<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

CHECK ONE
__X___  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 3, 1998.

                                       or

______  Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to ________.

COMMISSION FILE NUMBER 0-7214

                                HECHINGER COMPANY
             (Exact name of Registrant as specified in its charter)

          DELAWARE                                      52-1001530
(State or other jurisdiction               (I.R.S. Employer Identification No.)
     of incorporation)

     1801 MCCORMICK DRIVE, LARGO, MARYLAND                        20774
    (Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (301) 341-1000

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      None.

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
               5-1/2% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2012

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                       YES X           NO
                                          ---            ---

Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. [ X ]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant. (No voting stock is held by non-affiliates subsequent to
September 25, 1997.)

                                   --- $ 0 ---

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of January 8, 1999.

                    10 shares of Common Stock, $.01 par value

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.
<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS.

Hechinger Company, a Delaware corporation (together with its direct and indirect
subsidiaries, the "Company" or the "Registrant") is a leading retailer of
products and services for the care, repair, remodeling and maintenance of the
home and garden. At October 3, 1998, the Company operated 244 stores, primarily
under the Hechinger ("Hechinger"), Home Quarters Warehouse ("Home Quarters") and
Builders Square ("Builders Square") names. The 133 Builders Square stores are
located primarily in the Southern, Southeastern, Northern and Midwestern parts
of the United States. The 62 Hechinger stores are primarily located in the
Mid-Atlantic region; and the 46 Home Quarters stores are primarily located in
the Southeastern, Northeastern and Midwestern parts of the United States. The
remaining three stores are being converted to Hechinger or Home Quarters stores.

The following table sets forth the number of stores operated by the Company at
fiscal year-end and the aggregate amount of square feet of store space under
roof for the specified periods:

<TABLE>
<CAPTION>                                                                 STORE
                                                     NUMBER           SQUARE FOOTAGE
                                                   OF STORES          (IN THOUSANDS)
------------------------------------------------------------------------------------
<S>                                                   <C>            <C>
As of January 28, 1995                                   133            10,842
1995 openings                                             10             1,134
1995 closings                                            (25)           (2,081)
                                                       -----           ------- 

As of February 3, 1996                                   118             9,895
1996 openings                                              2               185
1996 closings                                             (3)             (190)
                                                       -----           ------- 

As of February 2, 1997                                   117             9,890
1997 purchase of Builders Square stores                  161            16,048
1997 openings                                              0                 0
1997 closings                                             (7)             (796)
                                                       -----           ------- 

As of September 27, 1997                                 271            25,142
1998 openings                                              0                 0
1998 closings                                            (27)           (2,759)
                                                       -----           ------- 

As of October 3, 1998                                    244            22,383
                                                       =====           =======
</TABLE>

On September 25, 1997, Centers Holdings, Inc., a Delaware corporation, through a
wholly-owned subsidiary (collectively "Centers Holdings"), acquired the Company
through a merger transaction (the "Merger"). On September 25, 1997, Centers
Holdings also purchased BSQ Transferee Corp. ("BSQ"), a Delaware corporation,
which held substantially all of the assets and liabilities of the Builders
Square business of Kmart Corporation (together with its subsidiaries, "Kmart")
(the "Initial Purchase"). BSQ and the Company are affiliates as a result of
these transactions.

On September 26, 1997, the Company purchased certain assets of BSQ (the
"Purchase") for cash and the assumption of certain liabilities. The assets
purchased, which consisted primarily of inventory, and the liabilities assumed
were recorded at BSQ's carrying values, which were finalized during fiscal 1998
based on the final determination of the fair value of the assets and liabilities
acquired in the Initial Purchase. The principal assets of BSQ which were not
acquired by the Company included assets held for resale and certain real
property, buildings and fixtures. Also on September 26, 1997, as part of the
Purchase, BSQ and the Company entered into subleases which cover substantially
all of BSQ's leased operating facilities, and a lease which covers certain
operating facilities owned by BSQ.


<PAGE>   3

As a result of the Purchase, the Company's consolidated financial statements
include the operating results of Builders Square stores subsequent to September
26, 1997. Accordingly, the Company's historical operating results may not be
indicative of or comparable to its current or future operating results.

Pursuant to the terms of the Purchase, 10 Builders Square stores were subleased
under a master month-to-month rental agreement. Shortly after the Initial
Purchase and pursuant to its terms, BSQ began the process of putting 10 stores
and the remaining related lease obligations back to Kmart, as well as disposing
of two additional stores to third parties. BSQ is responsible for closing put
stores and liquidating the inventory, and delivering a "broom clean" store back
to Kmart. Accordingly, BSQ recorded a liability of approximately $10 million for
the costs related to the closing of these stores. The assets acquired and
liabilities assumed from BSQ pursuant to the Purchase included amounts related
to these stores.

In addition, pursuant to the terms of the Purchase, the Company acquired the
ability to put back to BSQ 15 of the acquired stores and any remaining related
lease obligations, which it did during 1998. In accordance with the terms of the
Purchase, BSQ purchased the inventory in these 15 stores from the Company at its
book value, approximating $50.4 million. As of October 3, 1998, BSQ was in the
process of putting back 14 of these stores and the remaining related lease
obligations to Kmart pursuant to the terms of the Initial Purchase, and
disposing of one store to a third party.

In 1997, the Company changed its fiscal year end to the Saturday closest to
September 30. Prior to this change, the Company's fiscal year ended on the
Saturday closest to January 31. The fiscal year ended October 3, 1998 was 53
weeks ("1998" or "the year") compared to the fiscal period ended September 27,
1997 which was 34 weeks ("1997"), compared to the fiscal year ended February 1,
1997 ("1996") which was 52 weeks, and the fiscal year ended February 3, 1996
("1995") which was 53 weeks.


PRODUCTS

The Company's stores offer for sale a large selection of lumber and building
materials, hardware and tools, paint, garden supplies, electrical and plumbing
supplies and other items related to the home improvement market.

The following table sets forth the percentage of reported sales accounted for by
merchandise category. These percentages may not necessarily be representative,
however, of future product mix due to, among other things, changes in selling
seasons due to unusual weather patterns and ongoing merchandising product line
reviews conducted by management.

<TABLE>
<CAPTION>
FISCAL PERIOD ENDED                      OCT. 3, 1998          SEPT. 27, 1997            FEB. 1, 1997            FEB. 3, 1996
-----------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                     <C>                     <C>                      <C>
Lumber and building materials                      26%                     28%                     29%                     28%
Garden supplies and furniture                      20                      23                      20                      19
Plumbing supplies                                  19                      17                      18                      16
Hardware and tools                                 13                      11                      12                      13
Paint                                               8                       8                       8                       8
Electrical supplies and small
 appliances                                         7                       7                       7                      10
Home decor, housewares, and other                   7                       6                       6                       6
                                                  ---                     ---                     ---                     ---

Total                                             100%                    100%                    100%                    100%
                                                  ===                     ===                     ===                     ===
</TABLE>


Many of the items sold in the Company's stores are nationally advertised, brand
name products. The Company also offers some private label items such as garden
equipment and supplies, and paint. The Company may add private label items to
its merchandise in other areas where there are no major national brands or where
management deems it an effective way to meet price competition in a particular
product line.

By merging the merchandise acquisition function of Hechinger and Home Quarters
with Builders Square, the Company believes it has increased its purchasing power
with its suppliers. The Company also believes it has good relationships with its
suppliers and does not consider itself dependent upon any single

<PAGE>   4

source for its merchandise (See Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion).


MARKETING

The majority of the Company's sales are to individual consumers, with the
remainder being made to contractors and other businesses. Employees are trained
to help the do-it-yourself customer make his or her purchases and solve
technical problems related to home repair, maintenance and improvement work. The
Company offers its customers a liberal return policy.

The Company employs a multi-media marketing strategy featuring a weekly circular
that promotes key products and special prices. Additional selective marketing is
conducted via newspaper and radio advertisements, direct mail, and in-store
signage programs. The focus of the advertising is on the stores' wide selection
and values, featuring recognizable brand name products. The promotion of these
brand name products enables the Company to share advertising costs cooperatively
with its suppliers.

In August 1998, the Company substantially remodeled its Home Quarters stores in
the Tidewater, Virginia market including the conversion of the Builders Square
store in Virginia Beach, Virginia to the Home Quarters format. As part of the
remodel process, new product categories were added including a broad assortment
of home appliances and a convenience assortment of automotive supplies.
Additionally, the flooring department was significantly expanded.

Also in August 1998, the Company announced its plans to remodel 40 to 50 of its
stores to the Home Quarters format in the upcoming year and to change the name
of the remodeled stores to Home Quarters. Subsequent to October 3, 1998, the
Company converted its Austin and San Antonio, Texas stores to the new Home
Quarters format, including the addition of appliances, an automotive supplies
selection and expanded flooring departments.

The Company offers a private label credit card program pursuant to which credit
is extended to its customers by third party financial institutions. The Company
also accepts VISA, MasterCard, Discover and American Express in all of its
stores. For the fiscal year ended October 3, 1998, credit card sales accounted
for approximately half of the Company's total sales.


COMPETITION

The business of the Company is highly competitive. The Company competes in each
of its market areas with other major national and regional home center chains
(including The Home Depot and Lowe's), national chains of general merchandise
stores and local hardware stores, some of which have greater financial,
management and other resources than the Company or have been operating longer in
particular geographic areas than the Company.

The extent of the Company's competition varies by geographic area. Competitors
have entered many of the Company's existing markets and established competitors
are expanding in certain of these markets, which may, in each case, materially
adversely affect the Company's sales. In addition, the Company's strategy to
maintain competitive pricing in each of its markets may result in lower gross
margins as competition intensifies. There can be no assurance that the Company's
financial results and condition will not be impacted negatively and materially
by existing competition, by the further expansion of competitors into the
Company's markets or by the Company's expansion into competitors' markets (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations for discussion of store closings in certain markets).



