-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OhQlBK3MQm1hwFO300vFmQtE87SIjUFu0oDxQjx5xepRa+FnQnPPQA0sPziTpw3z 2UWUlGWRkYforMyE3hxUtQ== 0000046601-98-000017.txt : 19981208 0000046601-98-000017.hdr.sgml : 19981208 ACCESSION NUMBER: 0000046601-98-000017 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19981207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEILIG MEYERS CO CENTRAL INDEX KEY: 0000046601 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FURNITURE STORES [5712] IRS NUMBER: 540558861 STATE OF INCORPORATION: VA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-08484 FILM NUMBER: 98765023 BUSINESS ADDRESS: STREET 1: 12560 W CREEK PKWY CITY: RICHMOND STATE: VA ZIP: 23238 BUSINESS PHONE: 8047847300 MAIL ADDRESS: STREET 1: 2235 STAPLES MILL RD CITY: RICHMOND STATE: VA ZIP: 23230 10-K/A 1 FORM 10-K/A - AMENDMENT NO. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A (AMENDMENT NO. 1) (Mark One) X Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended February 28, 1998 or Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from to Commission file number 1-8484 HEILIG-MEYERS COMPANY (Exact name of registrant as specified in its charter) Virginia 54-0558861 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 12560 West Creek Parkway, Richmond, Virginia 23238 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 784-7300 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered Common Stock, $2.00 New York Stock Exchange Par Value Pacific Exchange Rights to purchase Preferred New York Stock Exchange Stock, Series A, $10.00 Pacific Exchange Par Value Securities registered pursuant to Section 12(g)of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No . --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of May 1, 1998 was approximately $748,798,640. This figure was calculated by multiplying (i) the closing sales price of the registrant's common stock on the New York Stock Exchange on May 1, 1998 by (ii) the number of shares of the registrant's common stock not held by the officers or directors of the registrant or any persons known to the registrant to own more than five percent of the outstanding common stock of the registrant. Such calculation does not constitute an admission or determination that any such officer, director or holder of more than five percent of the outstanding common stock of the registrant is in fact an affiliate of the registrant. As of May 1, 1998, there were outstanding 58,812,313 shares of the registrant's common stock, $2.00 par value. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for its Annual Meeting of Shareholders scheduled for June 17, 1998, are incorporated by reference into Part III. This Amendment No. 1 on Form 10-K/A (the "Amendment") amends and restates the disclosure made by the registrant in its Annual Report on Form 10-K for the fiscal year ended February 28, 1998 in response to "Item 1. Business", "Item 6. Selected Financial Data", "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", "Item 8. Financial Statements and Supplementary Data", "Item 10. Directors and Executive Officers of the Company", "Item 11. Executive Compensation", "Item 12. Security Ownership of Certain Beneficial Owners and Management", and "Item 13. Certain Relationships and Related Transactions." 2 PART 1 ITEM 1. BUSINESS A. Introduction Heilig-Meyers Company (the "registrant"), which together with its predecessors and subsidiaries, sometimes hereinafter referred to as the "Company," is engaged primarily in the retail sale of home furnishings and bedding. The Company's predecessors are numerous Virginia and North Carolina corporations, the first of which was incorporated in 1940, and all of which were merged into Heilig-Meyers Company, a North Carolina corporation, in March 1970, which in turn was merged into the registrant, a Virginia corporation, in June 1972. The Company has grown in recent years, in part, through a series of acquisitions. Among the largest acquisitions are the January 1994 acquisition of certain assets relating to 92 stores of McMahan's Furniture Company, the February 1995 acquisition of certain assets relating to the operations of 17 stores owned by Berrios Enterprises of Caguas, Puerto Rico, the October 1996 acquisition of certain assets relating to the 20 stores of J. McMahan's in Santa Monica, California and the unrelated acquisition of certain assets relating to the 23 stores of Self-Service Furniture Company of Spokane, Washington, the December 1996 acquisition of the Atlanta, Georgia-based Rhodes, Inc., a publicly traded home furnishings retailer with 105 stores in 15 states, and the February 1997 acquisition of certain assets relating to the 10 stores of The RoomStore, Inc. of Fort Worth, Texas. The Company also acquired the assets of the 19-store Star Furniture chain based in North Carolina in February 1997. The Company acquired Mattress Discounters Corporation and a related corporation in July 1997, with 169 stores in 10 states and Washington, D.C. The Company also acquired Bedding Experts, Inc. with 54 stores in Chicago, Illinois and the surrounding area in January 1998. In addition, the Company also acquired the assets of 5 John M. Smyth's Homemakers stores, a Chicago, Illinois furniture chain in January 1998, and the 24-store Hub Furniture chain based in Columbia, Maryland in February 1998. The Rhodes, RoomStore, and Mattress Discounters chains continue to operate under their respective names and formats. As of April 30, 1998, Heilig-Meyers Company operates stores under four formats. The "Heilig-Meyers" format is associated with the Company's historical operations, as well as the 32 stores operating in Puerto Rico under the "Berrios" name. The majority of the Heilig-Meyers stores operate in smaller markets with a broad line of merchandise. The "Rhodes" format is used for 102 stores as of April 30, 1998. The Rhodes format retailing strategy is selling quality furniture to a broad base of middle income customers. Stores under "The RoomStore" format display and sell furniture in complete room packages. The rooms are arranged by professional designers and sell at a value if purchased as a group. The "Mattress Discounters" format is used for 225 stores acquired in fiscal 1998. Mattress Discounters is the Nation's largest retail bedding specialist. Stores are classified by operating format rather than by the name under which a store is operated. B. Industry Segments The Company considers that it is engaged primarily in one line of business, the sale of home furnishings, and has one reportable industry segment. Accordingly, data with respect to industry segments has not been separately reported herein. C. Nature of Business General The Company is the Nation's largest specialty retailer of home furnishings with 1,244 stores (as of April 30, 1998), 1,212 of which are located in 37 states and Washington, D.C., with the remainder in Puerto Rico. The Company's Heilig-Meyers stores are primarily located in small towns and rural markets in the southern, mid-western and western Continental United States. The 3 102 Rhodes stores are primarily located in the mid-sized markets and metropolitan areas of 15 southern, midwestern and western states. The 67 stores of The RoomStore are primarily located in 7 states, including Texas, Illinois and Maryland. The 225 Mattress Discounters stores are primarily located in 11 eastern states, California and Washington, D.C. The Company's operating strategies include: (1) offering a broad selection of competitively priced home furnishings, including furniture and accessories, and bedding, and in the Heilig-Meyers stores, consumer electronics, appliances, and other items such as jewelry, small appliances and seasonal goods; (2) locating Heilig-Meyers stores primarily in small towns and rural markets which are at least 25 miles from a metropolitan market; (3) offering credit programs to provide flexible financing to its customers; (4) utilizing centralized inventory and distribution systems in strategic regional locations to support store inventory and merchandise delivery operations; (5) emphasizing customer service, including free delivery on most major purchases in the Heilig-Meyers stores and repair service for consumer electronics and other mechanical items. As a result of the acquisition of Rhodes, The RoomStore and Mattress Discounters, the Company now has the ability to match operating formats to markets with appropriate demographic and competitive factors. Profit Improvement Plan Home furnishings purchases are generally considered "big-ticket purchases", and consumers typically utilize consumer credit to finance these purchases. Impacted by an increase in consumer credit problems and personal bankruptcies, the demand for home furnishings in the niche in which the Company serves has been low over the past two fiscal years. In response to this difficult environment, the Company conducted a comprehensive review of its operations, and developed a Profit Improvement Plan (the "Plan"), which was announced on December 17, 1997. The Plan has three main components: (1) expense reductions; (2) restructuring of certain aspects of the business; and (3) Heilig-Meyers store operating initiatives. The Plan calls for the closing of approximately 40 Heilig-Meyers stores, the downsizing of administrative and support facilities, a reorganization of the Heilig-Meyers private label credit card program, and the development of operating initiatives to improve the performance of the Heilig-Meyers stores. The core-store operating initiatives include a plan to significantly slow the growth of the Heilig-Meyers stores over the next year to allow for the maturation of the recent store additions. Approximately 20 to 30 stores will be relocated to higher-traffic areas. The initiatives also call for adjustments to merchandising and advertising strategies based on the remaining markets and the strengthening of the inventory management programs. While management plans to slow the growth in the Heilig-Meyers division, it expects to pursue opportunities in the Company's other formats. These opportunities will be in the formats that are less capital intensive and are currently operating at higher levels of return than the Heilig-Meyers division. For additional information concerning the Plan, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Competition The retail home furnishings industry is a highly competitive and fragmented market. The Company, as a whole, competes with large chains, independent stores, discount stores, furniture stores, specialty stores and others, some of which have financial resources greater than those of the Company, and some of which derive revenues from the sale of products other than home furnishings. The Company believes that the "Rhodes", "The RoomStore" and "Mattress Discounters" names and formats will enhance the Company's competitive position. The Company is capable of matching the store format with the local market environment. The Company believes the "Rhodes" and "The RoomStore" formats are better suited for larger markets than the Heilig-Meyers store format, which it believes better serves small towns. The addition of "Mattress Discounters" enables the Company to position itself more competitively in the retail bedding market. 4 Due to volume purchasing, the Company believes it is generally able to offer merchandise at equal or lower prices than its competitors, particularly local independent and regional specialty furniture retailers. In addition, Management believes that it offers a broader selection of merchandise than many of its competitors. The Company believes that locating its Heilig-Meyers stores in small towns and rural markets provides an important competitive advantage. Currently, approximately 80% of all Heilig-Meyers stores are located in towns with populations under 50,000 that are more than 25 miles from a metropolitan market. Competition in these small towns largely comes from locally owned store operations, which generally lack the financial strength to compete effectively with the Company. Consequently, the Company believes that its Heilig-Meyers stores have the largest market share among home furnishings retailers in the majority of their areas. The RoomStore and Rhodes formats compete in mid-to-large metropolitan markets and serve middle income customers. The Mattress Discounters stores also operate in metropolitan markets. Based on its experience, the Company believes its competitive environment is comparable in all geographic regions in which it operates. Therefore, the Company does not believe that a regional analysis of its competitive market is meaningful at this time. D. Store Operations General The Company's Heilig-Meyers stores generally range in size from 12,000 to 35,000 square feet, with the average being approximately 25,000 square feet. A store's attached or nearby warehouse usually measures from 3,000 to 5,000 square feet. A typical store is designed to give the customer an urban shopping experience in a rural location. During the last five years, the Company has revised its Heilig-Meyers prototype store construction program. The Company's most recent version of its prototype stores opened in fiscal 1997. The Company added 3 of these stores in fiscal 1994, 7 in fiscal 1995, 8 in fiscal 1996, 8 in fiscal 1997 and 16 in fiscal 1998. The prototype stores are 27,000 square feet and feature the latest display techniques and construction efficiencies. Certain features of these prototype stores are incorporated into other locations through the Company's ongoing remodeling program. The Company's existing store remodeling program, under which stores are remodeled on a rotational basis, provides the Company's older stores with a fresh look and up-to-date displays on a periodic basis. During fiscal 1998, the Company remodeled 78 existing stores and plans to remodel approximately 10 existing stores in fiscal 1999. The existing Rhodes, The RoomStore, and Mattress Discounters stores average approximately 34,000, 25,000, and 4,000 square feet, respectively. The Company does not have significant remodeling activities planned for these formats during fiscal 1999. Each store unit is managed by an on-site manager responsible for day-to-day store operations including, if offered in that store, installment credit extension and collection. For executive management purposes, stores are grouped by operating format. For operational purposes, stores are generally grouped within their format by geographic market. The Company has an in-house education program to train new employees in its operations and to keep current employees informed of the Company's policies. This training program emphasizes sales productivity, store administration, and where applicable, credit extension and collection. The training program utilizes the publication of detailed store manuals, internally produced training videotapes and Company-conducted classes for employees. The Company also has an in-store manager training program, which provides potential managers with hands-on experience in all aspects of store operations. The Company's ongoing education program is designed to provide a sufficient number of qualified personnel for its stores. 5 In recent years, Heilig-Meyers has enhanced its operating systems to increase the availability and effectiveness of management information. In fiscal 1995, the Company made improvements to inventory management by use of just-in-time ordering and backhauling. In fiscal 1995, the Company completed the installation of a new satellite system. This system provides immediate communication between the Company's corporate headquarters and the Heilig-Meyers stores and distribution centers. As a result, the Company believes customer service has been improved by providing store management more timely access to information related to product availability. This system also provided the means for the Company to implement, for the Heilig-Meyers stores, its new inventory reservation system and enhanced target marketing programs during fiscal 1997. The Rhodes, The RoomStore, and Mattress Discounters formats have operating systems in place that provide similar operating capabilities. Merchandising The Company's Heilig-Meyers merchandising strategy is to offer a broad selection of competitively priced home furnishings, including furniture and accessories, consumer electronics, appliances, bedding and other items such as jewelry and seasonal goods. The RoomStore and Rhodes stores primarily sell mid-price-point furniture and accessories, and bedding. The Mattress Discounters stores are specialty bedding retailers and sell across the full spectrum of bedding price points. During the previous three fiscal years, the percentage of store sales derived from the various merchandising categories were as follows (by format): 1998 1997 1996 Heilig-Meyers Furniture: Furniture and accessories 60% 60% 58% Consumer electronics 9 10 12 Bedding 13 12 11 Appliances 7 8 9 Other (e.g. jewelry and seasonal goods) 11 10 10 Rhodes: Furniture and accessories 89 89 n/a Bedding 11 11 n/a The RoomStore: Furniture and accessories 90 n/a n/a Bedding 10 n/a n/a Mattress Discounters: Bedding 90 n/a n/a Bedding accessories 10 n/a n/a The Company's stores carry a wide variety of items within each merchandise category to appeal to individual tastes and preferences. The Company believes this broad selection of products has enabled it to expand its customer base and increase repeat sales to existing customers. By carrying seasonal merchandise (heaters, air conditioners, lawn mowers, outdoor furniture, etc.) in its Heilig-Meyers stores, the Company has been able to moderate the seasonal fluctuations in its sales that are common to the industry and, in particular, small towns. While the basic merchandise mix within each operating format remained fairly constant during fiscal 1998, the Company continued to refine its merchandise selections to capitalize on variations in customer preferences. During fiscal 1998, the Company continued to strengthen its vendor relationships. In addition to providing purchasing advantages, these relationships provide warehousing and distribution arrangements that improve inventory management. Advertising and Promotion Direct mail circulars are a key part of the Company's marketing program. The Company centrally designs its direct mail circulars for its Heilig-Meyers stores, which accounted for approximately 40% of the Company's Heilig-Meyers store advertising expenses