May 31,
-------------------
1999 1998
---- ----
Cash flows from operating activities:
Net earnings (loss) $(70,540) $ 10,194
Adjustments to reconcile net
earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 16,446 14,587
Provision for doubtful accounts 23,872 23,199
Store closing charge payments (1,312) (3,411)
Write-down of net assets held
for sale 79,552 ---
Other, net (4,275) (50)
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable (23,050) (20,631)
Retained interest in securitized
receivables at cost (964) (10,920)
Other receivables (8,606) (6,113)
Inventories (7,794) (3,377)
Prepaid expenses 3,205 (337)
Accounts payable (958) 14,250
Accrued expenses 16,116 11,451
--------- ---------
Net cash provided by
operating activities 19,692 28,842
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (8,975) (15,830)
Disposals of property and equipment 3,712 7,562
Miscellaneous investments (13,822) (10,385)
--------- ---------
Net cash used by investing
activities (19,085) (18,653)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in notes payable (8,642) (26,115)
Payments of long-term debt (34,381) (687)
Issuance of common stock --- 25
Dividends paid (4,189) (4,135)
--------- ---------
Net cash used by
financing activities (47,212) (30,912)
--------- ---------
Net (decrease) increase in cash (46,605) (20,723)
Cash at beginning of period 67,254 48,779
--------- ---------
Cash at end of period $ 20,649 $ 28,056
========= =========
See notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. The accompanying consolidated financial statements of Heilig-Meyers Company
(the Company) have not been audited by independent accountants, except for
the balance sheet at February 28, 1999. These financial statements have
been prepared in accordance with regulations of the Securities and Exchange
Commission in regard to quarterly (interim) reporting. In the opinion of
management, the financial information presented reflects all adjustments,
comprised only of normal recurring accruals, which are necessary for a fair
presentation of the results for the interim periods. Significant accounting
policies and accounting principles have been consistently applied in both
the interim and annual consolidated financial statements. Certain notes and
the related information have been condensed or omitted from the interim
financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with
the Company's 1999 Annual Report on Form 10-K. The results for the first
quarter of fiscal year 2000 are not necessarily indicative of future
financial results.
B. On May 28, 1999, the Company entered into a definitive agreement to sell
93% of its interest in its Mattress Discounters division. The sale price is
approximately $221.7 million, subject to final adjustment, including cash
proceeds, net of transaction and other costs, of approximately $206.7
million. The transaction, which is subject to certain closing conditions,
is expected to close in the second quarter ending August 31, 1999 and
result in a gain, net of income taxes, of approximately $68.0 million, or
$1.12 per share. The net cash proceeds will be used to pay down debt. The
net assets of the Mattress Discounters division totaled $71.0 million as of
May 31, 1999 and are included in net assets held for sale on the balance
sheet.
On June 15, 1999, the Company entered into a definitive agreement to sell
its interest in its Rhodes division. The transaction was closed on July 13,
1999, with an effective date of July 1, 1999. Under the terms of the sale
agreement the Company received $60.0 million in cash, a $40.0 million note
and an option to acquire a 10% equity interest in the new holding company.
The Company also has the option to acquire an additional 10% equity
interest if certain financial goals are achieved by the new holding
company. Pursuant to the agreement the Company retained rights to an
insurance claim settlement and a federal net operating loss carryforward
which in aggregate will result in approximately a $15.0 million cash
benefit to the Company. The Company has agreed to provide or guarantee a
$20.0 million standby credit facility to Rhodes after the closing, which
may only be drawn on in certain circumstances after utilization of
availability under Rhodes' primary credit facility. In addition, under
terms of the agreement, Rhodes will assume approximately $10 million in
capital lease obligations. Because management had committed to a formal
plan to dispose of the Rhodes division, the net assets of this division
were reclassified to net assets held for sale as of May 31, 1999. The net
assets of the Rhodes division are carried at the estimated net realizable
value totaling $88.8 million as of May 31, 1999. The write down of the net
assets of the Rhodes division to the estimated net realizable value
resulted in a $113.7 million charge to pre-tax operating results for the
quarter ended May 31, 1999. The write down reduced net income by $79.6
million, or $1.33 per share.
6
The results of operations for these two divisions are included in the
consolidated results of operations for the quarters ending May 31, 1999 and
1998. Results of operations for each division are presented in Note I. The
net cash proceeds from these transactions will be used to pay down debt.
C. On March 23, 1999, the Board of Directors declared a cash dividend of $0.07
per share which will be payable on May 15, 1999, to stockholders of record
on April 21, 1999.
