UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 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 October 1, 1999.
67,676,676 shares of Common Stock, $2.00 par value.
HEILIG-MEYERS COMPANY
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for
Three and Six Months Ended August 31, 1999
and August 31, 1998 (Unaudited) 3
Consolidated Balance Sheets as of August 31, 1999
(Unaudited) and February 28, 1999 (Audited) 4
Consolidated Statements of Cash Flows for
Six Months Ended August 31, 1999 and
August 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 12
Item 3. Quantitative and Qualitative Disclosure of
Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
2
PART I
ITEM 1. FINANCIAL STATEMENTS
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Sales $507,640 $596,360 $1,126,133 $1,190,155
Other income 65,308 78,647 136,020 153,791
-------- -------- ---------- ----------
Total revenues 572,948 675,007 1,262,153 1,343,946
-------- -------- ---------- ----------
Costs and Expenses:
Costs of sales 334,868 405,831 735,097 799,263
Selling, general and
administrative 192,885 213,935 424,205 431,231
Interest 18,557 18,986 38,292 38,126
Provision for doubtful
accounts 23,279 22,494 47,151 45,693
-------- -------- ---------- ----------
Total costs and
expenses 569,589 661,246 1,244,745 1,314,313
-------- -------- ---------- ----------
Gain (loss) on sale
and write-down of
assets held for sale 50,554 -- (63,136) --
Earnings (loss) before
provision for income
taxes 53,913 13,761 (45,728) 29,633
Provision for income taxes 51,071 5,003 21,970 10,681
-------- --------- ---------- ----------
Net earnings (loss) $ 2,842 $ 8,758 $ (67,698) $ 18,952
======== ======== ========== ==========
Net earnings (loss) per share of common stock:
Basic $ 0.05 $ 0.15 $ (1.13) $ 0.32
======== ======== ========== ==========
Diluted $ 0.05 $ 0.15 $ (1.13) $ 0.32
======== ======== ========== ==========
Cash dividends per
share of common stock $ 0.07 $ 0.07 $ 0.14 $ 0.14
======== ======== ========== ==========
See notes to consolidated financial statements.
3
HEILIG-MEYERS COMPANY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value data)
August 31, February 28,
1999 1999
---- ----
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 4,906 $ 67,254
Accounts receivable, net 148,654 254,282
Retained interest in securitized
receivables at fair value 191,999 190,970
Inventories 366,135 493,463
Other current assets 103,050 124,305
Net assets held for sale 161,519 ---
---------- ----------
Total current assets 976,263 1,130,274
Property and equipment, net 293,138 400,686
Other assets 133,786 72,632
Excess costs over net assets acquired, net 145,014 344,160
---------- ----------
$1,548,201 $1,947,752
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 89,707 $ 210,000
Long-term debt due within
one year 37,540 167,486
Accounts payable 138,147 193,799
Accrued expenses 160,417 178,656
---------- ----------
Total current liabilities 425,811 749,941
---------- ----------
Long-term debt 536,481 547,344
Deferred income taxes 56,194 45,365
Stockholders' equity:
Preferred stock, $10 par value --- ---
Common stock, $2 par value (250,000
shares authorized; shares issued
59,874 and 59,861, respectively) 119,748 119,722
Capital in excess of par value 242,476 242,346
Unrealized gain on investments 5,763 5,228
Retained earnings 161,728 237,806
---------- ----------
Total stockholders' equity 529,715 605,102
---------- ----------
$1,548,201 $1,947,752
========== ==========
See notes to consolidated financial statements.