<PAGE>   5


SEASONALITY

The Company's business is seasonal and its annual results of operations depend
to a significant extent on the results of operations for the third and fourth
quarters of its fiscal year. The Company's revenues and operating income have
traditionally been higher during March through September than during October
through February.

EMPLOYEES

The Company currently has approximately 28,000 employees, approximately half of
whom are employed on a part-time basis.  The Company believes its employee
relations are satisfactory.


ITEM 2.  PROPERTIES.

The Home Quarters stores currently average approximately 98,000 square feet
under roof and an additional 33,000 square feet of outdoor selling and storage
space. The Hechinger stores currently average approximately 72,000 square feet
under roof and an additional 23,000 square feet of outdoor selling and storage
space. The Builders Square stores currently average approximately 99,000 square
feet under roof and an additional 24,000 square feet of outdoor selling and
storage space.

The Company currently owns 17 operating stores (including four subject to ground
leases) and leases the remaining units. The Company believes that all of its
facilities, both owned and leased, are in good condition. Expiration dates of
the leases range from 1999 to 2023. Almost all leases contain renewal clauses.
However, with respect to the properties covered by BSQ's subleases with Kmart
(which represents the majority of all Builders Square stores), BSQ's ability to
exercise renewal options available in Kmart's leases with third parties is
subject to various conditions. As a result, the Company's ability to exercise
renewal options under its sublease with BSQ with respect to such properties is
similarly conditioned (See Note 11 to the Consolidated Financial Statements).

Prior to 1998, the Company's stores were serviced, in part, from the 640,000
square foot central warehouse and distribution facility in Landover, Maryland.
The expanded geographic spread of the Company's stores resulting from the
Purchase required a new distribution strategy. As a result, the Company now
utilizes pool points throughout the country rather than the central distribution
center, which was sold subsequent to fiscal year-end.

The Company currently leases approximately 100,000 square feet of office space
in Largo, Maryland and owns a 61,000 square foot office building in Virginia
Beach, Virginia.


ITEM 3.  LEGAL PROCEEDINGS.

On July 23, 1997, a purported class action complaint was filed in the Delaware
Chancery Court on behalf of all holders of the Company's common stock against
the Company and the former Company directors. The plaintiff has alleged that the
former officers and directors of the Company breached their fiduciary duties to
the holders of the common stock by, among other things, failing to take all
reasonable steps to assure the maximization of stockholder value including the
implementation of a bidding mechanism to foster a fair auction of the Company
and by entering into an agreement with Centers Holdings under which the
consideration offered by Centers Holdings to holders of the common stock was
"unfair and grossly inadequate." The Company believes that the plaintiff's
claims are without merit and intends to defend such action vigorously. No
significant activity occurred in 1998 with respect to this filing.

The Company and its subsidiaries are also parties to legal proceedings and
claims arising in the ordinary course of business. Although the outcome of such
proceedings and claims cannot be determined with certainty, based upon
evaluation by legal counsel, management believes that the outcome of such
proceedings and claims will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.

<PAGE>   6

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

NONE.


                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

There is no established trading market for the Registrant's common stock. All of
the Registrant's common stock is owned by Centers Holdings.

ITEM 6.  SELECTED FINANCIAL DATA.

The information called for by this item is contained in Exhibit 13 of this
report.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

OPERATIONS. On September 25, 1997, Centers Holdings, Inc., a Delaware
corporation, through a wholly-owned subsidiary (collectively "Centers
Holdings"), acquired the Company through a merger transaction (the "Merger"). On
September 25, 1997, Centers Holdings also purchased BSQ Transferee Corp.
("BSQ"), a Delaware corporation, which held substantially all of the assets and
liabilities of the Builders Square business of Kmart Corporation ("Kmart") (the
"Initial Purchase"). BSQ and the Company are affiliates as a result of these
transactions.

On September 26, 1997, the Company purchased certain assets of BSQ (the
"Purchase") for cash and the assumption of certain liabilities. The assets
purchased, which consisted primarily of inventory, and the liabilities assumed
were recorded at BSQ's carrying values, which were finalized during 1998 based
on the final determination of the fair value of the assets and liabilities
acquired in the Initial Purchase. The principal assets of BSQ which were not
acquired by the Company included assets held for resale, and certain real
property, buildings and fixtures. Also on September 26, 1997 as part of the
Purchase, BSQ and the Company entered into subleases which cover substantially
all of BSQ's leased operating facilities, and a lease which covers certain
operating facilities owned by BSQ.

As a result of the Purchase, the Company's consolidated financial statements
include the operating results of Builders Square stores subsequent to September
26, 1997. Accordingly, the Company's historical operating results may not be
indicative of or comparable to its current or future operating results.

In 1997, the Company changed its fiscal year end to the Saturday closest to
September 30. Prior to this change, the Company's fiscal year ended on the
Saturday closest to January 31. The fiscal year ended October 3, 1998 was 53
weeks ("1998" or "the year") compared to the fiscal period ended September 27,
1997 which was 34 weeks ("1997"), compared to the fiscal year ended February 1,
1997 ("1996") which was 52 weeks, and the fiscal year ended February 3, 1996
("1995") which was 53 weeks.

Pursuant to the terms of the Purchase, 10 Builders Square stores were subleased
under a master month-to-month rental agreement. Shortly after the Initial
Purchase and pursuant to its terms, BSQ began the process of putting 10 stores
and the remaining related lease obligations back to Kmart, as well as disposing
of two additional stores to third parties. BSQ is responsible for closing put
stores and liquidating the inventory, and delivering a "broom clean" store back
to Kmart. Accordingly, BSQ recorded a liability of approximately $10 million for
the costs related to the closing of these stores. The assets acquired and
liabilities assumed from BSQ pursuant to the Purchase included amounts related
to these stores.

In addition, pursuant to the terms of the Purchase, the Company acquired the
ability to put back to BSQ 15 of the acquired stores and any remaining related
lease obligations, which it did during 1998. In accordance with the terms of the
Purchase, BSQ purchased the inventory in these 15 stores from the Company at its
book value, approximating $50.4 million. As of October 3, 1998, BSQ was in the
process

<PAGE>   7

of putting back 14 of these stores and the remaining related lease obligations
to Kmart pursuant to the terms of the Initial Purchase, and disposing of one
store to a third party.

The following table sets forth the sales reported by the Company (in billions):

<TABLE>
<CAPTION>
Period                                                      1998              1997              1996              1995
---------------------------------------------------------------------------------------------------------------------- 
<S>                                                        <C>               <C>               <C>               <C>
Net sales                                                  $3.44             $1.36             $2.20             $2.25
Comparable period net sales (decrease)/increase               76%              (13%)              (2%)              (8%)
Comparable store sales (decrease)                            (15%)             (12%)              (3%)              (8%)
</TABLE>

Sales for the 53-week period ended October 3, 1998 were $3.44 billion. The
increase in net sales for 1998 was due to the 53-week period in 1998 compared to
a 34-week period in 1997 and the increased number of stores resulting from the
acquisition of 161 Builders Square stores on September 26, 1997. The decrease in
comparable store sales for 1998 compared with the comparable period of 1997 was
due primarily to increased competition during 1998. Sales for the 34-week period
ended September 27, 1997 were $1.36 billion. The decrease in net sales and
comparable store sales for 1997 compared with the comparable period of 1996 was
due primarily to increased competition during 1997 as well as unseasonable
weather. The sales decrease for 1996 compared with 1995 was due primarily to the
increased competition during 1996 and less stores open during 1996 compared with
1995. Additionally, 1996 was a 52-week year compared with the previous year
which was a 53-week year. Competition is expected to continue to expand into the
Company's markets and could have a materially adverse impact on the Company's
sales.

The following table sets forth the number of stores operated by the Company:

<TABLE>
<CAPTION>
Period                                    1998                    1997                    1996                    1995
----------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                     <C>                     <C>                     <C>
At beginning of period                     271                     117                     118                     133
Openings                                     0                       0                       2                      10
Closings                                   (27)                     (7)                     (3)                    (25)
Purchase of Builders Square stores           0                     161                       0                       0
                                           ---                     ---                     ---                     ---
At end of period                           244                     271                     117                     118
                                           ===                     ===                     ===                     ===
</TABLE>

Other income, which consists primarily of interest income on funds available for
investment, was $5.6 million, $3.0 million, $2.8 million and $2.9 million in
1998, 1997, 1996 and 1995, respectively. The increase in 1998 was due to the
53-week period in 1998 compared to a 34-week period in 1997 as well as a gain
from the sale of a tax partnership.

As a percent of sales, cost of sales was 81.2% for 1998 compared to 81.7% for
the comparable period in 1997, and 82.8%, 79.3% and 79.8% of sales for 1997,
1996 and 1995, respectively. Distribution and buying and occupancy expenses,
which are primarily fixed costs, are included in cost of sales. As a percent of
sales, the 1998 results were largely influenced by an increase in buying and
occupancy expenses as a percentage of sales this year compared with the
corresponding period in the prior year. This was due to the decrease in
comparable store sales (primarily as a result of increased competition) and
therefore less leveraging of these fixed costs, as well as increases in
inventory shrink. Offsetting these costs was an overall improvement in the
merchandise gross margin resulting from the Company's vendor consolidation
program as well as a LIFO credit. As a percent of sales, the increase in 1997
was due primarily to increases in inventory shrink and LIFO charges, various
inventory valuation adjustments, and the impact of competitive pricing in
certain markets. As a percent of sales, the decrease in 1996 was due primarily
to improvement in the merchandise margin resulting from the Company's vendor
consolidation program and a LIFO credit in 1996 versus a LIFO charge in 1995,
offset by the impact of competitive pricing in certain markets. Cost of sales
included LIFO credits of $21.3 million and $1.0 million in 1998 and 1996,
respectively, and charges of $5.1 million and $2.6 million in 1997 and 1995,
respectively.