in fiscal 1998. In fiscal 1998, the Heilig-Meyers format distributed over 183 million direct mail circulars. This 6 included monthly circulars sent by direct mail to over twelve million households on the Heilig-Meyer's mailing list and special private sale circulars mailed to approximately two million of these households each month, as well as during special promotional periods. In its Rhodes stores, direct mailing comprised approximately 25% of total advertising expenses in fiscal 1998, with circulars being mailed to approximately six million households per promotion. Direct mailing expenses accounted for approximately 15% of advertising expenses at The RoomStore during fiscal 1998, with circulars being mailed to approximately 350,000 customers per month. Direct mailing expenses comprised approximately 40% of total advertising expenses at Mattress Discounters during fiscal 1998, with approximately fourteen million circulars mailed each month. In addition to the Company's utilization of direct mail circulars, television and radio commercials are produced for each format and aired in virtually all of the Company's markets. Newspaper advertising is placed largely at the store level. The Company also utilizes Spanish language television and radio in selected markets with significant Hispanic populations. The Company regularly conducts approximately 40 Heilig-Meyers store promotional events each year. In addition to these events, individual stores periodically conduct promotional events locally. The Company also conducts promotions twice each month in its Rhodes and The RoomStore formats, and weekly in its Mattress Discounters format. Besides the conventional marketing techniques noted above, Heilig-Meyers has sought alternative methods to increase the Company's name recognition and customer appeal. In fiscal 1998, the Company continued its sponsorship of the Heilig-Meyers NASCAR Racing Team and added the Rhodes NASCAR Racing Team as a means of enhancing the Company's name recognition among the millions of NASCAR fans in its market areas. During fiscal 1998, the Company continued to utilize market segmentation techniques (begun in fiscal 1994) to identify prospective customers by matching their demographics to those of existing customers. Management believes ongoing market research and improved mailing techniques enhance the Company's ability to place circulars in the hands of those potential customers most likely to make a purchase. The Company believes that the availability as well as the terms of credit are key determinants in the purchasing decision at its Heilig-Meyers stores, and therefore, promotes credit availability by disclosing monthly payment terms in those circulars. Credit Operations The Company believes that offering flexible credit options is an important part of its business strategy, which provides a significant competitive advantage. Because Heilig-Meyers installment credit is administered at the store level, terms can generally be tailored to meet the customer's ability to pay. Each Heilig-Meyers store has a credit manager who, under the store manager's supervision, is responsible for extending and collecting that store's accounts in accordance with corporate guidelines. The Company believes its credit program fosters customer loyalty and repeat business. Approximately 75% to 80% of sales in the Heilig-Meyers stores have been made through the Company's installment credit program. Although the Company extends credit for original terms up to 24 months, the average term of installment contracts at origination for the fiscal year ended February 28, 1998, was approximately 17 months. The Company accepts major credit cards in all of its stores and, in addition, offers a revolving credit program featuring its private label credit cards. The Company promotes this program by direct mailings to revolving credit customers of acquired stores and potential new customers in targeted areas. Credit extension and collection of Heilig-Meyers revolving accounts are handled centrally from the Company's Credit Center located in Richmond, Virginia. 7 The Company also offers revolving credit programs, which are underwritten by third parties, in The RoomStore, Rhodes and Mattress Discounters formats. The Company does not service or generally provide recourse on these accounts. Credit applications, sales, and many payments on account are generally processed electronically through the point-of-sale systems. Approximately 40% of The RoomStore, 60% of Rhodes, and 10% of Mattress Discounters fiscal 1998 sales were made through the revolving credit programs. Revenue is recognized on installment and credit sales upon approval and establishment of a delivery date, which does not differ materially from recognition at time of shipment. The effect of sales returns prior to shipment date has been immaterial. Finance charges are included in revenues on a monthly basis as earned. During fiscal 1998, finance income amounted to $231,612,000, or approximately 9.4% of total revenues. Because credit operations are integrated with sales and store administration, management does not believe that an accurate allocation of various costs and expenses of operations can be made between retail sales and credit operations. Therefore, the Company is unable to estimate accurately the contribution of its financing operations to net income. The Company offers, but does not require, one or more of the following credit insurance products at the time of a credit sale in all formats except Mattress Discounters: property, life, disability and unemployment insurance. The Company's employees enroll customers under a master policy issued by an unrelated third-party insurer with respect to these credit insurance products. Distribution As of April 30, 1998, the Company operates eight Heilig-Meyers distribution centers in the Continental U.S. and one center in Puerto Rico. These centers are located in Orangeburg, South Carolina; Rocky Mount, North Carolina; Russellville, Alabama; Mount Sterling, Kentucky; Thomasville, Georgia; Moberly, Missouri; Hesperia, California; Athens, Texas; and Cidra, Puerto Rico. The Athens Distribution Center was completed near the end of fiscal 1997, with full operations commencing in March 1997. The Company relocated the Fontana, CA Distribution Center during fiscal 1998 to a larger, 400,000 square foot facility located in Hesperia, CA. The new distribution center also contains the relocated Fontana Service Center as well as an outlet store. Currently, the Company's Heilig-Meyers distribution network has the capacity to service over 900 stores in the continental U.S. The Company also operates the seven Rhodes distribution centers, which collectively have more than 950,000 square feet and include home delivery operations in certain markets. The Company also operates The RoomStore's seven and Mattress Discounters' eleven distribution centers, which collectively have approximately 800,000 and 370,000 square feet, respectively. Management is in the process of evaluating the distribution function in light of recent acquisitions in order to maximize warehousing and transportation efficiencies. The Company utilizes several sophisticated design and management techniques to increase the operational efficiency of its distribution network. These include cantilever racking and computer-controlled random-access inventory storage. Use of direct shipping and backhauling from vendors has also enhanced distribution efficiency. Backhauling involves routing its trucks so that they can transport purchased inventory from suppliers to the distribution centers while returning from normal store deliveries. The Company backhauled approximately 20% of its purchased inventory in the Heilig-Meyers stores during fiscal 1998. Typically, each of the Company's Heilig-Meyers stores is located within 250 miles of one of the eight distribution centers, each Rhodes store is within 100 miles of one of the seven Rhodes distribution centers, each of The RoomStore stores is located within 70 miles of the seven The RoomStore distribution and delivery centers, and each Mattress Discounters store is located within 110 miles of the eleven Mattress Discounters distribution and delivery centers. The Company operates a fleet of trucks which generally delivers merchandise to each 8 Heilig-Meyers store at least twice a week. In the Rhodes, The RoomStore and Mattress Discounters formats, which are located in larger cities, the Company also utilizes centralized delivery centers for home delivery. The Company believes the use of the distribution centers enables it to make available a broader selection of merchandise, to reduce inventory requirements at individual stores, to benefit from volume purchasing, to provide prompt delivery to customers and to minimize freight costs. Customer Service The Company believes that customer service is an important element for success in the retail furniture business and therefore provides a broad range of services to its customers. These include home delivery and setup, as well as liberal policies with respect to exchanges and returns. In addition, the Company offers service agreements on certain merchandise sold in its stores. The Company sells substantially all of its service policies to third parties and recognizes service policy income on these at the time of sale. Revenue from service policies and extended warranty contracts retained by the Company are deferred and recognized over the life of the contract period. In addition, the Company provides repair services on virtually all consumer electronics and mechanical items sold in its Heilig-Meyers stores. The Company operates Heilig-Meyers service centers in Fayetteville, North Carolina; Moberly, Missouri; Hesperia, California and Athens, Texas. The Fayetteville Service Center occupies approximately 32,000 square feet and has the capacity to process 2,000 repairs a week. The Moberly Service Center occupies 35,000 square feet adjacent to the Moberly, Missouri Distribution Center and has the capacity to process 2,000 repairs a week. The Hesperia Service Center occupies 35,000 square feet and has the capacity to process 2,500 repairs a week. The Athens Service Center occupies 30,000 square feet and has the capacity to process 2,000 repairs a week. The service centers provide service for all consumer electronic items, most mechanical items (except major appliances, which are serviced locally) and watches. The service centers are also authorized to perform repair work under certain manufacturers' warranties. Service center trucks visit Heilig-Meyers stores weekly, allowing one-week turnaround on most repair orders. E. Corporate Expansion The Company has grown from 434 stores at February 28, 1993, to 1,244 stores at April 30, 1998. Over this time period, the Company has expanded from its traditional southeast operating region into the midwest, west, southwest, northwest, southcentral and northeast Continental United States as well as Puerto Rico. In addition, the Company has acquired new operating formats as a result of the Rhodes, The RoomStore and Mattress Discounters acquisitions. 9 The following table lists the Company's stores by state and format as of April 30, 1998: Heilig- The Mattress State Meyers Rhodes RoomStore Discounters Total Alabama ...................... 33 10 43 Arizona ...................... 15 15 California ................... 82 60 142 Colorado ..................... 4 9 13 District of Columbia ......... 3 3 Florida ...................... 36 19 55 Georgia ...................... 56 18 74 Idaho ........................ 4 4 Iowa ......................... 19 19 Illinois ..................... 25 2 22 53 102 Indiana ...................... 21 1 22 Kansas ....................... 1 1 Kentucky ..................... 29 2 31 Louisiana .................... 21 21 Maine ........................ 1 1 Maryland ..................... 2 14 28 44 Massachusetts ................ 17 17 Michigan ..................... 12 12 Mississippi .................. 30 1 31 Missouri ..................... 29 6 35 Montana ...................... 2 2 Nevada ....................... 5 5 New Hampshire ................ 3 3 New Jersey ................... 14 14 New Mexico ................... 10 10 North Carolina ............... 112 11 123 Ohio ......................... 33 7 40 Oklahoma ..................... 11 11 Oregon ....................... 2 4 6 Pennsylvania ................. 22 8 30 Puerto Rico .................. 32 32 Rhode Island ................. 1 1 South Carolina ............... 45 6 51 Tennessee .................... 53 7 60 Texas ........................ 33 18 51 Virginia ..................... 44 2 4 24 74 Washington ................... 13 1 14 West Virginia ................ 27 27 Wisconsin .................... 4 1 5 ----- ----- ----- ----- ----- 850 102 67 225 1,244 ===== ===== ===== ===== ===== The table excludes 15 Heilig-Meyers stores in operation at April 30, 1998 that are scheduled to be closed during the first quarter of fiscal 1999 as part of the Profit Improvement Plan. Stores listed under the RoomStore format include: 1) the stores in Maryland and Virginia acquired in a recent acquisition that are in the process of converting to the RoomStore format, 2) former Heilig-Meyers stores in Illinois which have been converted to the RoomStore format, but continue to operate under Heilig-Meyers signage and 3) 3 recently acquired stores in Illinois that operate under the John M. Smyth's Homemakers name. All of these stores are under the supervision of the RoomStore management team. 10 Growth in the number of stores comes primarily from three sources: acquisition of chains or independent stores, refurbishing of existing retail space and new construction. During the fiscal year ended February 28, 1998, the Company opened or acquired 330 stores and closed 21 stores for a net increase of 309 stores. Of the 330 new stores, 284 were existing stores acquired by the Company in various transactions, 30 were operations begun by the Company in vacant existing buildings and 16 were prototype stores built according to the Company's specifications. The Company constantly evaluates opportunities for further expansion of its business. The Company plans to slow the growth of its Heilig-Meyers stores. In selecting new Heilig-Meyers locations, the Company intends to follow its established strategy of generally locating stores within 250 miles of a distribution center and in towns with populations of 5,000 to 50,000 that are over 25 miles from the closest metropolitan market. The Company believes that it has substantial growth potential in certain of its other formats. Growth opportunities of the recently acquired Rhodes, The RoomStore and Mattress Discounters formats are being evaluated. The Company plans to expand these formats as the appropriate markets are identified. F. Other Factors Affecting the Business of the Company Suppliers During the fiscal year ended February 28, 1998, the Company's ten largest suppliers accounted for approximately 30% of consolidated merchandise purchases. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist for the types of merchandise sold in its stores. Neither the Company nor its officers or directors have an interest, direct or indirect, in any of its suppliers of merchandise other than minor investments in publicly held companies. Service Marks, Trademarks and Franchise Operations The marks "Heilig-Meyers", "MacSaver", "MacSaver, design of a Scotsman", other marks acquired through various acquisitions and the Company's distinctive logo are federally registered service marks of the Company. The Company has registrations for numerous other trademarks and service marks routinely used in the Company's business. These registrations can be kept in force in perpetuity through continued use of the marks and timely applications for renewal. The mark "Berrios" is a federally registered service mark of the Company. The Company has also applied for certain other trademarks and service marks for use in connection with its stores in Puerto Rico. The marks "Rhodes" and "The RoomStore" are federally registered service marks of the Company which were acquired in fiscal year 1997. The marks "Mattress Discounters" and "Bedding Experts" are federally registered service marks of the Company which were acquired in fiscal year 1998. Seasonality Quarterly fluctuations in the Company's sales are insignificant. Employees As of April 30, 1998, the Company employed approximately 23,100 persons full- or part-time in the Continental United States, of whom approximately 22,100 worked in the Company's stores, distribution centers and service centers, with the balance in the Company's corporate offices. As of February 28, 1998, the Company employed approximately 1,000 persons full- or part-time in Puerto Rico, of whom approximately 900 worked in the stores and distribution center, with the balance in the corporate office. The Company is not a party to any union contract and considers its relations with its employees to be good. Foreign Operations and Export Sales The Company has no foreign operations and makes no export sales. 11 Executive Officers of the Registrant The following table sets forth certain information with respect to the executive officers of the Company as of May 1, 1998: Positions with the Company or Principal Occupation for the Years with Past Five Years and Name Age the Company Other Information William C. DeRusha 48 29 Chairman of the Board since April 1986. Chief Executive Officer since April 1984. Director since January 1983. Troy A. Peery, Jr. 52 26 President since April 1986. Chief Operating Officer since December 1987. Director since April 1984. James F. Cerza, Jr. 50 10 Executive Vice President, Heilig- Meyers since April 1998. Executive Vice President, Operations from June 1996 until April 1998. Executive Vice President, from April 1995 to June 1996. Executive Vice President, Operations from August 1989 to April 1995. Joseph R. Jenkins 52 10 Executive Vice President, Heilig- Meyers / Mattress Discounters since April 1998. Executive Vice President from July 1997 until April 1998. Executive Vice President and Chief Financial Officer from January 1988 to July 1997. Irwin L. Lowenstein 62 1 Executive Vice President, Rhodes since April 1997. Executive Vice President, Rhodes, Inc. since January 1997. Chairman of the Board, Rhodes, Inc. from 1994 to December 1996. Chief Executive Officer, Rhodes, Inc. from 1989 to December 1996. President and Chief Operating Officer, Rhodes, Inc. from 1973 to 1994. James R. Riddle 56 13 Executive Vice President, The RoomStore / Berrios since April 1998. Executive Vice President from April 1995 to April 1998. Executive Vice President, Marketing from January 1988 to April 1995. 