4
HEILIG-MEYERS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
August 31,
-------------------
1999 1998
---- ----
Cash flows from operating activities:
Net earnings (loss) $(67,698) $ 18,952
Adjustments to reconcile net
earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization 30,478 27,819
Provision for doubtful accounts 47,151 45,696
Store closing charge payments (1,312) (3,548)
Gain (loss), net of tax on sale and
write-down of net assets held for
sale 78,903 ---
Other, net (2,763) (4,858)
Change in operating assets and
liabilities net of the effects
of acquisitions:
Accounts receivable (49,503) (10,115)
Retained interest in securitized
receivables at cost (494) 4,657
Other receivables (41,957) 414
Inventories (39,713) 1,666
Prepaid expenses 13,864 (1,579)
Accounts payable 148 (1,180)
Accrued expenses (17,205) (53)
--------- ---------
Net cash provided (used)
by operating activities (50,101) 77,871
--------- ---------
Cash flows from investing activities:
Proceeds from sale of subsidiaries 263,575 ---
Additions to property and equipment (15,578) (35,015)
Disposals of property and equipment 5,109 16,742
Miscellaneous investments (7,476) (50,914)
--------- ---------
Net cash provided (used)
by investing activities 245,630 (69,187)
--------- ---------
Cash flows from financing activities:
Net decrease in notes payable (120,293) (11,500)
Payments of long-term debt (129,229) (2,551)
Issuance of common stock 26 25
Dividends paid (8,381) (8,271)
--------- ---------
Net cash used by
financing activities (257,877) (22,297)
--------- ---------
Net decrease in cash (62,348) (13,613)
Cash at beginning of period 67,254 48,779
--------- ---------
Cash at end of period $ 4,906 $ 35,166
========= =========
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 second
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, and on August 6,
the Company completed the transaction. Heilig-Meyers received approximately
$204 million in cash, subject to certain working capital adjustments,
pay-in-kind junior subordinated notes valued at $12.0 million and retained
a 7% equity interest in Mattress Discounters. The Company incurred costs
related to the transaction of approximately $8.9 million and assumed
liabilities of approximately $5.6 million. This transaction resulted in a
pre-tax gain of $135.2 million ($56.2 million net of tax).
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 million 10%
pay-in-kind subordinated note receivable due 2004 (9.5% interest rate per
annum for periods where interest is paid in cash) and an option to acquire
a 10% equity interest in Rhodes Holdings, the acquiring entity. The Company
also has the option to acquire an additional 10% equity interest if certain
financial goals are achieved by Rhodes Holdings. 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 assumed approximately $10
million in capital lease obligations. During the first quarter ended May
31, 1999, the Company recorded a pre-tax charge to earnings of $113.7
million ($79.6 million net of tax) to write down its investment in Rhodes
to estimated net realizable value. During the second quarter ended August
31, 1999, this loss was adjusted to $104.6 million ($68.8 million net of
tax) to reflect the final terms of this transaction.
During the second quarter ended August 31, 1999, the Company announced its
intent to exit certain markets which are not considered to be part of the
Company's core operations. These markets include Chicago, Illinois,
Milwaukee, Wisconsin and non-continental U.S. operations. During the
quarter ended August 31, 1999, the Company recorded a pre tax charge of
$93.8 million ($66.3 million net of tax) to write down the associated
assets to their estimated fair value, less costs to sell. The assets
effected by this plan total approximately $161.5 million and are classified
as net assets held for sale on the August 31, 1999 balance sheet. The
Company began the execution of this plan in September 1999 with the sale of
assets related to 18 Heilig-Meyers Furniture stores in the Chicago and
Milwaukee markets. The Company expects the remaining dispositions to be
completed within the next 12 months. The net cash proceeds from these
divestitures will be used to pay down debt.
6
C. On June 16, 1999, the Board of Directors declared a cash dividend of $0.07
per share which will be payable on August 21, 1999, to stockholders of
record on July 14, 1999.
D. Accounts receivable are shown net of the allowance for doubtful accounts
and unearned finance income. The allowance for doubtful accounts was
$46,435,000 and $42,475,000 and unearned finance income was $30,647,000 and
$31,775,000 at August 31, 1999, and February 28, 1999, respectively.
E. The Company made (received) net income tax payments (refunds) of $281,000
and $(9,942,000) during the three months ended August 31, 1999, and August
31, 1998, respectively.
F. The Company made interest payments of $41,550,000 and $38,639,000 during
the six months ended August 31, 1999, and August 31, 1998 respectively.
G. Total comprehensive income (loss) was $3,127,000 and ($67,163,000) for the
three and six months ended August 31, 1999 and total comprehensive income
was $6,955,000 and $17,149,000 for the three and six months ended August
31, 1998. The difference between net income (loss) and comprehensive income
(loss) is due to the change in the unrealized gain on investments, which
consists 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 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.
