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How death came to a once-prosperous discount-store chain

Editor's note: The following story ran Oct. 25, 1991, on Day Six of the nine-day "America: What went wrong?" series published in the Inquirer.

* * *

In March 1987, Russell L. Isaacs, the chief executive officer of Heck's Inc., received a singular honor. He was selected by the Horatio Alger Association as one of 10 people from across the country to receive its annual Distinguished American Award.

The 54-year-old Isaacs that month joined a prestigious roster of previous award-winners who ranged from Bernard M. Baruch, adviser to seven presidents, to Raymond A. Kroc, the founder of McDonald's Corp.

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  • 1991 SERIES:
    AMERICA: WHAT WENT WRONG?
    DAY 1
  • How game was rigged against middle class
  • After three decades, American worker loses out to Mexico
  • Who - and how many - in America's middle class
  • DAY 2
  • The lucrative business of bankruptcy
  • DAY 3
  • Big business hits the jackpot with billions in tax breaks
  • DAY 4
  • Why the world is closing in on the U.S. economy
  • DAY 5
  • The high cost of deregulation: Joblessness, bankruptcy, debt
  • DAY 6
  • For millions in U.S., a harsh reality: It's not safe to get sick
  • How death came to a once-prosperous discount-store chain
  • DAY 7
  • Raiders work their wizardry on an all-American company
  • DAY 8
  • When you retire, will there be a pension waiting?
  • Workers saving for their retirement lose on junk bonds
  • DAY 9
  • How special-interest groups have their way with Congress
  • Intended to recognize rags-to-riches success stories, the awards are given, in the association's words, to show young people that "opportunity still knocks in America for anyone willing to work. "

    The association and its awards are named for the author of the popular 19th-century novels - Ragged Dick and Luck and Pluck, among others - that recounted the tales of young boys who achieved success, fame and wealth through hard work, perseverance, honesty and luck.

    The association described the 1987 winners in general as "role models who give others a different kind of inspiration to succeed. "

    In Isaacs' case, the association related his rise from an impoverished West Virginia family - his father was a coal miner and his mother "suffered an apparent stroke" during the birth of her seventh child - to become chairman and chief executive officer of Heck's, a discount department-store chain based in Nitro, W. Va., near Charleston.

    The association said it was most fortuitous that Heck's directors had selected Isaacs, who once had been the company's chief financial officer, to run the entire operation: "Giving Isaacs free rein has proven to be a wise decision. . . . His previous knowledge of the company gave him an advantage in implementing changes he thought most beneficial to the company. "

    Well, not exactly.

    Actually, Russell Isaacs had just overseen three consecutive years of losses adding up to $31 million.

    He had directed the closing of three dozen stores scattered across several states.

    He had fired hundreds of employees, including Bobby Jean McLaughlin and many others who had worked at Heck's for 10 or 15 years or more.

    And he had presided over the company's relentless downhill decline - a decline that in time would lead to the elimination of thousands of jobs.

    In fact, on March 5, 1987 - the week before Isaacs was inducted into the Horatio Alger Association at a dinner in Washington - Heck's Inc. filed for bankruptcy protection.

    The irony is not an isolated one.

    For Russell Isaacs, the $300,000-a-year chief executive, is little different than thousands of other executives and investors who have assumed control of American corporations - from retailing businesses to manufacturing plants.

    He is a financial officer by training. And by all accounts a good one. But aside from a grasp of the numbers, his critics say, he had little understanding of the business he was running, or what made it work.

    Listen to Douglas R. Cook, one of the founders of Heck's who left when Isaacs took over: "Russell is a certified public accountant and a good financial man. Unfortunately . . . there's a difference between a financial man and a hands-on manager. "

    Cook, who with three other men built Heck's from a single department store in Charleston to a chain of more than 120 stores across the middle-Atlantic states, added:

    "I always tell people, if you started out to destroy a company, you couldn't have done as good a job as Russell Isaacs did. . . . He . . . tried to make a lot of changes, tried to fix a lot of things that weren't broken. "

    Isaacs has a different explanation.

    When Kmart and Hills built stores "two or three times the size of ours, you know it doesn't take a rocket scientist to figure out you can't compete with that size store," he said. "Just picture a 40,000-square-foot store beside a 120,000-square-foot store. Where's the customer going to go? He's going to go where the selection is the greatest and prices are the best. "

    While Heck's no longer exists and thousands of employees lost their jobs, there were a few notable financial success stories.