Selling, general and administrative expenses were 18.8% of sales for 1998
compared to 21.0% for the comparable period in 1997, and 20.3% of sales for 1997
and 20.1% for both 1996 and 1995. Pre-opening expenses of $1.9 million and $7.6
million are included in selling, general and administrative expenses for

<PAGE>   8

1996 and 1995, respectively, and were not significant thereafter. As a percent
of sales, the 1998 decrease in selling, general and administrative expenses was
due primarily to reductions in general and administrative overhead and
advertising expenses. The increase in 1997 was due primarily to less leverage
of selling, general and administrative expenses as a result of lower sales
levels in 1997 compared with 1996.

Interest expense, net of capitalized interest, was $67.1 million for 1998
compared to $46.6 million for the comparable period in 1997, and $32.7 million,
$40.2 million and $31.3 million for 1997, 1996 and 1995, respectively. The
increase in 1998 was due primarily to higher borrowings under the Company's
revolving credit facility compared with the corresponding periods in the prior
year as well as capital lease interest for certain of the newly acquired
Builders Square stores. The increases in 1997 (over the comparable period in
1996) and in 1996 were primarily due to the increased utilization of the
Company's revolving credit facility. Capitalized interest was $2.4 million for
1995 and was not significant thereafter.

In 1998, the Company incurred $27.5 million of merger related expenses primarily
associated with the elimination of duplicate overhead expenses including costs
connected with the integration of information technology systems related to
BSQ's operations. By eliminating these duplicate overhead costs, the Company
reduced its net annual general and administrative costs by approximately $40
million. In 1997, as a result of the Merger and change in control, the Company
incurred merger-related expenses of approximately $29.1 million, consisting
primarily of approximately $4.5 million of professional and advisory services
related to the Merger transaction, and approximately $24.6 million of
employee-related costs. The majority of these costs were included in accrued
liabilities as of September 27, 1997, and were paid by the Company in 1998.

Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" was issued in 1995. The statement requires companies to review long-lived
assets and certain intangible assets in certain circumstances, and if the value
of the assets is impaired, to record an impairment loss.

In 1998, the Company determined that the estimated undiscounted future cash
flows for certain stores were less than the carrying amount of their respective
assets. Accordingly, the Company recorded an impairment loss of approximately
$8.5 million, adjusting the carrying value of the assets in these stores to
their estimated fair value.

In 1997, management of the Company made decisions to close and dispose of
certain properties, including a distribution facility. As a result, the Company
recorded an impairment loss of approximately $29.3 million, which reflects the
difference between the carrying value of the properties and the estimated sales
value, net of estimated costs to sell. The Company is actively pursuing the
disposal of these properties, and sold the distribution center after the end of
fiscal 1998. This amount also includes approximately $9.0 million related to the
write-off of the unamortized portion of leasehold acquisition costs of certain
closed stores, which management believes is not recoverable.

In 1995, the Company recorded aggregate impairment losses of approximately $30
million. As a result of the Company's decision to slow down its expansion plans
and not to pursue development of a number of real estate properties which had
been acquired for future store expansion, the Company decided to dispose of
these properties, and recorded an impairment loss related to these properties of
approximately $15 million. This non-cash charge reflected the difference between
the carrying value of the properties and the estimated sales value, net of
estimated costs to sell. The Company is actively pursuing the disposal of the
remaining properties. Also in 1995, the Company reviewed its property,
furniture, fixtures and equipment and evaluated how these assets would continue
to be used in its operations. Based on this evaluation, the Company recorded an
impairment loss related to certain property, furniture, fixtures and equipment
of approximately $15 million.

In 1994, the Company recorded a charge of $61.9 million primarily related to the
Company's decision to close 22 stores in certain markets. Disposition of the
closed stores is accomplished by subleasing or assigning the property to a new
occupant or reverting possession back to the landlord. The Company previously
expected that it would dispose of or sublease the remaining stores by January
1999. As a

<PAGE>   9

result of certain decisions made by management of the Company related to the
future disposition of its non-operating properties, in 1997 the Company revised
its estimate and recorded an additional store closing charge of $42.7 million
for the estimated continuing carrying costs for non-operating stores,
consisting primarily of rents and other related costs, resulting in an accrual
of $47.7 million as of September 27, 1997. Reductions to the accrual in 1998
represent the net operating costs of non-operating properties, along with lease
termination fees for certain non-operating properties. The Company believes
that the remaining accrual of $38.6 million as of October 3, 1998 is adequate
to cover future liabilities related to the carrying cost of the closed stores,
which the Company is actively marketing. (See Note 7 to the Consolidated
Financial Statements.)

In 1997, the Company entered into an agreement to sell seven Home Quarters
Warehouse stores in the Michigan market. Competition had continued to intensify
in this market, which adversely affected the performance of these stores. Based
on the performance and limited potential of these stores, management decided to
close them. For 1997, 1996 and 1995, these seven stores generated revenue of
$84 million, $151 million and $171 million, respectively, while generating
operating losses of approximately $8 million, $13 million and $7 million,
respectively. As a result, the Company recorded a store closing charge of $31.8
million related to the decision to close and sell these stores. The main
components of this charge were:

-     Estimated write-down to net realizable value of real estate
      (approximately $13.6 million), and furniture, fixtures, equipment and
      other assets (approximately $14.3 million) to be disposed of.
-     Estimated cash expenditures for operating costs for the stores during the
      inventory liquidation period and for employee termination costs of
      approximately $3.9 million.

As of September 27, 1997, assets held for sale included approximately $50.0
million related to these stores and approximately $3.0 million of accrued store
closing liabilities remained. The Company consummated the sale of these stores
in November 1997. As of October 3, 1998, these accrued liabilities had been
substantially discharged.

In 1995, the Company recorded a charge of $25 million related primarily to the
Company's decision to combine its Hechinger and Home Quarters operations under
one management team. By merging the management, purchasing and administrative
functions of its two operating subsidiaries, the Company believed it would be in
a better competitive position as it operated a more efficient organization and
increased purchasing power with its vendors. In addition, in 1996 the Company
reduced its annual general and administrative costs by approximately $16 million
primarily from the elimination of duplicate information systems and management
and administrative functions.

Management reviews the ongoing performance of, and future prospects for, its
stores and its markets in conjunction with its planning process. In situations
where remarketing leases and/or selling owned stores may potentially represent a
preferable use of Company resources, management is committed to investigating
those options in order to enhance store, market and Company results. The
financial statement impact of store closings, if any, is recorded when a
decision is finalized and the criteria for accrual have been met.

The effective income tax expense (benefit) rates were 2.8%, 0.6%, 0.0%, and
(3.7%) of the losses before income taxes for 1998, 1997, 1996, and 1995,
respectively. The effective tax rates for 1998, 1997 and 1996 differ from the
statutory rates as a result of increases in the valuation reserve on the
deferred tax assets resulting from each year's loss. The effective tax rate for
1995 differed from the statutory rate as a result of the effect of a valuation
allowance established on the Company's deferred tax asset generated from
operational consolidation and asset impairment charges recorded in 1995. As
described in Note 13 to the Consolidated Financial Statements, on September 25,
1997 Centers Holdings acquired the Company. This transaction constituted an
ownership change as defined under Section 382 of the Internal Revenue Code of
1986, as amended (the "Code"). This ownership change subjects the Company to a
$5.5 million annual limitation in future years in the use of certain items
reflected as deferred tax assets, including net operating loss carryforwards and
certain other tax attributes which were available on the date of the ownership
change. As a result, due to uncertainties regarding the realization in future
periods of the deferred tax assets, the Company has provided a valuation
allowance on a substantial portion of its gross

<PAGE>   10

deferred tax assets. As of October 3, 1998, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately $80.7 million
(net of approximately $97.0 million which will not be utilized by the Company
pursuant to the Section 382 limitation), substantially all of which is subject
to the $5.5 million annual limitation resulting from the ownership change. The
Company's net operating loss carryforwards expire between 2009 and 2018. The
Company's alternative minimum tax credit carryforward of $3.6 million is
available indefinitely as it does not expire. (See Note 10 to the Consolidated
Financial Statements.)

ACCOUNTING PRONOUNCEMENT. In March 1998, the Accounting Standards Executive
Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance on identifying the characteristics of internal-use software and
accounting for the costs associated with internal-use software. This SOP is
effective for financial statements for fiscal years beginning after December 5,
1998. The Company has not yet determined the impact of implementing this
pronouncement.

COMPREHENSIVE INCOME.  On January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income."  SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of financial statements.  Comprehensive income of Hechinger Company
consists solely of net income and, accordingly, the adoption of SFAS No. 130
had no impact on the Company's financial statements.  The Statement requires
only additional disclosures in the consolidated financial statements; it does
not affect the Company's financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES. Net cash flows used in operations were $257.1
million and $59.1 million in 1998 and 1996, respectively. Net cash flows from
operations were $20.0 million and $47.1 million in 1997 and 1995, respectively.
The change between 1998 and 1997 was the result of a decrease in accounts
payable and accrued expenses, including the payment of accrued employee related
costs resulting from the Merger, increased merchandise inventory levels, largely
due to an expanded inventory selection supporting the Company's enhanced
merchandising plan partially offset by inventory decreases caused by the closing
of 27 stores, and the use of cash relating to store closings. The change
between 1997 and 1996 was the result of decreased inventory levels, due
primarily to the closing of the seven Michigan stores, and increases in
accounts payable and accrued expenses, partially offset by increased losses in
1997, net of non-cash store closing and merger-related items. The decrease
between 1996 and 1995 was due primarily to a decrease in accounts payable and
accrued expenses, increased losses in 1996 and the use of cash relating to
store closings and the Company's operational consolidation.