D. Accounts receivable are shown net of the allowance for doubtful accounts
and unearned finance income. The allowance for doubtful accounts was
$46,354,000 and $42,475,000 and unearned finance income was $31,336,000 and
$31,775,000 at May 31, 1999, and February 28, 1999, respectively.
E. The Company made income tax payments of $537,000 and $371,000 during the
three months ended May 31, 1999, and May 31, 1998, respectively.
F. The Company made interest payments of $11,473,000 and $12,677,000 during
the three months ended May 31, 1999, and May 31, 1998 respectively.
G. Total comprehensive loss was $70,290,000 for the three month period ended
May 31, 1999 and total comprehensive income was $10,194,000 for the three
month period ended May 31, 1998. The difference between net income (loss)
and comprehensive income (loss) is due to the change in the unrealized gain
on investments, which consist of retained interests in securitized
receivables.
H. In June 1998 the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 2000. The new statement requires that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires the changes in
the derivatives fair value to be recognized currently in earnings unless
specific hedge accounting criteria are met. The Company has not yet
determined the effect this statement will have on the consolidated
financial position or results of operations of the Company.
I. The Company has significant operations aligned in four operating formats:
Heilig-Meyers, The RoomStore, Rhodes and Mattress Discounters divisions. As
discussed in Note B, the Company has entered into agreements to sell its
Rhodes division and 93% of its interest in its Mattress Discounters
division. The Company's Heilig-Meyers division is associated with the
Company's historical operations. The majority of the Heilig-Meyers stores
operate in smaller markets with a broad line of merchandise. The RoomStore
division includes the stores primarily operating in Texas, Oregon, Maryland
and Illinois and the stores in Puerto Rico operating under the Berrios
name. The Rhodes retailing strategy is selling quality furniture to a broad
base of middle income customers. The Mattress Discounters division is the
Nations largest retail bedding specialist.
The Company evaluates performance based on earnings (loss) before interest
and income taxes (based on generally accepted accounting principles). The
Company generally accounts for intersegment sales and transfers at current
market prices as if the sales or transfers were to unaffiliated third
parties. General corporate expenses are allocated between the divisions.
7
Pertinent financial data by operating segment for the quarters ended May
31, 1999 and 1998 are as follows:
May 31, May 31,
(Amounts in thousands) 1999 1998
---------- -----------
Revenues:
Heilig-Meyers $ 382,451 $ 381,202
The RoomStore 123,572 110,914
Rhodes 122,103 117,710
Mattress Discounters 61,077 59,113
Total revenues from ---------- ----------
external customers $ 689,203 $ 668,939
========== ==========
Earnings (loss) before
interest and taxes:
Heilig-Meyers $ 24,120 $ 26,359
The RoomStore 3,783 6,435
Rhodes (832) (3,956)
Mattress Discounters 6,711 6,174
Total earnings (loss) ---------- ----------
before interest and taxes $ 33,782 $ 35,012
========== ==========
Write down of assets held for sale (113,690) --
Interest expense (19,733) (19,140)
Consolidated earnings (loss) ---------- ----------
before provision (benefit)
for income taxes $ (99,641) $ 15,872
========== ==========
Depreciation Expense:
Heilig-Meyers $ 10,561 $ 8,934
The RoomStore 1,595 1,341
Rhodes 3,070 3,238
Mattress Discounters 1,220 1,074
---------- ----------
Total depreciation expense $ 16,446 $ 14,587
========== ==========
Capital Expenditures:
Heilig-Meyers $ 4,730 $ 9,010
The RoomStore 1,960 4,305
Rhodes 1,326 1,471
Mattress Discounters 959 1,044
---------- ----------
Total capital expenditures $ 8,975 $ 15,830
========== ==========
Total identifiable assets:
Heilig-Meyers $1,326,689 $1,390,660
The RoomStore 255,800 274,364
Rhodes, at net realizable value 88,839 323,438
Mattress Discounters, net at
historical cost 71,018 101,659
---------- ----------
Total identifiable assets $1,742,346 $2,090,121
========== ==========
The net identifiable assets of the Rhodes division are stated at net
realizable value, which was below historical cost. The identifiable assets
of the Mattress Discounters division are stated net of liabilities at
historical cost which is lower than the estimated net realizable value. The
prior year amounts for these two divisions are stated at historical cost as
presented in the consolidated balance sheet.
