Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
Hechinger Company (the "Company") is the successor to a business started in 1911 by Sidney L. Hechinger. The Company is a leading specialty retailer providing products and services for the care, repair, remodelling and maintenance of the home and garden. The Company currently serves the home improvement industry through two operating subsidiaries: Hechinger Stores Company, operating 72 home center stores located primarily in the mid-Atlantic region and Home Quarters Warehouse, Inc., operating 56 stores located primarily in the eastern and central parts of the United States.
Hechinger stores are customer-service driven, offering expert advice and a full range of building material and home improvement merchandise in facilities containing on average approximately 70,000 square feet of space under roof. Home Quarters Warehouse stores, with their large-scale merchandise presentation, produce high sales volume by emphasizing low pricing and quality service. Home Quarters Warehouse stores bring a wide assortment of building materials and home improvement merchandise to do-it-yourselfers, and professional contractors in brightly-lit, uncluttered facilities containing on average approximately 90,000 square feet under roof.
PRODUCTS
All of the Company's stores offer for sale a large selection of lumber, 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 sales accounted for by the merchandise categories:
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 those 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.
The Company's merchandise is purchased from approximately 1000 suppliers. The Company believes it has good relationships with its suppliers and does not consider itself dependent upon any single source for its merchandise.
MARKETING
The Company is continuing its expansion of Home Quarters Warehouse subsidiary. In July 1993, the Company opened a new 115,000 square foot store in Chesapeake, Virginia. This store incorporates many new features, including: a 5,000 square foot greenhouse and garden center, three design centers, installation services for major items and a tool rental program. In addition, the new Home Quarters store has a dedicated Contractor's desk to handle the special needs of professional contractors and commercial property owners, including its own entrance and loading area. The new store also offers
"Kids Quarters", a supervised on-site child care facility for children ages three to eight and a dedicated classroom called "HQ University" for how-to clinics. Of the nine new Home Quarters stores opened since July 1993, eight have these new features. The Company is planning to implement these new features in all of its new stores to be opened in 1994 and in its existing Home Quarters stores where possible.
The majority of the Company's sales are to individuals. 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 employs an advertising program through the regular use of newspaper and direct mail pieces. A "catabook", which is compact enough to carry along as a shopping reference and serves as an "idea" book with an index and large type prices, is heavily utilized. Advertisements feature the stores' wide selection and values. The Company also employs television and radio advertising where deemed effective. The Company emphasizes competitive pricing with its policy being to meet or beat the regular or sale prices of all major competitors. In addition, the Company offers its customers a liberal return policy.
The Company hosts how-to clinics throughout the year at various stores. At these clinics, trained employees, manufacturers' representatives and, at times, nationally recognized experts, demonstrate products and conduct classes on major home improvement projects.
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 and Discover in all stores and American Express in its Home Quarters stores. For the fiscal year ended January 29, 1994 credit card sales account for 50% of the Company's total sales.
EXPANSION PROGRAM
The following tables set forth the number of stores operated by the Company and the aggregate amount of square feet of store space in such stores for the specified periods:
In 1994, the Company intends to open approximately 11 new Home Quarters Warehouse stores, including two relocations, and approximately two new Hechinger stores, although the precise number will depend upon, among other things, the availability of suitable locations and prevailing economic conditions. In addition, approximately 19 Home Quarters stores and approximately six Hechinger stores are intended to be remodelled.
COMPETITION
The business of the Company is highly competitive. The Company competes in each of its market areas with other home center chains, national chains of general merchandise stores and local hardware stores, some of which have greater financing resources than the Company.
The extent of the Company's competition varies by geographic area. New competitors have entered several of the Company's existing markets and those targeted for future development, and established competitors are expanding in certain of those markets, reflecting the high level of growth anticipated for the industry. The Company's pricing strategy against the introductory pricing of new competition in certain markets may lower gross margins.
The Company believes that it is in a strong competitive position. The Company believes that it occupies a leading position in most of its established market areas, reflecting the quality of its trained personnel, breadth and depth of merchandising, pricing, advertising policies and store size, location and condition. The Company believes that its ability to devote substantial capital resources to the operation and expansion of its business will enable it to remain competitive in the industry.
EMPLOYEES
The Company has approximately 18,000 employees, approximately half of whom are employed on a part-time basis. The Company conducts comprehensive employee training programs. These training programs have enabled the Company to promote from within many current area supervisors, store managers and merchandisers. The Company believes its employee relations are satisfactory.
ITEM 2.



ITEM 2. PROPERTIES
Hechinger stores currently average approximately 70,000 square feet under roof and an additional 22,000 square
feet of outdoor selling and storage space. The Home Quarters Warehouse stores currently average approximately 90,000 square feet under roof and an additional 28,000 square feet of outdoor selling and storage space.
As of January 29, 1994, the Company owned 23 stores and leased the remaining stores. The Company believes that all its facilities, both owned and leased, are in good condition and well maintained. Expiration dates of the leases range from 1994 to 2023. Almost all leases contain renewal clauses or continue on a year-to-year basis after their respective expiration dates. Twelve of the store sites are leased from an affiliate.
