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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
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GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
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HOMEPLACE OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 34-1894948
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3200 POTTERY DRIVE
MYRTLE BEACH, SOUTH CAROLINA 29579
(Address of principal executive (Zip Code)
offices)
</TABLE>
Registrant's telephone number, including area code:
(843) 236-4606
COPIES OF COMMUNICATIONS TO:
GARY C. IVEY
PARKER, POE, ADAMS & BERNSTEIN L.L.P.
2500 CHARLOTTE PLAZA
CHARLOTTE, NORTH CAROLINA 28244
(704) 372-9000
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Securities to be registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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None None
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
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TABLE OF CONTENTS
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PAGE
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Item 1. Business.................................................... 1
Item 2. Financial Information....................................... 11
Item 3. Properties.................................................. 19
Item 4. Security Ownership of Certain Beneficial Owners and
Management.................................................. 20
Item 5. Directors and Executive Officers............................ 22
Item 6. Executive Compensation...................................... 25
Item 7. Certain Relationships and Related Transactions.............. 31
Item 8. Legal Proceedings........................................... 31
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters...................... 31
Item 10. Recent Sales of Unregistered Securities..................... 32
Item 11. Description of Registrant's Securities to be Registered..... 32
Item 12. Indemnification of Directors and Officers................... 33
Item 13. Financial Statements and Supplementary Data................. 34
Item 14. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 34
Item 15. Financial Statements and Exhibits........................... 34
Index to Financial Statements........................................... F-1
Signatures
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FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Quantitative and Qualitative Disclosures About Market Risk," "Properties" and
"Legal Proceedings" sections of this Registration Statement, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Words such as "expects," "anticipates," "believes," "intends,"
"plans" and "hopes," variations of such words and similar expressions are
intended to identify such forward-looking statements. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors including, but not limited to, the factors
discussed in such sections and those set forth in the cautionary statements
contained in Exhibit 99.1 to this Form 10 Registration Statement (see Exhibit
99.1 -- Risk Factors). Forward-looking information set forth in such sections
should be evaluated in the context of these factors.
(i)
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ITEM 1. BUSINESS
HISTORY
HomePlace of America, Inc. ("HomePlace") was incorporated in Delaware on
March 10, 1999. It was formed to be, and is, the surviving entity resulting from
the merger (the "Merger") of the businesses formerly operated by HomePlace
Holdings, Inc. ("Holdings") as the parent company of HomePlace Stores, Inc.,
HomePlace Stores Two, Inc. and HomePlace Management, Inc. (the "Holdings
Subsidiaries" and, collectively with Holdings, the "Holdings Group") and
Waccamaw Corporation ("Waccamaw").
We are headquartered in Myrtle Beach, South Carolina and operate 118 stores
in 27 states with annual sales of over $700 million. Our principal executive
offices are located at 3200 Pottery Drive, Myrtle Beach, South Carolina 29579,
and our telephone number is (843) 236-4606.
The following graphic depicts the corporate structure of (i) the Holdings
Group and Waccamaw prior to the Merger and (ii) HomePlace and its subsidiaries
after giving effect to the Merger.
(CHART)
Waccamaw was founded in Myrtle Beach, South Carolina in 1977 as a
superstore for home decor and furnishings, offering a variety of brand name
merchandise in a warehouse atmosphere. It was incorporated as a South Carolina
corporation in 1965. In 1987, Waccamaw became a subsidiary of Georgetown
Industries, Inc. ("GII") and became a separate company again in October 1995, as
part of a corporate restructuring. At that time, GII "spun off" Waccamaw by
transferring its Waccamaw shares to the then sole stockholder of GII in exchange
for the surrender of certain outstanding GII shares then held by such
stockholder. In 1999, Waccamaw was identified as one of Forbes' 500 largest
privately-owned companies. At the time of the Merger, Waccamaw had 44 stores in
11 states with annual sales of approximately $260 million.
The Holdings Group was founded in Cleveland, Ohio in February 1994. The
Holdings Group opened its first store in Dallas, Texas in September 1994,
emphasizing housewares and home textiles. Holdings, a Nevada corporation, was
incorporated in November 1994 as the holding company for the Holdings
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Subsidiaries. As of January 5, 1998, the Holdings Group had grown to 98 stores
in 24 states with annual sales of approximately $440 million.
On January 5, 1998, the Holdings Group filed voluntary petitions for
reorganization relief (the "Chapter 11 Filing") under Chapter 11 of Title 11 of
the United States Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). On April 28, 1999,
the Holdings Group filed a first amended joint plan of reorganization (the "Plan
of Reorganization") with the Bankruptcy Court. On June 4, 1999, the Bankruptcy
Court entered an order under 11 U.S.C. sec. 1129(a) and (b) of the Bankruptcy
Code confirming the Plan of Reorganization and, in accordance therewith,
authorized the Merger. On June 7, 1999, pursuant to the Plan of Reorganization,
Holdings merged with and into HomePlace and the Holdings Subsidiaries became
subsidiaries of HomePlace. The Merger of HomePlace and Waccamaw became effective
June 15, 1999, also pursuant to the Plan of Reorganization and by order of the
Bankruptcy Court, with HomePlace as the surviving entity, and HomePlace emerged
from bankruptcy. The operations of the Holdings Subsidiaries were not affected
by the Merger. At the time of the Merger, the Holdings Group operated 75 stores
with year to date sales of approximately $110 million. See "-- Store Management
and Operations" for additional information.
The following summarizes the material components of the Plan of
Reorganization and the Merger:
- Waccamaw and Holdings were merged with and into HomePlace, a newly formed
corporation established for purposes of effecting the Merger.
- All outstanding shares of Waccamaw common stock were converted to
10,000,000 shares of common stock of HomePlace (the "Common Stock").
- 4,054,054 additional shares of the Common Stock were issued to the former
Waccamaw stockholder at a subscription price of $6.17 per share (of
which, 1,304,054 shares were subsequently sold by such stockholder in a
transaction exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act")).
- All existing common equity interests in Holdings were canceled. Holdings'
common stockholders did not receive any cash, securities or similar
consideration in exchange for the cancellation of their shares.
- 10,695,946 shares of Common Stock and $25 million in cash were paid in
respect of approximately 1,340 unsecured claims (representing
approximately $187 million in claims of unsecured creditors against the
Holdings Group) in full satisfaction of allowed unsecured claims against
the Holdings Group. Holdings Group secured creditors were generally paid
in full in cash or received the full collateral value of their security.
- 250,000 shares of Common Stock and warrants (the "Preferred Warrants") to
purchase an additional 1,250,000 shares of Common Stock were issued to
approximately 380 holders of preferred stock of Holdings in full
satisfaction of their allowed interests in the Holdings Group. The
Preferred Warrants entitle the holders to purchase Common Stock at an
exercise price of $14.00 per share and are exercisable from June 15, 1999
until June 15, 2004.
- Warrants ("Waccamaw Warrants") to purchase an additional 600,000 shares
of Common Stock were issued to the former Waccamaw stockholder. The
Waccamaw Warrants entitle the holder to purchase Common Stock at an
exercise price of $12.00 per share and are exercisable from June 15, 1999
until January 15, 2001.
- The then existing Waccamaw management team assumed the management of
HomePlace.
For a further description of HomePlace's Common Stock and warrants to
purchase Common Stock, see "Description of Registrant's Securities to be
Registered."
Liabilities assumed or recorded as a result of the Merger were $121.6
million, consisting of $50.0 million of accounts payable and accrued expenses,
$62.8 million of long-term debt and $8.8 million of other liabilities.
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In order to integrate the operations, merchandising strategies, systems and
personnel of the separate companies, and choose the best methods, products,
systems and personnel for the combined operations following the Merger, we
undertook the following steps: (i) reviewed store locations for any redundancies
in sales markets; (ii) reviewed merchandise assortments to find the best items
to be included in our product assortment; (iii) developed a new standardized
merchandise layout, including improved visual presentations for stores and
reformatted stores; (iv) developed marketing programs to inform customers of
these changes; and (v) developed standardized procedures for training new and
existing personnel. For information concerning certain store closings following
the Merger, see "-- Store Management and Operations."
Today, we believe we are the fourth largest home furnishings and
accessories specialty retailer in the United States based on sales revenue with
118 free-standing, enclosed mall and strip center units in 27 states, with a
concentration in Florida, Georgia, North Carolina, Ohio and South Carolina. For
a schedule of the number of HomePlace stores located in each state, see
"Properties."
All of the original Waccamaw stores and 17 original HomePlace stores
located in former Waccamaw markets now operate under the banner "Waccamaw's
HomePlace," with the exception of the Myrtle Beach and Spartanburg, South
Carolina locations that use the "Waccamaw Pottery" and "Waccamaw Linen" names.
All other HomePlace stores operate under the name "HomePlace."
BUSINESS STRATEGIES
Our goal is to become the leading home decor retailer in each market we
serve. The key elements of our business strategy are as follows:
Selection. We offer a broad assortment of department store brand home
items, including Calphalon, Mikasa, Noritake, Pfaltzgraff, Croscill, Laura
Ashley, Springs, Fieldcrest, Martex, Cuisinart, Braun, Krups, T-Fal, Anolon and
Circulon. Our stores feature over 30,000 stock keeping units ("SKU's") in 20
major product categories. Within each category, selection and assortment are
significant with a range of high quality merchandise designed to appeal to an
array of customer needs. Fashion colors and trends are emphasized by the many
vignettes located throughout our stores, providing customers with both the ideas
and the products needed for quality, attractive home design.
Value Pricing. Everyday low prices signify everyday values for our
customers. We consistently offer a complete selection of housewares and home
decor items below the department stores' suggested retail prices. Customers can
always find their favorite high quality, name brand products at significant
savings at HomePlace stores. In addition to everyday values and savings, our
stores regularly feature both specific sales and special theme sales featuring
important special pricing on linens, decorative accessories, furniture, floral
items, housewares and other major product categories. Our staff routinely shops
the marketplace to assure that our prices remain below or comparable to those of
our competitors. We support our pricing strategy with a "low price" guarantee.
Efficient Customer Service. To enhance customer satisfaction and loyalty,
we strive to provide prompt, knowledgeable sales assistance and enthusiastic
customer service. We emphasize competitive wages, training and personnel
development in order to attract and retain well-qualified, highly motivated
employees who are committed to providing efficient customer service. In
addition, our return policy permits customers to return merchandise at any time,
for any reason, and receive a refund or store credit.
Visual Presentation. We believe that visual presentation is an important
part of customer satisfaction. Various products are brought together in
vignettes that enable the customer to visualize a completely coordinated
ensemble. A visual merchandiser is assigned to each of our stores to coordinate
vignettes and feature presentations.
Expansion. Our expansion strategy is to increase market share in existing
markets and to penetrate new markets in which our management believes we can
become a leading operator of home furnishing stores. In 2000, we plan to open
seven new stores, three of which have already opened. We plan to open 15
additional stores in 2001.
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STORE DESIGN AND MERCHANDISING
Our merchandising focus is consistently to provide department store and
specialty store brand name merchandise at the best possible value with an
emphasis on quality and selection.
As a part of the process of integrating the Holdings Group and Waccamaw, in
July 1999 our management team began reformatting each store with a new store
concept. This project is now complete. The new HomePlace superstore format has a
"racetrack" aisle layout that guides shoppers in a giant circle throughout the
store. Merchandising by category dominates each store. Florals, seasonal items
and wall decor/photo frames are the focus at the front of our stores, followed
by housewares, lamps, furniture and home textiles. Impact items are merchandised
on end caps adjacent to the main circular aisle. Seasonal merchandise is
featured at the front of every store to create variety and excitement and to
capitalize on key selling seasons, including summer, back-to-school and holiday
events.
Our extensive merchandise offering of over 30,000 SKU's in 20 major product
categories enables our customers to select from a wide assortment of styles,
brands, colors and designs within each of our major product lines.
We have three major merchandise categories: home decor, housewares and
textiles. This balanced merchandise mix allows us to capitalize on consumer
demand for one-stop shopping. Each merchandise category is headed by a seasoned
merchandise manager.