12 Patrick D. Stern 41 - Executive Vice President, The RoomStore / Berrios since June 1997. Vice President, Merchandising, Value City Furniture (retailer) from April 1994 to April 1997. Vice President, Sales and Marketing, SilverOaks Furniture Manufacturing prior to 1994. George A. Thornton III 57 1 Executive Vice President, Rhodes since April 1997. Director from April 1980 to February 1997. Independent consultant to furniture manufacturers and Chairman, Tim Buck II, LTD (real estate development) for more than five years prior to April 1997. William J. Dieter 58 25 Senior Vice President, Accounting since April 1986. Chief Accounting Officer since 1975. Roy B. Goodman 40 17 Senior Vice President,Chief Financial Officer since July 1997. Senior Vice President, Finance from April 1995 to July 1997. Vice President, Secretary and Treasurer prior to April 1995. 13 PART II ITEM 6. SELECTED FINANCIAL DATA FISCAL YEAR 1998 (1) 1997 (1) 1996 1995 1994 (Dollar amounts in thousands except per share data) Operations Statement Data: Sales $2,160,223 $1,342,208 $1,138,506 $ 956,004 $ 723,633 Annual growth in sales 60.9% 17.9% 19.1% 32.1% 31.7% Annual growth in same store sales 2.8% (0.6)% 0.3% 6.1% 12.1% Other income $ 309,513 $ 250,911 $ 220,843 $ 196,135 $ 140,156 Total revenues 2,469,736 1,593,119 1,359,349 1,152,139 863,789 Annual growth in revenue 55.0% 17.2% 18.0% 33.4% 31.4% Costs of sales $1,451,560 $ 876,142 $ 752,317 $ 617,839 $ 460,284 Gross profit margin 32.8% 34.7% 33.9% 35.4% 36.4% Selling, general and administrative expense $ 828,105 $ 526,369 $ 436,361 $ 350,093 $ 260,161 Interest expense 67,283 47,800 40,767 32,889 23,834 Provision for doubtful accounts 181,645 80,908 65,379 45,419 32,356 Store closing and other charges 25,530 --- --- --- --- Provision (benefit) for income taxes (29,244) 21,715 23,021 39,086 32,158 Effective income tax rate 34.7% 35.1% 35.7% 36.9% 36.9% Net earnings (loss) $ (55,143) $ 40,185 $ 41,504 $ 66,813 $ 54,996 Earnings (loss) margin (2.6)% 3.0% 3.7% 7.0% 7.6% Net earnings (loss) per share: Basic (2) $ (.98) $ .81 $ .85 $ 1.38 $ 1.16 Diluted (2) (.98) .80 .84 1.34 1.12 Cash dividends per share .28 .28 .28 .24 .20 Balance Sheet Data: Total assets $2,097,513 $1,837,158 $1,288,960 $1,208,937 $1,049,633 Average assets per store 1,674 1,946 1,800 1,869 1,841 Accounts receivable, net 392,765 380,879 518,969 538,208 535,437 Retained interest in securitized receivables at fair value 182,158 243,427 --- --- --- Inventories 542,868 433,277 293,191 253,529 184,216 Property and equipment, net 398,151 366,749 216,059 203,201 168,142 Additions to property and equipment 70,921 84,137 40,366 49,101 36,252 Short-term debt 282,365 256,413 207,812 167,925 210,318 Long-term debt 715,271 561,489 352,631 370,432 248,635 Average debt per store 796 866 783 832 805 Stockholders' equity 609,154 642,621 518,983 490,390 433,229 Stockholders' equity per share 10.36 11.81 10.69 10.10 8.95 Other Financial Data: Working capital $ 591,397 $ 550,137 $ 527,849 $ 554,096 $ 453,175 Current ratio 1.8 1.9 2.4 2.9 2.4 Debt to equity ratio 1.64 1.27 1.08 1.10 1.06 Debt to debt and equity 62.1% 56.0% 51.9% 52.3% 51.4% Rate of return on average assets (3) (0.6)% 4.6% 5.4% 7.8% 7.7% Rate of return on average equity (8.8)% 6.9% 8.2% 14.5% 14.9% Number of stores 1,253 944 716 647 570 Number of employees 24,374 19,131 14,383 13,063 10,536 Average sales per employee $ 99 $ 84 $ 83 $ 81 $ 79 14 SELECTED FINANCIAL DATA, cont. FISCAL YEAR 1998 1997 1996 1995 1994 (Dollar amounts in thousands except per share data) Weighted average common shares outstanding: (in thousands) Basic 56,312 49,360 48,560 48,459 47,292 Diluted 56,312 50,146 49,604 49,954 49,103 Price range on common stock per share: High $ 20 $ 24 1/8 $ 27 1/4 $ 36 $ 39 Low 11 15/16 12 5/8 13 1/2 23 1/4 19 3/8 Close 15 1/2 14 1/8 14 23 5/8 33
(1)Operations statement data include operating results of acquisitions subsequent to the dates of acquisition. Balance sheet data include the financial position of acquisitions as of fiscal year ends subsequent to the dates of acquisition. See the description of such acquisitions in the Notes to Consolidated Financial Statements. (2)The earnings per share amounts prior to 1998 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. For further discussion of earnings per share and the impact of Statement 128, see the Notes to Consolidated Financial Statements. (3) Calculated using earnings before interest, net of tax. 15 ITEM 7. MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of OPERATIONS RESULTS OF OPERATIONS Results of operations expressed as a percentage of sales are as follows: Fiscal Year 1998 1997 1996 ---------------------------------------- Other income 14.3% 18.7% 19.4% Costs of sales 67.2 65.3 66.1 Selling, general and administrative expense 38.3 39.2 38.3 Interest expense 3.1 3.6 3.6 Provision for doubtful accounts 8.4 6.0 5.7 Store closing and other charges 1.2 - - Earnings (loss) before provision (benefit) for income taxes (3.9) 4.6 5.7 Provision (benefit) for income taxes (1.4) 1.6 2.0 Net earnings (loss) (2.6) 3.0 3.7 Profit Improvement Plan Home furnishings purchases are generally considered "big-ticket purchases", and consumers typically utilize consumer credit to finance these purchases. Impacted by an increase in consumer credit problems and personal bankruptcies, the demand for home furnishings in the niche in which the Company serves has been low over the past two fiscal years. In response to this difficult environment, Heilig-Meyers Company (the "Company") conducted a comprehensive review of its operations, and developed a Profit Improvement Plan (the "Plan"), which was announced on December 17, 1997. The Plan has three main components: (1) expense reductions; (2) restructuring of certain aspects of the business; and (3) Heilig-Meyers store operating initiatives. The Plan calls for the closing of certain Heilig-Meyers stores, the downsizing of administrative and support facilities, a reorganization of the Heilig-Meyers private label credit card program, and the development of operating initiatives to improve the performance of the Heilig-Meyers stores. Once completed, the store-closing component of the Plan will eliminate stores that incurred pretax operating losses before corporate overhead allocation of approximately $6.5 million in fiscal 1998. Management expects to incur total pretax operating losses before corporate overhead allocation of approximately $5.5 million during the first and second quarters of fiscal 1999 as these stores are closed in an orderly fashion. The downsizing initiatives completed in the fourth quarter of fiscal 1998 are expected to reduce general overhead expenses by approximately $8.0 million on an annual basis, starting in March 1998. Management does not believe the reorganization of the private label credit card program will have a material impact on the Company's financial statements. The Company expects to continue to offer its customers a private label credit card as a financing option. However, as a result of the reorganization of the program, the Company is not expected to be responsible for servicing these accounts or any related credit losses. In the fourth quarter of fiscal 1998, the Company recorded a pre-tax charge of approximately $25.5 million related to specific plans to close approximately 40 Heilig-Meyers stores, downsize office and support facilities, and reorganize the Heilig-Meyers private label credit card program. The charge reduced 1998 net earnings $16.7 million or $.30 per share. The pre-tax charge includes the following components: $8.1 million for severance, $7.6 million for lease and facility exit costs, $7.3 million for fixed asset impairment, and $2.5 million for goodwill impairment. The Company expects to substantially complete the store closings and office downsizing during the first quarter of fiscal 1999, and private label credit card program reorganization during fiscal 1999. Accordingly, the majority of the reserves are expected to be utilized during fiscal 1999. The final plan calls for closing approximately 40 stores rather than the approximately 60 stores initially contemplated, as a result of the completion of store operations and asset disposition analyses. 16 The core-store operating initiatives include a plan to significantly slow the growth of the Heilig-Meyers stores over the next year to allow for the maturation of the recent store additions. Approximately 20 to 30 stores will be relocated to higher-traffic areas. The initiatives also call for adjustments to merchandising and advertising strategies based on the remaining markets and the strengthening of the inventory management programs. While management plans to slow the growth in the Heilig-Meyers division, it expects to pursue opportunities in the Company's other formats. These opportunities will be in the formats that are less capital intensive and are currently operating at higher levels of return than the Heilig-Meyers division. The Company has adopted a capital allocation process under which all expansion and capital projects will be subjected to return on investment criteria. Pursuant to these initiatives, raw selling margins in the fourth quarter of fiscal 1998 were negatively impacted by approximately $5.1 million, or .2% of sales, due to inventory liquidations. Approximately $14.8 million (.7% of sales) in selling, general and administrative expenses were incurred related to asset write-downs and other reserves in the third and fourth quarters of fiscal 1998 (see "Costs and Expenses"). While the Company anticipates that the majority of the reserves related to this Plan will be utilized over the first two quarters of fiscal 1999, amounts related to property and long-term lease commitments will continue to be utilized subsequent to this time period. The overall cash impact of the Plan is expected to be positive as cash received from the sale of certain assets and from income tax benefits is expected to significantly exceed cash expenditures, which will consist primarily of employee severance and payments under lease obligations. Revenues Sales for fiscal 1998 compared to the two previous periods are shown below: Fiscal Year 1998 1997 1996 ---------------------------------------- Sales (in thousands) $2,160,223 $1,342,208 $1,138,506 Percentage increase over prior period 60.9% 17.9% 19.1% Portion of increase from existing (comparable) stores 2.8 (0.6) 0.3 Portion of increase from new stores 58.1 18.5 18.8 The growth in total sales of the Company for fiscal years 1998, 1997 and 1996 is primarily attributed to the growth in operating units through acquisitions. The impact of price changes on sales growth over the last three fiscal years has been insignificant. Expansion of the Heilig-Meyers retail units during fiscal 1998 and 1997 was primarily in the south central, southwestern and northwestern United States. The Company has four primary retail formats targeting a wide range of consumers. The increase in these formats over the past two years has been achieved through acquisitions. Sales for the last three fiscal years and store counts as of February 28, (29), were as follows: Fiscal Year 1998 1997 1996 ----------------------------------------------------------------- (Sales amounts in millions) # of % of # of % of # of % of Stores Sales Total Stores Sales Total Stores Sales Total ------------------------------------------------------------------ Heilig-Meyers 865 $1,436 66.5 829 $1,262 94.1 716 $1,139 100.0 Rhodes 102 480 22.2 105 78 5.8 - - - The RoomStore 61 112 5.2 10 2 0.1 - - - Mattress Discounters 225 132 6.1 - - - - - - ----------------------------------------------------------------- Total 1,253 $2,160 100.0 944 $1,342 100.0 716 $1,139 100.0 ================================================================= 17 On December 31, 1996, Rhodes, Inc., a Georgia Corporation, became a wholly-owned subsidiary of the Company in a transaction accounted for under the purchase method. The Company operates these stores under the Rhodes name and format. These stores are primarily located in metropolitan areas of 15 southern, midwestern and western states. In late February 1997, the Company acquired certain assets relating to 10 stores operating in central Texas under the name "The RoomStore" in a transaction accounted for under the purchase method. The RoomStore operates under a "rooms concept," displaying and selling furniture in complete room packages. At the end of fiscal 1998, The RoomStore operated 61 stores, 18 of which were acquired from Reliable Inc. in Columbia, Maryland, in February 1998 and 3 of which were acquired in January 1998 from John M. Smyth's Homemakers in Chicago, Illinois. The remaining additions to The RoomStore format were through the ongoing conversion of pre-existing Heilig-Meyers and Rhodes stores. In July 1997, the Company acquired all of the outstanding capital stock of Mattress Discounters Corporation and a related corporation ("Mattress Discounters") with 169 stores in 10 states and Washington, D.C. The transaction was accounted for under the purchase method. In January 1998, the Company acquired all of the outstanding capital stock of Bedding Experts, Inc., with 54 stores in Chicago, Illinois, and the surrounding area. The transaction was recorded as a pooling-of-interests, however, prior periods have not been restated as the effect is not considered material to the consolidated financial statements. These stores are included in the Mattress Discounters format in the table above. Other income decreased to 14.3% of sales for fiscal 1998 from 18.7% of sales for fiscal 1997. Other income decreased to 18.7% of sales for fiscal 1997 from 19.4% of sales for fiscal 1996. These decreases are primarily the result of the effect of Rhodes, The RoomStore and Mattress Discounters operations, as these stores' credit programs are maintained by third parties and, unlike the Heilig-Meyers in-house program, do not produce finance income for the Company. Excluding the results of Rhodes, The RoomStore and Mattress Discounters, other income decreased .1% of sales for the year ended February 28, 1998, compared to the prior fiscal year. The Company plans to continue its program of periodically securitizing a portion of the installment accounts receivable portfolio of its Heilig-Meyers stores. Proceeds from securitized accounts receivable are generally used by the Company to lower debt levels. Net servicing income related to securitized receivables that have been sold to third parties is included in other income. The Company offers third-party private label credit card programs to customers of the Rhodes and The RoomStore formats. Costs and Expenses In fiscal 1998, costs of sales increased, as a percentage of sales, to 67.2% from 65.3% in fiscal year 1997. This increase is the result of the liquidation of merchandise associated with acquisitions, reduced leverage on distribution and occupancy costs, and higher occupancy costs in the larger markets served by the Rhodes and The RoomStore formats. Raw selling margins were reduced by approximately $5.1 million, or .2% of sales, due to inventory liquidation sales in the Rhodes stores and Heilig-Meyers stores in Puerto Rico (see "Profit Improvement Plan"). Costs of sales decreased to 65.3% of sales in fiscal 1997 from 66.1% in fiscal 1996. The reduction in costs of sales was primarily related to improved raw selling margins in the Heilig-Meyers stores. A reduction in the use of aggressive, price-cutting promotions and improvement in day-to-day pricing policies were the primary contributors to the raw selling margin results. Additionally, as compared to fiscal 1996, the merchandise sales mix for fiscal 1997 included a higher percentage of furniture and bedding, which carry higher raw selling margins. Selling, general and administrative expenses decreased to 38.3% of sales in fiscal 1998 from 39.2% in fiscal 1997. The decrease between years was the result of leverage gained on sales at the Rhodes, The RoomStore and Mattress Discounters formats. Compared to the prior year period, the addition of these formats has resulted in a lower administrative cost structure generally due to the use of third-party credit providers. However, selling, general and administrative expenses for fiscal 1998 include charges of approximately $14.8 million, or .7% of sales, related to asset write-downs and other reserves (see "Profit Improvement Plan"). These charges arise primarily from asset impairment caused by the conversion of existing stores to new operating formats, relocations of administrative and support facilities, and a more aggressive strategy to exit excess real estate. Also included in this amount are legal and other transaction costs associated with the Bedding Experts acquisition, which was accounted for as a pooling of interests. Selling, general and administrative expenses increased to 39.2% of sales in fiscal 1997 from 38.3% in fiscal 1996. The increase in fiscal 1997 was primarily the result of loss of sales leverage on fixed type expenses such as base salaries, data processing, and depreciation and amortization, given the modest decline in comparable store sales during the fiscal year. Advertising costs in fiscal 1997 were slightly down as a percentage of sales compared to fiscal 1996. 