Hechinger stores are serviced, in part, from the Company's modern warehouse and distribution facility in Landover, Maryland, which has approximately 640,000 square feet under roof. The Landover distribution facility and the Hechinger headquarters office facility in Landover, Maryland together have approximately 177,000 square feet of executive and administrative office space. Home Quarters is serviced directly by their suppliers and as such, requires only limited distribution facilities. Home Quarters has approximately 71,000 square feet of office space in Virginia Beach, Virginia.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered Item in Part I of this Report in lieu of being included in its entirety in the Proxy Statement.
The following table sets forth certain information regarding the Company's executive officers:
John W. Hechinger Jr. and S. Ross Hechinger are sons of John W. Hechinger.
Executive officers are elected by the board of directors of the Company at its first meeting held after each Annual Meeting of Stockholders to serve until their successors are chosen and qualified, or as otherwise provided in the Company's By-laws.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Pursuant to General Instruction G(2) of Form 10-K, the information called for by this item is hereby incorporated by reference from page 23 of the Company's Annual Report to Stockholders for the fiscal year ended January 29, 1994.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
Pursuant to General Instruction G(2) of Form 10-K, the information called for by this item is hereby incorporated by reference from page 1 of the Company's Annual Report to Stockholders for the fiscal year ended January 29, 1994.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Pursuant to General Instruction G(2) of Form 10-K, the information called for by this item is hereby incorporated by reference from pages 9 through 11 of the Company's Annual Report to Stockholders for the fiscal year ended January 29, 1994.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Pursuant to General Instruction G(2) of Form 10-K, the information called for by this item is hereby incorporated by reference from pages 12 through 23 of the Company's Annual Report to Stockholders for the fiscal year ended January 29, 1994.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item regarding directors is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. Information regarding the Company's executive officers is set forth above in the unnumbered Item following Item 4 of Part I of this Report.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
PART IV
ITEM 14.

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 incorporated by reference to the pages indicated in Annual Report to Stockholders for the fiscal year ended January 29, 1994:
2. Financial Statement Schedules. The following consolidated financial statement schedules of Hechinger Company and subsidiaries for the year ended January 29, 1994, January 30, 1993 and February 1, 1992 are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Hechinger Company:
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits.
EXHIBIT NUMBER DOCUMENT - - -------------- --------
(b) Reports on Form 8-K.
The Current Report on Form 8-K dated October 15, 1993 was to file Ernst & Young's consent to the reference to that firm under the caption "Experts" in the Prospectus Supplement dated October 21, 1993 for the issuance of Senior Notes.
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.
Pursuant to the requirements of the Securities and 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.
HECHINGER COMPANY AND SUBSIDIARIES ANNUAL REPORT ON FORM 10-K YEAR ENDED JANUARY 29, 1994
INDEX TO SCHEDULES AND EXHIBITS
HECHINGER COMPANY AND SUBSIDIARIES SCHEDULE I - MARKETABLE SECURITIES YEAR ENDED JANUARY 29, 1994 (in thousands)
HECHINGER COMPANY AND SUBSIDIARIES SCHEDULE I - MARKETABLE SECURITIES YEAR ENDED JANUARY 29, 1994 (in thousands)
HECHINGER COMPANY AND SUBSIDIARIES SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT (in thousands)
(a) During the year ended February 1, 1992, the Hechinger Stores Company changed its method of transporting merchandise from its Landover, Maryland distribution facility to its stores, from using its own fleet to utilizing commerial carriers. Dispositions during the year were primarily the result of the Company disposing of this fleet of delivery vehicles. (b) Substantially all additions represent ordinary expenditures for new stores and store remodeling. (c) Sale and leaseback transactions. (d) Substantially all other retirements were primarily the result of store closings. (e) Transfer of construction in progress for assets placed in service.
Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the various assets, which in general are:
Classification Estimated Useful Life
Buildings Generally 30 to 45 years. Leasehold improvements The term of the lease. In some longer term leases, up to 21 years. Furniture, fixtures and equipment 5 to 10 years. Capital leases The term of the lease.
HECHINGER COMPANY AND SUBSIDIARIES SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (in thousands)
HECHINGER COMPANY AND SUBSIDIARIES SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
(a) In 1992, the Company sold the entire Hechinger Stores' accounts receivable.
HECHINGER COMPANY AND SUBSIDIARIES SCHEDULE IX - SHORT-TERM BORROWINGS (in thousands)
Notes:
(a) At February 1, 1992, January 30, 1993 and January 29, 1994 there were no short-term borrowings. (b) The weighted average interest rate during the period was computed by dividing the actual interest expense by average short-term debt outstanding. (c) Note payable to bank represents borrowings under a line of credit borrowing arrangement. (d) There were no short-term borrowings during the year ended January 30, 1993 and January 29, 1994.
HECHINGER COMPANY AND SUBSIDIARIES SCHEDULE X - SUPPLEMENTARY EARNINGS STATEMENT INFORMATION (in thousands)
Amounts for depreciation and amortization of intangible assets, taxes other than payroll and income taxes, and royalties are not presented as such amounts are less than 1% of total sales and revenues.