8
I. MacSaver Financial Services, Inc. (MacSaver) is the Company's wholly-owned
subsidiary whose principal business activity is to obtain financing for the
operations of Heilig-Meyers and its other subsidiaries, and, in connection
therewith, MacSaver generally acquires and holds the installment credit
accounts generated by the Company's operating subsidiaries. The payment of
principal and interest associated with MacSaver debt is guaranteed by the
Company. The Company has not presented separate financial statements and
other disclosures concerning MacSaver because management has determined
that such information is not material to the holders of the MacSaver debt
securities guaranteed by the Company. However, as required by the 1934 Act,
the summarized financial information concerning MacSaver is as
follows:
MacSaver Financial Services, Inc.
Summarized Statements of Operations
(Amounts in thousands)
(Unaudited)
Three Months Ended
May 31,
1999 1998
--------------------
Net revenues $ 76,513 $ 70,895
Operating expenses 61,858 55,564
-------- --------
Earnings before taxes 14,656 15,331
-------- --------
Net earnings $ 9,527 $ 9,966
======== ========
MacSaver Financial Services, Inc.
Summarized Balance Sheets
(Amounts in thousands)
May 31, February 28,
1999 1999
---------- -----------
(Unaudited) (Audited)
Current assets $ 46,655 $ 57,148
Accounts receivable, net 144,630 145,211
Retained interest in securitized
receivables at fair value 192,184 190,970
Due from affiliates 707,419 716,867
---------- ----------
Total Assets $1,090,888 $1,110,196
========== ==========
Current liabilities 155,351 172,727
Deferred income taxes 12,957 15,023
Notes payable 201,358 210,000
Long-term debt 535,000 535,000
Stockholders equity 186,222 176,446
---------- ----------
Total Liabilities and Equity $1,090,888 $1,110,196
========== ==========
9
J. The following table sets forth the computations of basic and diluted
earnings (loss) per share:
Three Months Ended
May 31,
1999 1998
--------------------
(Amounts in thousands except per share data)
Numerator:
Net earnings (loss) $(70,540) $10,194
Denominator:
Denominator for basic
earnings per share
average common shares
outstanding 59,861 58,812
Effect of potentially
dilutive stock options -- 594
Effect of contingently issuable
shares considered earned -- 264
Denominator for diluted
earnings per share 59,861 59,670
Basic EPS $(1.18) $0.17
Diluted EPS (1.18) 0.17
Options to purchase 5,266,000 and 2,990,000 shares of common stock at
prices ranging from $6.02 and $14.63 to $35.06 per share were outstanding
at May 31, 1999 and 1998, respectively, but were not included in the
computation of diluted earnings per share because they would have been
antidilutive.
K. In the fourth quarter of fiscal 1998, the Company recorded a pre-tax charge
of approximately $25,530,000 related to specific plans to close
approximately 40 Heilig-Meyers stores, downsize office and support
facilities, and reorganize the Heilig-Meyers private label credit card
program. Amounts charged to the provision during the three months ended May
31, 1999 are as follows:
Amount
Utilized Remaining
Reserve as through Reserve as
of March 1, May 31, of May 31,
(Amounts in thousands, 1999 1999 1999
unaudited) -------------------------------------
Severance $ 1,498 $ 890 $ 608
Lease & facility exit cost 3,294 422 2,872
-------------------------------------
Total $ 4,792 $ 1,312 $ 3,480
=====================================
The Company completed the store closings, office downsizing, and private
label credit card program reorganization associated with this plan during
fiscal 1999. The substantial majority of the remaining reserves are to be
utilized during fiscal 2000 with some amounts related to long-term lease
obligations extending beyond fiscal 2000.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements included in Item 1 of this document, and with the audited
consolidated financial statements of Heilig-Meyers Company (the Company) and
notes thereto for the fiscal year ended February 28, 1999.
On March 24, 1999, the Company announced that in an effort to substantially
improve the overall financial position of the Company and to refocus on its core
home furnishings operation, a review of strategic divestiture options of all
non-core operating assets was being made. The Heilig-Meyers division is
considered as the Company's core business.
On May 28, 1999, the Company entered into a definitive agreement to sell
93% of its interest in its Mattress Discounters division. The sale price is
approximately $221.7 million, subject to final adjustment, including cash
proceeds, net of transaction and other costs, of approximately $206.7 million.