18 Interest expense was 3.1% and 3.6% of sales in fiscal years 1998 and 1997, respectively. The decrease is mainly due to leverage on the sales by Rhodes, The RoomStore and Mattress Discounters, which were purchased with common stock. The Company issued $175 million in public debt during the second quarter of fiscal 1998. The Company also issued approximately $300 million in public debt in the last half of fiscal 1997 as part of the financing strategy discussed below. Weighted average long-term interest rates for fiscal 1998 remained relatively consistent at 7.8%, compared to 7.7% during the prior year. Weighted average short-term debt increased to $229.2 million in fiscal 1998 from $186.3 million in fiscal 1997. Weighted average short-term interest rates increased to 6.1% from 5.8% in the prior year. Interest expense was 3.6% of sales in fiscal years 1997 and 1996. The impact of an increase in weighted average long-term debt of $93.5 million was offset by lower weighted average interest rates, which decreased to 7.7% from 7.9% on long-term debt and to 5.8% from 6.3% on short-term debt in fiscal years 1997 and 1996, respectively. The increase in long-term debt levels in both fiscal 1998 and 1997 was consistent with the Company's plan to structure its debt portfolio to contain a higher percentage of long-term fixed rate debt in order to minimize the exposure to future short-term interest rate fluctuations. The provision for doubtful accounts was 8.4% of sales in fiscal 1998 compared to 6.0% and 5.7% in fiscal 1997 and 1996, respectively. The increase in the provision for doubtful accounts as a percentage of sales resulted from an increase in the installment portfolio's loss rate and related write-offs, the impact of management's plan to close approximately 40 stores, and management's plan to reorganize the Heilig-Meyers private label credit card program. The overall rise in the portfolio's loss rate is primarily attributed to an increase in bankruptcies. The Company provided an additional $38.0 million for doubtful bankrupt accounts based on the increase in the total bankrupt account portfolio, the mix of accounts by type of bankruptcy filed, and recent collection experience. The Company also provided for increased write-offs of approximately $36.3 million related to a more critical evaluation of accounts for write-off for fiscal 1998 and to cover the impact of transferring the servicing of accounts from stores that are planned for closing in fiscal 1999 to other Heilig-Meyers store locations. Additionally, management has committed to a reorganization of the Heilig-Meyers private label credit card program, which is offered to certain customers under an agreement with a financial institution. The Company provided $15.0 million to cover estimated losses under the recourse provisions of the agreement that will be incurred as a result of the reorganization plan. The items noted above, which total 4.1% of sales in fiscal 1998 were slightly offset by the operations of Rhodes, The RoomStore, and Mattress Discounters as these formats primarily use third-party credit providers and, accordingly, do not record significant provisions for doubtful accounts. Total portfolio write-offs for fiscal 1998, 1997 and 1996 were $167.5 million, $77.4 million and $66.1 million, respectively. Of these amounts, $21.2 million, $6.9 million and $8.9 million were for purchased receivables, respectively. Management believes that the allowance for doubtful accounts at February 28, 1998, is adequate. Components of the Profit Improvement Plan address the increase in the portfolio loss rate. Stores that have been targeted for closing have been among the poorest performers related to credit losses. Management believes the elimination of these stores will positively impact the Company's credit losses going forward. The Company plans to more fully implement risk-based scoring models to provide local management with better tools in making credit extension decisions. These models will also enable corporate management to more efficiently monitor the portfolio. Management believes implementing this plan at the local and corporate levels will also positively impact the portfolio's credit losses. Provision for Income Taxes and Net Earnings The income tax benefit for fiscal 1998 was calculated by applying a percentage of 34.7% compared to fiscal 1997's tax rate of 35.1%. The decrease in the rate from 1997 is due to the impact of the loss incurred during 1998, offset by the higher effective tax rates of the recently acquired operating subsidiaries. The higher rates result from the carryover tax attributes of acquired assets and liabilities. The effective tax rate for fiscal 1997 was 35.1% compared to 35.7% for fiscal 1996. The decrease between the fiscal 1997 and 1996 effective tax rate was primarily the result of higher fixed dollar income tax credits in fiscal 1997 and lower levels of pretax earnings. 19 The net loss for fiscal 1998 was $55.1 million compared to earnings of $40.2 million for fiscal 1997. The decrease between years was caused primarily by the $25.5 million pretax store closing charge and the $89.3 million increase in the provision for doubtful accounts. Selling, general and administrative expenses included $14.8 million related to asset write-downs and other reserves (see "Profit Improvement Plan"). The Company's raw selling margins were reduced by approximately $5.1 million due to inventory liquidation sales in the Rhodes stores and the Heilig-Meyers stores located in Puerto Rico. The remaining $11.6 million decrease between years is the result of the additional factors noted in the discussion above. The net earnings for fiscal 1997 decreased to $40.2 million from $41.5 million for fiscal 1996. As a percentage of sales, profit margin decreased to 3.0% for fiscal 1997 from 3.7% for fiscal 1996. The decrease was mostly attributable to an increase as a percentage of sales in selling, general and administrative expenses due to the decline in comparable store sales and an increase in the provision for doubtful accounts. LIQUIDITY AND CAPITAL RESOURCES The Company increased its cash position $33.8 million to $48.8 million at February 28, 1998, from $15.0 million at February 28, 1997, and $16.0 million at February 29, 1996. As the Company continued to expand its store base through acquisitions, cash flows used for investing activities exceeded cash provided by operating activities for fiscal years 1998, 1997 and 1996. The Company's operating activities typically use cash primarily because the significant majority of customer sales in the Heilig-Meyers format have been through the Company's in-house credit program. These uses of cash have been partially offset by proceeds from the sale of accounts receivable and financing activities. Operating activities used cash of $22.8 million for fiscal 1998 compared to cash used of $3.0 million in fiscal 1997 and cash provided of $92.5 million in fiscal 1996. The Company traditionally produces minimal or negative cash flow from operating activities because it extends in-house credit in its Heilig-Meyers stores. The Company's change in accounts receivable and provision for doubtful accounts netted to a $13.5 million increase in fiscal 1998. The Company's retained interest in securitized receivables at cost decreased $50.5 million during fiscal 1998 as the result of the sale of certain of these investments. The Company's retained interest in securitized receivables at cost grew by $198.8 million in fiscal 1997 with accounts receivable decreasing by $56.2 million. These changes relate to the sale of $60.5 million of receivables and the change in classification of certain receivables transferred to a master trust during fiscal 1997. The higher level of receivables transferred relate to the continued extension of credit to customers and a reduced amount of accounts sold during the year as compared to the amounts sold in fiscal 1996. During fiscal 1998, inventory levels increased at a higher rate than fiscal 1997 primarily due to the stocking of line-up inventory in the recently acquired stores in order to support the merchandising plan. The prior increases in inventory levels have primarily been the result of the opening of 113 new Heilig-Meyers stores in fiscal 1997 and 69 in fiscal 1996. Continued extension of credit and related increases in customer accounts receivable, as well as increases in inventory related to new stores, are expected to be negative cash flow activities in future periods. However, as noted above, the Company periodically sells accounts receivable to provide a source of positive cash flows from operating activities. Investing activities produced negative cash flows of $106.5 million in fiscal 1998, $146.5 million in fiscal 1997, and $95.6 million in fiscal 1996. Cash used for acquisitions decreased in 1998 to $40.2 million compared to $58.8 million in fiscal 1997 as a result of a lower level of acquisition activity in fiscal 1998. Cash used for acquisitions was relatively consistent in fiscal 1997 compared to fiscal 1996, at $58.8 million and $51.7 million, respectively. Cash used for additions to property and equipment resulted from the opening of new store locations and related support facilities as well as the remodeling and improvement of existing and acquired locations. The increase in the cash required for capital expenditures in fiscal 1997 was the result of a larger number of prototype stores and support facilities completed or under construction as of February 28, 1997, compared to February 29, 1996. The increase in the disposals of property and equipment between fiscal 1998 and 1997 is the result of the beginning phases of the Company's "Profit Improvement Plan." See the discussion concerning the Company's future expansion and disposition plans under "Profit Improvement Plan" above. 20 Financing activities provided a positive net cash flow of $163.1 million in fiscal 1998 as compared to $148.4 million in fiscal 1997 and $8.8 million in fiscal 1996. 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. As of February 28, 1998, long-term notes payable with an aggregate principal amount of $175.0 million have been issued to the public under this registration statement. Long-term notes payable with an aggregate principal amount of $300.0 million were issued to the public during fiscal 1997. Proceeds from the issues were used to retire long-term debt maturing and short-term notes payable. All previously issued debt had been in private placements rather than public markets. As of February 28, 1998, the Company had a $400.0 million revolving credit facility in place which expires in July 2000. This facility includes thirteen banks and had $260.0 million outstanding and $140.0 million unused as of February 28, 1998. The Company also had additional lines of credit with banks totaling $60.0 million, all of which was unused as of February 28, 1998. As a result of charges recorded in fiscal 1998 under the Profit Improvement Plan, the Company obtained amendments to its bank debt agreements in order to maintain covenant compliance. In addition, certain provisions of the Company's bond indenture restrict the Company's ability to incur long-term debt until certain covenant restrictions are met. Management expects to meet these covenants in the fourth quarter of fiscal 1999. However, management believes that the Company has adequate access to capital to finance accounts receivable, inventories and other capital needs during these next twelve months. Total debt as a percentage of debt and equity was 62.1% at February 28, 1998, compared to 56.0% and 51.9% at February 28, (29), 1997 and 1996, respectively. The increase in total debt as a percentage of debt and equity from February 28, 1997 to February 28, 1998 is primarily attributed to the issuance of $175 million of long-term debt as well as the increase in short-term notes payable during fiscal 1998. The issuance was partially offset by the payment on the maturity of long-term notes. The fiscal 1998 loss, which reduced retained earnings, also resulted in the increase of total debt as a percentage of debt and equity. The current ratio was 1.8X at February 28, 1998, compared to 1.9X and 2.4X for February 28, (29), 1997 and 1996, respectively. The decrease in the current ratios from February 29, 1996 to February 28, 1997 was primarily attributed to an $82.6 million increase in long-term debt due within one year. OTHER INFORMATION Year 2000 Issue The Year 2000 issue arises because many computer programs use two digits rather than four to define the applicable year. Using two digits could result in system failure or miscalculations that cause disruptions of operations. In addition to computer systems, any equipment with embedded technology that involves date sensitive functions is at risk if two digits have been used rather than four. During fiscal year 1997, management established a team to oversee the Company's Year 2000 date conversion project. The project is composed of the following stages: 1) assessment of the problem, 2) prioritization of systems, 3) remediation activities and 4) compliance testing. A plan of corrective action using both internal and external resources to enhance or replace the systems for Year 2000 compliance has been implemented. The team has continued to assess the systems of subsidiaries as the Company has expanded. Management expects to complete the remediation stage for the critical systems of the Heilig-Meyers operations during fiscal year 1999. Completion of remediation for all other subsidiaries' critical systems is expected in the first quarter of fiscal year 2000. The testing stage for the entire Company is planned for the first quarter of fiscal year 2000. The Company is in the early stages of making an assessment of its non-information technology systems (such as telephone and alarm systems). Managers of such systems have been instructed to contact the appropriate third party vendors to determine their Year 2000 compliance. Since fiscal 1997, the Company has incurred approximately $.6 million in expenses in updating its management information system to alleviate potential year 2000 problems. The remaining expenditures are expected to be approximately $1.2 million, which will be expensed as incurred. The remaining cost of the Company's Year 2000 Project and the dates on which the Company plans to complete the Year 2000 compliance program are based on management's current estimates, which are derived utilizing numerous assumptions including the continued availability of certain resources, and are inherently uncertain. 21 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 expects to complete its Year 2000 contingency planning during the first quarter of fiscal 2000. FORWARD-LOOKING STATEMENTS Certain statements included in this Annual Report are not based on historical facts, but are forward-looking statements. These statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. See, e.g., "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Leading Our Industry Through Innovation," "Strengthening Our Core Business," "Expanding Via New Formats and Markets," and "Leveraging Our Strengths." These statements reflect the Company's reasonable judgments with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the customer's willingness, need and financial ability to purchase home furnishings and related items, the Company's ability to extend credit to its customers, the costs and effectiveness of promotional activities, the Company's ability to realize cost savings and other synergies from recent acquisitions, as well as the Company's access to, and cost of, capital. Other factors such as changes in consumer debt and bankruptcy trends, tax laws, recessionary or expansive trends in the Company's markets, the ability of the Company to effectively correct the Year 2000 issue, 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. 22 ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) FISCAL YEAR 1998 1997 1996 ------ ------ ----- Revenues: Sales $2,160,223 $1,342,208 $1,138,506 Other income 309,513 250,911 220,843 ---------- ---------- --------- Total revenues 2,469,736 1,593,119 1,359,349 Costs and expenses: Costs of sales 1,451,560 876,142 752,317 Selling,general and administrative 828,105 526,369 436,361 Interest 67,283 47,800 40,767 Provision for doubtful accounts 181,645 80,908 65,379 Store closing and other charges 25,530 -- -- ---------- ---------- --------- Total costs and expenses 2,554,123 1,531,219 1,294,824 ---------- ---------- --------- Earnings (loss) before provision (benefit) for income taxes (84,387) 61,900 64,525 Provision (benefit) for income taxes (29,244) 21,715 23,021 ---------- --------- --------- Net earnings (loss) $ (55,143) $ 40,185 $ 41,504 ========== ========= ========= Net earnings (loss) per share: Basic $ (.98) $ .81 $ .85 ========== ========= ========= Diluted $ (.98) $ .80 $ .84 ========== ========= ========= Weighted average common shares outstanding: Basic 56,312 49,360 48,560 Diluted 56,312 50,146 49,604 ========= ========= ========= Cash dividends per share of common stock $ .28 $ .28 $ .28 ========= ========= ========= See notes to consolidated financial statements. 