Net cash flows from investing activities were $39.4 million in 1998 compared to
net cash flows used in investing activities of $240.8 million, $19.9 million and
$29.7 million in 1997, 1996 and 1995, respectively. Net cash flows from
investing activities in 1998 was primarily due to receipt of $61.6 million in
proceeds relating to the sale of seven Home Quarters Warehouse stores in the
Michigan market and other assets held for sale. Additionally, the Company
surrendered certain corporate owned life insurance policies and received
proceeds for the cash surrender value, net of policy loans and other amounts
due, of $18.3 million. Offsetting these proceeds was a $17.9 million increase in
the purchase price of the Purchase primarily resulting from adjustments to
capital leases, as well as capital spending of $25 million primarily related to
the Company's remodeling and merchandise reset programs. The change between 1997
and 1996 was primarily due to the purchase of net assets from BSQ and the change
between 1996 and 1995 was primarily due to decreased level of capital spending
resulting from reductions to the Company's store expansion, relocation and
remodeling programs. These programs were largely financed from the Company's
marketable securities in 1995.

Net cash flows from financing activities in 1998 were $151.6 million and were
primarily the result of the net proceeds from the Company's senior secured
revolving credit facility and $55 million of capital contributed by the
Company's parent, partially offset by payments of $15.7 million to redeem a
portion of the 5-1/2% Convertible Subordinated Debentures. The 1997 net cash
flows were $271.3 million and were primarily the result of the net proceeds
from the Company's senior secured revolving credit facility, contributed
capital from the Company's parent, and a non-interest bearing advance from the
parent. Net cash flows were $79.9 million in 1996 and were funded primarily
from the Company's revolving credit facility. Net cash flows used in financing
activities were $7.9 million in 1995 and primarily resulted from cash dividends
paid to the Company's stockholders.

Cash and cash equivalents were $21.1 million, $87.2 million and $36.7 million at
October 3, 1998, September 27, 1997 and February 1, 1997, respectively.

<PAGE>   11

During the third and fourth quarters of 1998, the Company redeemed $30.7
million of the 5-1/2% Convertible Subordinated Debentures for cash of $15.7
million, including accrued interest to the date of redemption, which resulted   
in the recognition of an extraordinary gain of $15.3 million (before and after
tax effect). These debenture purchases, together with purchases in prior years,
are sufficient to fulfill the scheduled mandatory sinking fund payments prior
to April 2004.

On September 26, 1997, Centers Holdings, BSQ, and the Company entered into a
senior secured revolving credit facility, which permitted borrowings of up to
$600 million (the "Credit Agreement"). The Credit Agreement replaced a $200
million revolving credit facility and all letter of credit facilities
outstanding. This facility is guaranteed by the Company, collateralized by
merchandise inventories and expires in September 2002. The amount available
under the facility fluctuated based on the Company's "Eligible Inventory"
balance (as defined in the agreement). The borrowings under the Credit Agreement
bore interest at a rate which fluctuated based on (i) the greatest of (a) Prime
Rate, (b) the Base CD Rate (as defined) plus 1.0%, or (c) the Federal Funds rate
plus 0.5%, plus an additional 0.0% to 0.5% based on the Interest Coverage Ratio
(as defined) or (ii) LIBOR plus an additional 1.5% to 2.0% based on the Interest
Coverage Ratio (as defined). The weighted average interest rate on the
outstanding borrowing was 7.78% at October 3, 1998.

As of October 3, 1998, the Company had outstanding borrowings of $372.0 million
under the Credit Agreement, and had issued and outstanding letters of credit of
$51.3 million under this facility. The available borrowing as of October 3, 1998
was approximately $177 million, and carried a commitment fee of 0.5% per year.

Subsequent to year-end, the Company borrowed significantly larger amounts under
the Credit Agreement. In order to provide additional availability for seasonal
purchases, remodeling and merchandise reset activity, as well as to provide
additional flexibility and address concerns with regard to quarterly EBITDA
requirements, the Company entered into an amendment of the Credit Agreement and
entered into a supplemental revolving facility in the amount of $50 million.

On December 31, 1998, the Company amended the Credit Agreement (the "Amended and
Restated Credit Agreement"), increasing the advance rate against "Eligible
Inventory" (the "borrowing base") for a period of time. The increased advance
rate begins to decrease in April 1999, until resuming the original advance rate
on June 21, 1999. The Amended and Restated Credit Agreement is guaranteed by the
Company, collateralized by merchandise inventories and expires in September
2002, and contains certain additional financial covenants and increased interest
rates. The borrowings under the Amended and Restated Credit Agreement bear
interest at a rate which fluctuates based on (i) the greatest of (a) Prime Rate,
(b) the Base CD Rate (as defined) plus 1.0%, or (c) the Federal Funds rate plus
0.5%; plus an additional 1.25% or (ii) LIBOR plus 2.75%. In addition, the
Company pays a fee at the rate of 0.5% per annum on any available borrowing.

Also on December 31, 1998, the Company concurrently entered into a short-term
secured revolving credit facility (the "Supplemental Agreement") which permits
borrowings of up to an additional $50 million. The Supplemental Agreement
expires on June 30, 1999 and provides funds during periods when there is
insufficient availability under the borrowing base of the Amended and Restated
Credit Agreement. Borrowings under the Supplemental Agreement bear interest at
the same rate and are generally under the same terms as the Amended and Restated
Credit Agreement.

In connection with the Supplemental Agreement, GEI II, the majority shareholder
of Centers Holdings, and Kmart agreed to repurchase from the lenders 20% and
80%, respectively, of the outstanding amounts of such supplemental credit, up to
the amount of $10 million and $40 million, respectively, in case of an event of
default, as defined. The Company agreed to pay GEI II and Kmart fees equal to
1.0% of their repurchase commitments under this agreement. Should the Company
borrow any amount under the Supplemental Agreement, Kmart's warrant to purchase
shares of the common stock of Centers Holdings increases from 210,000 to 245,000
shares, representing approximately 31.6% of the common stock of Centers Holdings
issued and outstanding after giving effect to the warrant.

The Amended and Restated Credit Agreement contains certain covenants which
restrict the Company's ability to, among other things, enter into additional
indebtedness, make acquisitions or sales of certain

<PAGE>   12

assets and declare and pay cash dividends. In addition, the Amended and
Restated Credit Agreement limits the annual amount of capital expenditures of
the Company and, beginning with the period ended December 31, 1998, requires
the Company to maintain minimum quarterly EBITDA (as defined) at increasing
levels.

In order to meet the amended quarterly EBITDA covenants, the Company must
improve its operating results in the second half of the current fiscal year as
compared to 1998 and has been taking steps to improve virtually every aspect of
its business operation, including but not limited to: management personnel,
store remodeling and merchandise reset programs, merchandise procurement and
distribution logistics, labor management and training, information systems, and
loss prevention. In the event the Company is unable to meet these covenants in
1999, it will be necessary to obtain a waiver from the lenders, amend the
Amended and Restated Credit Agreement, or arrange for alternative financing with
other lenders. There can be no assurance that the Company will be able to
consummate any such transaction, if necessary.

Under the terms of a sale and leaseback transaction completed in 1990, the
Company is restricted from taking certain actions that would result in its net
worth, less goodwill, falling below $175 million. Under the terms of certain
sale and leaseback transactions completed in 1992, the Company is required to
maintain a minimum net worth of $200 million as disclosed in its annual audited
financial statements. Under the 1992 transactions, in the event this minimum
net worth is not maintained, which could occur at the end of 1999, or in future
periods, the Company could be required to repurchase properties aggregating
approximately $42 million. In this event, the Company would be required to
utilize borrowing available under the Amended and Restated Credit Agreement, if
any, and/or arrange third-party financing for the properties subject to capital
expenditure and other limitations. There can be no assurance that the Company
will be able to consummate any such transaction, if necessary.

The Company anticipates that capital expenditures for fiscal 1999 will be
approximately $35 million, including the planned remodeling of approximately 40
to 50 of its stores to the Home Quarters format, enhancements to its
distribution facilities and upgrades to its information systems infrastructure.
Management believes that cash and cash equivalents, cash generated from
operations and its available credit facility will be adequate to meet the
Company's working capital needs and planned capital expenditures for fiscal
1999.

IMPACT OF INFLATION AND CHANGING PRICES. The Company does not measure precisely
the effect of inflation on its operations; however, it does not believe
inflation has had a material effect on sales or results of operations.

YEAR 2000. The Year 2000 issue is a universal concern resulting from many
computer programs being written using two digits rather than four to define the
applicable year. Any computer program that has date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a temporary inability to process transactions or engage in
normal business activities.

STATE OF READINESS
The Company, on a coordinated basis and with the assistance of outside
consultants, has developed a Year 2000 readiness program which has four primary
phases: (1) Inventory Analysis and Assessment, (2) Remediation, (3) Testing and
Implementation, and (4) External Agent Management. The current status for each
phase is as follows:

-     INVENTORY ANALYSIS AND ASSESSMENT.  This phase was completed in the
      fourth quarter of fiscal 1998.
-     REMEDIATION.  This phase is underway and approximately 50% complete.  The
      remaining effort is scheduled for completion in April 1999.
-     TESTING AND IMPLEMENTATION.  Testing design and execution has begun, with
      a scheduled completion date of June 1999.
-     EXTERNAL AGENT MANAGEMENT.  External agents include merchandisers,
      software vendors, telecommunications / data communications providers,
      EDI, and critical suppliers (utilities, contractors, benefit providers,
      insurers, facilities, etc.). The Company has initiated formal
      communications with its

<PAGE>   13

      significant suppliers to determine the extent to which each supplier is
      Year 2000 compliant and the potential impact on the Company if the
      supplier fails to correct their Year 2000 issues. The Company is still in
      the process of verifying application readiness of its vendors, assigning
      levels of criticality to external agents, and developing contingency
      plans related to vendors whose failure to address their Year 2000 issues
      could impact the Company. Failure of the Company's significant vendors to
      correct their Year 2000 issues could significantly reduce the Company's
      inventory levels and sales and affect the Company's ability to serve its
      customers.