Merchandise and sample brands in each category are highlighted below:
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CATEGORY ITEMS SOLD SAMPLE BRANDS
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Home Decor.................. Candles, Wicker, Dinnerware, Glassware, Mikasa, Noritake, Pfaltzgraff, Libby,
Flatware, Silk Flowers, Photo Frames, Crystal Clear, Tree Factory, Colonial
Wall Decor, Lamps, Furniture, Garden Candle and Burnes of Boston
Accessories and Potpourri
Housewares.................. Bakeware, Cookware, Kitchen Gadgets, Braun, Krups, Anolon, Circulon,
Small Electrical Appliances, Lamps, Farberware, Black & Decker, KitchenAid,
Furniture and Cutlery Calphalon and T-Fal
Textiles.................... Towels, Shower Curtains, Bath Rugs, Wamsutta, Laura Ashley, Croscill,
Sheets, Comforters, Bed Pillows, Fieldcrest, Waverly, Springmaid,
Blankets, Mattress Pads, Curtains, Martex, Royal Velvet, Beautyrest, Park
Valances and Window Hardware Smith and Pillowtex
</TABLE>
For the fiscal year ended February 26, 2000, the home decor category
accounted for 36% of our sales, the housewares category accounted for 27% and
the textiles category accounted for 36%.
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The table below presents the relative percentage of net sales for each of
our major product categories (within each major merchandise category) for the
last three fiscal years:
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RELATIVE PERCENTAGES FOR THE FISCAL YEAR ENDED
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MAJOR PRODUCT CATEGORY FEBRUARY 26, 2000 FEBRUARY 27, 1999 FEBRUARY 28, 1998
---------------------- ----------------- ----------------- -----------------
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Home Decor
Pictures/Frames................................ 7.4% 8.6% 8.3%
Dinnerware/Flatware............................ 5.9 6.5 7.4
Flowers & Wicker Baskets....................... 5.4 9.1 10.0
Candles/Scents................................. 4.0 4.4 3.9
Glassware...................................... 3.8 5.4 5.5
Decorative & Garden Accessories................ 3.7 5.8 6.0
Seasonal....................................... 3.2 3.7 3.8
Lamps.......................................... 2.4 2.4 2.4
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35.8 45.9 47.3
Housewares
Cookware/Gift Housewares....................... 9.1 7.3 7.6
Small Appliances............................... 7.4 4.8 4.1
Furniture...................................... 6.6 7.7 6.2
Storage & Organization......................... 3.5 3.0 3.4
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26.6 22.8 21.3
Textiles
Fashion/Seasonal Bedding....................... 11.1 9.8 9.7
Towels/Rugs/Bath Shop.......................... 10.3 6.2 5.8
Table Linens................................... 3.4 2.5 2.8
Area Rugs...................................... 3.3 3.4 3.0
Window Decor................................... 3.2 2.0 2.3
Basic Bedding.................................. 2.7 2.5 2.5
Decorative Pillows............................. 1.4 1.5 0.8
Cards/Wraps.................................... 0.6 0.7 1.3
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36.0 28.6 28.2
Other............................................ 1.6 2.7 3.2
Total.................................. 100.0% 100.0% 100.0%
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Our emphasis on cross merchandising and fully coordinated ensembles
provides us with a great opportunity to encourage add-on sales.
PRICING
We guarantee low prices, every day. If a customer finds that a local
competitor is underselling us on the same item, we will match the competitor's
price. We consistently offer items at or below department store sale prices, and
regularly feature product specific sales and theme sales at substantially lower
prices than our competitors. Our price points are intentionally broad to provide
customers with a wide variety of price ranges.
MARKETING
Our independent marketing research results show that our target customers
are females, ages 25 to 55, who are married with two to three children, have
some college education and a combined household income from $45,000 to $80,000
annually.
To reach our target market, we build upon our brand name awareness and
loyalty through an aggressive media campaign anchored around a newspaper insert
program (appearing either weekly or every other week depending on the market),
radio promotions and outdoor billboard displays in each store's trade area. Our
full-
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color, pre-printed newspaper inserts are designed to showcase our merchandise
mix, everyday pricing philosophy and aggressive promotional strategy.
Our newspaper inserts are produced by our in-house advertising department,
which includes writers, designers and production and photography personnel. This
full-service department ensures that in-store signage and promotions, as well as
printed inserts, are coordinated. It also focuses on point of purchase displays.
Our creative personnel have redesigned almost all promotional materials and have
reviewed all product displays, pricing and locator signs throughout the stores
to ensure that our signage is consistent, sales promotions are easy to
understand and customers have a convenient shopping experience.
We work with vendors to incorporate vendor-supplied brochures, fixtures and
signage into our displays. The new HomePlace stores feature hanging department
aisle markers along the "racetrack" aisles that can be hung with interchangeable
vendor or category names. We also utilize product packaging as a marketing tool
to reinforce brand names by displaying merchandise up to the store ceiling.
Our nationwide Gift & Bridal Registry service is available for weddings,
anniversaries, birthdays, housewarmings, graduations, holidays and other special
occasions. Each registry is updated every 10 minutes to prevent unwanted
duplication of gifts. A customer may access the registry in each of our stores
or on our website located at "www.homeplace.com" to find the perfect gift. This
service includes free gift wrapping, enclosure cards and reduced shipping fees.
The program not only provides a convenience for customers, it provides us with
valuable information on customer segments and their needs.
To promote frequent shopping visits, to encourage customer loyalty and to
provide additional information on customers and their needs, we are developing a
preferred shopper program called "Club Decor." Currently available in 23
locations in selected markets with membership in excess of 88,000 customers, the
"Club Decor" program offers repeat customers the opportunity to receive annual
rebates of $5 for every $100 in purchases during the year.
PURCHASING
We maintain our own central buying staff, comprised of three merchandise
managers and 15 full-time buyers. The buying team is responsible for selection
and development of assortments, selection of promotional items and negotiation
of prices and terms. We also maintain a replenishment team, which is responsible
for the allocation of product by SKU and store and for stock replenishment. We
consider local market conditions such as climate and demographics when selecting
the merchandise mix for our different markets.
We purchase from over 2,500 vendors annually. No supplier represents over
5% of our total purchases. We believe that any of our suppliers could be
replaced with other suppliers with minimal impact on our financial results. As a
large volume purchaser, we believe we receive favorable terms on pricing, terms
of purchase, delivery and merchandise access. Additionally, we have established
programs with certain vendors that allow merchandise to be shipped floor ready
and pre-ticketed with our price labels, increasing overall operating efficiency.
Over 450 of our vendors are linked to our electronic data interchange
("EDI"), which communicates orders electronically to suppliers. These vendors
represented approximately 60% of our purchases for the fiscal year ended
February 26, 2000. Our management believes that EDI, in combination with timely
vendor response, improves in-stock performance and increases inventory turns.
Many vendors, such as Pillowtex, Fieldcrest and Croscill, stopped shipping
to the Holdings Group after its Chapter 11 Filing on January 5, 1998. Since the
Merger and our emergence from bankruptcy on June 15, 1999, every major supplier
has returned to doing business with us.
WAREHOUSING AND DISTRIBUTION
At year-end, we operated a 330,000 square foot leased distribution center
in Myrtle Beach, South Carolina. At that time, approximately 35% of our total
inventory was received through this distribution center,
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servicing the former Waccamaw stores. The balance of our merchandise was shipped
directly to individual stores.
Utilization of a centralized distribution center provides for lower freight
expense, more timely control of inventory shipment to stores, improved inventory
turnover, better in-stock positions and improved information flow. In addition,
centralized receiving at a distribution center allows our sales associates to
direct their focus to the sales floor, thereby increasing the level of customer
service. We believe that strong distribution support for our stores is a
critical element to our growth strategy and is central to our ability to
maintain a low cost operating structure.
In order to achieve these efficiencies and accommodate future growth, we
opened two new distribution centers in June 2000. These centers have, combined,
approximately 420,000 square feet and are located in the Columbus, Ohio and
Atlanta, Georgia metropolitan areas. Once they are fully operational, we expect
that at least 85% of our merchandise purchases will be handled through our
distribution facilities with the balance shipped directly to the stores. These
facilities and the bulk of the material handling equipment at the facilities
were obtained through leases. The leases on the facilities are each for 20-year
initial terms with three and four, five-year renewal options, respectively. The
facilities leases require us to make annual minimum lease payments of
approximately $0.9 million and $0.8 million, respectively, with increases
beginning in the sixth and fourth years, respectively. The leases on the
material handling equipment are for three-year initial terms at each of the
facilities, with one six-month renewal option. At the end of the lease, we have
the option, in each case, to purchase the equipment at the then fair market
value. Annual minimum lease payments under these equipment leases are
approximately $1.2 million at each facility. The cost to open each center was
approximately $1.0 million, consisting primarily of capital expenditures for
storage racks, fixtures and equipment not covered under the leases.
Each center has the capacity to serve 75 stores and expansion capabilities.
The new distribution centers will allow centralized inventory control within
their geographic regions, which will reduce freight costs and the time each
store must allocate for receiving product shipments. They will reduce overstock
and keep high demand items in stock. They will also eliminate the majority of
product drop shipments to HomePlace stores. We expect these distribution centers
to reduce overall freight costs in the second half of 2000.
The current distribution center in Myrtle Beach will be converted to our
"import center" and new store staging area. As an "import center," the Myrtle
Beach distribution center will be the initial point of receipt for imported
merchandise for distribution to the other distribution centers or to the stores.
It will also be used to receive and package the initial inventory purchased to
facilitate new store openings. The lease of the Myrtle Beach distribution center
expires in July 2002, but has a ten-year renewal option. We are currently
evaluating this distribution center and determining its place in our long-term
strategy.
STORE MANAGEMENT AND OPERATIONS
The table below reflects total revenue of the Holdings Group for the fiscal
periods presented and certain additional information relating to the Holdings
Group stores at each period-end:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------
YEAR TO DATE FEBRUARY 27, FEBRUARY 28, MARCH 1, FEBRUARY 24, FEBRUARY 25,
DOLLARS IN MILLIONS 6/15/99 1999 1998 1997 1996 1995
------------------- ------------ ------------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenue..................... $109.7 $430.0 $443.9 $269.9 $87.6 $6.6
Stores at beginning of period..... 75 88 61 30 5 0
Stores opened..................... 0 0 37 31 25 5
Stores closed..................... 0 13 10 0 0 0
Transferred to HomePlace pursuant
to Merger....................... 75 0 0 0 0 0
------ ------ ------ ------ ----- ----
Stores at end of period........... 0 75 88 61 30 5
====== ====== ====== ====== ===== ====
</TABLE>
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The table below sets forth certain information relating to HomePlace stores
during each of the last five years and for the year to date as of August 11,
2000:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------
YEAR TO DATE FEBRUARY 26, FEBRUARY 27, FEBRUARY 28, MARCH 1, FEBRUARY 27,
AUGUST 11, 2000 2000 1999(1) 1998(1) 1997(1) 1996(1)
--------------- ------------ ------------ ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stores at beginning of period... 115 44(1) 42 42 36 30
Stores opened................... 3 1(1) 2 1 6 7
Stores closed................... -- 5(2) -- 1 -- 1
Transferred from Holdings Group
pursuant to Merger............ 0 75 0 0 0 0
--- --- -- -- -- --
Stores at end of period......... 118 115 44 42 42 36
=== === == == == ==
</TABLE>
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(1) Reflects Waccamaw stores prior to June 15, 1999.
(2) Consists of three Waccamaw stores and two stores acquired pursuant to the
Merger and subsequently closed.
Net sales for the fiscal year ended February 26, 2000 averaged
approximately $5.9 million per store open the entire year.
Our store operations are led by our Senior Vice President of Stores and 10
regional managers. Each regional manager is responsible for 10 to 12 stores.
Store management is comprised of a store manager, an operations manager and one
to three area managers (depending on sales volume).
We place a strong emphasis on our people and their development and
opportunity for advancement, particularly at the store level. We utilize several
methods of training for our employees, including on-the-job training, workbooks,
policy and procedure manuals, trainers and videos. We believe our policy of
promoting from within, as well as the opportunities for advancement generated by
our ongoing store expansion program, serve as incentives to attract and retain
quality individuals and result in lower turnover.
We employ a "Best Practices" philosophy to encourage employees to provide
the best customer service. Experienced employees conduct "best practices"
training in an effort to have employees learn from their peers and to create a
cohesive work force. Our STAR (Smile, Talk, Assist and Relate) program rewards
employees for outstanding customer service.
We pay our store managers a base salary plus performance bonuses, which are
based on an evaluation of performance results, including sales, shrinkage, store
operating profit and customer service ratings.
Our stores are generally open from 10 a.m. to 9 p.m. Monday through
Saturday and from 11 a.m. to 6 p.m. on Sunday, unless affected by local laws.