I. During the six months ended August 31, 1999, the Company had significant
operations aligned in four operating formats: Heilig-Meyers, The RoomStore,
Rhodes and Mattress Discounters. 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, Illinois and Virginia and the stores in
Puerto Rico operating under the "Berrios" name. The Rhodes retailing
strategy was selling quality furniture to a broad base of middle income
customers. The Mattress Discounters division is the Nation's largest
retail bedding specialist.
As discussed in Note B, the Company has completed the sale of its Rhodes
division and has also sold 93% of its interest in its Mattress Discounters
division. Therefore, results from the second quarter of 2000 include
operations of the Rhodes division through June 30, 1999 and the Mattress
Discounters division through August 6, 1999.
Results for the second quarter and six months ended August 31, 1999 also
include the results associated with operations that the Company plans to
divest. These include operations in the Chicago, Illinois, Milwaukee,
Wisconsin and non-continental U.S. markets, which are reported as part of
The RoomStore operating segment.
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 three and six month
periods ended August 31, 1999 and 1998 are as follows:
Three Months Three Months
Ended Ended
August 31, August 31,
(Amounts in thousands) 1999 1998
---- ----
Revenues:
Heilig-Meyers $ 368,788 $ 377,000
The RoomStore 120,559 110,923
Rhodes 37,945 121,440
Mattress Discounters 45,656 65,644
---------- ----------
Total revenues from
external customers $ 572,948 $ 675,007
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ 14,782 $ 28,261
The RoomStore 3,753 3,586
Rhodes (1,558) (7,357)
Mattress Discounters 4,939 8,257
---------- ----------
Total earnings before
interest and taxes $ 21,916 $ 32,747
Gain on sale and write-
down of assets held for sale 50,554 --
Interest expense (18,557) (18,986)
----------- -----------
Consolidated earnings
before provision for
income taxes $ 53,913 $ 13,761
========== ==========
Depreciation and amortization expense:
Heilig-Meyers $ 10,616 $ 7,717
The RoomStore 1,677 1,212
Rhodes 848 3,203
Mattress Discounters 896 1,100
---------- ----------
Total depreciation and
amortization expense $ 14,037 $ 13,232
========== ==========
Capital Expenditures:
Heilig-Meyers $ 1,997 $ 13,452
The RoomStore 4,031 4,116
Rhodes 339 869
Mattress Discounters 236 748
---------- ----------
Total capital expenditures $ 6,603 $ 19,185
========== ==========
Total identifiable assets:
Heilig-Meyers $1,345,989 $1,376,732
The RoomStore 202,212 270,366
Rhodes -- 323,743
Mattress Discounters -- 99,215
---------- ----------
Total identifiable assets $1,548,201 $2,070,056
========== ==========
8
Six Months Six Months
Ended Ended
August 31, August 31,
1999 1998
---- ----
Revenues:
Heilig-Meyers $ 751,241 $ 758,202
The RoomStore 244,131 221,837
Rhodes 160,048 239,150
Mattress Discounters 106,733 124,757
---------- ----------
Total revenues from
external customers $1,262,153 $1,343,946
========== ==========
Earnings (loss) before interest and taxes:
Heilig-Meyers $ 38,903 $ 54,620
The RoomStore 7,537 10,022
Rhodes (2,390) (11,314)
Mattress Discounters 11,650 14,431
---------- ----------
Total earnings before
interest and taxes $ 55,700 $ 67,759
Gain (loss) on sale and write-
down of assets held for sale (63,136) --
Interest expense (38,292) (38,126)
----------- -----------
Consolidated earnings (loss)
before provision for
income taxes $ (45,728) $ 29,633
=========== ==========
Depreciation and amortization expense:
Heilig-Meyers $ 21,177 $ 16,651
The RoomStore 3,272 2,554
Rhodes 3,918 6,440
Mattress Discounters 2,116 2,174
---------- ----------
Total depreciation and
amortization expense $ 30,483 $ 27,819
========== ==========
Capital Expenditures:
Heilig-Meyers $ 6,727 $ 22,462
The RoomStore 5,991 8,421
Rhodes 1,665 2,340
Mattress Discounters 1,195 1,792
---------- ----------
Total capital expenditures $ 15,578 $ 35,015
========== ==========
9
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)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
------------------ ------------------
Net revenues $ 74,896 $ 72,799 $151,410 $143,694
Operating expenses 62,243 55,228 124,101 110,791
-------- -------- -------- --------
Earnings before taxes 12,653 17,571 27,309 32,903
-------- -------- -------- --------
Net earnings $ 8,224 $ 11,421 $ 17,751 $ 21,387
======== ======== ======== ========
MacSaver Financial Services, Inc.