The Company has not encountered any significant difficulties with any of the
project phases to date. Additionally, the Company is in the process of
developing contingency plans for those business functions which might be
affected by the Year 2000 problem and expects to have a plan by March 1999.

YEAR 2000 COSTS
The Company incurred approximately $1.1 million during 1998 for the phases
completed and in process to date. The Company estimates it will incur an
additional $10 million of internal and external costs as the Company completes
the remediation, testing and implementation, external agent management, and
contingency plans in fiscal year 1999 and the end of calendar 1999. The Company
expects Year 2000 costs to be funded from cash generated from operations and
available credit facility.

YEAR 2000 RISKS
Failure to identify and successfully remediate the Company's internal systems,
as well as infrastructure failures, such as loss of electric power, loss of
telecommunication services, delays or cancellations of shipping or
transportation, shut-downs of significant manufacturers or suppliers, or
computer errors by vendors and major bank errors, could significantly reduce the
Company's ability to sell its inventory and serve its customers. With respect to
the Company's internal systems, the most reasonable worst case scenario for the
Company with respect to the Year 2000 problem would be a major disruption in its
distribution and merchandising operations with respect to customers and
suppliers. With respect to external parties, the most reasonable worst case
scenario with respect to the Year 2000 problem is the failure of a supplier to
be Year 2000 compliant such that the Company's supply of needed inventory would
be interrupted temporarily. These scenarios are part of the contingency plans
currently under development.

The foregoing discussion regarding Year 2000 project timing, effectiveness,
implementation, and costs are based on management's current evaluation using
available information. Factors that might cause material changes include, but
are not limited to, the availability of key Company Year 2000 personnel and
external consultants, the readiness of third parties, and the Company's ability
to respond to unforeseen Year 2000 complications.

FORWARD-LOOKING STATEMENTS. Forward-looking statements in this Form 10-K are
made pursuant to the safe harbor provision of the Private Securities Litigation
Reform Act of 1995. There are various factors that could cause results to differ
materially and adversely from those anticipated by some statements made herein.
Investors are cautioned that all forward looking statements involve risks and
uncertainty. Factors that could cause actual results to differ materially and
adversely include, but are not limited to the following: the strength and extent
of new and existing competition; the Company's ability to maintain competitive
pricing in its markets; the Company's ability to maintain adequate levels of
vendor support; the success of the Company's customer service programs; the
Company's ability to attract, train and retain experienced, quality management
and employees; the Company's ability to assimilate Builders Square's operations
into its own; general economic conditions; housing turnover; interest rates;
weather; disposal of excess real estate; the Company's ability to make its
computer systems Year 2000 compliant, as well as Year 2000 issues facing its
vendors, lenders and others with whom the Company engages in substantial
business; the Company's ability to maintain compliance with its debt agreements;
and other factors described from time to time in the Company's Securities and
Exchange Commission filings.

<PAGE>   14

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments is not material.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information called for by this item is contained in Exhibit 13 of this
report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

On October 14, 1997, the Company filed a Current Report on Form 8-K which
reported that the Company had changed its independent accountants. Ernst &
Young LLP was previously the Registrant's independent accounting firm. On
October 7, 1997, Ernst & Young LLP's engagement by the Registrant as its
independent accounting firm was terminated and KPMG LLP, the independent
accounting firm of Centers Holdings, was engaged by the Registrant as
independent accounting firm. The decision to change accountants was approved
and ratified by the Board of Directors of the Registrant at a meeting of the
Board on October 8, 1997.

In connection with the audits of the two fiscal years ended February 1, 1997 and
the subsequent interim period through October 7, 1997, there were no
disagreements with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures,
which disagreement if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement.

The audit reports of Ernst & Young LLP on the consolidated financial statements
of the Registrant as of and for the fiscal years ended February 1, 1997 and
February 3, 1996 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified. The audit reports were modified for the Registrant's
adoption of SFAS 121 in the fiscal year ended February 3, 1996.

<PAGE>   15

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth certain information regarding the Company's
directors and executive officers as of January 1999:

<TABLE>
<CAPTION>
                                                                                                            YEAR FIRST
                                                                                                              JOINED
NAME AND AGE                                    POSITION WITH THE COMPANY                                   THE COMPANY
------------                                    -------------------------                                   -----------
<S>                       <C>     <C>                                                                          <C>
Anthony R. Petrillo       (59)    Chairman of the Board and Director since March 1998.                         1997
                                  President, Chief Executive Officer and Director from 
                                  September 1997 to March 1998. Prior thereto, Consultant 
                                  to Thrifty PayLess, Inc. since May 1995 and prior thereto, 
                                  Chairman, Chief Executive Officer and President of 
                                  Kash n' Karry Food Stores, Inc. since August 1994 and 
                                  prior thereto, Consultant.

Mark S. Schwartz          (38)    President and Chief Executive Officer since March 1998                       1998
                                  Prior thereto, President & Director General of Supercenters
                                  Mexico operations for Wal-mart Stores, Inc. since October
                                  1996.  Prior thereto, Senior Vice President of Supercenters
                                  Stores for Wal-mart since January 1995.  Prior thereto, Vice
                                  President of Supercenters Stores for Wal-mart.

Mark R. Adams             (37)    Executive Vice President, Chief Financial Officer, General                   1988
                                  Counsel, Treasurer and Secretary since April 1998.  Prior
                                  thereto, Executive Vice President, General Counsel,
                                  Treasurer and Secretary since September 1997.  Prior
                                  thereto, Senior Vice President, General Counsel, Treasurer
                                  and Secretary since March 1995 and prior thereto, served
                                  in various capacities as an Officer of the Company.

Clifford C. Smith, Jr.    (39)    Executive Vice President - Merchandising and Marketing                       1998
                                  since February 1998.  Prior thereto, Consultant to the
                                  Company since October 1997.  Prior thereto, Senior Vice
                                  President - Marketing/Merchandising for Kash 'n Karry Food
                                  Stores, Inc. since March 1996. Prior thereto, Senior Vice
                                  President - Marketing/Merchandising - Perishables for
                                  Kash 'n Karry Food Stores, Inc. since April 1995.  Prior
                                  thereto, Director - Deli/Bakery/Food Service for the Harris
                                  Teeter division of Ruddick Corporation.

Donald T. Stallings       (43)    Executive Vice President - Store Operations since                            1998
                                  October 1998.  Prior thereto, Vice President - Operations
                                  - Southwest Region for Lowe's since June 1996.  Prior
                                  thereto, District Manager for Lowe's since March 1994.
                                  Prior thereto, District Manager for Payless Cashways.

Leonard I. Green          (65)    Director since September 1997.  Executive officer and an equity
                                  owner of Leonard Green & Partners, L.P. ("LGP"), a merchant
                                  banking firm that manages GEI, since the formation of LGP
                                  and GEI in 1994 by the principals of Leonard Green & Associates, L.P.
                                  ("LGA").  Mr. Green has also been, individually or through a
                                  corporation, a partner in LGA, a merchant banking firm, since its
                                  inception in 1989.  Prior to forming LGA, Mr. Green had been a partner
</TABLE>

<PAGE>   16

<TABLE>
<S>                       <C>     <C>
                                  of Gibbons, Green, van Amerongen for more than five years.
                                  Also a Director of Rite Aid Corporation, Carr-Gottstein Foods Co.,
                                  and Communications & Power Industries, Inc.

Gregory J. Annick         (34)    Director since September 1997.  Executive officer and
                                  an equity owner, through a trust, of LGP, a merchant
                                  banking firm that manages GEI, since the formation of GEI in
                                  1994 by the principals of LGA.  Joined LGA as an associate
                                  in 1989, became a principal in 1993, and through a
                                  corporation became a partner of LGA in 1994.  From 1988
                                  to 1989, an associate with the merchant banking firm of
                                  Gibbons, Green, van Amerongen.  Also a director of Carr-
                                  Gottstein Foods Co., Communications & Power Industries,
                                  Inc., and Leslie's Poolmart, Inc.

John G. Danhakl           (42)    Director since September 1997.  Executive officer and an equity
                                  owner of LGP, a merchant banking firm that manages GEI,
                                  since 1995.  Previously a Managing Director at Donaldson,
                                  Lufkin & Jenrette Securities Corporation ("DLJ") and had been
                                  with DLJ since 1990.  Prior thereto a Vice President at Drexel
                                  Burnham Lambert Incorporated.  Also a director of Big 5 Corp.,
                                  Communications & Power Industries, Inc., Leslie's Poolmart, Inc.,
                                  Twinlab Corporation, and The Arden Group, Inc.

Jonathan D. Sokoloff      (41)    Director since September 1997.  Executive officer and an equity
                                  owner of LGP, a merchant banking firm that manages GEI,
                                  since the formation of LGP and GEI in 1994 by the principals of
                                  LGA.  Joined LGA as a partner in 1990.  Prior thereto a
                                  Managing Director at Drexel Burnham Lambert Incorporated.
                                  Also a director of Gart Sports Company, Twinlab Corporation
                                  and Carr-Gottstein Foods Co.

Martin L. Grass           (44)    Director since September 1997.  Chairman of the Board
                                  and Chief Executive Officer of Rite Aid Corporation
                                  since 1995.  Prior thereto President and Chief Operating
                                  Officer of Rite Aid Corporation since April 1989.  Also a
                                  director of Tessco Technologies, Inc. and Mercantile Safe
                                  Deposit & Trust Company.