23 CONSOLIDATED BALANCE SHEETS (Amounts in thousands except par value data) FEBRUARY 28, 1998 1997 ------ ----- Assets Current assets: Cash $ 48,779 $ 14,959 Accounts receivable, net 392,765 380,879 Retained interest in securitized receivables at fair value 182,158 243,427 Inventories 542,868 433,277 Other current assets 126,978 61,515 ----------- ----------- Total current assets 1,293,548 1,134,057 Property and equipment, net 398,151 366,749 Other assets 55,321 42,262 Excess costs over net assets acquired, net 350,493 294,090 ----------- ----------- $ 2,097,513 $ 1,837,158 =========== =========== Liabilities And Stockholders' Equity Current liabilities: Notes payable $ 260,000 $ 156,000 Long-term debt due within one year 22,365 100,413 Accounts payable 203,048 160,857 Accrued expenses 216,738 166,650 ----------- ----------- Total current liabilities 702,151 583,920 Long-term debt 715,271 561,489 Deferred income taxes 70,937 49,128 Stockholders' equity: Preferred stock, $10 par value -- -- Common stock, $2 par value (250,000 shares authorized; 58,808 and 54,414 shares issued and outstanding, respectively) 117,616 108,828 Capital in excess of par value 230,580 195,352 Unrealized gain on investments 4,548 10,797 Retained earnings 256,410 327,644 ----------- ----------- Total stockholders' equity 609,154 642,621 ----------- ----------- $ 2,097,513 $ 1,837,158 =========== =========== See notes to consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in thousands) Number of Common Capital in Unrealized Total Shares Common Excess of Gain on Retained Stockholders' Outstanding Stock Par Value Investments Earnings Equity Balances at March 1,1995 48,548 $ 97,096 $120,129 $ -- $273,165 $490,390 Cash dividends -- -- -- -- (13,598) (13,598) Exercise of stock options, net 23 47 640 -- -- 687 Net earnings -- -- -- -- 41,504 41,504 ------------------------------------------------------------ Balances at February 29,1996 48,571 97,143 120,769 -- 301,071 518,983 Cash dividends -- -- -- -- (13,612) (13,612) Common stock issued for acquisitions 5,791 11,582 73,842 -- -- 85,424 Exercise of stock options, net 52 103 741 -- -- 844 Unrealized gain on investments -- -- -- 10,797 -- 10,797 Net earnings -- -- -- -- 40,185 40,185 ------------------------------------------------------------ Balances at February 28,1997 54,414 108,828 195,352 10,797 327,644 642,621 Cash dividends -- -- -- -- (16,249) (16,249) Common stock issued for acquisitions 4,279 8,558 34,578 -- -- 43,136 Exercise of stock options, net 115 230 650 -- -- 880 Change in unrealized gain on investments -- -- -- (6,249) -- (6,249) Net loss -- -- -- -- (55,143) (55,143) Other -- -- -- -- 158 158 ------------------------------------------------------------ Balances at February 28,1998 58,808 $117,616 $230,580 $ 4,548 $256,410 $609,154 ============================================================ See notes to consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) FISCAL YEAR 1998 1997 1996 ------------------------------- Cash flows from operating activities: Net earnings (loss) $ (55,143) $ 40,185 $ 41,504 Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Depreciation and amortization 54,043 33,874 29,460 Provision for doubtful accounts 181,645 80,908 65,379 Store closing and other charges provision 25,530 -- -- Store closing and other charges payments (1,452) -- -- Other, net 2,616 588 (470) Change in operating assets and liabilities, net of the effects of acquisitions: Accounts receivable (195,141) (4,331) (167,860) Sale of accounts receivable -- 60,500 150,000 Retained interest in securitized receivables at cost 50,533 (198,786) -- Inventories (77,115) (35,154) (24,015) Other current assets (65,218) (11,749) (23,447) Accounts payable 14,788 18,017 216 Accrued expenses 42,106 12,948 21,734 -------------------------------- Net cash provided (used) by operating activities (22,808) (3,000) 92,501 -------------------------------- Cash flows from investing activities: Acquisitions, net of cash acquired (40,186) (58,842) (51,658) Additions to property and equipment (70,921) (84,137) (40,366) Disposals of property and equipment 15,107 3,423 6,348 Miscellaneous investments (10,467) (6,907) (9,942) --------------------------------- Net cash used by investing activities (106,467) (146,463) (95,618) --------------------------------- Cash flows from financing activities: Issuance of stock 912 683 286 Proceeds from long-term debt 174,767 299,444 -- Increase (decrease) in notes payable, net 104,000 (34,000) 50,200 Payments of long-term debt (100,335) (104,110) (28,114) Dividends paid (16,249) (13,612) (13,598) --------------------------------- Net cash provided by financing activities 163,095 148,405 8,774 -------------------------------- Net increase (decrease) in cash 33,820 (1,058) 5,657 Cash at beginning of year 14,959 16,017 10,360 -------------------------------- Cash at end of year $ 48,779 $ 14,959 $ 16,017 ================================ See notes to consolidated financial statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies - ----------------------------------------------------------------------------- Nature of Operations Heilig-Meyers Company and subsidiaries (the "Company") is a retailer of home furnishings that operated 1,253 stores as of February 28, 1998 of which 1,221 are located in 38 states and Washington, D.C. and 32 are located in Puerto Rico. Through acquisitions, the Company now has four primary retail formats operating as Heilig-Meyers Furniture, Rhodes Furniture, The RoomStore and Mattress Discounters. The Company's operating strategy includes offering a broad selection of home furnishings and bedding. The Company offers third party private label credit card programs to provide financing to its customers. The Heilig-Meyers format also offers consumer electronics, appliances, and floor coverings as well as an in-house installment credit program. Principles of Consolidation The consolidated financial statements include the accounts of Heilig-Meyers Company and its subsidiaries, all of which are wholly owned. All material intercompany balances and transactions have been eliminated. Fiscal Year Fiscal years are designated in the consolidated financial statements by the calendar year in which the fiscal year ends. Accordingly, results for fiscal years 1998, 1997 and 1996 represent the years ended February 28, 1998, February 28, 1997 and February 29, 1996, respectively. Certain amounts in the fiscal 1997 and 1996 consolidated financial statements have been reclassified to conform to the fiscal 1998 presentation. Segment Information The Company considers that it is engaged primarily in one line of business, the sale of home furnishings. Accordingly, data with respect to industry segments have not been separately reported herein. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounts Receivable Accounts receivable arise primarily from closed-end installment sales contracts used by customers to finance purchases of merchandise and services offered by the Company. These contracts are at fixed rates and terms with level payments of principal and interest. In accordance with trade practice, payments due after one year are included in current assets. Provisions for doubtful accounts are made to maintain an adequate allowance to cover anticipated losses. Credit operations are generally maintained at each store to evaluate the credit worthiness of its customers and to manage the collection process. The Company reviews customer accounts on an individual basis in reaching decisions regarding methods of collection or write-off of doubtful accounts. Generally, accounts on which payments have not been received for six months are charged to the allowance for doubtful accounts. The Company generally requires down payments on credit sales and offers credit insurance to its customers, both of which lessen credit risk. 27 The Company also offers certain of its customers revolving credit through private label credit facilities with various commercial banks. Where applicable, provisions for recourse obligations are made to maintain an adequate allowance to cover anticipated losses. The Company operates its 1,253 stores throughout 38 states, Washington, D.C., and Puerto Rico and, therefore, is not dependent on any given industry or business for its customer base and has no significant concentration of credit risk. Retained Interest in Securitized Receivables As part of its accounts receivable securitization program, the Company transfers a portion of installment accounts receivable to a Master Trust ("Trust") in exchange for certificates representing undivided interests in such receivables. The Company retains an undivided interest in the securitized receivables through its ownership of the seller's certificate, which represents both contractually required seller's interest and excess seller's interest in the receivables in the Trust. Retained interests also include an interest-only strip, which arises due to estimated excess cash flow from the Trust that reverts to the Company. The Company continues to service the receivables in the Trust. The prior year balances of retained interests have been reclassified to a separate balance sheet line item. Inventories Merchandise inventories are stated at the lower of cost or market as primarily determined by the average cost method. Inventory costs include certain warehouse and handling costs. Property and Equipment Additions to property and equipment, other than capital leases, are recorded at cost and, when applicable, include interest incurred during the construction period. Capital leases are recorded at the lesser of fair value or the discounted present value of the minimum lease payments. Depreciation is computed by the straight-line method. Capital leases and leasehold improvements are amortized by the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. The estimated useful lives are 7 to 45 years for buildings, 3 to 10 years for fixtures, equipment and vehicles, and 10 to 15 years for leasehold improvements. Excess Costs Over Net Assets Acquired Excess costs over net assets acquired are being amortized over periods not exceeding 40 years using the straight-line method. The Company evaluates excess costs over net assets acquired for recoverability on the basis of whether goodwill is fully recoverable from projected, undiscounted net cash flows from operations of the related business unit. Impairment, should any occur, would be recognized by a charge to operating results and a reduction in the carrying value of excess costs over net assets acquired. Stockholders' Equity The Company is authorized to issue 250,000,000 shares of $2 par value common stock. At February 28, 1998 and 1997, there were 58,808,000 and 54,414,000 shares outstanding, respectively. The Company is authorized to issue 3,000,000 shares of $10 par value preferred stock. To date, none of these shares have been issued. On February 10, 1998 the Board of Directors of the Company declared a dividend distribution of one preferred share purchase right (a "Right") on each outstanding share of Common Stock pursuant to a Shareholders' Rights Plan. The action replaced a similar plan expiring in fiscal 1998. The Rights are exercisable only after the attainment of, or the commencement of a tender offer to attain, a specified ownership interest in the Company by a person or group. When exercisable, each Right would entitle its holder to purchase one-hundredth of a newly issued share of Cumulative Participating Preferred Stock, Series A, par value $10.00 per share (the "Series A Preferred Stock") at an initial price of $110, subject to adjustment. A total of 750,000 shares of Series A Preferred Stock have been reserved. Each share of Series A Preferred Stock will entitle 28 the holder to 100 votes and has an aggregate dividend rate of 100 times the amount paid to holders of the Common Stock. Upon occurrence of certain events, each holder of a Right (other than those which are void pursuant to the terms of the plan) will become entitled to purchase shares of Common Stock having a value of twice the Right's then current exercise price in lieu of Series A Preferred Stock. New Accounting Standards During the fiscal year, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which requires the Company to disclose basic and diluted earnings per share. See Note 13 for the calculation of basic and diluted earnings per share. The Company also adopted SFAS No. 129, "Disclosure Information about Capital Structure," which established disclosure requirements for the Company's common stock. The adoption of SFAS No. 128 and SFAS No. 129 did not have a material impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," which requires presentation of total nonowner changes in equity for all periods displayed. The Company plans to adopt this statement for the year ending February 28, 1999, and is evaluating the alternative disclosure formats suggested by the standard. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for the Company's fiscal year ended February 28, 1999. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. Adoption of this statement will not affect the Company's consolidated financial position, results of operations or cash flows, and will be limited to the form and content of its disclosures. Revenues and Costs of Sales Sales revenue is generally recognized upon determination that merchandise is in stock and establishment of a delivery date, and, if applicable, upon approval of customer credit. Sales are presented net of returns. The effect of sales returns prior to shipment date has been immaterial. Other income consists primarily of finance and other income earned on accounts receivable. Finance charges were $231,612,000, $209,491,000, and $182,426,000 during fiscal 1998, 1997 and 1996, respectively. Finance charges are included in revenues on a monthly basis as earned. The Company sells substantially all of its service policies to third parties and recognizes service policy income on these at the time of sale. Revenue from service policies and extended warranty contracts retained by the Company are deferred and recognized over the life of the contract period. Costs of sales includes occupancy and delivery expenses. Earnings Per Share Basic earnings per share is computed based on the weighted average number of common shares outstanding. Diluted earnings per share also includes the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares are additional common shares (dilutive stock options) assumed to be earned. Interest Rate Swap Agreements The Company has entered into several interest rate swap agreements ("swap agreements") as a means of managing its exposure to changes in interest rates. These agreements in effect convert a portion of the Company's floating rate debt and floating rate asset securitizations to fixed rates by exchanging floating rate payments for fixed rate payments. The differential to be paid or received on these agreements is accrued and is recognized as an adjustment to interest expense. The related amount of payable to or receivable from counterparties is recorded as an adjustment to accrued interest expense. 29 (2) Expansion - ----------------------------------------------------------------------------- During fiscal years 1998 and 1997, the Company made the acquisitions described below. All acquisitions, except for the Bedding Experts transaction, have been accounted for by the purchase method, and accordingly, operations subsequent to the respective acquisition dates have been included in the accompanying financial statements. Pro forma results of operations for certain acquisitions have not been presented because the effects were not significant. Other acquisitions completed during fiscal years 1998 and 1997 are not discussed below because they are not considered material to the consolidated financial statements. During July 1997, the Company acquired all of the outstanding capital stock of Mattress Discounters Corporation and a related corporation ("Mattress Discounters") with 169 stores in 10 states and Washington, D.C. The initial purchase price was valued at approximately $42,900,000. The Company issued 2,269,839 shares of its common stock at the time of closing and placed 264,550 shares of common stock in escrow to be paid to the former shareholders of Mattress Discounters if the acquired stores meet certain earnings targets in the twelve months following the closing. As of February 28, 1998, the purchase price allocation was considered preliminary as certain studies related to the fair value of assets acquired and liabilities assumed have not been completed. However, management does not expect the resulting adjustments to be material. The unamortized excess of purchase price over the fair market value of the net assets acquired, as of February 28, 1998 was $56,181,000. During January 1998, the Company acquired all of the outstanding capital stock of Bedding Experts, Inc. with 54 stores in Chicago, Illinois and the surrounding area. The Company issued 2,019,182 shares of its common stock in the transaction valued at $25,000,000. The transaction was recorded as a pooling-of-interests, however prior periods have not been restated as the effect is not considered material to the consolidated financial statements. During January 1998, the Company acquired certain assets related to 5 stores, 3 of which will remain in operation, of John M. Smyth's Homemakers ("Homemakers") in Chicago, Illinois. The purchase price of these assets was approximately $11,959,000. The unamortized excess of purchase price over the fair market value of the net assets acquired from Homemakers as of February 28, 1998 was not significant. During February 1998, the Company acquired certain assets related to 24 stores of Reliable, Inc. of Columbia, Maryland. The purchase price of these assets was approximately $18,164,000. The unamortized excess of purchase price over the fair market value of the net assets acquired from Reliable, Inc. as of February 28, 1998 was $4,602,000. During October 1996, the Company acquired certain assets related to 20 stores of J. McMahan's in Santa Monica, California. The purchase price of these assets was approximately $20,021,000, net of $26,989,000 of assets, which were subsequently sold. The unamortized excess of purchase price over the fair market value of the net assets acquired from J. McMahan's as of February 28, 1998 was $16,346,000. During October 1996, the Company purchased certain assets relating to 23 stores of Self Service Furniture Company of Spokane, Washington. The purchase price of these assets was approximately $19,163,000. The unamortized excess of purchase price over the fair market value of the net assets acquired from Self Service as of February 28, 1998 was $4,857,000. During December 1996, the Company acquired Rhodes, Inc., a publicly traded home furnishings retailer with 105 stores in 15 states. The Company issued approximately 4,588,000 shares of its common stock in the transaction valued at $69,390,000, assumed debt and other accrued liabilities of $192,542,000 and incurred approximately $1,400,000 in costs related to the acquisition. The Company assigned $108,319,000 of acquisition costs to excess of purchase price over the fair market value of the net assets acquired. The unamortized excess of purchase price over the fair market value of the net assets acquired, as of February 28, 1998 was $105,162,000. Adjustments made to the preliminary purchase price allocation were not material. 