    One was Russell Isaacs'. As was the case with many corporate executives and investors, Isaacs, his managers and those who followed him received millions of dollars, collectively, in generous compensation packages, pensions and severance contracts.

    By contrast, Patsy J. Perry of Teas Valley, W. Va., one of the many longtime Heck's workers dismissed by Isaacs and his successors during a string of failed reorganization efforts, received little more than $1,000.

    The money represented her pension for 12 years' work. There was no severance pay for Perry, 56, who lives alone and supports herself. There was no interim allowance to tide her over until she found another job.

    More important for Perry, a diabetic who takes insulin daily, the medical insurance that Heck's provided was terminated.

    For two years, Perry said, she could not afford regular medical checkups. Her vision deteriorated because of the diabetes.

    Still, she recalled fondly the early years at Heck's. "We were just like one big family," she said. "In fact, that's what they called it - Heck's family. "

    To understand how that family was born and prospered, and then withered and died, it is necessary to turn back the clock to 1959. The place is downtown Charleston, in an empty building that had housed a Kaiser-Fraser auto dealership.

    It was there that Fred Haddad; brothers Tom and Lester Ellis, and Douglas Cook opened their first discount department store. Haddad and the Ellises had operated competing stores in nearby Madison, W. Va. Cook was working for a wholesale distributor.

    The new store - called Heck's after the letters in the names of the founders and two friends - proved an instant success. A second was opened in 1960 in St. Albans, W. Va., Cook recalled, "and about a week or two later we opened our third store in Huntington. "

    Fred Haddad was Heck's chairman of the board and president, a hands-on executive who wandered through the stores and knew his employees by name. Cook was in charge of merchandising and advertising.

    By 1963, they had expanded beyond West Virginia, opening stores in Kentucky, Maryland and Virginia.

    From the very beginning, according to Cook, the company was profitable: ''We showed a good profit. And it was profitable every year up until, say, 1984. "

    By 1983, when Haddad retired and sold his Heck's stock, the company had grown to 122 stores with annual sales of $435 million.

    Although net income trailed off in 1983 to $10 million from a peak of $15 million in 1980, Heck's still had posted 24 consecutive years of profits.

    Then it all unraveled.

    Haddad was replaced by Russell Isaacs, who had worked for Heck's in the 1960s and '70s before becoming executive vice president of Wheat First Securities Inc., a Richmond, Va., brokerage firm.

    Isaacs recruited new managers, introduced new marketing concepts, redesigned store layouts, and added a new computer system.

    As part of the sweeping overhaul, Isaacs said in a report to shareholders, ''each store was planogrammed, a photo-optical process that allocates product space uniformly . . . according to a master plan based upon sales. "

    "Hence, fast-moving products were given greater shelf space and a better position than slower-moving items. In addition, low-profit and marginal products were dropped from Heck's product mix, an important step in improving store productivity . . . "

    The rearranged layouts, Isaacs said, included "one or more racetrack aisles leading shoppers to prominent departments through the store. The racetracks were dotted with speed tables featuring fast-moving and desirable merchandise to attract shoppers. "

    Isaacs concluded that "though the overall effort was massive and frequently caused dislocation to shoppers, the initial results indicate a positive response. "

    Well, not too positive.

    Despite - or perhaps because of - the racetrack aisles, photo-optical process and upscale merchandise, Heck's celebrated its silver anniversary in 1984 by recording its first loss ever: $8 million.

    Along the way, veteran Heck's employees heard a mounting chorus of complaints from customers who were irked when they were unable to buy products the chain had stocked for years but no longer carried.

    Like Lucite paint. Perry said it was one of the biggest sellers in the store where she worked, but the new management "did away with it and went to another brand. . . . I know the other paint didn't sell. "

    Douglas Cook agreed. "We had a big following in that," he said. "We had regular customers. . . . We did a terrific amount of Lucite business. . . . The first thing that Russell Isaacs' new management team does is throw out Lucite paint. . . . That's a good example of (why) . . . the customers get upset. "

    The ever-changing store layouts also caused confusion. "Every time you turned around," Perry said, "they were changing something. All the customers complained because they never could find anything . . . "

    In any event, Russell Isaacs, fresh from the experiences of his own investment firm and a satellite Wall Street investment house, plunged ahead - with more changes.