REAL ESTATE AND EXPANSION
We lease our corporate offices (approximately 31,000 square feet) in Myrtle
Beach, South Carolina. We currently lease all of our existing store facilities
and expect that our policy of leasing rather than owning will continue as we
expand. Our original lease terms generally range from 10 to 20 years. Most of
our leases provide renewal options that range from 5 to 20 years at increased
rents. Some provide for scheduled rent increases (which, in the case of fixed
increases, we account for on a straight line basis over the non-cancelable lease
term) and some provide for contingent rent (based upon stores sales exceeding
stipulated amounts).
In March 2000, we opened a new 45,000 square foot prototype store in
Richmond, Virginia that incorporates the best of both the former Holdings Group
and Waccamaw stores. Following this model, we also opened stores in Mobile,
Alabama and St. Petersburg, Florida in June and August, respectively. We plan to
open four other new HomePlace stores in 2000 with an emphasis on the
southeastern United States. Locations for the other new stores for 2000 are
expected to consist of Memphis, Tennessee; Southhaven, Mississippi;
Fayetteville, North Carolina; and Greenville, South Carolina. We plan to open 15
additional new stores in 2001.
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As indicated above, we opened two new distribution centers in June 2000, in
the Atlanta, Georgia and Columbus, Ohio metropolitan areas. For information
concerning these centers and our leases on the facilities and equipment at these
centers, see "-- Warehousing and Distribution."
Our primary locations include the southeastern, midwestern, mid-Atlantic
and western United States, as indicated below:
(MAP OF U.S. WITH STORES)
We select new store locations on the basis of demographic factors, such as
income, population, number of households, home values, education and percentage
of married persons. We target demographic areas with (i) at least 20,000
households within a three mile radius, (ii) a median household income of $40,000
and above, (iii) a high percentage of married females, ages 25 to 55 and (iv) a
daytime population of at least 20,000. Our stores are located predominantly in
power strip centers and, to a lesser extent, in malls and stand-alone locations.
Based upon our prior experience, we estimate that the required capital to
open a new store is $2.6 million. This amount includes $1.3 million of inventory
and $1.0 million for leasehold improvements and fixtures. Pre-opening expenses
of $0.3 million are expensed as incurred. We believe our current management
infrastructure and management information systems, together with our
distribution centers, are capable of supporting planned expansion.
In the fiscal year ended February 26, 2000, we closed five stores as a
result of the Merger to address market overlap issues, under-performing stores
and lease expirations. We are currently reviewing stores in other markets with
overlap issues for potential closings.
For additional information concerning our real estate and current store and
distribution locations, see "Properties" below.
INFORMATION TECHNOLOGY
We experienced no significant impact from the Year 2000 computer issue,
either from our own operations or our suppliers, and we anticipate no future
problems.
We are in the final stages of a two-year implementation of SAP R/3
software. The SAP R/3 software is an enterprise resource planning system that
offers fully integrated functions across most significant business areas. The
financial and human resources modules were implemented by Waccamaw in November
9
<PAGE> 12
1998 and the payroll module followed in March 1999. We will use the purchasing,
inventory management and warehouse management modules of SAP in connection with
forecasting software from the Sterling Douglas Group to handle all of our
purchasing and inventory management functions. The total cost for our technology
conversion was approximately $8 million. It is now fully operational.
We utilize point-of-sale ("POS") terminals with price look-up capabilities
for both inventory and sales transactions on a SKU basis. Waccamaw has tracked
inventory and sales by SKU by store since 1987 and has had automated inventory
replenishment based on specific requirements in each store and rate of sales by
SKU by store since 1990.
We have adopted industry standards related to EDI coding. Implementation of
these standards allows more effective management of the supply chain and
improves data integrity. We will continue to invest in these standards and to
partner with our vendors in these technologies.
Our website is located at "www.homeplace.com." It features information
about store locations, return policies, answers to frequently asked questions
and the Waccamaw Home Superstore located in Myrtle Beach, South Carolina. It
also features our Gift & Bridal Registry, which may be viewed on-line. We are
currently evaluating the feasibility of allowing customers to order our products
over the internet. At this time, no timetable has been established for
implementation.
COMPETITION
The retail industry in general, and the home-fashion superstore business in
particular, are intensely competitive. Home furnishings and housewares are sold
through a variety of retail distribution channels, including traditional
department stores, specialty stores, discount stores, home improvement
retailers, warehouse clubs, catalogs and off-price retailers.
We believe we are the fourth largest furnishings and accessories specialty
retailer based on sales revenue. However, we compete with many different types
of retail stores that sell many or most of the products sold by HomePlace
stores. Such competitors include: department stores; specialty stores and other
superstores selling product lines that are the same as or similar to ours;
national chains and mass merchandise stores; and catalog retailers. Our
management believes that although we will continue to face competition from
retailers in each of these categories, our most significant competition is from
the large format specialty stores. The visibility of our stores may encourage
additional competitors or may encourage existing competitors to imitate our
format and methods. Some of our competitors have greater sales, assets and
financial resources than we do.
Our management believes that the ability to compete successfully in our
markets is determined by several factors, including price, breadth and quality
of product selection, in-stock availability of merchandise, effective
merchandise presentation, marketing and customer service. We believe that we are
well-positioned to compete on the basis of these factors. Nonetheless, we can
make no assurances that we will be able to compete successfully in our markets
or that any or all of the factors that currently enable us to compete favorably
will not be adopted by companies having greater financial and other resources.
TRADEMARKS
We use the "HomePlace -- America's Home Decor Superstore" name as a trade
name and as a service mark in connection with retail services. We have an
application pending with the United States Patent and Trademark Office for this
mark. We believe that the name HomePlace is an important element of our
business. We also have a service mark for "Waccamaw Your Home Superstore" and
other names that were used by Waccamaw prior to the Merger.
SEASONALITY
Our business is seasonal in nature with a high proportion of sales and
operating income generated in the third and fourth quarters. Sales during the
third and fourth quarters account for approximately 25% and 30% of our annual
sales volume, respectively.
10
<PAGE> 13
EMPLOYEES
As of August 11, 2000, we employed approximately 5,600 persons, of whom
2,600 were full-time employees and 3,000 were part-time employees. No employees
are covered under collective bargaining agreements. All employees receive
discounts on purchases. We contribute to the cost of medical and disability
coverage for those who are eligible to participate in HomePlace-sponsored plans.
We also provide a 401(k) profit sharing program. We believe that our
relationship with our employees is good.
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following table presents selected historical financial data for
HomePlace and its subsidiaries for the years ended February 26, 2000, February
27, 1999, February 28, 1998, March 1, 1997 and February 27, 1996.
Our year-end for financial reporting purposes is the Saturday closest to
the last day of the month of February each year. The fiscal years ended February
26, 2000, February 27, 1999, February 28, 1998, March 1, 1997 and February 27,
1996 contained 364, 364, 364, 368 and 371 days, respectively. They are referred
to hereafter as fiscal 1999, fiscal 1998, fiscal 1997, fiscal 1996 and fiscal
1995, respectively.
For financial reporting purposes, the Merger has been treated as an
acquisition of Holdings and the Holdings Subsidiaries by Waccamaw and has been
accounted for under the purchase method of accounting. The accompanying selected
historical financial data reflects the historical financial position and results
of operations of Waccamaw combined with the effects of the acquisition of
Holdings and the Holdings Subsidiaries, which occurred on June 15, 1999.
Accordingly, the results of operations for fiscal 1999 and the thirteen weeks
ended May 27, 2000, are not comparable to prior years.
The selected historical financial data should be read in conjunction with
the financial statements and the related notes and other information contained
elsewhere in this Registration Statement, including information set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FIVE-YEAR FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
THIRTEEN WEEKS ENDED ----------------------------------------------------------------------
----------------------- MARCH 1, FEBRUARY
MAY 27, MAY 29, FEBRUARY 26, FEBRUARY 27, FEBRUARY 28, 1997 27,
2000 1999 2000(1) 1999(1) 1998(1) (1)(2)(3) 1996(1)(2)
---------- ---------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................... $ 155,477 $ 59,351 $ 576,941 $ 242,701 $ 228,307 $ 209,874 $ 185,835
Operating income (loss)........ (4,647) (907) (10,462)(4) 965 (4,044) (9,798) (997)
Net income (loss).............. (8,483) (1,423) (21,126)(4) 850 (4,533) (56,425) (1,907)
Net income (loss) per share.... (0.34) (0.14) (1.03) 0.09 (0.45) (5.64) (0.19)
Weighted average shares
outstanding (5).............. 25,000,000 10,000,000 20,549,451 10,000,000 10,000,000 10,000,000 10,000,000
BALANCE SHEET DATA:
Total assets................... $ 438,711 $ 118,925 $ 414,136 $ 115,894 $ 107,514 $ 100,675 $ 144,772
Working capital................ 147,361 25,137 138,944 50,388 49,108 47,587 51,970
Total long-term debt........... 147,795 59,955 130,696 20,168 15,393 12,632 --
Stockholders' equity........... 189,425 59,955 197,908 61,378 60,528 65,060 123,198
SELECTED OPERATING DATA:
Number of stores open at period
end.......................... 116 45 115 44 42 42 36
Square footage of open
stores....................... 6,642,767 2,994,499 6,597,044 2,935,854 2,837,224 2,828,175 2,508,191
Increase/(decrease) in
comparable store net sales
(6).......................... 5.5% 7.1% 5.3% 5.3% 3.3% (10.3)% (3.9)%
</TABLE>
---------------
(1) We employ a standard 5-4-4, 52-week retail fiscal calendar with the year
normally consisting of 364 days. Periodically, this results in an extra week
being added to a given fiscal year. As a result, fiscal 1995 consists of 371
days.
11
<PAGE> 14
(2) During fiscal 1996, we changed our fiscal period end from Tuesday to
Saturday. This created, without duplication, a four-day "stub" period that
was incorporated into fiscal 1996.
(3) In fiscal 1996, we recognized a one-time charge of $45,348 for the write-off
of a pre-existing acquisition premium.
(4) Includes charges of $14,043 in clearance markdowns and $10,116 in business
integration expenses due to the Merger.
(5) Weighted average shares outstanding reflects for all periods the conversion
of Waccamaw shares pursuant to the Merger. See "Business -- History."
(6) Comparable stores are those stores that have been open one full fiscal year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Due to the Merger, effected on June 15, 1999, we have viewed the fiscal
year ended February 26, 2000 as a transitional year. As a result of the Merger,
we became the fourth largest home furnishings and accessories specialty retailer
in the United States based on 1998 sales revenue of the combined Waccamaw and
HomePlace Holdings operations. In order to integrate the operations,
merchandising strategies, systems and personnel of the separate companies, and
choose the best methods, products, systems and personnel for the combined
operations following the Merger, we have undertaken the following steps: (i)
reviewed store locations for any redundancies in sales markets; (ii) reviewed
merchandise assortments to find the best items to be included in the go-forward
assortment; (iii) developed a new standardized merchandise layout, including
improved visual presentations for stores and reformatted stores; (iv) developed
marketing programs to inform customers of these changes; and (v) developed
standardized procedures for training new and existing personnel. These steps
have resulted in higher than normal expenses.
Fiscal 2000 Plans
During the upcoming year, we plan to finalize the Merger integration
efforts that began in fiscal 1999. In addition, we will seek to implement the
following strategic initiatives: (i) grow our sales volume through increased
market share in existing markets and penetrate new markets through the opening
of seven new stores in fiscal 2000 (three of which were open as of August 11,
2000); (ii) refine our merchandise assortment to provide customers with everyday
low pricing, while continuing aggressive promotions; (iii) increase our vendor
participation in advertising and promotions; (iv) continue the integration of
our two new distribution facilities that were opened in June 2000; and (v)
finish implementing our SAP computer software, including the training of all
personnel.
For information concerning our anticipated sources of funds and commitments
for capital expenditures in connection with these strategic initiatives, see
"-- Capital Resources" below.
12
<PAGE> 15
Results of Operations
The Thirteen Weeks Ended May 27, 2000 Compared With Thirteen Weeks Ended
May 29, 1999.
The following table reflects the unaudited results of operations for
HomePlace and its subsidiaries for the thirteen weeks ended May 27, 2000 and May
29, 1999. The Merger has been treated as an acquisition of Holdings and the
Holdings Subsidiaries by Waccamaw and has been accounted for under the purchase
method of accounting. The accompanying selected financial data reflects the
historical results of operations of Waccamaw, combined with the effects of the
acquisition of Holdings and the Holdings Subsidiaries, which occurred on June
15, 1999. Accordingly, the results of operations for the thirteen weeks ended
May 27, 2000 are not comparable to the same period for the prior year.