Summarized Balance Sheets
(Amounts in thousands)
August 31, February 28,
1999 1999
(Unaudited) (Audited)
---------- ----------
Current assets $ 67,068 $ 57,148
Accounts receivable, net 120,039 145,211
Retained interest in securitized
receivables at fair value 191,999 190,970
Due from affiliates 508,225 716,867
---------- ----------
Total Assets $ 887,331 $1,110,196
========== ==========
Current liabilities 55,463 173,727
Deferred income taxes 12,429 15,023
Notes payable 89,707 210,000
Long-term debt 535,000 535,000
Stockholder's equity 194,732 176,446
---------- ----------
Total Liabilities and Equity $ 887,331 $1,110,196
========== ==========
10
J. The following table sets forth the computations of basic and diluted
earnings (loss) per share:
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
------------------ ----------------
(Amounts in thousands except per share data)
Numerator:
Net earnings (loss) $2,842 $ 8,758 $(67,698) 18,952
Denominator:
Denominator for basic
earnings per share -
average common shares
outstanding 59,949 59,077 59,905 58,945
Effect of potentially
dilutive stock options 37 494 -- 544
Effect of contingently
issuable shares
considered earned -- -- -- 132
------ ------ ------ ------
Denominator for diluted
earnings per share 59,986 59,571 59,905 59,621
Basic EPS $ 0.05 $ 0.15 $(1.13) $ 0.32
Diluted EPS 0.05 0.15 (1.13) 0.32
Options to purchase 4,806,000 and 3,481,000 shares of common stock at
prices ranging from $9.03 and $13.56 to $35.06 per share were
outstanding at August 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 first and second
quarter of fiscal 2000 are as follows:
Amount
Utilized Remaining
Reserve as through Reserve as
of March 1, August 31, of August 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 expected to be utilized during fiscal 2000 with some
amounts related to long-term lease obligations extending beyond fiscal
2000.
11
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 and certain
markets within The RoomStore division are considered as the Company's core
business.
On May 28, 1999, the Company announced that it had entered into a
definitive agreement to sell 93% of its interest in its Mattress Discounters
division, and on August 6, the Company completed the transaction. Heilig-Meyers
received approximately $204 million in cash, subject to certain working capital
adjustments, pay-in-kind junior subordinated notes valued at $12.0 million and
retained a 7% equity interest in Mattress Discounters. The Company incurred
costs related to the transaction of approximately $8.9 million and assumed
liabilities of approximately $5.6 million. This transaction resulted in a
pre-tax gain of $135.2 million ($56.2 million net of tax).
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 million 10%
pay-in-kind subordinated note receivable due 2004 (9.5% interest rate per annum
for periods where interest is paid in cash) and an option to acquire a 10%
equity interest in Rhodes Holdings, the acquiring entity. The Company also has
the option to acquire an additional 10% equity interest if certain financial
goals are achieved by Rhodes Holdings. 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 assumed approximately $10 million in capital lease
obligations. During the first quarter ended May 31, 1999, the Company recorded a
pre-tax charge to earnings of $113.7 million ($79.6 million net of tax) to write
down its investment in Rhodes to estimated net realizable value. During the
second quarter ended August 31, 1999, the loss was adjusted to $104.6 million
($68.8 million net of tax) to reflect the final terms of this transaction.