    He next did what so many other executives were - and still are - doing when confronted with an ailing business: He sought to acquire other businesses.

    In 1985, he bought another retailer, Maloney Enterprises Inc., which operated 34 discount department stores in Heck's marketing area. The selling price was right.

    That's because Maloney's had filed for reorganization under the U. S. Bankruptcy Code in 1982 and was just emerging from court protection.

    The acquisition, completed in August 1985, brought the number of Heck's stores to 166.

    That same month, Heck's picked up a quick $9 million from the IRS by applying its 1984 net operating loss against taxes paid in earlier years when the company was profitable.

    Even so, Heck's was sinking fast.

    On Sept. 4, 1985, the company borrowed $4 million from Algemene Bank Nederland NV, a Netherlands bank. Two weeks later, it borrowed an additional $1 million.

    Next, it began firing dozens of workers.

    On Friday, Oct. 11, 1985, Heck's management sat down to decide who would go. It later seemed to some that many employees selected for termination were those with the most experience - and the most pay and benefits.

    There was Bobby Jean McLaughlin, now 57, who was earning $6.20 an hour as a department manager after 18 years with Heck's. That gave her a base salary of less than $13,000 a year.

    And there was Patsy Perry, who was earning $5.60 an hour as a supervisor after 12 years with Heck's. That gave her a base salary of less than $12,000 a year.

    During an interview, Perry recounted her dismissal: "They just came in one morning, the store manager and the supervisor, and called me and another lady and told us as of today we were being laid off.

    "I was so upset. I asked them if we could work in a different part of the store if they were doing away with our jobs. And they said no, they weren't doing it that way. . . . They were just letting us go. . . .

    "They had us to go home as soon as they told us. They thought it would be better if we leave the store immediately, they said. "

    Employees were stunned.

    "It was a shock," Perry said. "My mother was here visiting. . . . When I came home, I cried and cried. She nearly thought I was going to have a stroke. That night, the girls (from the store) kept coming over to the house. It was like a funeral. "

    The timing of her firing had a bitter twist for Perry, who had lived for years in her own home in St. Albans, W. Va., about 15 miles from the store.

    "I sold it in September," she said, "and bought me a little trailer and a lot . . . so I'd be close to work and I could be here till I retired . . . about five minutes away. And then I got laid off the next month. "

    Other former Heck's employees, particularly those over 40, found themselves unable to obtain a job that paid comparable wages or benefits.

    Betty Jean Thompson, a widow, was terminated as a $6.09-an-hour department manager after 11 years. Thompson, now 60, eventually was hired by another retailer - but for only 20 hours' work a week. Her new salary: $3.50 an hour. That represented a 43 percent pay cut. There was no health insurance. No life insurance. No pension.

    For a brief time, the firings of people such as Betty Jean Thompson and Bobby Jean McLaughlin and Patsy Perry appeared to stem the tide of red ink at Heck's.

    Indeed, company executives forecast a return to profitability by year's end.

    The optimism was unfounded. As it turned out, Heck's new management team had failed to detect data errors in yet another of its fresh merchandising and cost-control innovations - a new computerized accounting system. The computer, it seemed, abetted by human error, ran amok.

    Price markdowns on merchandise went unrecorded, thereby creating fictitious profits. Invoices were incorrectly marked, which led to the reordering of unneeded goods.

    A company spokesman was quoted as saying: "When you have computers and people messing up, you have a big problem. "

    By the time all the bookkeeping errors had been corrected, Heck's had posted a $5 million loss for 1985.

    The longtime employees had seen it coming. Recalled Bobby Jean McLaughlin: ''I would order six eyebrow pencils. Two or three dozen would come in. . . . They had people who didn't know what they were doing. "

    That was none too surprising, given the stream of new management recruits. ''That's all you saw," she said, "were people from different places. They brought people in to show us how to set the shelves and all that stuff, like we weren't smart enough. They brought all those big shots in. "

    Isaacs labeled the accounting breakdown nothing more than "a temporary setback in our efforts to return the company to a strong, profitable operation. "

    Nevertheless, to shore up Heck's shaky finances, the board of directors in April 1986 embarked on another money-raising course:

    It voted to raid the company's pension fund.

    On Oct. 30, 1986, Heck's informed the Pension Benefit Guaranty Corp. that it intended to withdraw $4.6 million of the $7.4 million in the retirement fund.