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED
-----------------------------
MAY 27, 2000 MAY 29, 1999
------------- -------------
(DOLLARS IN MILLIONS, WITH
PERCENT OF SALES)
<S> <C> <C>
Net sales................................................... $155.5 $59.4
Cost of sales............................................... 96.9 37.1
------ -----
Gross Profit................................................ 58.6 22.3
Percent of net sales...................................... 37.7% 37.5%
Store SG&A.................................................. 54.6 19.1
Percent of net sales...................................... 35.1% 32.1%
------ -----
Store contribution.......................................... 4.0 3.2
Non-store SG&A.............................................. 6.5 4.1
Goodwill amortization....................................... 0.7 --
Business integration expenses............................... 1.5 --
------ -----
Loss from operations........................................ (4.7) (0.9)
Interest expense............................................ (3.8) (0.5)
------ -----
Income (loss) before taxes.................................. (8.5) (1.4)
Provision for income taxes.................................. -- --
------ -----
Net Loss.................................................... $ (8.5) $(1.4)
====== =====
</TABLE>
Net sales for the thirteen weeks ended May 27, 2000 were $155.5 million
compared to $59.4 million for the thirteen weeks ended May 29, 1999. The
increase is primarily attributable to the additional sales of 73 Holdings Groups
stores (net of those subsequently closed) acquired on June 15, 1999, in
connection with the Merger, a new store opened in the Richmond, Virginia area in
March 2000, and a comparable store (those stores open one full fiscal year)
sales increase of 5.5% (inclusive of HomePlace Group stores).
Gross profit for the thirteen weeks ended May 27, 2000 was $58.6 million,
or 37.7% of net sales, compared to $22.3 million, or 37.5% of net sales, for the
same period last year. The improvement in gross profit, as a percentage of
sales, is due primarily to a lower markdown rate and a better mix of higher
margin merchandise.
Store selling, general, and administrative expenses ("SG&A") for the
thirteen weeks ended May 27, 2000 were $54.6 million, or 35.1% of net sales,
compared to $19.1 million, or 32.1% of net sales, for the same period last year.
The increase is primarily attributable to the additional expenses of the 73
Holdings Group stores (net of those subsequently closed) acquired pursuant to
the Merger. The increase in store SG&A, as a percentage of net sales, is due
primarily to the higher payroll and occupancy costs of the Holdings Group
stores, relative to net sales.
Non-store SG&A for the thirteen weeks ended May 27, 2000 were $6.5 million,
or 4.2% of net sales, compared to $4.1 million, or 7.0% of net sales, for the
same period last year. This increase is due primarily to increases in staff and
equipment required by the Merger and costs associated with opening two central
distribution facilities. The decrease, as a percentage of net sales, in
non-store SG&A reflects leveraging of our overhead costs over an increased sales
base.
13
<PAGE> 16
Amortization of goodwill (the excess of cost over fair value of the assets
and liabilities acquired pursuant to the Merger) for the thirteen weeks ended
May 27, 2000 amounted to $0.7 million, or 0.5% of net sales. Goodwill resulting
from the Merger is being amortized over 40 years.
We also have incurred charges of $1.5 million, or 0.9% of net sales, for
certain business integration expenses relating to the Merger to integrate the
operations of Waccamaw and the Holdings Group. These costs consisted of $1.0
million to reformat existing Waccamaw and Holdings Group stores and $0.5 million
in other costs such as promoting the "grand re-opening" of the stores and
incremental costs incurred to operate a dual replenishment system.
Operating loss prior to business integration expense and amortization of
goodwill for the thirteen weeks ended May 27, 2000 was $2.5 million, or (1.6%)
of net sales, compared to $0.9 million, or (1.6%) of net sales, for the same
period last year due to the factors noted above. Operating loss after business
integration expenses and amortization of goodwill for the thirteen weeks ended
May 27, 2000 was $4.7 million, or (3.0%) of net sales.
Interest expense for the thirteen weeks ended May 27, 2000 was $3.8
million, or 2.5% of net sales, compared with $0.5 million, or 0.8% of net sales,
for the same period last year. This increase is due to borrowings under the
Revolving Credit Facility and Term Note (each as defined below) in connection
with and following the Merger.
Net loss for the thirteen weeks ended May 27, 2000 was $8.5 million, or
(5.5%) of net sales, versus a net loss of $1.4 million, or (2.4%), for the same
period last year, due to the factors noted above.
Fiscal Year Ended February 26, 2000 Compared With Fiscal Year Ended
February 27, 1999.
The following table sets forth the results of operations for HomePlace and
its subsidiaries for fiscal years 1999, 1998 and 1997. The Merger has been
treated as an acquisition of Holdings and the Holdings Subsidiaries by Waccamaw
and has been accounted for under the purchase method of accounting. The
accompanying selected historical financial data reflects the historical results
of operations of Waccamaw, combined with the effects of the acquisition of
Holdings and the Holdings Subsidiaries, which occurred on June 15, 1999.
Accordingly, the results of operations for fiscal 1999 are not comparable to
prior years. Fiscal 1999 results of operations are shown in three columns
representing (i) the former Waccamaw stores' activity
14
<PAGE> 17
for the entire fiscal year; (ii) the Holdings Group stores' activity for the
post-Merger period (June 16, 1999 through February 26, 2000); and (iii)
Merger-related expense items.
<TABLE>
<CAPTION>
FISCAL 1999
--------------------------------------
MERGER HOLDINGS FISCAL FISCAL
TOTAL RELATED GROUP WACCAMAW 1998 1997
------ ------- -------- -------- ------ ------
(DOLLARS IN MILLIONS, WITH PERCENT OF NET SALES)
<S> <C> <C> <C> <C> <C> <C>
Net sales................................... $576.9 -- $316.1 $260.8 $242.7 $228.3
Cost of sales before clearance markdowns.... 358.7 -- 199.0 159.7 155.1 147.5
------ ------ ------ ------ ------ ------
Gross profit before clearance markdowns..... 218.2 -- 117.1 101.1 87.6 80.8
Percent of net sales...................... 37.8% -- 37.0% 38.8% 36.1% 35.4%
Clearance markdowns......................... 14.0 14.0 -- -- -- --
------ ------ ------ ------ ------ ------
Gross profit................................ 204.2 (14.0) 117.1 101.1 87.6 80.8
Percent of net sales...................... 35.4% -- 37.0% 38.8% 36.1% 35.4%
Store SG&A.................................. 178.6 -- 101.1 77.5 70.9 70.1
Percent of net sales...................... 31.0% -- 32.0% 29.7% 29.2% 30.7%
------ ------ ------ ------ ------ ------
Store contribution.......................... 25.6 (14.0) 16.0 23.6 16.7 10.7
Non-store SG&A.............................. 23.9 -- 6.2 17.7 15.7 14.7
Goodwill amortization....................... 2.0 2.0 -- -- -- --
Business integration expenses............... 10.1 10.1 -- -- -- --
------ ------ ------ ------ ------ ------
Income (loss) from operations............... (10.4) (26.1) 9.8 5.9 1.0 (4.0)
Interest expense............................ (9.8) (1.8) (6.0) (2.0) (1.9) (1.6)
Other non-operating (expenses) income....... (0.8) -- -- (0.8) (0.2) 0.1
------ ------ ------ ------ ------ ------
Income (loss) before taxes.................. (21.0) (27.9) 3.8 3.1 (1.1) (5.5)
Provision for (benefit from) income taxes... 0.1 -- -- 0.1 (2.0) (1.0)
------ ------ ------ ------ ------ ------
Net income (loss)........................... $(21.1) $(27.9) $ 3.8 $ 3.0 $ 0.9 $ (4.5)
====== ====== ====== ====== ====== ======
</TABLE>
Net sales for the fiscal year ended February 26, 2000 were $576.9 million
as compared to $242.7 million for the fiscal year ended February 27, 1999. The
increase is primarily attributable to the additional sales of 73 Holdings Group
stores acquired on June 15, 1999, in connection with the Merger and a comparable
store (those stores open one full fiscal year) sales increase of 5.3%. The
increase in comparable store sales reflects a number of factors, including new
blended merchandise assortments with a higher percentage of brand name products,
value pricing and competitive opening price points, increased marketing with
frequent newspaper inserts and the generally favorable retailing environment.
Gross profit before clearance markdowns for fiscal 1999 was $218.2 million,
or 37.8% of net sales, as compared with $87.6 million, or 36.1% of net sales,
for fiscal 1998. During fiscal 1999, we recognized $14.0 million, or 2.4% of net
sales, in clearance markdowns to liquidate inventory and align the merchandise
assortments of the new combined HomePlace. Gross profit after clearance
markdowns was $204.2 million, or 35.4% of net sales. Net markdowns were 6.8% of
net sales for fiscal 1999 versus 7.6% of net sales for fiscal 1998. The
reduction in net markdowns is due to two primary factors: (i) reduction in the
overall level of markdowns and (ii) vendor contributions negotiated as part of
our initial stock realignment. The vendor contributions totalled $0.9 million,
or 0.2% of net sales, in fiscal 1999. Freight costs as a component of cost of
goods sold increased 2.2% over the prior year, as a percentage of net sales. The
increase was primarily attributable to higher freight costs resulting from
vendors shipping directly to the former Holdings Group stores rather than
through a central distribution facility. We plan to reduce freight costs by the
opening of two new central distribution facilities in June 2000. We expect that
the reduction in freight costs, offset in part by the additional warehousing
costs, related to the new distribution facilities will result in savings of
approximately 0.5% of sales. Buying costs were $5.9 million, or 1.0% of net
sales, for fiscal 1999, compared to $7.2 million, or 3.0% of net sales, for
fiscal 1998. Warehousing costs, consisting primarily of costs to receive and
store merchandise, were $8.8 million, or 1.5% of net sales, for fiscal 1999,
compared to $4.8 million, or 2.0% of net sales, for fiscal 1998.
15
<PAGE> 18
Store SG&A for fiscal 1999 were $178.6 million, or 31.0% of net sales,
compared to $70.9 million, or 29.2% of net sales, for fiscal 1998. The increase
is primarily attributable to the additional expenses of 73 former Holdings Group
stores acquired pursuant to the Merger. The increase as a percentage of net
sales is primarily attributable to the higher payroll and occupancy costs
relative to net sales, of the Holdings Group stores.
Non-store SG&A increased $8.2 million in fiscal 1999 over fiscal 1998. This
was due primarily to certain overhead expenses of the Holdings Group that
continued through February 2000 and other increases in staff required by the
Merger. We believe we can obtain reductions of non-store SG&A expense as a
percentage of sales by leveraging our overhead costs over an increasing sales
base and further eliminating duplicative costs incurred in connection with the
Merger.
Amortization of goodwill (the excess of cost over fair value of the assets
and liabilities acquired pursuant to the Merger) for fiscal 1999 was $2.0
million, or 0.3% of net sales. Goodwill resulting from the Merger is being
amortized over 40 years.
We also incurred charges in fiscal 1999 of $10.1 million, or 1.8% of net
sales, for business integration expenses relating to the Merger to integrate the
operations of Waccamaw and the Holdings Group. These costs include $3.8 million
incurred to reformat existing Waccamaw and Holdings Group stores, $1.9 million
to close existing Waccamaw stores, $2.1 million in marketing expenses promoting
the "grand re-opening" of the newly combined company, $1.3 million in employee
related expenses and conversion of certain computer systems and $1.0 million of
incremental costs incurred to operate a dual replenishment system during a
transitional period that is expected to be completed during fiscal 2000.
Operating income for fiscal 1999, prior to clearance markdowns, business
integration expenses and amortization of goodwill, was $15.7 million, or 2.7% of
net sales, as compared to operating income of $1.0 million, or 0.4% of net
sales, for fiscal 1998 due to the factors noted above. Operating loss after
clearance markdowns, business integration expenses and amortization of goodwill
for fiscal 1999 was $10.4 million.
Interest expense was $9.8 million, or 1.7% of net sales, for fiscal 1999
compared to $1.9 million, or 0.8% of net sales, for fiscal 1998. This increase
is due to borrowings under the Revolving Credit Facility and Term Loan (each as
defined below) in connection with and following the Merger.
Other non-operating expenses for fiscal 1999 were $0.8 million, as compared
to $0.2 million for fiscal 1998. These expenses consist primarily of gain or
loss on disposal of fixed assets.