Martin E. Welch III       (50)    Director since April 1998.  Senior Vice President and Chief
                                  Financial Officer of Kmart since December 1995.  Prior
                                  thereto, Senior Vice President, Chief Financial Officer of
                                  Federal-Mogul Corporation.
</TABLE>

There is no family relationship between any of the foregoing persons.


ITEM 11.  EXECUTIVE COMPENSATION.

The Summary Compensation Table sets forth individual compensation information
paid by or on behalf of the Company and its subsidiaries to the Chief Executive
Officer and the most highly paid executive officers (the "Named Executive
Officers"), for services rendered in all capacities during the fiscal year ended
October 3, 1998 ("1998"), fiscal period ended September 27, 1997 ("1997") and
fiscal years ended February 1, 1997 ("1996") and February 3, 1996 ("1995").

<PAGE>   17


<TABLE>
<CAPTION>
                                                          SUMMARY COMPENSATION TABLE
                         --------------------------------------------------------------------------------------------
                                                                            LONG-TERM COMPENSATION
                                 ANNUAL COMPENSATION                                AWARDS                PAYOUTS    
                                                                                                                     
                            -----------------------------------------     ----------------------------  -------------
                                                                                          SECURITIES                 
                                                                                                                     
                                                            OTHER ANNUAL  RESTRICTED      UNDERLYING     PERFORMANCE   ALL OTHER
NAME AND                              SALARY        BONUS   COMPENSATION    STOCK          OPTIONS         SHARES     COMPENSATION
PRINCIPAL                                                                   AWARDS
POSITION                  YEAR          ($)           ($)     ($)  (1)        ($)            (#)  (2)       ($)         ($) (3)
----------------------   -------    ----------    -------   ------------  ----------      -------------  -----------  ------------
<S>                      <C>         <C>          <C>            <C>             <C>             <C>             <C>       <C>
Anthony R. Petrillo         1998      $923,076         $0             $0          $0              9,500           $0            $0
  Chairman of the
  Board


Mark S. Schwartz            1998       259,615     50,000          5,400           0             13,000            0       165,176
  President &
   Chief Executive
   Officer(5)

Mark R. Adams               1998       226,923          0         13,085           0              7,000            0             0
  Executive Vice         1997(4)       101,346     65,000          8,239           0             12,000            0         2,540
  President, Chief          1996       155,000          0         12,600           0              6,641            0         4,858
  Financial Officer,        1995       137,337     22,700          7,419           0              2,875            0           775
   General Counsel
   Treasurer and
   Secretary

Clifford C. Smith, Jr.      1998       153,846          0              0           0              5,000            0        89,526
  Executive Vice
  President -
  Merchandising and
   Marketing (5)


Martin R. Bocola            1998       310,181    183,600          3,037           0              5,000            0             0
   Former Executive
   Vice President (6)


Harold R. Hall              1998       150,000          0         13,085           0                  0            0       486,346
 Former Executive        1997(4)       145,154     94,100          8,239           0             14,267            0        21,040
  Vice President            1996       220,654          0         12,600           0             14,267            0         4,750
  and Chief
  Financial Officer (6)     1995       216,250     11,000            969           0              7,500            0         1,985
</TABLE>

Except as shown above, none of the Named Executive Officers identified above was
employed by the Company prior to September 25, 1997.

----------------------------------

(1) These amounts represent automobile allowances.

(2) Option grants made in fiscal year 1998 are options for the common stock of
Centers Holdings. Previous option grants were made with respect to the common
stock of Hechinger Company under the 1991 Stock Incentive Plan.

(3) These amounts represent the following: For Mr. Schwartz, a relocation
allowance; for Mr. Smith, the amount of $35,000 in consulting fees he earned
previous to being employed by the Company and a relocation allowance of $54,526;
and for Mr. Hall, for 1998, a severance payment of $425,343 (see Severance
Agreements, to follow) plus certain accrued benefits and a relocation allowance
of $7,580; for 1997, a relocation allowance of $18,500.

The 1997, 1996, and 1995 amounts for Messrs. Adams and Hall also include
contributions by the Company to the Company Profit Sharing and 401(k) Plans.
Company contributions to the Profit Sharing Plan are in such amounts as may be
determined by the Board up to the maximum amount allowable under the Internal
Revenue Code of 1986, as amended (the "Code"). Company contributions to the
401(k) Plan represent a match of up to 50% of a participant's first 6% of pay
contributed subject to the maximum amount allowable under the Code. Company
contributions become 100% vested in both plans after a participant completes
prescribed Plan Service and in certain other circumstances.

<PAGE>   18

(4) Represents compensation information related to the 34-week period ended
September 27, 1997.

(5) Mr. Schwartz and Mr. Smith joined the Company in April 1998 and February
1998, respectively.

(6) Mr. Bocola and Mr. Hall are no longer employees of the Company as of
December 1998 and April 1998, respectively.

--------------------------------------------------


All stock options granted to the Named Executive Officers for the four previous
fiscal years are disclosed in the Summary Compensation Table. The table below
restates the options granted to the Named Executive Officers in the last fiscal
period, and provides other information regarding such grants, including an
estimate of the Grant Date Present Value.

Stock Options granted during the last fiscal period were granted by Centers
Holdings, Inc., the indirect parent company of the Registrant, in its common
stock, par value $.01 per share ("Centers Holdings Common Stock"), pursuant to
its 1997 Management Equity Plan (the "1997 Plan"). The 1997 Plan provides for
the issuance of incentive stock options, non-qualified stock options, and
restricted stock to key employees of Centers Holdings and its subsidiaries at
the discretion of Centers Holdings' Board of Directors. An aggregate of up to
65,000 shares of Centers Holdings Common Stock may be subject to awards under
the 1997 Plan. As of January 9, 1999, incentive stock options to purchase 54,300
shares of Centers Holdings Common Stock have been granted under the 1997 Plan,
and are further subject to Management Stock Option and Stockholders Agreements.
The Management Stock Option and Stockholders Agreement gives Centers Holdings a
right of first refusal and repurchase rights under certain circumstances, as
well as the option, upon a Change in Control or an Asset Sale, as defined
therein, to accelerate the vesting of options, to cash out options, or to cause
an acquiring party to assume options. The Company has not granted any stock
appreciation rights.


<TABLE>
<CAPTION>
                                                  OPTION GRANTS IN LAST FISCAL PERIOD
-------------------------------------------------------------------------------------------------------------------

                                                  INDIVIDUAL GRANTS                
                            -------------------------------------------------------
                                NUMBER OF                                                          GRANT DATE VALUE
                               SECURITIES         PERCENT OF TOTAL      EXERCISE OR                ----------------
                               UNDERLYING          OPTIONS GRANTED       BASE PRICE                   GRANT DATE
                             OPTIONS GRANTED       TO EMPLOYEES IN        PER SHARE   EXPIRATION     PRESENT VALUE
NAME                              (#)               FISCAL PERIOD          ($/SH.)       DATE            ($)(3)
----------------------      ------------------   -------------------    -----------   ----------   ----------------
<S>                                <C>                        <C>           <C>         <C>               <C>
Anthony R. Petrillo                 9,500(1,2)                 20.5%         $51.02      9/27/07           $331,550
Mark S. Schwartz                   13,000(1)                   28.0%          51.02      9/27/07            355,160
Mark R. Adams                       7,000(1)                   15.1%          51.02      9/27/07            191,240
Clifford C. Smith, Jr.              5,000(1)                   10.8%          51.02      9/27/07            129,550
Martin R. Bocola                    5,000(1)                   10.8%          51.02      9/27/07            129,550
Harold R. Hall                          0                       0.0%            N/A          N/A                N/A
</TABLE>

--------------------------------------------------

(1) The options to purchase these shares of Centers Holdings Common Stock were
granted as of September 27, 1997 at an exercise price equal to its fair market
value as of that date. The options generally vest proportionately over a four-
or five-year period, and are subject to certain terms and conditions (see
above).

(2) Mr. Petrillo's options were fully vested at the grant date.

(3) Computed using a modified Black-Scholes model.
--------------------------------------------------
,

<PAGE>   19

The following sets forth certain information on options exercised during the
last fiscal period and unrealized value for both exercisable and unexercisable
options at fiscal year end.

<TABLE>
<CAPTION>
             AGGREGATED OPTION EXERCISES IN LAST FISCAL PERIOD AND FISCAL PERIOD-END OPTION VALUES
--------------------------------------------------------------------------------------------------------------------

                                                                                                                    
                                                        NUMBER OF SECURITIES                    VALUE OF UNEXERCISED
                             SHARES                    UNDERLYING UNEXERCISED                   IN-THE-MONEY OPTIONS
                            ACQUIRED                OPTIONS AT FISCAL PERIOD END             AT FISCAL PERIOD END(1)
                               ON        VALUE      ----------------------------   ---------------------------------
                            EXERCISE    REALIZED    EXERCISABLE    UNEXERCISABLE     EXERCISABLE       UNEXERCISABLE
NAME                        (#) (2)       ($)         (#)               (#)             ($)                ($)
--------------------------  ---------   --------    -----------    -------------   -------------       -------------
<S>                                <C>        <C>         <C>              <C>               <C>                 <C>
Anthony R. Petrillo                 0         $0          9,500                0              $0                  $0
Mark S. Schwartz                    0          0          3,250            9,750               0                   0
Mark R. Adams                       0          0          1,750            5,250               0                   0
Clifford C. Smith, Jr.              0          0          1,000            4,000               0                   0
Martin R. Bocola                    0          0          1,000            4,000               0                   0
Harold R. Hall                      0          0              0                0               0                   0
</TABLE>

--------------------------------------------------

(1)  Market value of stock at fiscal year end less exercise price, before
payment of applicable income taxes.