The transaction, which is subject to certain closing conditions, is expected to
close in the second quarter ending August 31, 1999 and result in a gain, net of
income taxes, of approximately $68.0 million, or $1.12 per share. The net cash
proceeds will be used to pay down debt. The net assets of the Mattress
Discounters division totaled $71.0 million as of May 31, 1999 and are included
in net assets held for sale on the balance sheet.
On June 15, 1999, the Company entered into a definitive agreement to sell
its interest in its Rhodes division. The transaction was closed on July 13,
1999, with an effective date of July 1, 1999. Under the terms of the sale
agreement the Company received $60.0 million in cash, a $40.0 million note and
an option to acquire a 10% equity interest in the new holding company. The
Company also has the option to acquire an additional 10% equity interest if
certain financial goals are achieved by the new holding company. Pursuant to the
agreement the Company retained rights to an insurance claim settlement and a
federal net operating loss carryforward which in aggregate will result in
approximately a $15.0 million cash benefit to the Company. The Company has
agreed to provide or guarantee a $20.0 million standby credit facility to Rhodes
after the closing, which may only be drawn on in certain circumstances after
utilization of availability under Rhodes' primary credit facility. In addition,
under terms of the agreement, Rhodes will assume approximately $10 million in
capital lease obligations. Because management had committed to a formal plan to
dispose of the Rhodes division, the net assets of this division were
reclassified to net assets held for sale as of May 31, 1999. The net assets of
the Rhodes division are carried at the estimated net realizable value totaling
$88.8 million as of May 31, 1999. The write down of the net assets of the Rhodes
division to the estimated net realizable value resulted in a $113.7 million
charge to pre-tax operating results for the quarter ended May 31, 1999. The
write down reduced net income by $79.6 million, or $1.33 per share.
The operating results for the Rhodes and Mattress Discounters divisions are
included in the consolidated statements of operations and the consolidated
statements of cash flows for the quarters ended May 31, 1999 and 1998. The net
assets of these two divisions are considered held for sale and are presented in
current assets on the May 31, 1999 balance sheet. The May 31, 1998 balance sheet
reports the assets of these two divisions on a consolidated basis.
11
RESULTS OF OPERATIONS
Revenues and Earnings
Total revenues for the quarter rose 3.0% to $689.2 million from $668.9
million in the prior year. Rhodes, The RoomStore and Mattress Discounters
contributed approximately $122.1 million, $123.6 million and $61.1 million of
the total revenues, respectively. Total revenues for stores operated under the
Heilig-Meyers and The RoomStore divisions for the quarter increased 2.8% from
the prior year. Including a $79.6 million after tax charge, or $1.33 per share,
the Company incurred a net loss for the quarter ended May 31, 1999 of $70.5
million or $1.18 per share. This loss was primarily the result of the $79.6
million after tax charge associated with the write down of the net assets of the
Rhodes division to net realizable value. Excluding the asset write down, net
income for the current quarter was $9.0 million, or $0.15 per share compared to
net income of $10.2 million, or $0.17 per share in the comparable period of the
prior year. This decrease of approximately $1.2 million from the first quarter
of fiscal 1999 is due to factors discussed below.
The following table shows a comparison of sales by division:
Three Months Ended
(Sales amounts in millions)
May 31, 1999 May 31, 1998
------------ ------------
# of % of # of % of
Stores Sales Total Stores Sales Total
---------------------- ----------------------
Heilig-Meyers 814 $327.3 52.9 813 $320.4 54.0
The RoomStore 109 115.4 18.7 101 101.9 17.2
Rhodes 93 114.8 18.6 102 112.4 18.9
Mattress Discounters 241 61.0 9.9 225 59.1 9.9
---------------------- ---------------------
Total 1,257 $618.5 100.0 1,241 $593.8 100.0
====================== =====================
Sales for the first quarter of fiscal 2000 increased 4.2% to $618.5 million
from $593.8 million in the quarter of the prior year. The overall increase in
sales was primarily attributable to a comparable store sales increase of 3.8%
for the three months ended May 31, 1999, with the remainder due to an increase
in operating units from May 31, 1998 to May 31, 1999. Price changes had an
immaterial impact on the overall sales increase for the quarter.
On a consolidated basis, other income decreased during the first quarter to
11.4% from 12.7% of sales in the prior year quarter. This decrease is primarily
the result of sales growth in stores that do not offer the Company's in-house
installment credit program. The Heilig-Meyers division and certain stores in The
RoomStore division offer installment credit as a financing option to customers.