During the second quarter ended August 31, 19999, the Company announced its
intent to exit certain markets which are not considered to be part of the
Company's core operations. These markets include Chicago, Illinois, Milwaukee,
Wisconsin and non-continental U.S. operations. During the quarter ended August
31, 1999, the Company recorded a pre tax charge of $93.8 million ($66.3 million
net of tax) to write down the associated assets to their estimated fair value,
less costs to sell. The assets effected by this plan total approximately $161.5
million and are classified as net assets held for sale on the August 31, 1999
balance sheet. The Company began the execution of this plan in September 1999
with the sale of assets related to 18 Heilig-Meyers Furniture stores in the
Chicago and Milwaukee markets. The Company expects the remaining dispositions to
be completed within the next 12 months. The net cash proceeds from these
divestitures will be used to pay down debt.
12
RESULTS OF OPERATIONS
Revenues and Earnings
Revenues in those divisions which were under the Company's ownership for
the full quarter increased 0.3% to $489.3 million, compared to $487.9 million in
the prior year quarter. As a result of the sale of the Company's Rhodes and
Mattress Discounters divisions, total revenues for the quarter declined 15.1% to
$572.9 million from $675.0 million in the prior year, which included a full
three months activity for these divisions. Net earnings from operations for the
quarter ended August 31, 1999, were $2.2 million or $0.04 per share. Including
the net gain relating to the divestiture activity, the Company reported net
income of $2.8 million or $0.05 per share for the quarter ended August 31, 1999
compared to $0.15 per share in the prior year quarter. The results for the
quarter ended August 31, 1999 include a net gain of $0.6 million or $.01 per
share related to divestiture activity and write downs of assets held for sale.
For the six month period ended August 31, 1999, revenues in those divisions
which were under the Company's ownership for the full six months increased 1.6%
to $995.4 million, compared to $980.0 million for the six months ended August
31, 1998. As a result of the sales of the Company's Rhodes and Mattress
Discounters divisions, total revenues for the six month period declined to $1.26
billion from $1.34 billion for the same period in the prior year. For the six
month period ended August 31, 1999, the Company has incurred pre-tax costs of
$63.1 million ($78.9 million net of tax) associated with divestiture activities
and the write down of assets held for sale. Including these costs, the Company
reported a net loss of $67.7 million or $1.13 per share for the six month period
ending August 31, 1999. Absent these charges, net earnings for the six month
period ended August 31, 1999, were $11.2 million, or $0.19 per share, compared
to $19.0 million, or $0.32 per share in the prior year comparative period.
The following table shows a comparison of sales by division:
Three Months Ended Six Months Ended
August 31, August 31,
1999 1998 1999 1998
------------ ------------ ------------- ------------
(Sales amounts in millions)
% of % of % of % of
Sales Sales Sales Sales Sales Sales Sales Sales
------------ ------------ ------------ ------------
Heilig-Meyers $313.1 61.7% $313.3 52.5% $640.5 56.9% $633.6 53.2%
The RoomStore 112.9 22.2 101.7 17.1 228.2 20.2 203.6 17.1
Rhodes 36.0 7.1 115.9 19.4 150.8 13.4 228.4 19.2
Mattress
Discounters 45.6 9.0 65.5 11.0 106.6 9.5 124.6 10.5
------ ------ -------- --------
Total $507.6 $596.4 $1,126.1 $1,190.2
====== ====== ======== ========
Sales in those divisions which were under the Company's ownership for the
full second quarter of fiscal 2000 increased 2.7% to $426.0 million, compared to
$415.0 million for the quarter ended August 31, 1998. As a result of the sales
of the Company's Rhodes and Mattress Discounters divisions, sales declined 14.9%
to $507.6 million compared to sales of $596.4 million in the prior year quarter.
For the six month period ended August 31, 1999, sales in those divisions which
were under the Company's ownership for the full six months increased 3.8% to
$868.7 million from $837.2 million. As a result of the sales of the Company's
Rhodes and Mattress Discounters divisions, sales for the six month period
declined 5.4% to $1,126.1 million from $1,190.2 million. The overall increase in
sales in the divisions under the Company's ownership for the full period was
primarily attributable to a comparable store sales increase of 0.7% and 1.9% for
the three and six months ended August 31, 1999, with the remainder due to an
increase in operating units from August 31, 1998 to August 31, 1999. Price
changes had an immaterial impact on the overall sales increase for the quarter.
