Trying to protect the family-controlled Hechinger Co. from being taken over by outsiders, Hechinger management is planning to restructure its stock.
Under the restructuring, which would enable the chain of home-improvement stores to issue more stock to underwrite its aggressive expansion plans without diminishing the Hechinger family control, the company would create a new class of stock, Class A, and hope that it could convince existing non-family stockholders to exchange their shares for the new shares.
The restructuring plan was announced at the same time the company reported record earnings for the latest quarter--$5 million (35 cents), a 67 percent increase over the $3 million (21 cents) profits posted for the same time period last year.
As described in special proxy material being sent to Hechinger stockholders this week, existing stock would be redesignated as Class B, with each share entitled to 10 votes. Each share of the new Class A stock would be allowed only one vote.
Class A shares could not be converted into Class B stock, and only Class A stock would be issued in the future.
But with the promise of at least four cents a share more in dividends each year on Class A stock than on the Class B, Hechinger management hopes all non-family stockholders would convert their Class B shares into Class A. In that case, the company might not pay any dividend on the Class B stock.
Hechinger family members say they have no current intention of converting their Class B shares, noting that they have consistently declined the cash dividends over the years, preferring to put that money back into the company.
At the same time that the new issue is created, the company will pay a stock dividend of one share of Class A for every four shares of existing common.
A special stockholders meeting to vote on the restructuring package will be held Oct. 4.
The effect of the restructuring is "to prevent a takeover," President John W. Hechinger said yesterday. Hechinger said that the family--which holds about 56 percent of the stock--would become "inhibited from obtaining additional growth capital from underwriting when the family's share falls below the 50 percent mark."
Yet, because outside capital is needed to meet the company's goal of opening seven to eight new stores a year, some arrangement had to be made to get more funds while allowing the family to maintain its control, Hechinger said.
Noting that the existing management brought stockholders a 32 percent compounded growth rate in profits over the past five years, Hechinger said stockholders "will be better served with the management that it has" than any that would come after a takeover, especially an unfriendly one.
Although the company has not been approached within the last year, "there have been several attempts at friendly takeovers from very large companies," Hechinger said.
The second-quarter was the first three-month period in which the company's profits reached $5 million. Sales for the period, which ended July 30, totaled $87.7 million, up 31 percent from $67.2 million rung up during the same quarter last year.
A large part of the sales increase was due to Hechinger's expansion into Pennsylvania and North Carolina, as well as to the opening of several new stores in the Washington-Baltimore area.
"Our overhead stays relatively constant and thereby any additional volume on top of previous volume puts more on the bottom line," Hechinger said.
Sales and profits for the first half of this year were also at record highs. Sales totaled $152.5 million, up 25 percent from last year's $122 million level. Profits were up 48 percent to $7.5 million (52 cents) from $5 million (36 cents) last year.
Hechinger termed the restructuring "a gift" to the stockholders because it would give shareholders more stock and increased dividends. The planned stock dividend of Class B shares would result in an initial issuance of approximately 3.6 million shares of Class A common stock.