The following table shows other income as a percentage of divisional sales:
May 31, May 31,
1999 1998
------ ------
Heilig-Meyers 16.8% 19.0%
The RoomStore 7.1% 8.9%
Rhodes 6.3% 4.7%
Mattress Discounters 0.1% 0.1%
Within the Heilig-Meyers format, other income decreased 2.2% as a
percentage of sales for the quarter. The decrease is due to an increase in the
amount of receivables that have been securitized and the elimination of the
previous revolving credit card program. The Rhodes division experienced an
increase in other income of 1.6% as a percentage of sales for the quarter. This
increase was due to a higher level of selling emphasis placed on non-furniture
goods and services. Within The RoomStore division, other income decreased as a
percentage of sales 1.8% for the quarter due to an increase in stores that do
not offer an in-house installment program. Other income as a percentage of sales
within the Mattress Discounters division remained flat versus the prior year
quarter.
12
Costs and Expenses
Costs of sales decreased to 64.7% of sales compared to 66.3% in the prior
year quarter. The following table shows the costs of sales as a percentage of
divisional sales:
May 31, May 31,
1999 1998
------ ------
Heilig-Meyers 63.9% 65.7%
The RoomStore 64.2% 64.5%
Rhodes 69.1% 71.1%
Mattress Discounters 61.6% 63.0%
The costs of sales in the Heilig-Meyers division decreased 1.8% from the
prior year quarter as a result of cost control efforts primarily in the
warehouse and delivery areas. Within the Rhodes division costs of sales
decreased 2.0%. Selling margins in the Rhodes division were reduced during the
repositioning period in the prior year quarter in order to increase consumer
demand, which was below managements expectations. In the current year quarter
the Rhodes promotional strategy was refocused to expand its middle income
customer base which resulted in higher selling margins. The decrease in costs of
sales in The RoomStore division was primarily due to decreases in costs of sales
in the Puerto Rican stores. Mattress Discounters reported a 1.4% decrease in
cost of sales due to improved buying power and increased sales of private label
merchandise.
Selling, general and administrative expense increased as a percentage of
sales to 37.4% from 36.6% in the prior year quarter. The following table
displays selling, general and administrative expenses as a percentage of the
applicable divisions sales:
May 31, May 31,
1999 1998
------ ------
Heilig-Meyers 39.4% 38.6%
The RoomStore 36.5% 35.6%
Rhodes 37.9% 37.1%
Mattress Discounters 27.6% 26.6%
Selling, general and administrative expenses as a percentage of sales for
the Heilig-Meyers division increased 0.8% as compared to the prior year quarter.
This increase is due to the timing of certain administrative ex legal and
professional fees and contributions as compared to the prior year. The Rhodes
division experienced an increase of 0.8% in selling, general and administrative
expenses as compared to the prior year quarter as a result of costs associated
with special promotion programs in the first quarter of fiscal 2000. Selling,
general and administrative expenses as a percentage of sales increased 0.9% in
The RoomStore division primarily due to increased advertising for new stores.
Mattress Discounters selling, general and administrative expenses increased 1.0%
as a percentage of sales primarily as a result of new store growth.
13
Interest expense was flat versus the prior year quarter at 3.2% of sales
with the effect of lower debt levels being offset by higher interest rates. For
the quarter, weighted average long-term debt decreased to $675.4 million from
$722.2 million in the prior year first quarter. The decrease in long-term debt
levels between years is a result of repayments made on $20.0 million of private
placement debt in the third quarter of fiscal 1999 and $34.4 million paydown of
long-term debt in the first quarter of fiscal 2000. Weighted average long-term
interest rates increased to 8.3% from 7.6% in the prior year. Weighted average
short-term debt decreased to $186.3 million from $228.1 million in the prior
year. Weighted average short-term interest rates increased to 6.6% from 6.2% in
the prior year. Interest expense remained relatively flat as a percentage of
sales to the prior year period due to sales leverage gained from the Mattress
Discounters units, which were purchased with common stock in July 1997 and
January 1998.
The provision for doubtful accounts for the first quarter of fiscal 2000
was equal to the prior year quarter as a percentage of sales at 3.9%. For those
stores offering installment credit, the provision was 6.5% and 6.4% of sales for
the first quarters of fiscal years 2000 and 1999.
The effective income tax benefit for the first quarter of fiscal 2000 was
29.2% compared to the income tax rate of 35.8% for the first quarter fiscal
1999. The lower rate is due to the write down of the Rhodes net assets to net
realizable value. Because of differences between the carrying value and the tax
basis of certain assets that were written down, the effective tax rate
applicable to the write down was 30%. The effective rate applicable to earnings
before the asset write down was 35.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its cash position $46.6 million to $20.7 million at
May 31, 1999 from $67.3 million at February 28, 1999.