Income tax expense for fiscal 1999 was $0.1 million, as compared to an
income tax benefit of $2.0 million for fiscal 1998. For further discussion of
our tax position, see Notes to Consolidated Financial Statements elsewhere
herein.
Net loss for fiscal 1999 was $21.1 million versus net income of $0.9
million for fiscal 1998, due to the factors noted above.
Fiscal Year Ended February 27, 1999 Compared With Fiscal Year Ended February
28, 1998
Net sales for fiscal 1998 were $242.7 million, an increase of $14.4
million, or 6.3%, compared to net sales of $228.3 million for fiscal 1997.
Comparable store sales increased 5.3%.
Gross profit for fiscal 1998 was $87.6 million, or 36.1% of net sales,
compared to $80.8 million, or 35.4% of net sales for fiscal 1997. Product cost
of goods sold for fiscal 1998, as a percentage of net sales, was 0.7% higher
than in fiscal 1997. This was offset by a reduction of 0.9% in net markdowns and
a 0.3% reduction in buying and warehousing expenses, both expressed as a
percentage of net sales. Buying costs were $7.2 million, or 3.0% of net sales,
for fiscal 1998, compared to $7.3 million, or 3.2% of net sales, for fiscal
1997. Warehousing costs were $4.8 million, or 2.0% of net sales, for fiscal
1998, compared to $4.8 million, or 2.1% of net sales, for fiscal 1997.
Store and non-store SG&A expenses for fiscal 1998 were $86.6 million, or
35.7% of net sales, versus $84.8 million, or 37.1% of sales, for fiscal 1997.
The reduction in expenses as a percentage of net sales was the result
16
<PAGE> 19
of leveraging overhead and other fixed costs over an increased sales base.
Included in SG&A in fiscal 1998 and 1997 are charges of $0.5 million and $1.8
million, respectively, to reserve for estimated lease termination and other
costs incurred in connection with the closing of one of our stores. Cash
payments of $2.0 million and $0.3 million were made in fiscal 1998 and fiscal
1997, respectively, related to this reserve.
Operating income for fiscal 1998 was $1.0 million, or 0.4% of net sales,
compared to an operating loss of $4.0 million, or 1.7% of net sales, for fiscal
1997.
Interest expense for fiscal 1998 was $1.9 million, or 0.8% of sales, versus
$1.6 million, or 0.7% of net sales, for fiscal 1997. Other non-operating
expenses for fiscal 1998 were $0.2 million, or 0.1% of net sales, compared to
other non-operating income of $0.1 million, or 0.1% of net sales, for fiscal
1997.
Income tax benefit for fiscal 1998 was $2.0 million, or (0.9%) of net
sales, compared to $1.0 million, or (0.5%) of net sales, for 1997. Net income
for fiscal 1998 was $0.9 million, or 0.4% of net sales, versus a net loss of
$4.5 million, or (1.8%) of net sales, for fiscal 1997.
Liquidity and Financial Condition
Total assets at February 26, 2000, were $414.1 million compared to $115.9
million at February 27, 1999, an increase of $298.2 million. This increase is
due to the additional assets of 73 former Holdings Group stores, and goodwill of
$110.7 million (net of $2.0 million in amortization), representing the excess of
cost over fair value of the assets and liabilities acquired in the Merger.
Total liabilities at February 26, 2000, were $216.2 million compared to
$54.5 million at February 27, 1999, an increase of $161.7 million. This increase
is due to the additional liabilities of 73 former Holdings Group stores and
increase in long-term debt to finance the Merger.
Stockholders' equity was $197.9 million at February 26, 2000, compared to
$61.4 million at February 27, 1999. This increase reflects the issuance of
Common Stock related to the Merger, offset in part by a net loss for fiscal
1999.
In connection with the Merger, we recorded a $4.9 million liability for
severance costs related to the termination of 160 Holdings Group employees as
part of the consolidation of certain centralized operations. Since the Merger,
we have charged payments of $4.9 million to this reserve. See Note 1 of the
Notes to Consolidated Financial Statements elsewhere herein.
Net cash used in operating activities was $25.7 million in fiscal 1999.
Changes in working capital assets and liabilities, primarily increased inventory
and payments made to reduce accounts payable and accrued expenses, used $18.1
million of operating cash flow in fiscal 1999. Net loss, adjusted for non-cash
items such as depreciation and amortization and loss on disposal of fixed
assets, was $7.6 million for fiscal 1999. Included in the net loss were
Merger-related items, such as clearance markdowns of $14.0 million and business
integration expenses of $10.1 million. Excluding Merger-related items, net cash
used in operations would have been $1.6 million. Net cash used in operating
activities was $10.2 million for the thirteen weeks ended May 27, 2000 compared
with $3.7 million for the same period last year. The $10.2 million use of cash
consisted of a net loss of $8.5 million, an increase of $15.8 million in
inventory, an increase of $4.0 million in receivables, and an increase of $2.5
million in other assets, partially offset by depreciation and amortization of
$3.9 million, an increase in accounts payable and accrued expenses of $15.6
million, and an increase of 1.1 million in other liabilities.
Net cash used in investing activities was $44.6 million in fiscal 1999,
$25.5 million of which (net of cash acquired of $3.0 million) was used for the
acquisition of the Holdings Group and $19.1 million of which was used for
capital expenditures. The $19.1 million in capital expenditures consisted of the
following: $12.2 million for the post-Merger reformatting of stores in
connection with the new standardized merchandise layout, $2.8 million for the
implementation of SAP computer software, $1.0 million for new store development
and $3.1 million for other store and distribution projects. Cash flows used in
investing activities for the thirteen weeks ended May 27, 2000 were $5.0 million
compared to $1.6 million for the same period last year and consisted of
purchases of property and equipment. The $5.0 million consisted of $1.6 million
for new stores
17
<PAGE> 20
and new distribution centers, $2.0 million for store reformatting and
remodeling, and $1.4 million for computer systems.
Net cash provided by financing activities was $69.8 million in fiscal 1999.
This consisted of $25 million from the issuance of Common Stock pursuant to the
Merger and borrowings of $130.3 million under the Revolving Credit Facility and
the Term Note (each as defined below). This was offset by repayments of
indebtedness incurred prior to the Merger, in the amounts of $62.8 million and
$20.2 million for the Holdings Group and Waccamaw, respectively, and payments of
$2.5 million under capital leases. Cash flows from financing activities for the
thirteen weeks ended May 27, 2000 were $16.3 million compared to $5.0 million
for the thirteen weeks ended May 29, 1999. Financing activities for the thirteen
weeks ended May 27, 2000 consisted of $17.0 million net borrowings under the
Revolving Credit Facility (as defined below), which were partially offset by
payments of $0.7 million under capital leases.
Capital Resources
Our capital requirements, primarily investments in new stores, central
distribution centers, new store inventory purchases and seasonal working
capital, are funded through a combination of internally generated cash from
operations, credit extended by our suppliers, leasing arrangements and
borrowings under our Revolving Credit Facility and Term Loan.
In connection with the Merger, we entered into a revolving credit facility
(the "Revolving Credit Facility") with commercial banks that provides secured
borrowings of up to $200 million. Available borrowings under the Revolving
Credit Facility, as amended on May 12, 2000 (as discussed below), are based on a
percentage of eligible merchandise inventory at cost, as defined, limited to 75%
of eligible inventory during the period from December 16 to September 14, and
79% of eligible inventory during the period of September 15 to December 15 of
each year. Outstanding letters of credit, which reduce available borrowings,
were $3.6 million, $6.1 million, and $9.6 million at February 26, 2000, May 27,
2000 and August 9, 2000 respectively. We had additional available borrowings
under the Revolving Credit Facility of $16.3 million, $7.9 million, and $8.7
million at February 26, 2000, May 27, 2000 and August 9, 2000, respectively. The
Revolving Credit Facility expires in June 2002 and is generally collateralized
by all of our assets.
Also in connection with the Merger, we entered into a term loan (the "Term
Loan"), subordinated to the Revolving Credit Facility. The Term Loan was also
amended (as discussed below) on May 12, 2000. The Term Loan, as amended,
provides secured borrowings of $15 million (exclusive of PIK Interest, as
defined below) at a rate of 12.5% per annum, payable monthly in arrears.
Additional paid-in-kind interest ("PIK Interest") accrues at a rate of 3% per
annum on the unpaid principal balance and is added to the then unpaid principal
balance of the Term Loan. The aggregate balance of PIK Interest so added to the
Term Loan accrues interest at a rate of 12.5% per annum. Repayments of the Term
Loan are permitted beginning July 1, 2000, subject to certain conditions. All
outstanding indebtedness under the Term Loan, including accrued PIK Interest, is
due in full in June 2002. Borrowings under the Term Loan are collateralized on a
subordinated basis by all of our assets.
On May 12, 2000, we amended the Revolving Credit Facility and the Term
Loan. Pursuant to the amendment, the interest rates on advances under the
Revolving Credit Facility and on the Term Loan were increased by 0.25% and
0.50%, respectively, and the EBITDA (earnings before interest, taxes,
depreciation and amortization) covenant (as defined in the Revolving Credit
Facility) was amended, reducing the required EBITDA, as defined.
The Revolving Credit Facility and the Term Loan, both as amended, require
us to comply with certain financial performance covenants, including minimum
levels of EBITDA as defined, place restrictions on, among other things, our
ability to incur additional indebtedness and prohibit the payment of dividends.
We are currently in compliance with all financial performance covenants.
On August 3, 2000, we entered into a $5 million unsecured commercial credit
agreement with Carolina First Bank (the "Carolina First Agreement"). The
Carolina First Agreement will be used exclusively for letters of credit, which
we generally issue in connection with our import purchases.
18
<PAGE> 21
Based on current estimates of cash flow, we believe funds from operations
and funds available under our various credit agreements, as discussed above,
will be sufficient to fund operations and new store growth during fiscal 2000.
We may also, from time to time, seek alternative sources of capital to
reduce indebtedness, provide additional working capital and augment new store
growth. No assurances can be given that such alternative sources will be
available on commercially acceptable terms.
Inflation
Our results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, we believe that the
effect of inflation, if any, on the results of operations and financial
condition has been minor. There can be no assurance, however, that our results
of operations and financial condition will not be affected by inflation in the
future.
Seasonality
Our business is subject to substantial seasonal variations. Historically,
we have realized a significant portion of our net sales and net income in the
third and fourth quarters of the year. Quarterly results may fluctuate
significantly as a result of a variety of factors, including the timing of new
store openings. We believe this is the general pattern associated with our
segment of the retail industry, and we expect this pattern to continue in the
future. Consequently, comparisons between quarters are not necessarily
meaningful and the results for any quarter are not necessarily indicative of
future results.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates that may
adversely affect our financial position, results of operations and cash flows.
In seeking to minimize risks from interest rate fluctuations, we manage
exposures through our regular operating and financing activities. We do not use
financial instruments for trading or other speculative purposes and are not
party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through borrowings under the
Revolving Credit Facility. The Revolving Credit Facility, as amended, expires in
June 2002 and generally bears interest at the Prime Rate (as defined) plus
0.25%. Under the Revolving Credit Facility, as amended, we have other borrowing
options available that allow us to fix portions of the outstanding indebtedness
at the then LIBOR rate plus 2.50% for periods of between 30 days and 2 years. At
February 26, 2000, we had $30.0 million in a 30-day LIBOR advance at 8.155%,
$30.0 million in a 30-day LIBOR advance at 8.13% and $40.0 million in a 60-day
LIBOR advance at 8.154%. The balance of the indebtedness under the Revolving
Credit Facility at February 26, 2000, $15.3 million, was at a variable rate of
8.75%. An increase of 1% in the interest rate would have caused an increase in
interest payments of approximately $0.8 million for the fiscal year ended
February 26, 2000.
At May 27, 2000, we had $85.0 million in a 60-day LIBOR advance at 8.745%
and $35.0 million in a 60-day LIBOR advance at 8.44%. The balance of the
indebtedness under the Revolving Credit Facility at May 27, 2000, $12.4 million,
was at a variable interest rate of 9.50%. That rate subsequently increased to
9.75% on June 1, 2000. An increase of 1% in the interest rate would have caused
an increase in interest payments of approximately $0.4 million for the thirteen
weeks ended May 27, 2000.
ITEM 3. PROPERTIES
We lease all of our existing stores, distribution centers, warehouses and
management facilities. Our average lease term is 10 to 20 years with one to
four, five-year renewal terms. Currently, HomePlace stores range in size from
20,000 to 243,000 square feet. We expect that our new stores will be
approximately 45,000 square feet.