30 The unaudited consolidated results of operations on a pro forma basis as though Rhodes had been acquired as of the beginning of fiscal years 1997 and 1996 are as follows: 1997 1996 ---- ---- (Amounts in thousands except per share data) Total revenues $2,027,753 $1,795,015 Net earnings 33,829 48,674 Net earnings per share: Basic 0.64 0.92 Diluted 0.63 0.90 The pro forma information is presented for comparative purposes only and is not necessarily indicative of the operating results that would have occurred had the Rhodes acquisition been consummated as of the above dates, nor is it necessarily indicative of future operating results. During February 1997, the Company acquired certain assets relating to 10 stores of The RoomStore, Inc. of Ft. Worth, Texas. The Company issued 720,000 shares of its common stock in the transaction valued at $9,630,000, and assumed debt and other accrued liabilities of $5,984,000. The unamortized excess of purchase price over the fair market value of the net assets acquired as of February 28, 1998 was $7,778,000. The Company amortizes the excess of purchase price over fair market value of net assets acquired on a straight-line basis over periods not exceeding 40 years. The unamortized excess of purchase price over the fair value of the net assets acquired for all acquisitions was $350,493,000 and $294,090,000, net of accumulated amortization of $29,050,000 and $20,213,000, at February 28, 1998 and 1997, respectively. (3) Store Closing & Other Charges - ------------------------------------------------------------------------------ In the fourth quarter of fiscal 1998, the Company recorded a pre-tax charge of approximately $25,530,000 related to specific plans to close approximately 40 Heilig-Meyers stores, downsize office and support facilities, and reorganize the Heilig-Meyers private label credit card program. The charge reduced 1998 net earnings $16,683,000 or $.30 per share. The pre-tax charge is summarized as follows: Amount Utilized Remaining through Reserve as of Pre-Tax February 28, February 28, Charge 1998 1998 --------------------------------------------- (Amounts in thousands) Severance $ 8,100 $1,452 $ 6,648 Lease & facility exit cost 7,680 - 7,680 Fixed asset impairment 7,250 2,117 5,133 Goodwill impairment 2,500 2,500 - -------------------------------------------- Total $25,530 $6,069 $19,461 ============================================ The Company expects to complete the store closings, office downsizing, and private label credit card program reorganization within the next fiscal year. Accordingly, the substantial majority of the reserves are expected to be utilized during fiscal 1999. Amounts related to long-term lease obligations may extend beyond fiscal 1999. 31 (4) Accounts Receivable and Retained Interest in Securitized Receivables - ----------------------------------------------------------------------------- Accounts receivable are shown net of an allowance for doubtful accounts and unearned finance income. The allowance for doubtful accounts was $60,306,000 and $41,120,000 and unearned finance income was $46,980,000 and $44,356,000 at February 28, 1998 and 1997, respectively. Accounts receivable having balances due after one year were $94,676,000 and $139,233,000 at February 28, 1998 and 1997, respectively. As noted in Note 1, the Company transfers a portion of its installment accounts receivable to a Master Trust ("Trust") in exchange for certificates representing undivided interests in such receivables. The Trust has two series of certificates outstanding as of February 28, 1998: Series 1997-1 and Series 1998-1. Certificates have been sold to third parties representing undivided interests in $652,000,000 of the securitized receivables as of February 28, 1998, and $592,000,000 of the securitized receivables as of February 28, 1997. The Series 1997-1 Senior class certificates totaling $252,000,000 and $592,000,000 were outstanding as of February 28, 1998 and 1997, respectively, and bear a variable interest rate tied to commercial paper indices. The rates in effect as of February 28, 1998 and 1997 were 6.1% and 5.7%, respectively. Unless extended, the commitment termination date related to the Series 1997-1 certificates is February 24, 1999. The Series 1998-1 $307,000,000 Class A 6.125% and $61,000,000 Class B 6.35% fixed rate certificates were held by third parties as of February 28, 1998. Additionally, as of February 28, 1998, a third party held the $32,000,000 Series 1998-1 Collateral Indebtedness Interest, which bears interest at a variable rate (6.5% as of February 28, 1998). The final distribution date for the Class A certificates is scheduled to occur in December 2002, at which time the Class A certificate holders will begin to receive principal payments. The final distribution date for the Class B certificates is scheduled to occur in February 2003, at which time the Class B certificate holders will begin to receive principal payments provided that Class A certificates have been paid in full. The holder of the Collateral Indebtedness Interest will receive principal payments beginning one month subsequent to the final principal payment to Class B certificate holders. The Company retained the remaining undivided interests in the Trust's receivables. The Company will continue to service all accounts in the Trust. No servicing asset resulted because contractual rates are at estimated market rates and are considered adequate compensation for servicing. Retained interests are carried at fair value and are summarized below: Unrealized Unrealized (Amounts in thousands) Cost Gain Loss Fair Value February 28, 1998: Contractually required seller's interest $110,193 $ 7,242 $ - $117,435 Excess seller's interest 36,706 - - 36,706 Interest-only strip 27,925 92 - 28,017 --------------------------------------- $174,824 $ 7,334 $ - $182,158 ======================================= February 28, 1997: Contractually required seller's interest $200,229 $ 15,851 $ - $216,080 Interest-only strip 25,337 2,010 - 27,347 --------------------------------------- $225,566 $ 17,861 $ - $243,427 ======================================= 32 (5) Property and Equipment - ----------------------------------------------------------------------------- Property and equipment consists of the following: 1998 1997 ------------------------ (Amounts in thousands) Land and buildings $135,857 $133,049 Fixtures, equipment and vehicles 150,259 111,916 Leasehold improvements 254,363 215,683 Construction in progress 30,998 36,484 ------------------------ 571,477 497,132 Less accumulated depreciation 173,326 130,383 ------------------------ $398,151 $366,749 ======================== (6) Notes Payable and Long-Term Debt - ----------------------------------------------------------------------------- The Company is currently in the third year of a five-year $400,000,000 revolving credit facility dated July 19, 1995. Comprised of thirteen banks, the facility had $260,000,000 outstanding and $140,000,000 unused as of February 28, 1998. The Company also has additional lines of credit with banks, totaling $60,000,000, all of which were unused at February 28, 1998. The Company's maximum short-term borrowings were $342,100,000 during fiscal 1998 and $321,000,000 during fiscal 1997. The average short-term debt outstanding for fiscal 1998 was $229,213,000 compared to $186,281,000 for fiscal 1997. The approximate weighted average interest rates were 6.1%, 5.8% and 6.3% in fiscal 1998, 1997 and 1996, respectively. At February 28, 1998, the Company had $260,000,000 of outstanding short-term borrowings compared to $156,000,000 at February 28, 1997. The average interest rate on this debt was approximately 6.2% at February 28, 1998, and 5.8% and 5.6% at February 28, 1997 and February 29, 1996, respectively. There were no compensating balance requirements. Long-term debt consists of the following: 1998 1997 ------------------------ (Amounts in thousands) Shelf registration issues: 7.60% unsecured notes due 2007 $175,000 $ - 7.88% unsecured notes due 2003 200,000 200,000 7.40% unsecured notes due 2002 100,000 100,000 Other issues: Notes payable to insurance companies and banks, maturing through 2002, interest ranging from 6.25% to 8.99%,unsecured 245,000 343,400 Notes, collateralizing industrial development revenue bonds, maturing through 2005, interest ranging from a floating rate of 60% of prime to an 8.50% fixed rate 906 1,316 Term loans, maturing through 2007, interest ranging to 9.80%, primarily collateralized by deeds of trust 1,026 505 Capital lease obligations, maturing through 2009, interest ranging from 76% of prime to 12.80% 15,704 16,681 ----------------------- 737,636 661,902 Less amounts due within one year 22,365 100,413 ----------------------- $715,271 $561,489 ======================= 33 Principal payments are due for the four years after February 28, 1999 as follows: 2000, $131,132,000; 2001, $35,641,000; 2002, $200,000; and 2003, $208,000. The aggregate net carrying value of property and equipment collateralization at February 28, 1998, was $9,794,000. The Company has on file a shelf registration to issue up to $400,000,000 of common stock, warrants and debt securities. The $175,000,000 unsecured 7.60% notes due 2007 were issued under the shelf registration with the remaining $225,000,000 unissued at February 28, 1998. During fiscal 1997, the Company issued $200,000,000 unsecured 7.88% notes due 2003 and $100,000,000 unsecured 7.40% notes due 2002 under a previous shelf registration. Notes payable to insurance companies contain certain restrictive covenants. Under these covenants, the payment of cash dividends is limited to $92,687,000 plus 75% of net earnings adjusted for dividend payouts subsequent to February 28, 1998. Other covenants relate to the maintenance of working capital, pre-tax earnings coverage of fixed charges, limitations on total and funded indebtedness and maintenance of stockholders' equity. As a result of the loss incurred during fiscal 1998, the Company obtained amendments to its bank debt agreements to exclude certain charges from its pre-tax earnings coverage of fixed charges calculation in order to maintain covenant compliance as of February 28, 1998. As a result of these charges, certain provisions of the Company's bond indenture restrict the Company's ability to incur long-term debt until certain covenant restrictions are met. Interest payments of $65,404,000, $46,710,000 and $40,710,000 net of capitalized interest of $3,762,000, $2,360,000 and $2,141,000 were made during fiscal 1998, 1997 and 1996, respectively. (7) Income Taxes - ------------------------------------------------------------------------------ The provision (benefit) for income taxes consists of the following: 1998 1997 1996 (Amounts in thousands) ----------------------------------- Current: Federal $(21,250) $ 5,481 $11,034 State (4,911) 3,006 1,988 Puerto Rico 2,238 2,160 (522) ------------------------------------ (23,923) 10,647 12,500 ------------------------------------ Deferred: Federal (2,178) 7,758 6,012 State ( 573) 1,618 1,293 Puerto Rico (2,570) 1,692 3,216 ----------------------------------- (5,321) 11,068 10,521 ----------------------------------- $(29,244) $21,715 $23,021 =================================== The income tax effects of temporary differences that gave rise to significant portions of the net deferred tax liability as of February 28, 1998 and February 28, 1997, consist of the following: 1998 1997 (Amounts in thousands) Deferred tax assets: Allowance for doubtful accounts $ 20,613 $ 8,775 Store closing and other charges 15,521 - Accrued liabilities 12,400 25,198 Alternative minimum tax credit carryforward 7,973 3,014 Federal tax credits 6,655 - Net operating loss carryforward 1,977 5,622 Other 247 435 Deferred revenues - 1,487 ------------------------ 65,386 44,531 ------------------------ 34 Deferred tax liabilities: Excess costs over net assets acquired 46,536 58,172 Accounts receivable 20,586 6,813 Depreciation 17,520 7,029 Asset securitizations 17,436 19,152 Inventory 9,264 7,469 Deferred revenues 8,962 - Costs capitalized on constructed assets 6,525 5,767 Other 3,580 2,547 ------------------------ 130,409 106,949 $ 65,023 $ 62,418 Balance sheet classification: Other current assets $ 5,914 $ - Other current liabilities - 13,290 Deferred income tax liability 70,937 49,128 ------------------------ $ 65,023 $ 62,418 ======================== A reconciliation of the statutory federal income tax rate to the Company's effective rate is provided below: 1998 1997 1996 --------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 2.5 3.7 3.8 Tax credits (4.9) (5.3) (3.1) Other, net 2.1 1.7 - --------------------------------------- 34.7% 35.1% 35.7% ======================================= Federal and state income tax payments of $8,427,000, $18,447,000 and $24,738,000 were made during fiscal 1998, 1997, and 1996, respectively. The Company has an alternative minimum tax and other federal tax credit carryforwards of approximately $7,973,000 and $6,655,000, respectively. Additionally, the Company has a federal net operating loss carryforward of approximately $566,000. The federal net operating loss and tax credit carryforwards will expire fiscal year 2013. (8) Retirement Plans - ------------------------------------------------------------------------------ The Company has a qualified profit sharing and retirement savings plan, which includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code (the "Code") and covers substantially all the Company's employees. Eligible employees may elect to contribute specified percentages of their compensation to the plan. The Company guarantees a dollar-for-dollar match on the first two percent of the employee's compensation contributed to the plan. The Company will make an additional matching contribution if and to the extent that four percent of the Company's estimated consolidated income before taxes exceeds the two percent dollar-for-dollar match described above. The Company may, at the discretion of its Board of Directors, make additional Company matching contributions subject to certain limitations. The plan may be terminated at the discretion of the Board of Directors. If the plan is terminated, the Company will not be required to make any further contributions to the plan and participants will become 100% vested in any Company contributions made to the plan. The plan expense recognized in fiscal 1998, 1997 and 1996 was $3,052,000, $2,507,000 and $2,553,000, respectively. In addition, a non-qualified supplemental profit sharing and retirement savings plan was established as of March 1, 1991, for the purpose of providing deferred compensation for certain employees whose benefits and contributions under the qualified plan are limited by the Code. The deferred compensation expense recognized in fiscal 1998, 1997 and 1996 was $445,000, $283,000 and $254,000, respectively. 35 The Company has an executive income continuation plan which covers certain executive officers. The plan is intended to provide certain supplemental pre-retirement death benefits and retirement benefits to its key executives. In the event an executive dies prior to age 65 in the employment of the Company, the executive's beneficiary will receive annual benefits of 100% of salary for a period of one to two years and/or 50% of salary for a period of eight years. If the executive retires at age 65, either the executive or his beneficiary will receive an annual retirement benefit of 20% to 25% of the executive's salary increased 4% annually for a period of 15 years. This plan has been funded through the purchase of life insurance contracts covering the executives and owned by the Company. For fiscal years 1998, 1997 and 1996, there was no charge to earnings. As of February 28, 1998, the Company continued to operate separate employee benefit plans covering certain groups of employees of Rhodes, which was acquired on December 31, 1996. These plans include a qualified non-contributory defined benefit plan, a non-qualified unfunded defined benefit plan, and a qualified defined contribution savings plan. During fiscal 1998, these three plans were amended in order to cease future benefit accruals and contributions. As of that date, no new participants could be added. A comparison of accumulated plan benefits and plan net assets as of February 28, 1998 and 1997 for the qualified defined benefit plan follows: Plan Benefits & Assets 1998 1997 (Amounts in thousands) Actuarial present value of accumulated plan benefits: Vested $15,280 $13,495 Non-vested - 387 ------------------- $15,280 $13,882 Net assets available for plan benefits $15,205 $12,972 =================== The projected benefit obligation of the unfunded plan totaled $1,796,000 and $1,062,000 at February 28, 1998 and 1997, respectively. The assumed rate of return used in determining the actuarial present value of accumulated plan benefits for both defined benefit plans was 7.25% and 7.75%, for the fiscal years ended February 28, 1998 and 1997, respectively. The expense related to the operation of these plans during fiscal 1998 and 1997 was insignificant. (9) Stock Options - ------------------------------------------------------------------------------ The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. In electing to account for its stock options under APB 25, the Company is required by SFAS No. 123, "Accounting for Stock-Based Compensation" to provide pro forma information regarding net income and earnings per share. The 1983, 1990 and 1994 Stock Option Plans provide that key employees of the Company are eligible to receive common stock options (at an exercise price of no less than fair market value at the date of grant) and stock appreciation rights. Under these plans, approximately 8,094,000 shares have been authorized to be reserved for issuance. All options granted have ten-year terms. Options granted during fiscal 1998 immediately vested and became exercisable when granted. Previously granted options vest on a graduated basis and become fully exercisable at the end of two years of continued employment. Pro forma information regarding net income and earnings per share as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option valuation model with the following weighted-average assumptions for fiscal 1998, 1997 and 1996, respectively: risk-free interest rates of 6.5%, 6.1% and 5.2%; a dividend yield of 1.6%; volatility factors of the expected market price of the Company's common stock of 46%, 41% and 41%; and a weighted-average expected option life of 3.61, 3.48 and 3.50 years. 