Net cash inflow from operating activities was $19.7 million, compared to an
inflow of $28.8 million in the comparable period of the prior year. The Company
traditionally produces minimal or negative cash flow from operating activities
because it extends in-house credit in its Heilig-Meyers and certain RoomStore
stores. Continued extension of credit and related increases in customer accounts
receivable will likely produce minimal or negative cash flow from operations in
the upcoming fiscal 2000 quarters. However, the Company expects to continue to
periodically sell accounts receivable as a source of cash flows from operating
activities.
Cash flows from investing activities for the quarter remained flat as
compared to the prior year quarter. Investing activities produced negative cash
flows of $19.1 million during the first quarter of fiscal 2000 compared to
negative cash flows of $18.7 million in the prior year period.
Financing activities produced negative cash flows of $47.2 million during
the first quarter of fiscal 2000 compared to a negative cash flow of $30.9
million in the prior year period. The negative cash flow from financing
activities in the current year quarter 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 three months ended May 31, 1999. As of May 31,
1999, long-term notes payable with an aggregate principal amount of $175 million
securities have been issued to the public under this Registration Statement. As
of May 31, 1999, the Company had a $298.1 million revolving credit facility in
place, which expires in July 2000. This facility includes ten banks and had
$201.4 million outstanding and $96.7 million unused as of May 31, 1999.
14
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 62.1% at May 31, 1999,
compared to 60.4% at February 28, 1999. This increase is primarily due to the
reclassification of assets held for sale. The current ratio was 1.8X at May 31,
1999, compared to 1.5X at February 28, 1999. The current ratio also increased
due to the reclassification of assets held for sale. Without the
reclassification, the current ratio would have remained unchanged compared to
February 28, 1999.
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
second quarter of fiscal year 2000. The Company is in the mid to late stages 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 projects 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.
15
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:
Dollars % of
Task: (in thousands) Total
- ------------------------------------------------------
Auditing Remediation Efforts $ 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 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
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 above are not based on historical facts, but
are forward-looking statements. These statements can be identified by the use of
forward-looking terminology such as believes, expects, may, will, should, or
anticipates or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. These statements reflect the
Company's reasonable judgments with respect to future events and are subject to
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Such risks and uncertainties
include, but are not limited to, the 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 access to, and cost of,
capital, the investment group's ability to obtain satisfactory financing for the
purchase of the controlling interest, as well as valuations at which certain
other potential divestitures may occur. Payments under guarantees of Rhodes
leases or other obligations or the standby credit facility as a result of lower
than expected Rhodes operating results or defaults by Rhodes could impact the
outcome of the forward looking statements. Other factors such as changes in tax
laws, consumer credit and bankruptcy trends, recessionary or expansive trends in
the Company's markets, the ability of the Company, its key vendors and service
providers to effectively correct the Year 2000 issue, and inflation rates and
regulations and laws which affect the Company's ability to do business in its
markets may also impact the outcome of forward-looking statements.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes to the disclosure on this matter made in our
Report on Form 10-K for the year ended February 28, 1999. Reference is made to
Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in
the Registrants Annual Report on Form 10-K for the year ended February 28, 1999.
17
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See INDEX TO EXHIBITS
(b) There was one Current Report on Form 8-K filed during
the quarterly period ended May 31, 1999. On March 29,
1999, Registrant filed a Form 8-K in which it attached
and incorporated by reference the March 24, 1999 press
release issued by the Registrant reporting the hiring
of Don Shaffer as President and Chief Operating Officer,
the possible divestiture of the Company's Rhodes and
Mattress Discounters subsidiaries and the results for the
fourth quarter and fiscal year ended February 28, 1999.
INDEX TO EXHIBITS
Page
----
2. Transaction Agreement among Heilig-Meyers
Company, Heilig-Meyers Associates, Inc. and
MD Acquisition Corporation, dated as of
May 28, 1999, as amended by Amendment No. 1
hereto dated as of July 14, 1999 20
27. Financial Data Schedule 45
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Heilig-Meyers Company
(Registrant)
Date: July 15, 1999 /s/Roy B. Goodman
-----------------
Roy B. Goodman
Executive Vice President and
Principal Financial Officer
Date: July 15, 1999 /s/William J. Dieter
--------------------
William J. Dieter
Senior Vice President,
Accounting and Principal
Accounting Officer
19