    Heck's management was going to take 62 percent of the fund's assets and use them to help bail out the business. That would leave 38 percent of the assets, or $2.8 million, to be distributed among 3,251 employees with vested pensions.

    That worked out to an average of $861 for each employee.

    Isaacs and Ray O. Darnall, who had served as president and later vice chairman of the Heck's board, did a little better. According to records filed with the U. S. Securities and Exchange Commission, Isaacs collected $134,494 from the terminated pension plan, and Darnall picked up $397,851.

    The pension fund raid failed to shore up the company's shaky finances. Heck's ended 1986 with a loss of $18 million.

    On March 5, 1987, five months after Heck's submitted the pension plan termination to the PBGC, the company filed for protection in U.S. Bankruptcy Court.

    As the year wore on, however, Isaacs expressed continued confidence in the plan to restore Heck's to profitability.

    To that end, in August 1987 he announced the appointment of a new president with a similar-sounding name. He was John R. Isaac Jr., who had worked for several retailers, including Service Merchandise Co. and a subsidiary of Federated Department Stores.

    Russell Isaacs was enthusiastic about the new president: "We believe his extensive retailing background will be instrumental in helping Heck's effect the recovery it has been working so diligently to achieve. I'm just tickled to death with him. "

    John Isaac most recently had been president of Tradevest Inc., a Florida mail-order company that attorneys general in several states had labeled a pyramid scheme.

    Tradevest peddled $789 subscriptions to a mail-order purchase club. Once people joined the club, they could sell subscriptions to others and collect a commission.

    In return for their fee, members were assured they could earn a rebate of 90 percent of what they spent buying products. The rebate would come as an annuity - to be paid 20 years after the purchase.

    Soon after John Isaac left the mail-order business to take over day-to-day operations at Heck's, Tradevest filed for protection under the U. S. Bankruptcy Code.

    But John Isaac was confident about Heck's. A discount-store trade publication quoted him at the time as saying that "the company has been making good progress in redefining its basic core group of stores and in re- evaluating its future direction. I'm very optimistic . . . "

    Once more, the optimism proved unfounded. Heck's ended 1987 with another loss. In fact, the loss of $61 million was almost double the cumulative losses of the preceding three years.

    John Isaac, who recruited new management, including former employees at Tradevest, ended the year by closing eight more stores and dismissing scores of employees.

    By June 1988, John Isaac had a new plan: He would sell off or close an additional 40 stores, fire hundreds more employees. A company news release used all the catch phrases that have become so much a part of corporate jargon to justify eliminating businesses.

    John Isaac said "the restructuring would enable the company to dispose of assets which have not provided an adequate return on investment . . . and which the company believes provide only limited growth potential for the future. "

    It was to no avail. The losses continued to pile up. Heck's stores continued to disappear.

    From a high of 166 stores, the retailer shrank to 55 stores. Employment plummeted from more than 7,000 workers to 1,700.

    By January 1990, the name Heck's had vanished; the remaining stores were renamed the Take 10 Discount Club - as in pay $5 to become a member and take 10 percent off everything.

    Total Heck's losses for 1988 and 1989: $85.5 million.

    In February 1990, the management of Take 10 Discount Club sold the business to a subsidiary of Jordache Enterprises Inc. The sale price: $1 and the assumption of $22 million in debt. The remaining stores scattered across the hills of Appalachia were relabeled L.A. Joe Department Stores. One year later, L.A. Joe was in Bankruptcy Court. The stores have since been closed.

    One statistical footnote to the collapse of a once-successful regional retailer:

    John Isaac, who earned $360,000 a year in the top job at Heck's, and four associates who managed the final dismantling of the company, collected more than $1.5 million in severance pay.

    Patsy Perry did not fare so well.

    Although she subsequently found work in a convenience store, Perry said that she did not make as much as she did at Heck's. What's more, two years went by before she qualified for medical insurance. During that time, her eyesight deteriorated and she had laser surgery on both eyes. She also underwent a hysterectomy.

    As for the medical bills run up during the time she had no health insurance, Perry said:

    "I still owe almost $4,000 to them people which I can't begin to pay. So I don't know what's going to happen. "

    When she was off work for an extended period, she lost her job at the convenience store. She since has found another job working about 30 hours a week for minimum wage, and she has some insurance.

    The job is at a Value City discount store housed in an old Heck's building.

    Donald L. Barlett and James B. Steele INQUIRER STAFF WRITERS
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