19
<PAGE> 22
At February 26, 2000, we were party to leases that require minimum lease
payments of approximately $60 million annually. During the current fiscal year,
we have entered into additional leases (including those for the facilities and
equipment for the two new distribution centers) that require additional minimum
lease payments of approximately $4.8 million annually.
As of August 11, 2000, we operated 118 stores located in 27 states, all of
which are free-standing stores or are located in malls or strip center units.
The following table shows the number of stores located in each state:
<TABLE>
<CAPTION>
STATE NO. OF STORES STATE NO. OF STORES
----- ------------- ----- -------------
<S> <C> <C> <C>
Alabama................... 4 Nebraska.................. 1
Arizona................... 4 Nevada.................... 3
Colorado.................. 3 New Jersey................ 3
Florida................... 16 New York.................. 3
Georgia................... 8 North Carolina............ 6
Illinois.................. 4 Ohio...................... 13
Indiana................... 4 Oklahoma.................. 2
Iowa...................... 1 Oregon.................... 1
Kansas.................... 1 Pennsylvania.............. 6
Maryland.................. 6 South Carolina............ 6
Michigan.................. 1 Tennessee................. 4
Minnesota................. 6 Texas..................... 4
Mississippi............... 1 Virginia.................. 6
Missouri.................. 1
</TABLE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth the beneficial ownership of our Common Stock
(including shares underlying warrants or stock options currently exercisable or
that will become exercisable within 60 days of the date hereof) as of August 10,
2000, for (i) each person who is known by us to own beneficially more than five
percent (5%) of our Common Stock; (ii) each of our directors; (iii) each named
executive officer in the Summary Compensation Table below; and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF SHARES
NAME AND ADDRESS OF PRINCIPAL STOCKHOLDERS: COMMON STOCK OF COMMON STOCK
------------------------------------------- ------------------- -----------------------
<S> <C> <C>
The Kuwait Investment Authority (the "KIA"), as agent for
The Government of Kuwait(1)............................ 13,350,000(2) 52.0%
Ministries Complex, Block 3
Safat, Kuwait 13141
Bank of America, N.A.(3)................................. 2,327,148 9.3%
100 North Tryon Street
Charlotte, NC 28255
</TABLE>
---------------
(1) In conjunction with the Merger, the KIA, as agent for The Government of
Kuwait, received 10,000,000 shares of the Common Stock in exchange for its
20,000,000 shares of Waccamaw stock. The balance of the shares of Common
Stock was acquired pursuant to a subscription agreement dated as of May 27,
1999 among HomePlace and the KIA, as agent for The Government of Kuwait.
(2) Includes 600,000 shares underlying warrants to purchase Common Stock granted
in connection with the Merger. Such warrants are currently and will remain
exercisable until January 15, 2001.
(3) Reflects record ownership on HomePlace's stock records as reported by
HomePlace's stock transfer agent.
20
<PAGE> 23
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF SHARES OF
DIRECTORS AND EXECUTIVE OFFICERS COMMON STOCK(1) COMMON STOCK
-------------------------------- ------------------- -----------------------
<S> <C> <C>
G. William Miller........................................ 287,457(2) 1.1%
Gregory K. Johnson....................................... 174,484 *
Sheikh Salem Abdullah Al-Ahmed Al-Sabah.................. 5,000 *
Abdullah Al-Gabandi...................................... 51,686(3) *
Farouk A. Bastaki........................................ 16,700 *
Moira A. Cary............................................ 5,000 *
Joseph R. Ettore......................................... 5,000(4) *
William M. Goodyear...................................... 92,444 *
Arthur L. Kelly.......................................... 336,500(5) 1.3%
David L. Resnick......................................... 22,489 *
Kathryn M. Sawa.......................................... 5,000 *
John Shea................................................ 74,956 *
Kathryn D. Wriston....................................... 16,500 *
P. Christian Beseler III................................. 31,000 *
Marc C. Campbell......................................... 34,000 *
Robert E. Jewell......................................... 34,000 *
Jeffrey J. Klosterman.................................... 31,000 *
All current directors and executive officers as a group
(20 persons)........................................... 1,277,216 5.1%
</TABLE>
---------------
* Less than one percent.
(1) Includes shares underlying options to purchase Common Stock initially
granted in connection with the Merger (the "New HomePlace Options") under
the Stock Incentive Plan (as defined and described below), exercisable
(except as indicated in (4) below) as follows: Mr. Johnson, 50,000; each
other named executive officer of HomePlace 10,000; each other director of
HomePlace, 5,000; and all directors and executive officers as a group,
177,000. Also includes options to purchase Common Stock under the Stock
Incentive Plan originally granted by Waccamaw prior to the Merger and
converted in connection with the Merger to options to purchase Common Stock
(each option to purchase a share of Waccamaw common stock deemed to
constitute, following the Merger, an option to purchase one-half share of
Common Stock)(the "Converted Waccamaw Options") exercisable as follows: Mr.
Johnson, 100,000; Mr. Beseler, 21,000; Mr. Campbell, 24,000; Mr. Jewell,
24,000; Mr. Klosterman, 21,000; and all directors and executive officers as
a group, 217,000.
(2) G. William Miller is the sole trustee and a beneficiary of the G. William
Miller & Co. Profit Sharing Plan, which is a qualified retirement benefit
plan with 12 other participants. The number of shares reported includes
97,500 held by such plan. G. William Miller & Co., Inc., of which Mr. Miller
is Chairman and principal owner, is the record owner of 184,957 of the
shares reported.
(3) Abdullah Al-Gabandi shares voting power with respect to 46,686 of these
shares with one other individual.
(4) These options to purchase Common Stock will vest on October 1, 2000.
(5) Arthur L. Kelly owns 136,500 shares in his own name. KEL Enterprises L.P., a
private equity investment partnership of which Mr. Kelly is the Managing
Partner, is the record owner of 58,500 shares. Trust #36955, of which Mr.
Kelly and Northern Trust Company are co-trustees, is the record owner of
136,500 shares. Mr. Kelly possesses sole voting and investment power over
all of the 331,500 shares held of record by him individually or by these
entities.
21
<PAGE> 24
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of HomePlace and their ages and
positions with HomePlace as of August 10, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
G. William Miller...................... 75 Chairman of the Board and Director
Gregory K. Johnson..................... 51 President and Chief Executive Officer
and Director
Sheikh Salem Abdullah Al-Ahmed
Al-Sabah............................. 51 Director
Abdullah Al-Gabandi.................... 54 Director
Farouk A. Bastaki...................... 40 Director
Moira A. Cary.......................... 40 Director
Joseph R. Ettore....................... 61 Director
William M. Goodyear.................... 52 Director
Arthur L. Kelly........................ 62 Director
David L. Resnick....................... 41 Director
Kathryn M. Sawa........................ 39 Director
John J. Shea........................... 62 Director
Kathryn D. Wriston..................... 61 Director
P. Christian Beseler III............... 54 Senior Vice President of Marketing and
Sales Promotion
Marc C. Campbell....................... 50 Senior Vice President of Real Estate
and Construction
David A. Frost......................... 38 Senior Vice President of Finance and
Treasurer
Robert E. Jewell....................... 53 Senior Vice President of Human
Resources
Jeffrey J. Klosterman.................. 47 Senior Vice President of Stores
John M. Starkey........................ 38 Senior Vice President of Management
Information Systems
Roberts J. Kohrs....................... 51 Vice President of Merchandise Planning
and Allocation
</TABLE>
The Board of Directors of HomePlace is divided into two classes, with six
directors designated as Class I directors and seven directors designated as
Class II directors. Class II directors are entitled to elect and appoint the
Chief Executive Officer of HomePlace. The Class I directors are Moira A. Cary,
Joseph R. Ettore, William M. Goodyear, David L. Resnick, Kathryn M. Sawa and
John J. Shea. They will serve as directors until the 2001 annual meeting of
stockholders. The Class II directors are G. William Miller, Gregory K. Johnson,
Sheikh Salem Abdullah Al-Ahmed Al-Sabah, Abdullah Al-Gabandi, Farouk A. Bastaki,
Arthur L. Kelly and Kathryn D. Wriston. They will serve as directors until the
2001 annual meeting of stockholders. From and after the 2001 annual meeting of
stockholders, the Board of Directors shall cease to be divided into classes, and
the stockholders will elect directors at each annual meeting of stockholders to
hold office until the next succeeding annual meeting. No more than seven of the
members of the Board of Directors may be officers, employees or affiliates of
HomePlace or the Government of Kuwait.
Set forth below is a biographical description of each director and
executive officer of HomePlace based on information supplied by each of them.
With the exception of Mr. Ettore, each person was appointed a director or
executive officer of HomePlace as a result of the Merger.
G. William Miller. Mr. Miller has served as Chairman of the Board of
HomePlace since the Merger. From 1995 until the Merger, Mr. Miller was the
Chairman of the Board of Waccamaw. Since 1982, Mr. Miller has been the Chairman
of G. William Miller & Co., Inc., a merchant banking business. He is a director
of Repligen Corporation, GS Industries, Inc., Dresdner RCM Global Strategic
Income Fund and Simon Property Group, Inc. He previously served as Chairman and
Chief Executive Officer of Federated
22
<PAGE> 25
Stores, Inc. from 1990 to 1992 and as President, Chief Executive Officer and
Chairman of Textron from 1968 to 1978. In 1978, he was appointed Chairman of the
Federal Reserve and served as Secretary of the Treasury from 1979 until 1981.
Gregory K. Johnson. Mr. Johnson has served as President and Chief
Executive Officer of HomePlace since the Merger. From 1995 until the Merger, Mr.
Johnson was Chief Executive Officer and President of Waccamaw, as well as a
member of its Board of Directors. Mr. Johnson has over 30 years of retail and
home store experience, including as Senior Vice President of Home Furnishings,
General Merchandising Manager at Federated Department Stores and Senior Vice
President/General Merchandising Manager for Home at May Department Stores.
Sheikh Salem Abdullah Al-Ahmed Al-Sabah. Sheikh Al-Sabah has served as a
Director of HomePlace since the Merger. From 1995 until the Merger, Sheikh
Al-Sabah was a member of the Board of Directors of Waccamaw. He has served as
chief investment officer for the KIA for more than the past five years.
Abdullah Al-Gabandi. Mr. Al-Gabandi has served as a Director of HomePlace
since the Merger. From 1995 until the Merger, Mr. Al-Gabandi was a Director of
Waccamaw. He has served as the Chairman of the Board of Pearl of Kuwait Real
Estate Company since 1997. From 1993 to 1997, he owned and operated a private
consulting firm, International Business Consultants. He is also a member of the
Board of Directors of GS Industries, Inc.
Farouk A. Bastaki. Mr. Bastaki has served as a Director of HomePlace since
the Merger. Prior to the Merger, Mr. Bastaki had served as a Director of
Waccamaw since 1996. He has served as investment manager for the KIA for more
than the past five years.
Moira A. Cary. Ms. Cary has served as a Director of HomePlace since the
Merger. Ms. Cary was an investment banker with Bank of America from 1982 through
1999.
Joseph R. Ettore. Mr. Ettore has served as a Director of HomePlace since
October 1999. He has over 36 years of discount retail experience and has served
as Chairman and Chief Executive Officer of Ames Department Stores since 1999 and
as a director since 1994. Prior to joining Ames, Mr. Ettore served as President
and Chief Executive Officer of Jamesway Corporation. From 1989 to 1992, he
served as President, Chief Operating Officer and director, and then as Chairman
and Chief Executive Officer of Stuarts Department Store. He is a two-term
Chairman of the International Mass Retail Association, which is a leading
industry trade group. He is also a director of Modells Sporting Goods.
William M. Goodyear. Mr. Goodyear has served as a Director of HomePlace
since the Merger. He became the Chairman and Chief Executive Officer of Navigant
Consulting, Inc. in May 2000. He is the immediate past Chairman and former Chief
Executive Officer of Bank of America, Illinois and the former President of Bank
of America's Global Private Bank. He was Vice Chairman and a director of
Continental Bank until 1994. Mr. Goodyear joined Continental Bank in 1972 and
subsequently handled assignments in various areas of the bank, including
corporate finance, large corporate lending, trading and distribution. He is also
a director of Equity Office Properties Trust.
Arthur L. Kelly. Mr. Kelly has served as a Director of HomePlace since the
Merger. Mr. Kelly served as a Director of Waccamaw from 1995 until the Merger.