13
Other income for those divisions which were under the Company's ownership
for the full quarter decreased to 14.8% from 17.6% of sales in the prior year
quarter. For the six months ended August 31, 1999, other income for these
divisions decreased as a percentage of sales to 14.5% from 17.1% in the prior
year. On a consolidated basis, other income decreased to 12.9% for the quarter
from 13.2% in the prior year quarter. For the six month period other income
decreased to 12.1% from 12.9% in the prior year. These decreases are 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:
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
Heilig-Meyers 17.6% 20.3% 17.1% 19.7%
The RoomStore 6.8 9.1 7.0 9.0
Rhodes 5.4 4.8 6.1 4.7
Mattress
Discounters 0.0 0.2 0.1 0.2
Within the Heilig-Meyers format, other income decreased 2.7% as a
percentage of sales for the quarter and 2.6% of sales year-to-date. 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. Within The
RoomStore division, other income decreased as a percentage of sales 2.3% for the
quarter and 2.0% year-to-date due to an increase in stores that do not offer an
in-house installment program.
Costs and Expenses
Costs of sales for those divisions which were under the Company's ownership
for the full quarter decreased to 65.7% from 67.6% of sales in the prior year
quarter. For the six months ended August 31, 1999, costs of sales for these
divisions decreased as a percentage of sales to 64.8% from 66.5% in the prior
year. On a consolidated basis, cost of sales decreased to 66.0% for the quarter
from 68.1% in the prior year quarter. For the six month period ended August 31,
1999, cost of sales decreased to 65.3% from 67.2% in the prior year. The
following table shows the costs of sales as a percentage of divisional sales:
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
Heilig-Meyers 65.6% 67.6% 64.7% 66.6%
The RoomStore 66.3 67.8 65.2 66.1
Rhodes 75.3 73.2 70.6 72.2
Mattress
Discounters 63.2 61.8 62.2 62.4
The costs of sales in the Heilig-Meyers division decreased 2.0% as a
percentage of sales from the prior year quarter and 1.9% as a percentage of
sales from the prior year-to-date as a result of cost control efforts primarily
in the warehouse and delivery areas. The decrease in costs of sales in The
RoomStore division was primarily due to decreases in costs of sales in the
Puerto Rican stores.
14
Selling, general and administrative expenses for those divisions which were
under the Company's ownership for the full quarter increased to 39.6% from 36.9%
of sales in the prior year quarter. For the six months ended August 31, 1999,
selling, general and administrative expenses for these divisions increased as a
percentage of sales to 39.1% from 37.4% in the prior year. On a consolidated
basis, selling, general and administrative expenses increased to 38.0% for the
quarter from 35.9% in the prior year quarter. For the six month period ended
August 31, 1999, selling, general and administrative expenses increased to 37.7%
from 36.2% in the prior year. The following table displays selling, general and
administrative expense as a percentage of the applicable division's sales:
Three Months Ended Six Months Ended
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---- ---- ---- ----
Heilig-Meyers 41.3% 37.5% 40.3% 38.0%
The RoomStore 34.9 35.1 35.7 35.4
Rhodes 34.5 37.9 37.1 37.5
Mattress
Discounters 26.1 25.8 26.9 26.2
Selling, general and administrative expenses as a percentage of sales for
the Heilig-Meyers division increased 3.8% as a percentage of sales as compared
to the prior year quarter and 2.3% as a percentage of sales as compared to the
prior year six month period. This increase is due to the timing of certain
administrative expenses such as legal and professional fees as well as a
redistribution of store-level compensation from year end bonus programs to base
pay as compared to the prior year. Selling, general and administrative expenses
in The RoomStore division decreased 0.2% as a percentage of sales versus the
prior year quarter and increased 0.3% versus the prior year six month period.
The increases in expenses in The RoomStore division are primarily due to
increased advertising for new stores.