36 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: 1998 1997 1996 (Amounts in thousands except per share data) Pro forma net income (loss) $(55,837) $37,072 $36,524 Pro forma earnings (loss) per share: Basic (.99) .75 .75 Diluted (.99) .74 .74 A summary of the Company's stock option activity and related information for the years ended February 28, (29), 1998, 1997 and 1996 follows: Weighted Average Options Exercise Price --------- -------------- Outstanding at March 1, 1995 4,075,729 $18.46 Granted 1,045,200 17.25 Exercised (23,525) 12.17 Forfeited (665,500) 32.50 --------- ------ Outstanding at February 29, 1996 4,431,904 18.49 Granted 816,480 14.55 Exercised (51,500) 13.25 --------- ------ Outstanding at February 28, 1997 5,196,884 15.55 Granted 28,008 15.53 Exercised (116,435) 7.81 Forfeited (100,000) 15.63 --------- ------ Outstanding at February 28, 1998 5,008,457 $15.98 ========= ====== Range of $5.52 $10.01 $17.01 $27.01 Exercise to to to to Prices $10.00 $17.00 $27.00 $35.06 ------ ------ ------ ------ Options outstanding at February 28, 1998 1,527,259 733,758 2,735,440 12,000 Weighted average remaining contract life, outstanding options 3.21 8.95 5.96 5.95 Weighted average exercise price, outstanding options $8.66 $14.46 $20.39 $35.06 Options exercisable at February 28, 1998 1,527,259 659,596 2,632,240 12,000 Weighted average exercise price, exercisable options $8.66 $14.32 $20.51 $35.06 37 Options exercisable at year end and the respective weighted average exercise prices were 4,831,095 at $15.96, 4,762,846 at $15.50 and 4,017,290 at $18.06 for fiscal 1998, 1997 and 1996, respectively. The weighted average fair values of options granted were $5.82, $4.88, and $5.42 for fiscal 1998, 1997, and 1996, respectively. (10) Commitments and Contingencies - ----------------------------------------------------------------------------- Leases The Company has entered into noncancellable lease agreements with initial terms ranging from 1 to 25 years for certain stores, warehouses and the corporate office. Certain leases include renewal options ranging from 1 to 10 years and/or purchase provisions, both of which may be exercised at the Company's option. Most of the leases are gross leases under which the lessor pays the taxes, insurance and maintenance costs. The following capital leases are included in the accompanying consolidated balance sheets: 1998 1997 (Amounts in thousands) Land and buildings ............................. $12,098 $12,098 Fixtures and equipment ......................... 1,955 675 ------- ------- 14,053 12,773 Less accumulated depreciation and amortization ...................... 5,219 3,724 ------- ------- $ 8,834 $ 9,049 ======= ======= Capitalized lease amortization is included in depreciation expense. Future minimum lease payments under capital leases and operating leases having initial or remaining noncancellable lease terms in excess of one year at February 28, 1998, are as follows: Fiscal Years Capital Leases Operating Leases (Amounts in thousands) 1999 $ 3,308 $136,294 2000 3,772 133,179 2001 3,349 116,732 2002 2,957 100,782 2003 2,403 91,684 After 2003 5,085 337,684 -------------------------------- Total minimum lease payments $ 20,874 $916,355 ======== Less: Executory costs 88 Imputed interest 5,082 Present value of minimum -------- lease payments $ 15,704 ======== Total rental expense under operating leases for fiscal 1998, 1997 and 1996 was $138,128,000, $83,888,000 and $67,509,000, respectively. Contingent rentals and sublease rentals are negligible. Payments to affiliated entities under capital and operating leases were $327,000 for fiscal 1998, which included payments to limited partnerships in which the Company has equity interests. Lease payments to affiliated entities for fiscal 1997 and 1996 were $314,000 and $625,000, respectively. Litigation The Company is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. Based on the best information presently available, the Company believes that the disposition of these matters will not have a material effect on the financial statements. 38 (11) Derivative Financial Instruments - ------------------------------------------------------------------------------ The Company uses derivative financial instruments in the form of interest rate swap agreements primarily to manage the risk of unfavorable movements in interest rates. These convert floating rate notes payable to banks and floating rates on asset securitization agreements to fixed rates. The notional amounts of these swap agreements at February 28, were as follows: 1998 1997 (Amounts in thousands) On notes payable and other $168,300 $211,700 On securitized receivables 185,000 235,000 Interest rates that the Company paid per the swap agreements related primarily to notes payable were fixed at an average rate of 7.0% and 6.7% at February 28, 1998 and 1997, respectively. The variable rates received per these agreements were tied to LIBOR or commercial paper rates and averaged 5.7% at February 28, 1998 and 1997. The terms for these agreements range from 1 to 2 years. Interest rates that the Company paid on swap agreements related to securitized receivables were fixed at an average rate of 6.8% and 6.5% at February 28, 1998 and 1997, respectively. The variable rates received per these agreements were tied to LIBOR or commercial paper rates and averaged 5.7% and 5.5% at February 28, 1998 and 1997, respectively. The terms for these agreements range from 1 to 3 years. Resulting changes in interest are recorded as increases or decreases to interest expense. The accrued interest liability is correspondingly increased or decreased. The Company believes its risk of credit-related losses resulting from nonperformance by a counterparty is remote. The amount of any such loss would be limited to a small percentage of the notional amount of each swap. As a means of reducing this risk, the Company as a matter of policy only enters into transactions with counterparties rated "A" or higher. The Company does not mark its swaps to market and therefore does not record a gain or loss with interest rate changes. Gains on disposals of swaps are recognized over the remaining life of the swap. Losses on disposals, which there have been none to date, would be recognized immediately. All swaps are held for purposes other than trading. (12) Fair Value of Financial Instruments - ------------------------------------------------------------------------------ The estimated fair values of financial instruments have been determined by using available market information. The estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The estimated fair values of the Company's financial instruments at February 28, 1998 and 1997 are as follows: 39 1998 1997 ---- ---- Carrying Fair Carrying Fair (Amounts in thousands) Amount Value Amount Value Assets: Cash $ 48,779 $ 48,779 $ 14,959 $ 14,959 Accounts receivable, net 392,765 392,765 380,879 380,879 Retained interest in securitized receivables 182,158 182,158 243,427 243,427 Liabilities: Accounts payable 203,048 203,048 160,857 160,857 Notes payable 260,000 260,000 156,000 156,000 Long-term debt 721,932 725,997 645,221 661,940 Off-balance-sheet financial instruments: Interest rate swap agreements: Assets - 86 - 632 Liabilities - 6,570 - 6,247 The following methods and assumptions were used to estimate the fair value for each class of financial instruments shown above: Cash and Accounts Receivable The carrying amount approximates fair value because of the short-term maturity of these assets. Retained Interest in Securitized Receivables The carrying amount approximates fair value, based upon customer payment experience and discounted at the market rate. Accounts Payable and Notes Payable The carrying amount approximates fair value because of the short-term maturity of these liabilities. Long-Term Debt The fair value of the Company's long-term debt is based on the discounted cash flow of that debt, using current rates and remaining maturities. Interest Rate Swap Agreements The fair value of the Company's interest rate swap agreements is the estimated amount that the Company would receive or pay upon termination of the agreements, based on estimates obtained from the counterparties. These agreements are not held for trading purposes, but rather to hedge interest rate risk. (13) Earnings (Loss) Per Share - ------------------------------------------------------------------------------ The Company was required to adopt in the fourth quarter of fiscal 1998 SFAS No. 128, "Earnings Per Share", which superceded APB Opinion No. 15. Earnings (loss) per share for all periods presented have been restated to reflect the adoption of SFAS No. 128. SFAS No. 128 requires companies to present basic and diluted earnings (loss) per share, instead of primary and fully diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing the net earnings (loss) by the weighted average number of shares outstanding. Diluted earnings (loss) per share reflects the potential dilution that could occur if options or other contingencies to issue common stock were exercised. 40 The following is a reconciliation of the number of shares (denominator) used in the basic and diluted earnings (loss) per share computations: 1998 1997 1996 ------------------------------- (Amounts in thousands) Numerator: Net earnings (loss) $(55,143) $40,185 $41,504 Denominator: Denominator for basic earnings (loss) per share - average common shares outstanding 56,312 49,360 48,560 Effect of potentially dilutive stock options - 786 1,044 Denominator for diluted earnings loss) per share 56,312 50,146 49,604 Basic EPS $ (0.98) $ 0.81 $ 0.85 Diluted EPS (0.98) 0.80 0.84 The computation for fiscal 1998 does not assume the conversion of outstanding options to purchase 5,008,000 shares of common stock at prices ranging from $5.52 to $35.06, with expiration dates between January 1999 and June 2007 or 265,000 contingently issuable shares, since the result would be antidilutive to the loss from operations. Options to purchase 1,723,000 shares of common stock at prices ranging from $20.29 to $35.06, with expiration dates between February 2003 and August 2004, were outstanding during fiscal 1997, however, were excluded from the diluted EPS calculation because the options' exercise prices were greater than the average market price of the common shares. Options to purchase 545,000 shares of common stock at prices ranging from $26.13 to $35.06, with expiration dates between February 2004 and August 2004, were outstanding during fiscal 1996, however, were excluded from the diluted EPS calculation because the options' exercise prices were greater than the average market price of the common shares. 41 (14) Quarterly Financial Data (Unaudited) - ------------------------------------------------------------------------------ The following is a summary of quarterly financial data for fiscal 1998 and 1997: Three months ended May 31 August 31 November 30 February 28 - -------------------------------------------------------------------------------- (Amounts in thousands except per share data) 1998 Revenues $566,325 $590,212 $678,468 $634,732 Gross profit(1) 169,058 171,201 202,796 165,609 Store closing and other charges - - - 25,530 Earnings (loss) before taxes 22,000 14,402 (75,467) (45,322) Net earnings (loss) 13,761 9,279 (49,122) (29,061) Earnings (loss) per share of common stock(2): Basic 0.25 0.17 (0.87) (0.50) Diluted 0.25 0.16 (0.87) (0.50) Cash dividends per share of common stock 0.07 0.07 0.07 0.07 1997 Revenues $357,914 $343,523 $413,474 $478,207 Gross profit(1) 106,977 95,784 123,614 139,692 Earnings before taxes 19,208 12,085 14,701 15,907 Net earnings 12,371 7,747 9,492 10,576 Earnings per share of common stock(2): Basic 0.25 0.16 0.20 0.20 Diluted 0.25 0.16 0.19 0.20 Cash dividends per share of common stock 0.07 0.07 0.07 0.07 (1) Gross profit is sales less costs of sales. (2) Total of quarterly earnings (loss) per common share may not equal the annual amount because net income (loss) per common share is calculated independently for each quarter. The earnings (loss) per share amounts have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion of earnings (loss) per share and the impact of SFAS No. 128, see Note 13. (15) MacSaver Financial Services - ------------------------------------------------------------------------------ MacSaver Financial Services ("MacSaver"), is the Company's wholly-owned subsidiary whose principal business activity is to obtain financing for the operations of the Company, and in connection therewith, MacSaver generally acquires and holds the aggregate principal amount of installment credit accounts generated by the Company's operating subsidiaries, and issues and carries substantially all of the Company's notes payable and long-term debt. MacSaver also transfers a portion of its installment accounts receivable, through a wholly-owned subsidiary, to a Master Trust which issues certificates representing undivided interests in such certificates (See Notes 1 and 4). Substantially all of the net revenues generated by MacSaver are pursuant to operating agreements with the Company and certain of its wholly-owned subsidiaries. In June 1997, the Company and MacSaver filed a joint Registration Statement on Form S-3 with the Securities and Exchange Commission relating to up to $400,000,000 aggregate principal amount of securities. MacSaver has issued $175,000,000 in aggregate principal amount of its notes at 7.60% due 2007. In fiscal 1997, MacSaver issued $300,000,000 in aggregate principal amount of its 42 notes under a previous Registration Statement filed jointly by the Company and MacSaver; $200,000,000 at 7.88% due 2003 and $100,000,000 at 7.40% due 2002. These notes are unconditionally guaranteed as to payment of principal and interest by the Company. The Company has not presented separate financial statements and other disclosures concerning MacSaver because management has determined that such information is not material to holders of the debt securities. However, as required by the 1934 Act, the summarized financial information concerning MacSaver is as follows: MacSaver Financial Services Summarized Statements of Operations Twelve months ended February 28, (29), 1998 1997 1996 (Amounts in thousands) Net revenues $267,386 $158,306 $116,243 Operating expenses 292,493 102,706 71,649 ----------------------------- Earnings (loss) before taxes (25,107) 55,600 44,594 ----------------------------- Net earnings (loss) $(16,320) $ 36,140 $ 28,986 ============================= MacSaver Financial Services Summarized Balance Sheets February 28, 1998 1997 (Amounts in thousands) Current assets $ 29,545 $ 9,054 Accounts receivable, net 295,405 238,694 Retained interest in securitized receivables at fair value 182,158 243,427 Due from affiliates 645,291 504,763 ---------------------- Total assets $1,152,399 $995,938 ====================== Current liabilities $ 48,951 $128,921 Notes payable 260,000 156,000 Long-term debt 700,000 545,000 Stockholder's equity 143,448 166,017 ---------------------- Total liabilities and stockholder's equity $1,152,399 $995,938 ====================== 43 Independent Auditors' Report To the Stockholders and Board of Directors Heilig-Meyers Company Richmond, Virginia We have audited the accompanying consolidated balance sheets of Heilig-Meyers Company and subsidiaries as of February 28, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 28, 1998. Our audits also included the financial statement schedule listed in the Index at item 14(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Heilig-Meyers Company and subsidiaries as of February 28, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Richmond, Virginia March 25, 1998 44 PART III With the exception of the information incorporated by reference from the Company's Proxy Statement in Items 10, 11 and 12 of Part III of this Form 10-K, the Company's Proxy Statement dated May 8, 1998 (the "1998 Proxy Statement"), is not to be deemed filed as a part of this Report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. The information concerning the Company's directors required by this Item is incorporated by reference to the section entitled "Election of Directors" appearing on pages 2-4 of the 1998 Proxy Statement. The information concerning the Company's executive officers required by this Item is incorporated by reference to the section in Part I hereof entitled "Executive Officers of the Company." The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this Item is incorporated by reference to the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" appearing on page 6 of the 1998 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. Except as set forth below, the information required by this Item is incorporated by reference to the sections entitled "Executive Compensation"appearing on pages 7-8 of the 1998 Proxy Statement, "Executive Supplemental Retirement Plan" and "Executive Severance Plan" appearing on page 13 of the 1998 Proxy Statement, and "Director's Compensation" and "Compensation Committee Interlocks and Insider Participation" appearing on page 14 of the 1998 Proxy Statement. Employment Agreements The Company has entered into employment contracts, effective November 1, 1996, with William C. DeRusha and Troy A. Peery, Jr., which provide for a constant rolling three-year employment period. These contracts provide that the executive's position will be at least commensurate in all material respects with the most significant of those held by the executive during the 90 days before November 1, 1996. These contracts also provide that the executive will be nominated for election to the Board of Directors during the employment period and, in the case of Mr. DeRusha, will serve as Chairman of the Board. Under these contracts, Messrs. DeRusha and Peery are entitled to receive an annual base salary at least equal to that in effect on November 1, 1996. These contracts provide for annual review of the base salary and permit the annual base salary to be increased, but not decreased. These contracts also provide that each executive is entitled to an annual bonus in accordance with the terms of the Company's annual performance-based bonus plan or, if more favorable, a bonus under other plans in effect generally with respect to other peer executives of the Company. These contracts provide further that the Company may terminate either executive's employment for cause as defined in the contracts. In the event of such termination, the contract terminates without further obligation to the terminated executive except for payment of annual base salary to the date of termination plus any previously deferred and unpaid compensation. If the Company terminates the executive's employment other than for cause or the death of the executive, or if the executive terminates employment for any reason, the executive is entitled to receive a lump sum cash payment equal to the sum of (i) unpaid annual base salary through the date of termination, (ii) the greater of the annual bonus paid or payable for the most recently completed fiscal year or the average annualized bonus paid or payable in respect of the three fiscal years immediately preceding the fiscal year in which termination occurs (the "Highest Annual Bonus") for the portion of the then current fiscal year through the executive's termination of employment, (iii) previously deferred and unpaid compensation, (iv) accrued vacation pay, and (v) annual base salary plus the Highest Annual Bonus payable for the remainder of the three-year employment period. The terminated executive is also entitled to a continuation of medical and other benefits for three years following termination of the employment or such longer period as the applicable benefit program may provide. 