Mr. Kelly is founder and has served as managing partner of KEL Enterprises,
L.P., an investment partnership in Chicago, since 1982. He was previously
President and Chief Operating Officer of LaSalle Steel Company. He is a director
of ARCH Development Corporation, Bayerische Motoren Werke (BMW) A.G., DataCard
Corporation, Deere & Company, mpct Solutions Corporation, Northern Trust
Corporation, Snap-On Incorporated, Thyssen-Krupp Industries, A.G. and HSBC
Trinkaus & Burkhardt KGaA.
David L. Resnick. Mr. Resnick has served as a Director of HomePlace since
the Merger. From 1990 to 1996, Mr. Resnick served as Vice President of Lazard
Freres & Co., LLC. From 1996 to March 2000, he was a Principal/Managing Director
of Peter J. Solomon Company Ltd., an investment banking firm. He is currently a
Managing Director of Rothschild Inc., also an investment banking firm.
23
<PAGE> 26
Kathryn M. Sawa. Ms. Sawa has served as a Director of HomePlace since the
Merger. Since 1996, she has been a private investor. Ms. Sawa served as a Sales
Executive for Boise Cascade, a wood and paper products company, from 1982 to
1996.
John J. Shea. Mr. Shea has served as a Director of HomePlace since the
Merger. Since 1997, he has been a private investor. He served as President and
Chief Executive Officer of Spiegel, Inc., a direct marketing company, from 1985
to 1997. He is a director of Pulte, Inc. and Fotoball, Inc.
Kathryn D. Wriston. Ms. Wriston has served as a Director of HomePlace
since the Merger. Ms. Wriston served as a Director of Waccamaw from 1995 until
the Merger. Since 1995, Ms. Wriston has served as a director of various
organizations including Northwestern Mutual Life Insurance Company, Santa Fe
Snyder Corporation, The Stanley Works Inc., The John A. Hartford Foundation,
Practising Law Institute, and Catholic Health Care System. Ms. Wriston served as
a director of Federated Department Stores from 1975 to 1988.
P. Christian Beseler III. Mr. Beseler has served as Senior Vice President
of Marketing and Sales Promotion for HomePlace since the Merger. Mr. Beseler
joined Waccamaw in 1996 as Senior Vice President of Marketing and Sales
Promotion. Mr. Beseler served as Senior Vice President of Advertising and
Marketing for OfficeMax from 1994 to 1996. In addition, he has served as Vice
President of Advertising for Hooks-SuperRx Drug Stores and Director of
Advertising for Kroger Food Stores.
Marc C. Campbell. Mr. Campbell has served as Senior Vice President of Real
Estate and Construction for HomePlace since the Merger. From 1995 until the
Merger, he served in the same capacity for Waccamaw. His previous experience
includes positions as Staff Attorney for K-Mart Corporation, Vice President of
Real Estate for Whitlock Auto and Vice President of Real Estate for F&M Super
Drug Stores.
David A. Frost. Mr. Frost has served as Senior Vice President of Finance
for HomePlace since the Merger. Mr. Frost joined Waccamaw in 1984. During his
time with Waccamaw, he served as Vice President of Finance and Corporate
Controller from 1996 until 1999 and as Senior Vice President in 1999 until the
Merger. Prior to 1996, he served in various capacities with Waccamaw. Mr. Frost
is a Certified Public Accountant and serves as the Corporate Treasurer.
Robert E. Jewell. Mr. Jewell has served as Senior Vice President of Human
Resources for HomePlace since the Merger. He is also responsible for
distribution and asset protection. Mr. Jewell previously served in the same
capacity for Waccamaw from 1995 until the Merger. His previous experience
includes the positions of Senior Vice President of Human Resources for the
Retail Apparel Group, Senior Vice President of Services for McCrory Corporation,
and several years of Human Resources and Operations experience at Federated
Department Stores.
Jeffrey J. Klosterman. Mr. Klosterman has served as Senior Vice President
of Stores for HomePlace since the Merger. He served in the same capacity for
Waccamaw from 1996 until the Merger. He served as Senior Vice President of
Stores for Lechmere, a division of Montgomery Ward, in 1994 and 1995 and as a
Regional Director for Montgomery Ward from 1987 until 1994.
John M. Starkey. Mr. Starkey has served as Senior Vice President of
Management Information Systems for HomePlace since the Merger. Mr. Starkey
joined Waccamaw in 1991. He was Vice President of Management Information Systems
from 1996 until 1999 and Senior Vice President in 1999 until the Merger. From
1991 to 1996 he served in various roles for Waccamaw. His retail experience
prior to joining Waccamaw includes Data Processing Manager for Pilgrim Glass in
Huntington, West Virginia and Fullers Jewelry in Dallas, Texas.
Robert J. Kohrs. Mr. Kohrs has served as Vice President of Planning and
Allocation for HomePlace since the Merger. Mr. Kohrs served from 1995 until the
Merger as the Vice President of Planning and Replenishment for the Holdings
Group. From 1993 to 1995, he was Director of Replenishment at Fabri-Centers of
America. From 1986 to 1993, Mr. Kohrs was Director of Replenishment at Harris
Wholesale, a pharmaceutical wholesaler. Prior to 1986, he was Vice President,
Merchandise for Hardgoods at Cook United, a discount store chain, having been
promoted from Assistant Store Manager in 1973.
24
<PAGE> 27
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth compensation paid by or on behalf of
HomePlace to the Chief Executive Officer, to our four other highest paid
executive officers and to a former president and chief executive officer of the
Holdings Group for services rendered during HomePlace's fiscal year ended
February 26, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ------------------------
-------------------------------------------- RESTRICTED SECURITIES
NAME AND FISCAL OTHER ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(2) COMPENSATION ($) AWARDS OPTIONS (4) COMPENSATION ($)
------------------ ------ ---------- ------------ ---------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory K. Johnson..... 1999(1) $436,577 $246,178 (3) -- 250,000 $ 4,800(5)
President and CEO
Robert E. Jewell....... 1999(1) 207,192 91,767 (3) -- 50,000 4,800(5)
Sr. VP of Human
Resources
Jeffrey J.
Klosterman........... 1999(1) 198,519 87,217 (3) -- 50,000 4,800(5)
Sr. VP of Stores
P. Christian Beseler
III.................. 1999(1) 193,110 84,942 (3) -- 50,000 4,800(5)
Sr. VP of Marketing
and Sales Promotion
Marc C. Campbell....... 1999(1) 186,596 82,200 (3) -- 50,000 4,800(5)
Sr. VP of Real Estate
and Construction
Lawrence I. Pollock.... 1999(6) 31,154 225,000 $25,097(7) 22,597(8) 0 1,847,470(9)
Former President and
CEO of Holdings
Group
</TABLE>
---------------
(1) For the fiscal year ended February 26, 2000.
(2) Reflects bonus earned in fiscal 1999 under our Incentive Bonus Plans (as
defined and described below) and paid after year-end. Does not include
$78,750, $28,700, $27,300, $26,600 and $25,550 in deferred 1999 bonus
payable to Messrs. Johnson, Jewell, Klosterman, Beseler and Campbell,
respectively, at the end of fiscal 2000, provided such executive officer
continues to be actively employed by HomePlace at that time. Messrs.
Johnson, Jewell, Klosterman, Beseler and Campbell are also scheduled to
receive $33,600, $17,280, $16,320, $15,840 and $16,080, respectively, in
deferred 1998 bonus under our Incentive Bonus Plans, at the end of fiscal
2000, subject to their continued employment.
(3) The aggregate amount of perquisites and other personal benefits received did
not exceed the lesser of $50,000 or 10% of the total annual salary and bonus
reported for such executive officer.
(4) For additional information concerning the grant of stock options, see
"-- Stock Option Plans -- Option Grants for the Fiscal Year Ended February
26, 2000" below.
(5) Reflects matching employer contributions under our 401(k) plan.
(6) For the period from June 7, 1999 to June 15, 1999, pursuant to the Plan of
Reorganization. Mr. Pollock's employment terminated on June 15, 1999.
(7) Reflects accrued vacation pay.
(8) Reflects the issuance of Common Stock in settlement of allowed unsecured
claims pursuant to the Plan of Reorganization.
(9) Reflects $1.25 million in a confirmation fee, $495,000 in severance pay and
$102,470 in cash settlement of allowed unsecured claims, each pursuant to
the Plan of Reorganization.
INCENTIVE BONUS PLANS FOR FISCAL 1999
The incentive bonus plans referenced above consist of the Senior Management
Bonus Program and the Senior Management 1999 Merger Integration Supplemental
Bonus Program (together, the "Incentive Bonus Plans"). See footnote (2) to the
Summary Compensation Table above for information concerning bonuses paid or to
be paid to the named executive officers under such plans.
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<PAGE> 28
Senior Management Bonus Program
The Senior Management Bonus Program (the "Bonus Program") for fiscal year
1999 awarded a maximum annual bonus of 30% of base salary (37.5% for the Chief
Executive Officer) to members of senior management based on increases in
comparable store sales and operating income. In addition, retention bonuses were
awarded equal to 50% of the annual bonus, payable on a deferred basis as
indicated in footnote (2) to the Summary Compensation Table above. The Bonus
Program was established by Waccamaw and ratified by the HomePlace Compensation
Committee on June 16, 1999.
Senior Management 1999 Merger Integration Supplemental Bonus Plan
The Senior Management 1999 Merger Integration Supplemental Bonus Plan (the
"Supplemental Bonus Program") for fiscal year 1999 awarded senior management an
additional bonus payment for successful integration of the Merger, based on
gross margin and transition expense criteria. The maximum payout allowed under
the Supplemental Bonus Program was 20% of base salary (25% for the Chief
Executive Officer).
EMPLOYMENT AGREEMENTS
Prior to the Merger, Waccamaw entered into employment agreements with
Messrs. Johnson, Jewell, Klosterman, Beseler and Campbell (each an "Employment
Agreement" and collectively the "Employment Agreements"), providing for an
annual base salary and certain other benefits. Capitalized terms used below but
not defined have the meanings set forth in the respective Employment Agreements.
Upon the consummation of the Merger, the Employment Agreements were assumed by
HomePlace.
Johnson Employment Agreement
Mr. Johnson entered into an employment agreement with Waccamaw on October
23, 1995, that was subsequently amended on March 13, 1997. In connection with
the Merger, Mr. Johnson entered into an Amended and Restated Employment
Agreement with Waccamaw dated as of May 14, 1999. Waccamaw's obligations under
this Amended and Restated Employment Agreement were assumed by HomePlace upon
completion of the Merger.
Pursuant to his Employment Agreement, Mr. Johnson currently receives a base
salary of $450,000 per year, an automobile or automobile allowance, country club
initiation fees and membership dues, four weeks of paid vacation, tax planning
and preparation services and reimbursement of expenses incurred on behalf of
HomePlace. During his period of employment, Mr. Johnson is eligible to receive
an incentive bonus (the "Incentive Bonus") pursuant to our senior management
incentive plans as in effect from time to time. In addition, Mr. Johnson, his
qualified dependents and his beneficiaries (where applicable) are entitled to
participate in our 401(k) savings plan, pension plan, life insurance plan,
disability plan, death benefit plan, medical, dental and health and welfare
plans, as in effect from time to time. Mr. Johnson was granted options to
purchase 250,000 shares of Common Stock of HomePlace at an exercise price of
$12.00 per share pursuant to our Stock Incentive Plan (as defined below). These
options are exercisable 20% per year commencing June 16, 2000, and each of the
succeeding four anniversaries thereof, and expire on June 16, 2009.
In the event of his death, Mr. Johnson's legal representative will be
entitled to an amount equal to his base salary for the month in which his death
occurs and will also receive a pro rata portion of his Incentive Bonus for that
portion of the fiscal year prior to the date of death. In the event of
Disability, he is entitled to an amount equal to his base salary at the rate
being paid at the time of the commencement of the Disability, for the period of
such Disability, but not in excess of six months.
In the event Mr. Johnson's employment is terminated within one year
following a Change of Control (i) by HomePlace for any reason other than for
Cause, death, Disability or normal retirement of Mr. Johnson or (ii) by Mr.
Johnson for Good Reason, Mr. Johnson is entitled to receive: (a) a lump sum
equal to two times his annual base salary at the highest rate in effect during
the 12 months immediately preceding the Change of Control and (b) his Incentive
Bonus through the end of the fiscal year in which termination occurs.