Interest expense was 3.7% and 3.2% of sales in the second quarters of
fiscal years 2000 and 1999, respectively with the effect of lower debt levels
being offset by higher interest rates. For the quarter, weighted average
long-term debt decreased to $627.0 million from $722.0 million in the prior year
second 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 $129.2 million paydown of long-term debt in the first
and second quarters of fiscal 2000. Weighted average long-term interest rates
increased to 8.6% from 7.6% in the prior year. Weighted average short-term debt
decreased to $172.5 million from $258.7 million in the prior year. This decrease
was the result of the use of proceeds from divestitures to paydown notes
payable. Weighted average short-term interest rates increased to 7.1% from 6.4%
in the prior year. Interest expense increased 0.5% as a percentage of sales
compared to the prior year quarter due to higher interest rates. For the six
month period ended August 31, 1999, interest expense increased to 3.4% of sales
from 3.2% in the prior year.
The reduction in the sales contribution of the Rhodes and Mattress
Discounters divisions caused the provision for doubtful accounts to increase for
the second quarter, as a percentage of sales to 4.6% from 3.8% in the prior year
quarter. For the six month period ended August 31, 1999, the provision increased
to 4.2% from 3.8% in the prior year. For those stores offering installment
credit, the provision was 6.5% and 6.4% of sales for the second quarters of
fiscal years 2000 and 1999 and 6.4% for the six months ended August 31, 1999 and
1998.
As a result of divestiture activity, the effective income tax rate was
94.7% for the second quarter ended August 31, 1999. For the six months ended
August 31, 1999, the divestiture activity caused the provision for income taxes
to be an expense of $22.0 million on a pre-tax loss of $45.7 million. Because
the Company's tax basis in the Mattress Discounters division was minimal, the
sale of the division resulted in a tax gain significantly in excess of the gain
recorded for financial reporting purposes. Before divestiture activity, the
effective income tax rate from operations for the second quarter of fiscal 2000
was 34.7% compared to 36.4% for the second quarter of fiscal 1999. For the
six-month period ended August 31, 1999, the effective tax rate from operations
was 35.6% compared to 36.0% in the prior year.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its cash position $62.4 million to $4.9 million at
August 31, 1999 from $67.3 million at February 28, 1999.
Net cash from operating activities produced negative cash flows of $50.1
million, compared to an inflow of $77.9 million in the comparable period of the
prior year. The prior year amount includes a cash inflow of $59.3 million from
the sale of accounts receivable through the Company's asset securitization
program. 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.
Investing activities produced cash flows of $245.6 million during the six
months ended August 31, 1999 compared to negative cash flows of $69.2 million in
the prior year period. The increase in cash flows from investing activities is
primarily due to cash proceeds received from the sale of the Rhodes and Mattress
Discounters divisions, as well as a decrease in additions to property and
equipment during the period and a decrease in miscellaneous investments. Cash
used for miscellaneous investments during the six months ended August 31, 1998
includes deposits paid by the Company related to the change in lessor of certain
leased real estate and the purchase of previously leased equipment.
Financing activities produced negative cash flows of $257.9 million during
the six months ended August 31, 1999 compared to a negative cash flow of $22.3
million in the prior year period. The negative cash flow from financing
activities in the current year period is due to the payments of debt from the
proceeds of the sale of the Rhodes and Mattress Discounters divisions. In June
1997, the Company and a wholly-owned subsidiary filed a joint Registration
Statement on Form S-3 with the Securities and Exchange Commission relating to up
to $400.0 million aggregate principal amount of securities. There were no
issuances of debt pursuant to the joint Registration Statement during the six
months ended August 31, 1999. As of August 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 August 31, 1999, the
Company had a $200.0 million revolving credit facility in place, which expires
in July 2000. This facility includes ten banks and had $89.7 million outstanding
and $110.3 million unused as of August 31, 1999.
As a result of losses incurred during the second quarter of fiscal 2000,
the Company obtained amendments to its bank debt agreements in order to maintain
covenant compliance.
Total debt as a percentage of debt and equity was 55.6% at August 31, 1999,
compared to 60.4% at February 28, 1999. This decrease is primarily due to the
paydown of debt from proceeds of divested subsidiaries as well as the
reclassification of assets held for sale. The current ratio was 2.3X at August
31, 1999, compared to 1.5X at February 28, 1999. The current ratio also
increased due to the paydown of debt and the reclassification of assets held for
sale.