45 Each of these executives has also agreed not to compete with the Company in the United States for a period of 36 months following termination of the executive's employment. This non-competition covenant may be terminated by the executive if his employment was terminated by the Company other than for cause and if he desires to accept employment with a competitor, provided that he agrees to repay the Company the portion of the amount paid to him for salary and bonus with respect to the year in which termination took place equal to the amount of salary and pro rata bonus payable to him by the competitor during the three-year period following termination of employment with the Company. The Company has also entered into employment contracts with Joseph R. Jenkins and James F. Cerza, Jr. effective March 1, 1991. These contracts provided for an initial two-year term that ended February 28, 1993, with automatic annual one-year extensions, unless either party notifies the other at least one year in advance that it does not wish to extend the term. The contracts also provide that Messrs. Jenkins and Cerza will receive annual salaries established by the Compensation Committee of the Board of Directors of the Company (or the Board of Directors of the Company), which may be increased, but not decreased, on an annual basis. The contracts provide that each executive is entitled to an annual bonus in accordance with the terms of the Company's annual performance bonus plan, provided that in the event of a change of control, such payment shall be not less than the average bonus paid to him during the three fiscal years immediately preceding the year for which the bonus is currently payable. The contracts provide further that the Company may terminate an executive's employment immediately for cause as defined in the contracts. In the event of such a termination before the expiration of the employment term, each executive will forfeit the right to receive any further salary or benefits to which he is entitled under the employment contract. Should an executive voluntarily terminate employment and become employed with another employer before the expiration of the employment term, he will also forfeit the right to receive any further salary or benefits to which he is entitled under the employment contract. These contracts also provide that if (a) the executive's employment is terminated by the Company for any reason other than cause or (b) the executive voluntarily terminates employment within 60 days after there has been a material reduction in his compensation, benefits or other material change in his employment status, he will be entitled to a lump sum payment equal to the aggregate compensation he would have received during the remainder of the employment term. If a change of control event occurs, the bonus to which the executive is entitled during the change of control year will be computed on the assumption that the financial results achieved before the change of control will continue at levels not less favorable than those before the change of control. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section entitled "Election of Directors" appearing on pages 2-5 of the 1998 Proxy Statement and "Principal Shareholders" appearing on page 16 of the 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by the item is incorporated by reference to the section entitled "Certain Transactions" appearing on pages 14-16 of the 1998 Proxy Statement and the last paragraph under the section entitled "Election of Directors - Nominees" on page 5. 46 PART IV SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HEILIG-MEYERS COMPANY Date: December 7, 1998 by /s/William C. DeRusha ------------------------- William C. DeRusha Chairman of the Board and Chief Executive Officer 47 Index to Exhibits 3. Articles of Incorporation and Bylaws. a. Registrant's Restated Articles of Incorporation, as amended. b. Registrant's Amended and Restated Bylaws, filed as Exhibit 3a to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997, are incorporated herein by this reference. 4. Instruments defining the rights of security holders, including indentures. a. The long-term debt as shown on the consolidated balance sheet of the Registrant at February 28, 1995 includes various obligations each of which is evidenced by an instrument authorizing an amount that is less than 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The documents evidencing these obligations are accordingly omitted pursuant to Regulation S-K, Item 601(b)(4)(iii) and will be furnished to the Commission upon request. 10. Contracts a. Three leases dated as of December 27, 1976 between Hyman Meyers, Agent, and the Registrant, filed as Exhibit 10(a)(2) and Exhibit 10(a)(4) - Exhibit 10(a)(5) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1989 (No. 1-8484), are incorporated herein by this reference. b. The following Agreements filed as Exhibits 10(b) through 10(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1991 (No. 1-8484) are incorporated herein by this reference: (1) Lease dated as of January 1, 1980 between Hyman Myers , Agent, and the Registrant. (2) Lease dated November 1, 1970 between Hyman Meyers, Agent, and the Registrant as successor in interest to Heilig-Meyers Company of Greenville, Inc. (3) Lease dated April 15, 1971 between Meyers-Thornton Investment Co. and the Registrant as successor in interest to Meyers-Thornton Corporation. (4) Lease dated June 28, 1971 between Meyers-Thornton Investment Company and the Registrant as successor in interest to Meyers-Thornton Corporation. (5) Lease dated December 1, 1972 between Meyers-Thornton Investment Company and the Registrant. c. The following Agreements (originally filed as exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1982) were refiled as Exhibits 10(c)(1)-(3) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (No. 1-8484) and are incorporated herein by reference: (1) Executive Employment and Deferred Compensation Agreement made January 12, 1982 between Hyman Meyers and the Registrant. * (2) Executive Employment and Deferred Compensation Agreement made January 12, 1982 between S. Sidney Meyers and the Registrant. * 48 (3) Executive Employment and Deferred Compensation Agreement made January 12, 1982 between Nathaniel Krumbein and the Registrant. * d. Addendum to Lease and Contract dated February 26, 1973 amending Lease Contract dated April 15, 1971 between Meyers-Thornton Investment Co. and the Company as successor in interest to Meyers-Thornton Corporation (see Exhibit 10(c)(2)), filed as Exhibit 10(k) to Registrant's Registration Statement on Form S-2 (No. 2-81775) is incorporated herein by this reference. e. The following Agreements filed as Exhibits 19(a) through 19(c) to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1984 (No. 1-8484) are incorporated herein by this reference: (1) Agreement made as of May 4, 1984 to amend Executive Employment and Deferred Compensation Agreement between Hyman Meyers and Registrant.* (2) Agreement made as of May 4, 1984 to amend Executive Employment and Deferred Compensation Agreement between S. Sidney Meyers and Registrant.* (3) Agreement made as of May 4, 1984 to amend Executive Employment and Deferred Compensation Agreement between Nathaniel Krumbein and Registrant.* f. Agreement made as of September 15, 1989 to amend Executive Employment and Deferred Compensation Agreement between Hyman Meyers and Registrant filed as Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* g. Agreement made as of September 15, 1989 to amend Executive Employment and Deferred Compensation Agreement between S. Sidney Meyers and Registrant filed as Exhibit 10(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* h. Agreement made as of September 15, 1989 to amend Executive Employment and Deferred Compensation Agreement between Nathaniel Krumbein and Registrant filed as Exhibit 10(k) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484)is incorporated herein by this reference.* i. Deferred Compensation Agreement between Robert L. Burrus, Jr. and the Registrant filed as Exhibit 10(o) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1987(No.1-8484) is incorporated herein by this reference.* j. Amendment dated September 15, 1989 to the Deferred Compensation Agreement between Robert L. Burrus, Jr. and the Registrant filed as Exhibit 10(m) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990(No.1-8484) is incorporated herein by this reference.* k. Deferred Compensation Agreement between Lawrence N. Smith and the Registrant filed as Exhibit 10(p) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1987 (No. 1-8484) is incorporated herein by this reference.* l. Amendment dated September 15, 1989 to Deferred Compensation Agreement between Lawrence N. Smith and the Registrant filed as Exhibit 10(o) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* 49 m. Deferred Compensation Agreement between George A. Thornton, III and the Registrant filed as Exhibit 10(q) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1987 (No. 1-8484) is incorporated herein by this reference.* n. Amendment dated September 15, 1989 to Deferred Compensation Agreement between George A. Thornton, III and the Registrant filed as Exhibit 10(q) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* o. Employees Supplemental Profit-Sharing and Retirement Savings Plan, adopted effective as of March 1, 1991, amended and restated effective as of March 1, 1994 filed as Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * p. Registrant's 1983 Stock Option Plan, as amended, filed as Exhibit C to Registrant's Proxy Statement dated May 9, 1988 (No. 1-8484) for its Annual Meeting of Stockholders held on June 22, 1988 is incorporated herein by this reference.* q. Amendments to registrant's 1983 Stock Option Plan, as amended, filed as Exhibit 10(t) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* r. Registrant's 1990 Stock Option Plan, as amended, filed as Exhibit 10(t) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (No. 1-8484) is incorporated herein by this reference.* s. Registrant's 1994 Stock Option Plan, as amended, filed as Exhibit A to Registrant's Proxy Statement dated May 3, 1994 (No. 1-8484) for its Annual Meeting of Stockholders held on June 15, 1994 is incorporated herein by this reference.* t. Registrant's Executive Severance Plan effective as of September 15, 1989 filed as Exhibit 10(v) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1990 (No. 1-8484) is incorporated herein by this reference.* u. Form of Executive Supplemental Retirement Agreement between the Registrant and each of William C. DeRusha and Troy A. Peery, Jr. dated January 1, 1996 filed as Exhibit 10(y) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * v. Form of Executive Supplemental Retirement Agreement between the Registrant and each of James F. Cerza, Jr., Joseph R. Jenkins and James R. Riddle dated January 1, 1996 filed as Exhibit 10(z) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * w. Form of Executive Supplemental Retirement Agreement between the Registrant and William J. Dieter dated January 1, 1996 filed as Exhibit 10(aa) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * x. Employment Agreement made as of November 1, 1996 between William C. DeRusha and the Registrant filed as Exhibit 10(bb) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * 50 y. Employment Agreement made as of November 1, 1996 between Troy A. Peery, Jr. and the Registrant filed as Exhibit 10(cc) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. * z. The following Agreements filed as Exhibits 10 (ii) through 10 (kk) to the Registrant's Annual Report on Form 10-K for fiscal year ended February 28, 1991 (No. 1-8484) are incorporated herein by this reference: (1) Employment Agreement dated April 10, 1991 between Joseph R. Jenkins and the Registrant.* (2) Employment Agreement dated April 10, 1991 between James C. Cerza, Jr. and the Registrant.* (3) Employment Agreement dated April 10, 1991 between James R. Riddle and the Registrant.* aa. Carve Out Life Insurance Plan filed as Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (No. 1-8484) is incorporated herein by this reference.* bb. Amendment, dated as of August 18, 1993, to the Heilig- Meyers Company Severance Plan filed as exhibit 10(hh) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* cc. 1988 Deferred Compensation Agreement for Outside Directors between George A. Thornton, III and the Registrant filed as exhibit 10(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* dd. Amendment, dated as of April 18, 1994, to the 1986 Heilig-Meyers Company Deferred Compensation Agreement for Outside Director between George A. Thornton, III and the Registrant filed as exhibit 10(jj) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* ee. Amendment, dated as of April 18, 1994, to the 1990 Heilig Meyers Company Deferred Compensation Agreement for Outside Director between George A. Thornton, III and the Registrant filed as exhibit 10(kk) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* ff. Letter Agreement, dated August 26, 1993, amending employment agreement between Joseph R. Jenkins and the Registrant filed as exhibit 10(ll) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* gg. Letter Agreement, dated August 26, 1993, amending employment agreement between James R. Riddle and the Registrant filed as exhibit 10(mm) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* hh. Letter Agreement, dated August 26, 1993, amending employment agreement between James F. Cerza and the Registrant filed as exhibit 10(nn) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994 (No. 1-8484) is incorporated herein by this reference.* 51 ii. $400,000,000 Credit Agreement dated July 18, 1995 (the "Credit Facility") among MacSaver Financial Services, Inc., as Borrower; the Registrant, as Guarantor; and Wachovia Bank of Georgia, N.A., as Administrative Agent, as amended by the First Amendment and Restatement of Credit Agreement dated May 14, 1996 filed as exhibit 10 (pp) to the Registrant's Annual Report on Form 10-K for the fiscal year ended February 29, 1996 (No. 1-8484) is incorporated herein by this reference. jj. Policy issued by Life Insurance Company of North America, dated March 1, 1989 covering the Rhodes, Inc. Employee Disability Plan, filed with the Commission as Exhibit 10.38 to Rhodes, Inc.'s Annual Report on Form 10-K for the year ended February 28, 1991 (No. 0-08966) is incorporated herein by this reference.* kk. Form of Compensation (change in control) Agreement between Irwin L. Lowenstein and Rhodes, Inc., filed with the Commission as Exhibit 10.7 to Rhodes, Inc.'s Annual Report on Form 10-K for the year ended February 28, 1995 (No. 1-09308) is incorporated herein by this reference.* ll. Amended and Restated Merchant Agreement by and between Beneficial National Bank USA, HMY RoomStore, Inc. and Rhodes, Inc., dated as of May 9, 1997 filed as Exhibit 10(qq) to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1997 (No. 1-8484) is incorporated herein by this reference. mm. Compensation Agreement entered into between Rhodes, Inc. and Joel T. Lanham, filed with the Commission as Exhibit 10.10 to Rhodes, Inc.'s. Annual Report on Form 10-K for the year ended February 29, 1996 (No. 1-09308) is incorporated herein by this reference.* nn. Compensation Agreement entered into between Rhodes, Inc. and Joel H. Dugan, filed with the Commission as Exhibit 10.11 to Rhodes, Inc.'s Annual Report on Form 10-K for the year ended February 29, 1996 (No. 1-09308) is incorporated herein by this reference.* oo. First Amendment and Restatement of Credit Agreement dated as of May 14, 1996. pp. Second Amendment and Restatement of Credit Agreement dated as of January 8, 1997. qq. Third Amendment and Restatement of Credit Agreement dated as of May 23, 1997. rr. Amendment No. 4 to the Credit Agreement, dated as of November 30, 1997 filed as Exhibit 10a to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997, is incorporated herein by this reference. ss. Amendment No. 5 to the Credit Agreement dated as of April 22, 1998. tt. Amended and Restated Guaranty by the Registrant, dated as of May 9, 1997, of certain obligations under the Amended and Restated Merchant Agreement by and among Beneficial National Bank USA, HMY RoomStore, Inc. and Rhodes, Inc., dated as of May 9, 1997, filed as Exhibit 10a to Registrant's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997, is incorporated herein by this reference. uu. Rhodes Inc. Supplemental Employees Pension Plan, effective as of March 1, 1995. 52 21. Subsidiaries of Registrant. 23. Consents of experts and counsel. a. Consent of Deloitte & Touche LLP to incorporation by reference of Accountants' Reports into Registrant's Registration Statements on Form S-8. 27. Financial Data Schedule * Management contract or compensatory plan or arrangement of the Company required to be filed as an exhibit. 53 EX-23 2 INDEPENDENT AUDITOR' CONSENT EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in (i) the Registration Statements No. 2-96961 and No. 33-28095 on Form S-8 and related Prospectus of Heilig-Meyers Company relating to Common Stock issued and issuable under the 1983 Stock Option Plan of the Company, (ii) the Registration Statements No. 33-35263, No. 33-50086 and No. 33-64616 on Form S-8 and related Prospectuses of Heilig-Meyers Company relating to Common Stock issued and issuable under the 1990 Stock Option Plan of the Company, (iii) the Registration Statement No. 33-43791 on Form S-8 relating to the Heilig-Meyers Company Employee Stock Purchase Plan and related Prospectus of the Company, (iv) Registration Statements No. 33-54261 and No. 333-29105 on Form S-8 and related Prospectuses of Heilig-Meyers Company relating to Common Stock issued and issuable under the 1994 Stock Option Plan of the Company, and (v) the Registration Statements No. 333-07753, No. 333-29929, No. 333-45129 and No. 333-320825 on Form S-3 and the related Prospectuses of Heilig-Meyers Company of our report dated March 25, 1998 on the consolidated financial statements and schedule of Heilig-Meyers Company and subsidiaries, as listed under Items 14(a) (1) and (2), appearing in Amendment No. 1 to the Annual Report on Form 10-K of Heilig-Meyers Company for the year ended February 28, 1998. /s/ Deloitte & Touche LLP Richmond, Virginia December 7, 1998 54 -----END PRIVACY-ENHANCED MESSAGE-----