(2)  None.
--------------------------------------------------

SEVERANCE AGREEMENTS

Under the terms of the Severance Agreements dated April 10, 1997 entered into by
the Company and certain executive officers thereof, each of Messrs. Hall and
Adams would receive a benefit equal to one and one half times the sum of his
annual salary and the average of his last three annual bonuses if the executive
was terminated for reasons other than cause, death, disability or retirement or
by such executive for "good reason" within two years following a change in
control of the Company. Each executive would also be eligible for additional
benefits for eighteen months in the event of such termination. These additional
benefits would include existing medical, dental and life insurance (provided the
executive paid the premiums due under such plans); merchandise discounts;
outplacement services; monthly auto allowances up to an annual cost of $13,200;
and payment of excise taxes incurred in connection with the payments received.
The Severance Agreements contain confidentiality requirements applicable to the
executives during and after their employment with the Company. Pursuant to the
terms of the Severance Agreements, Mr. Hall received approximately $425,343 in
the aggregate (excluding excise taxes) during 1998.

EMPLOYMENT AGREEMENTS

Mr. Schwartz and Mr. Smith entered into three-year employment agreements with
the Company on April 1, 1998 and February 1, 1998, respectively. The agreements
generally provide for payment of salary during the full term of the agreement,
but may be terminated early by mutual consent, "for cause" as specified therein,
or under certain other circumstances. In addition, the agreements provide for
bonuses consistent with the Company's bonus policy in effect from year to year,
as well as for the stock option grants disclosed above. These agreements contain
confidentiality requirements applicable to the executives during and after their
employment with the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee for the fiscal year ended October 3,
1998 were Gregory J. Annick, Jonathan D. Sokoloff, and Anthony R. Petrillo.
Neither Mr. Annick nor Mr. Sokoloff are or were officers or employees of the
Company or any of its subsidiaries, while Mr. Petrillo has been Chairman of the
Board since March 1998 and was President and Chief Executive Officer from
September 1997 to March 1998. None of the members of the Compensation Committee
had any other relationships which would require disclosure.

<PAGE>   20

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The Company's outstanding capital stock is indirectly wholly-owned by Centers
Holdings. The following table sets forth the ownership of Centers Holdings
Common Stock as of January 8,1999 by any person known by the Company to be the
beneficial owner of more than 5% of the Centers Holdings Common Stock (for whom
an address is also provided), the Company's directors and executive officers
named in the Summary Compensation Table above, and all executive officers and
directors of the Company as a group.

<TABLE>
<CAPTION>
NAME AND ADDRESS(1)
OF BENEFICIAL OWNER                                                     NUMBER OF SHARES        PERCENT OF CLASS
----------------------------------------------                          ----------------        ----------------
<S>                                                                       <C>                        <C>
Green Equity Investors II, L.P. (2)                                        490,000                    92.6%
Kmart (2) (3)                                                              210,000                    28.4%
Anthony R. Petrillo (4)                                                      9,500                     1.8%
Mark S. Schwartz (4)                                                         3,250                     0.6%
Mark R. Adams (4)                                                            1,750                     0.3%
Clifford C. Smith, Jr. (4)                                                   1,000                     0.2%
Martin R. Bocola (4)                                                         1,000                     0.2%
Leonard I. Green                                                                    (5)                      (5)
Jonathan D. Sokoloff                                                                (5)                      (5)
John G. Danhakl                                                                     (5)                      (5)
Gregory J. Annick                                                                   (5)                      (5)
Martin E. Welch III                                                              0                     0
Martin L. Grass (6)                                                         39,200                     7.4
All Executive Officers and Directors
     as a Group (7)                                                        529,200                   100.0%
</TABLE>

--------------------------------------------------

(1) The address for Green Equity Investors II, L.P. ("GEI II") and Messrs.
Green, Sokoloff, Danhakl and Annick is 11111 Santa Monica Boulevard, Suite 2000,
Los Angeles, California 90025. The address for Kmart and Mr. Welch is 3100 West
Big Beaver Road, Troy, Michigan, 48084. The address for all others is 1800
McCormick Drive, Largo, Maryland, 20774.

(2) Pursuant to the Securityholders Agreement (as defined below), each of GEI II
and Kmart has agreed to vote for the directors designated by the other. (See
Securityholders Agreement, below.)

(3) Represents 210,000 shares of Centers Holdings Common Stock that Kmart has
the right to acquire pursuant to a currently-exercisable warrant received in
conjunction with the Initial Purchase. As of January 9, 1999, Kmart had not
exercised the warrant. For purposes of calculating Kmart's ownership
percentages, the shares for which the warrant is exercisable are deemed to be
outstanding, but are not so deemed in calculating the ownership percentages of
any of the other stockholders. The number of shares represented by this warrant
may be increased to 245,000 if the Company borrows under the Supplemental
Agreement (See Note 5 to the Consolidated Financial Statements).

(4) Represents shares of Centers Holdings Common Stock that Company officers and
directors have the right to acquire pursuant to a currently-exercisable warrant
received under the 1997 Plan. As of January 9, 1999, none of the officers and
directors had exercised any options. For purposes of calculating each officer's
and director's ownership percentages, the shares for which the option is
exercisable are deemed to be outstanding, but are not so deemed in calculating
the ownership percentages of any of the other stockholders.

(5) GEI II is a Delaware limited partnership managed by Leonard Green &
Partners, L.P. ("LGP"), which is an affiliate of the general partner of GEI II.
Each of Messrs. Green, Sokoloff, Danhakl and Annick, either directly (whether
through ownership interest or position) or through one or more intermediaries,
may be deemed to control LGP and such general partner and thus may be deemed to
be beneficial owners of the shares of Centers Holdings Common Stock owned by GEI
II.

(6) All of these shares are owned by Square Builders, LLC, a Maryland limited
liability company, the managing member of which is Mr. Grass and the other
member of which is Mr. Grass's father.

(7) Includes the shares identified in note (5) above.

--------------------------------------------------
<PAGE>   21

SECURITYHOLDERS AGREEMENT

In connection with the Initial Purchase, GEI II, Kmart and Centers Holdings
entered into a Securityholders Agreement (the "Securityholders Agreement")
which, among other things, provides that (i) the Board of Directors of Centers
Holdings (the "Centers Holdings Board") will consist of six members, (ii) GEI II
and Kmart will each vote any shares of Centers Holdings Common Stock they own
(a) in the case of GEI II, in favor of one nominee selected by Kmart and (b) in
the case of Kmart five nominees selected by GEI II (six if GEI II elects to
expand the Centers Holdings Board to seven members). The Securityholders
Agreement also provides that, so long as certain minimum ownership requirements
by Kmart or its transferee are met, the affirmative vote of Kmart's nominees on
the Centers Holdings Board will generally be required to approve transactions
not in the ordinary course of business. In addition, the Securityholders
Agreement provides for certain share transfer restrictions and grants Kmart
"tag-along" rights in connection with certain sales of Centers Holdings Common
Stock by GEI II. In addition, the Securityholders Agreement grants GEI II and
Kmart certain demand and "piggyback" registration rights. The voting, transfer
and tag-along provisions of the Securityholders Agreement will terminate
generally if the Centers Holdings Common Stock is listed or admitted to trading
on a national securities exchange or quoted on The NASDAQ Stock Market's
National Market or traded in the over-the-counter market.

COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934

Not applicable subsequent to September 24, 1997.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The majority of the Builders Square stores are leased or subleased by the
Company from BSQ pursuant to a lease and sublease. The lease and sublease each
provide for an initial lease term of six years, with two five-year options. In
addition, the Company may decline to renew the lease and/or sublease on up to 40
stores. At October 3, 1998, minimum fixed rental commitments under the lease and
sublease agreements to BSQ for the next year were approximately $89.3 million.
The approximate amount of rent paid under these agreements in 1998 was $111.7
million.

The majority of the facilities subleased by the Company from BSQ are in turn
subleased by BSQ from Kmart pursuant to subleases as modified by the Consent and
Undertaking Agreement (the "Consent Agreement"). The Consent Agreement provides
in general for certain standardized terms for the subleased properties, to the
extent permitted by and not violative of the underlying leases between Kmart and
its lessors. All of the subsidiaries of Centers Holdings, including the Company
and each of its subsidiaries, have unconditionally guaranteed the payment and
performance of the subleases.

Pursuant to the terms of the Purchase, 10 Builders Square stores were subleased
under a master month-to-month rental agreement. Shortly after the Initial
Purchase and pursuant to its terms, BSQ began the process of putting 10 stores
and the remaining related lease obligations back to Kmart, as well as disposing
of two additional stores to third parties. BSQ is responsible for closing put
stores and liquidating the inventory, and delivering a "broom clean" store back
to Kmart. Accordingly, BSQ recorded a liability of approximately $10 million for
the costs related to the closing of these stores. The assets acquired and
liabilities assumed from BSQ pursuant to the Purchase included amounts related
to these stores.

In addition, pursuant to the terms of the Purchase, the Company acquired the
ability to put back to BSQ 15 of the acquired stores and any remaining related
lease obligations, which it did during 1998. In accordance with the terms of the
Purchase, BSQ purchased the inventory in these 15 stores from the Company at its
book value, approximating $50.4 million. As of October 3, 1998, BSQ was in the
process of putting back 14 of these stores and the remaining related lease
obligations to Kmart pursuant to the terms of the Initial Purchase, and
disposing of one store to a third party. As of October 3, 1998, BSQ owes the
Company approximately $12.6 million in connection with BSQ's purchase and
liquidation of this inventory.

During the year, the Company paid certain amounts on behalf of BSQ Transferee,
primarily related to taxes prorated as of the date of the Initial Purchase. As a
result of these payments, which have been

<PAGE>   22

partially offset by the adjustments related to the final determination of the
fair value of the assets and liabilities acquired in the Purchase, BSQ also
owes the Company approximately $20.2 million.