16
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. Remediation for all other subsidiaries' critical
systems was completed in the second quarter of fiscal year 2000. The testing
stage for critical systems within the entire Company was also completed in the
second quarter of fiscal year 2000. The audit phase for this testing began in
the second quarter and will continue into the third quarter of fiscal year 2000.
The Company is in the last stages of inventorying and making an assessment of
its lower priority non-information technology systems. Managers of such systems
have contacted 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:
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 management's 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 has obtained 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.
17
The Company is currently assessing the consequences of its Year 2000
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 ranked
suppliers based on how critical each supplier is believed to be to the Company's
operations. The Company requested a copy of the Year 2000 project plan under
which these suppliers are operating. The Company's Year 2000 project team has
reviewed 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 third quarter of fiscal year 2000.
FORWARD-LOOKING STATEMENTS
Certain statements included above are not based on historical facts, but
are forward-looking statements. These statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy. These statements
reflect the Company's reasonable judgments with respect to future events and are
subject to risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the customer's willingness, need
and financial ability to purchase home furnishings and related items, the
Company's ability to extend credit to its customers, the costs and effectiveness
of promotional activities, the Company's access to, and cost of, capital, and
the Company's ability to attract buyers and obtain satisfactory valuations for
certain assets held for sale. 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 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.
18
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 Registrant's Annual Report on Form 10-K for the year ended February 28,
1999.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Company's shareholders was held June 16, 1999.
(c)(i) The shareholders approved the ratification of the selection of Deloitte
and Touche LLP as accountants and auditors for the Company for the
current fiscal year. The ratification was approved by the following vote:
FOR - 50,330,069
AGAINST - 125,679
ABSTAIN - 64,293
(c)(ii) The shareholders of the Company elected a board of nine directors for
one-year terms. The elections were approved by the following vote:
Directors For Withheld
--------- --- --------
William C. DeRusha 48,522,355 1,999,538
Alexander Alexander 48,732,011 1,789,881
Robert L. Burrus, Jr. 48,735,497 1,786,396
Beverley E. Dalton 48,741,787 1,780,106
Charles A. Davis 48,733,601 1,788,292
Benjamin F. Edwards, III 48,737,419 1,784,474
Lawrence N. Smith 48,736,168 1,785,724
Eugene P. Trani 48,735,793 1,786,100
L. Douglas Wilder 48,515,614 2,006,278
(c)(iii) The shareholders approved the Company's Director Stock Ownership Plan.
The votes were cast as follows:
FOR - 46,767,041
AGAINST - 3,632,247
ABSTAIN - 120,752
(c)(iv) The shareholders disapproved the shareholder proposal. The votes were
cast as follows:
FOR - 14,403,031
AGAINST - 26,545,513
ABSTAIN - 755,501
19
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See INDEX TO EXHIBITS
(b) There were three Current Reports on Form 8-K filed during
the quarterly period ended August 31, 1999. On June 17,
1999, Registrant filed a Form 8-K in which it announced the
signing of a definitive agreement to transfer a controlling
interest in Mattress Discounters Corporation to an
investment group. The Registrant also announced the signing
of a definitive agreement to sell Rhodes, Inc. to an
investment group and reported results for the first quarter
ended May 31, 1999.
On July 28, 1999, Registrant filed a Form 8-K in which it
reported that Registrant had sold its interest in Rhodes,
Inc. and included pro forma financial statements related
thereto.
On August 23, 1999, Registrant filed a Form 8-K in which it
reported that Registrant had sold a controlling interest in
Mattress Discounters Corporation and included pro forma
financial statements related thereto.
INDEX TO EXHIBITS
Page
10.1 Registrant's Director Stock Ownership Paln as
amended effective July 1, 1999 22
10.2 Registrant's Severance Plan (1999 Amendment
and Restatement) 26
27. Financial Data Schedule 30
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Heilig-Meyers Company
(Registrant)
Date: October 15, 1999 /s/Roy B. Goodman
----------------------------
Roy B. Goodman
Executive Vice President and
Principal Financial Officer
Date: October 15, 1999 /s/Thomas F. Crump
----------------------------
Thomas F. Crump
Senior Vice President,
Controller
21