As of October 3, 1998, the Company owes its immediate parent company, BSQ
Aquisition, Inc. approximately $14.3 million of an initial $23.8 million
non-interest-bearing advance provided at September 27, 1997.

In connection with the $50 million Supplemental Credit Agreement dated December
31, 1998, GEI II, the majority shareholder of Centers Holdings, and Kmart
agreed to repurchase from the Lenders 20% and 80%, respectively, of the
outstanding amounts of such supplemental credit, up to the amount of $10
million and $40 million, respectively, in case of an Event of Default, as
defined. The Company agreed to pay GEI II and Kmart fees equal to 1.0% of their
repurchase commitments under this agreement. Should the Company borrow any
amount under the Supplemental Agreement, Kmart's warrant to purchase shares of
the common stock of Centers Holdings increases from 210,000 to 245,000 shares,
representing approximately 31.6% of the common stock of Centers Holdings issued
and outstanding after giving effect to the warrant.

                                    PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

    (a) The following documents are filed as a part of this Report:

1. Financial Statements. The following Consolidated Financial Statements of
Hechinger Company and subsidiaries are hereby incorporated by reference from
Exhibit 13 of this report.


            Financial Highlights

            Quarterly Results

            Consolidated Statements of Operations - Year ended October 3, 1998,
            thirty-four week period ended September 27, 1997, and years ended
            February 1, 1997 and February 3, 1996.

            Consolidated Balance Sheets - As of October 3, 1998, September 27,
            1997, and February 1, 1997.

            Consolidated Statements of Cash Flows - Year ended October 3, 1998,
            thirty-four week period ended September 27, 1997, and years ended
            February 1, 1997 and February 3, 1996.

            Consolidated Statements of Stockholders' Equity - Year ended October
            3, 1998, thirty-four week period ended September 27, 1997, and years
            ended February 1, 1997 and February 3, 1996.

            Notes to Consolidated Financial Statements

            Independent Auditors' Reports

<PAGE>   23

2. Financial Statement Schedules. Schedules have been omitted because the
information required to be set forth therein is included in the Consolidated
Financial Statements or Notes thereto.

3. Exhibits.

Exhibit Number                      Document

3(a)  Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8, File No. 33-27134), as
amended by the merger agreement incorporated by reference as Exhibit 10(f)
herewith.

3(b)  Hechinger Company Restated By-Laws.

4(a)  Indenture, dated as of March 15, 1987, between the Company and First
Union National Bank of North Carolina, relating to 5-1/2% Convertible
Subordinated Debentures due 2011 (incorporated by reference to Exhibit 4(d) to
Registration Statement on Form S-3, File No. 33-12649); as amended by
Supplemental Indenture dated January 31, 1997 between the Company and First
Union National Bank of North Carolina (incorporated by reference to Exhibit
4(a) to the Company's Annual Report on Form 10-K for the fiscal year ended
February 1, 1997).

4(b)  Indenture, dated as of October 1, 1992, between the Company and First
Union National Bank of North Carolina, and the Prospectus Supplement dated
November 12, 1992 relating to 9.45% Senior Debentures due 2012 (incorporated by
reference to Exhibit 4 to Registration Statement on Form S-3, File No.
33-52960); as amended by Supplemental Indenture dated January 31, 1997 between
the Company and First Union National Bank of North Carolina (incorporated by
reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1997).

4(c)  Indenture, dated as of October 1, 1992, between the Company and First
Union National Bank of North Carolina, and the Prospectus Supplement dated
October 21, 1993 relating to 6.95% Senior Notes due 2003 (incorporated by
reference to Exhibit 4 to Registration Statement on Form S-3, File No.
33-52960); as amended by Supplemental Indenture dated January 31, 1997 between
the Company and First Union National Bank of North Carolina (incorporated by
reference to Exhibit 4(b) to the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 1997).

10(a) Form of Severance Agreement for Named Executive Officers.

10(b) Bill of Sale, Assignment and Assumption Agreement dated as of September
26, 1997 by and between BSQ Transferee Corp. and Hechinger Investment Company of
Delaware, Inc. (incorporated by reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated October 14, 1997).

10(c) Agreement and Plan of Merger, dated as of July 17, 1997, by and among
Hechinger Acquisition, Inc., BSQ Acquisition, Inc. and Hechinger Company
(incorporated by reference to Exhibit 2A to the Company's Current Report on Form
8-K dated October 8, 1997), as amended by First Amendment, dated as of August
27, 1997, to the Agreement and Plan of Merger, dated as of July 17, 1997, by and
among Hechinger Acquisition, Inc., BSQ Acquisition, Inc. and Hechinger Company
(incorporated by reference to Exhibit 2B to the Company's Current Report on Form
8-K dated October 8, 1997).

10(d) Credit Agreement, dated as of September 26, 1997, as amended and restated
as of December 31, 1998, among Hechinger Investment Company of Delaware, Inc.,
as Borrower, Centers Holdings, Inc., BSQ Acquisition, Inc., BSQ Transferee
Corp., Hechinger Company, Hechinger Stores Company and Hechinger Stores East
Coast Company, The Lenders Party Thereto, The Chase Manhattan Bank, as
Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender,
BankAmerica Business Credit, Inc., as Documentation Agent and Borrowing Base
Audit Agent, and Citicorp USA, Inc., as Syndication Agent with Chase Securities
Inc., as Arranger and Sole Book Manager.

10(e) Credit Agreement, dated as of December 31, 1998, among Hechinger
Investment Company of Delaware, Inc., as Borrower, Centers Holdings, Inc., BSQ
Acquisition, Inc., BSQ Transferee Corp.,

<PAGE>   24

Hechinger Company, Hechinger Stores Company and Hechinger Stores East Coast
Company, The Lenders Party thereto, and The Chase Manhattan Bank, as
Administrative Agent, Collateral Agent, Borrowing Base Audit Agent, Issuing
Bank and Swingline Lender, and Chase Securities Inc., as Arranger.

10(f) Form of Executive Employment Agreement.

13    Annual Report for the fiscal year ended October 3, 1998.

18    Letter regarding change in accounting principle.

21    Subsidiaries of the Registrant.

27    Financial Data Schedule.


(b) Reports on Form 8-K.

None.
<PAGE>   25

                                  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.

                                     HECHINGER COMPANY
                                     -----------------
                                     (Registrant)

Date:  January 13, 1999              By  /S/
                                         -------------------------------------
                                         Mark S. Schwartz
                                         President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                     TITLE                                                      DATE
-----------------------------------------     -------------------------------------                      ----------------

<S>                                           <C>                                                        <C>
/S/                                           President and Chief Executive Officer                      January 13, 1999
-----------------------------------------
Mark S. Schwartz


/S/                                           Executive Vice President, Chief                            January 13, 1999
-----------------------------------------     Financial Officer (Principal Financial
Mark R. Adams                                 and Accounting Officer), General      
                                              Counsel, Treasurer, and Secretary     
                                                                                    

/S/                                           Director                                                   January 13, 1999
-----------------------------------------
Anthony R. Petrillo

/S/                                           Director                                                   January 13, 1999
-----------------------------------------
Leonard I. Green

/S/                                           Director                                                   January 13, 1999
-----------------------------------------
Gregory J. Annick

/S/                                           Director                                                   January 13, 1999
-----------------------------------------
John G. Danhakl

/S/                                           Director                                                   January 13, 1999
-----------------------------------------
Jonathan D. Sokoloff

-----------------------------------------     Director                                                   January 13, 1999
Martin L. Grass

-----------------------------------------     Director                                                   January 13, 1999
Martin E. Welch III
</TABLE>

<PAGE>   26

                      HECHINGER COMPANY AND SUBSIDIARIES
                          ANNUAL REPORT ON FORM 10-K
                       FISCAL YEAR ENDED OCTOBER 3, 1998

                        INDEX TO SCHEDULES AND EXHIBITS


EXHIBIT NUMBER                   DESCRIPTION
--------------------------------------------------------------------------------

3(b)  Hechinger Company Restated By-Laws.

Exhibit 10

10(a) Form of Severance Agreement for Named Executive Officers.

10(d) Credit Agreement, dated as of September 26, 1997, as amended and restated
as of December 31, 1998, among Hechinger Investment Company of Delaware, Inc.,
as Borrower, Centers Holdings, Inc., BSQ Acquisition, Inc., BSQ Transferee
Corp., Hechinger Company, Hechinger Stores Company and Hechinger Stores East
Coast Company, The Lenders Party Thereto, The Chase Manhattan Bank, as
Administrative Agent, Collateral Agent, Issuing Bank and Swingline Lender,
BankAmerica Business Credit, Inc., as Documentation Agent and Borrowing Base
Audit Agent, and Citicorp USA, Inc., as Syndication Agent with Chase Securities
Inc., as Arranger and Sole Book Manager.

10(e) Credit Agreement, dated as of December 31, 1998, among Hechinger
Investment Company of Delaware, Inc., as Borrower, Centers Holdings, Inc., BSQ
Acquisition, Inc., BSQ Transferee Corp., Hechinger Company, Hechinger Stores
Company and Hechinger Stores East Coast Company, The Lenders Party Hereto, and
The Chase Manhattan Bank, as Administrative Agent, Collateral Agent, Borrowing
Base Audit Agent, Issuing Bank and Swingline Lender, and Chase Securities Inc.,
as Arranger.

10(f) Form of Executive Employment Agreement.

Exhibit 13        Annual Report for the fiscal year ended October 3, 1998.

Exhibit 18        Letter regarding change in accounting principle.

Exhibit 21        Subsidiaries of the Registrant.

Exhibit 27        Financial Data Schedule.