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<PAGE> 29
A "Change of Control" in Mr. Johnson's Employment Agreement is defined as (a)
any stock sale, exchange, merger, reorganization, stock issuance, stock
redemption, or other transaction, occurrence or series of transactions or
occurrences resulting in a change in the ownership of HomePlace such that more
than 50% of the voting rights of HomePlace stock is held, after such change,
directly, indirectly or beneficially by a person or entity (a "New Control
Person") other than The Government of Kuwait unless the New Control Person has
advised Mr. Johnson of its good faith intent to register the Common Stock of
HomePlace in an initial public offering under the Securities Act within six
months of such change; or (b) any sale of all or substantially all of the assets
of HomePlace to a New Control Person.
Finally, Mr. Johnson's Employment Agreement contains a noncompetition
provision whereby he is prohibited for a period of two years from the
termination of his employment from, among other things, competing with HomePlace
or employing or soliciting the employment of any individual who has been an
employee of HomePlace or its subsidiaries at any time during the 12 months
preceding the termination of his employment for any reason. For purposes of this
agreement, Mr. Johnson would be considered to be competing with HomePlace if he
directly or indirectly, other than at the direction of HomePlace and on behalf
of HomePlace: (i) organizes or owns any interest in an entity that engages in a
competing business in an area within 20 miles from any HomePlace store, provided
that Mr. Johnson is allowed to own up to 5% of the outstanding shares of any
company whose stock is registered on a national securities exchange; (ii)
engages in a competing business in an area within 20 miles from any HomePlace
store; or (iii) assists any person (as a director, officer, employee, agent,
consultant, manager, lender or otherwise) engaging in a competing business in an
area within 20 miles of any HomePlace store.
Mr. Johnson's Employment Agreement expires on May 31, 2004.
Other Employment Agreements
Pursuant to separate Employment Agreements, each of Messrs. Jewell,
Klosterman, Beseler and Campbell (each, an "Executive") is entitled to a base
salary, use of an automobile and participation in our Incentive Bonus Plans and
Stock Incentive Plan. The base salaries under their Employment Agreements are
subject to periodic review and revision as necessary and are currently $205,000,
$195,000, $190,000 and $183,000, respectively. Pursuant to the Employment
Agreements, each Executive is also entitled to moving expenses, vacation time
and other fringe benefits. Further, if an Executive is terminated without cause,
he will receive one year's pay at his then current salary. If terminated due to
performance issues, he will receive prior written notice. Finally, each
Executive is entitled to an amount equal to his then current annual salary if he
loses his job in the event of a Change of Control of HomePlace during the first
three years of his employment or if his job is terminated within the first 12
months of a Change of Control.
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<PAGE> 30
STOCK OPTION PLANS
Stock Incentive Plan
Our Amended and Restated Stock Incentive Plan (the "Stock Incentive Plan")
gives the Compensation and Stock Option Committee of the Board of Directors (the
"Committee") discretion to award options (either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs")) to employees of HomePlace and
its subsidiaries. The number of shares of Common Stock issuable under the plan
(including the Converted Waccamaw Options described below) may not exceed
2,000,000. Option prices for ISOs granted to employees may not be less than 100%
of the fair market value per share of the Common Stock on the date of grant.
Option prices for ISOs granted to 10% stockholders may not be less than 110% of
the fair market value per share of the Common Stock on the date of the grant.
Option prices for NQSOs shall be determined by the Committee in its discretion.
Terms of each option are to be determined by the Committee or the Board,
provided that the exercise of an option may not be more than 10 years from the
date of grant or, in the case of an ISO granted to a 10% stockholder, more than
five years from the date of grant. Non-employee directors received a one-time
grant of NQSOs to purchase 5,000 shares of Common Stock immediately following
the consummation of the Merger. Thereafter, each new non-employee director is
entitled to such one-time grant upon his or her initial election as a director.
Commencing in 2000, NQSO's to purchase 1,000 shares of Common Stock will be
granted on June 30 of each year to each non-employee director who is then
serving on the Board and has been a non-employee director for a minimum of six
months, at an exercise price per share equal to the fair market value per share
of Common Stock as of the date of such award.
Until (i) the Common Stock is registered under the Securities Exchange Act
of 1934, as amended, and authorized for trading by a national securities
exchange or national securities association and (ii) the shares underlying
options issued under the Stock Incentive Plan can be issued and sold upon option
exercise and resold by the initial holder, all without registration under the
Securities Act, or are registered for such issuance, sale and resale, HomePlace
will have the right, upon notice to a holder within 60 days of exercise of an
option, to redeem all shares issued upon such exercise at a price equal to the
excess of the fair market value of the Common Stock over the option exercise
price at the time of exercise. The redemption price may, at HomePlace's
election, be paid, with interest, over a two-year period from the redemption
date.
Option Grants for the Fiscal Year Ended February 26, 2000
The following table sets forth certain information regarding stock options
that were granted to executive officers of HomePlace under the Stock Incentive
Plan during the fiscal year ended February 26, 2000.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM (8)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------------
NAME GRANTED (#) FISCAL YEAR (7) ($/SH) DATE 0%($) 5%($) 10%($)
---- ----------- --------------- -------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory K. Johnson..... 250,000(1) 19.57% $12.00 June 16, 2009 -- $1,886,684 $4,781,227
125,000(2)(3) 9.78 11.20 Jan. 1, 2006 $100,000 664,585 1,401,281
Robert E. Jewell....... 50,000(1) 3.91 12.00 June 16, 2009 -- 377,337 956,246
30,000(2)(3) 2.35 11.20 Jan. 1, 2006 24,000 159,500 336,307
Jeffrey J.
Klosterman........... 50,000(1) 3.91 12.00 June 16, 2009 -- 377,337 956,246
15,000(2)(4) 1.17 11.20 March 1, 2006 12,000 81,815 173,756
15,000(5) 1.17 11.20 April 1, 2007 12,000 95,389 211,013
P. Christian Beseler
III.................. 50,000(1) 3.91 12.00 June 16, 2009 -- 377,337 956,246
15,000(2)(6) 1.17 11.20 July 1, 2006 12,000 85,944 184,961
15,000(5) 1.17 11.20 April 1, 2007 12,000 95,389 211,013
Marc C. Campbell....... 50,000(1) 3.91 12.00 June 16, 2009 -- 377,337 956,246
30,000(2)(3) 2.35 11.20 Jan. 1, 2006 24,000 159,500 336,307
</TABLE>
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<PAGE> 31
---------------
(1) Represents New HomePlace Options granted by HomePlace after the Merger on
June 16, 1999. These options vest at a rate of 20% per year beginning June
16, 2000.
(2) Upon consummation of the Merger, on June 16, 1999, each option to purchase
shares of the Waccamaw common stock that was outstanding immediately prior
to the Merger, whether vested or unvested, was deemed to constitute an
option (the "Converted Waccamaw Options") to acquire one-half of a share of
HomePlace Common Stock with an option exercise price per share equal to the
exercise price of the Waccamaw stock option multiplied by two, or $11.20 per
share. The Converted Waccamaw Options, along with the New HomePlace Options,
are issued under, and are subject to, the Stock Incentive Plan described
above.
(3) These options vest at a rate of 20% per year beginning January 1, 1997.
(4) These options vest at a rate of 20% per year beginning March 1, 1997.
(5) These options vest at a rate of 20% per year beginning April 1, 1998.
(6) These options vest at a rate of 20% per year beginning July 1, 1997.
(7) A total of 1,277,500 stock options were granted in the year ended February
26, 2000, including 385,000 Converted Waccamaw Options.
(8) Based on a fair market value for the Common Stock of $12.00 per share
Aggregated Option Exercises and Fiscal Year-End Option Values
The following table sets forth information concerning outstanding options
to purchase Common Stock held by executive officers of HomePlace at February 26,
2000.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS AT
AT FY END (#) FY END ($)
---------------------- --------------------
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE (1) UNEXERCISABLE (7)
---- ---------------------- --------------------
<S> <C> <C>
Gregory K. Johnson.................................... 100,000/275,000(2) $80,000/$20,000
Robert E. Jewell...................................... 24,000/ 56,000(3) 19,200/4,800
Jeffrey J. Klosterman................................. 15,000/ 65,000(4) 12,000/12,000
P. Christian Beseler III.............................. 15,000/ 65,000(5) 12,000/12,000
Marc C. Campbell...................................... 24,000/ 56,000(6) 19,200/4,800
</TABLE>
---------------
(1) The exercise price for the Converted Waccamaw Options is $11.20 per share.
The exercise price for the New HomePlace Options is $12.00 per share.
(2) Mr. Johnson's exercisable options at year end consist of 100,000 Converted
Waccamaw Options. His unexercisable options consist of 25,000 Converted
Waccamaw Options and 250,000 New HomePlace Options.
(3) Mr. Jewell's exercisable options at year end consist of 24,000 Converted
Waccamaw Options. His unexercisable options consist of 6,000 Converted
Waccamaw Options and 50,000 New HomePlace Options.
(4) Mr. Klosterman's exercisable options at year end consist of 15,000 Converted
Waccamaw Options. His unexercisable options consist of 15,000 Converted
Waccamaw Options and 50,000 New HomePlace Options.
(5) Mr. Beseler's exercisable options at year end consist of 15,000 Converted
Waccamaw Options. His unexercisable options consist of 15,000 Converted
Waccamaw Options and 50,000 New HomePlace Options.
(6) Mr. Campbell's exercisable options at year end consist of 24,000 Converted
Waccamaw Options. His unexercisable options consist of 6,000 Converted
Waccamaw Options and 50,000 New HomePlace Options.
(7) Based on a fair market value for the Common Stock of $12.00 per share.
No options held by the named executive officers were exercised during the
fiscal year ended February 26, 2000.
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<PAGE> 32
PENSION PLANS
The following table shows the projected annual benefits payable under
HomePlace's Salaried Employees' Pension Plan and Trust (the "Pension Plan")
described below, upon retirement at the normal age of 65 based on different
levels of average annual compensation.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------
REMUNERATION 5 10 15 20 25
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$125,000......................................... $ 9,010 $18,020 $27,030 $36,040 $45,050
150,000......................................... 11,010 22,020 33,030 44,040 55,050
175,000......................................... 11,490 22,980 34,470 45,960 57,450
200,000......................................... 11,490 22,980 34,470 45,960 57,450
250,000......................................... 11,490 22,980 34,470 45,960 57,450
300,000......................................... 11,490 22,980 34,470 45,960 57,450
400,000......................................... 11,490 22,980 34,470 45,960 57,450
450,000......................................... 11,490 22,980 34,470 45,960 57,450
500,000......................................... 11,490 22,980 34,470 45,960 57,450
</TABLE>
The Pension Plan defines compensation as the total amount paid to an
employee by HomePlace or its subsidiaries that is required to be reported on
such employee's Form W-2, plus any elective or salary reduction contributions to
a cash or deferred arrangement (e.g., a 401(k) plan) or cafeteria plan, but
excluding reimbursements or other expense allowances, cash and non-cash fringe
benefits, moving allowances and expenses and any retirement-oriented
non-qualified deferred compensation and welfare benefits. Thus, for each named
executive officer, the salary, bonus and other annual compensation as reported
in the Summary Compensation Table above are considered compensation under the
Pension Plan.
For purposes of determining benefits under the Pension Plan, compensation
is averaged over the five consecutive years of employment that produce the
highest average, subject to the limitations of Section 401(a) of the Internal
Revenue Code of 1986, as amended.
The Pension Plan was frozen effective December 31, 1999, and no
compensation or credited years of service earned after that date will be
considered for purposes of determining benefits under the Pension Plan.
The estimated credited years of service for Messrs. Johnson, Jewell,
Klosterman, Beseler and Campbell are 4, 4, 4, 4 and 5 years, respectively.
Benefits under the Pension Plan are computed on the basis of a straight
life annuity. Benefits under the Pension Plan are not subject to deduction for
Social Security or any other offset amounts.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of HomePlace consists of five directors and
serves at the pleasure of the Board of Directors. Currently, the Compensation
Committee is composed of the following individuals: Abdullah Al-Gabandi
(Chairman), Joseph R. Ettore, G. William Miller, Kathryn M. Sawa and Kathryn D.
Wriston.
None of the members of the Compensation Committee are employees of
HomePlace, although as Chairman of the Board, Mr. Miller is designated as an
officer of HomePlace.
For services as investment and financial advisor in connection with the
Merger, HomePlace paid G. William Miller & Co., Inc. a fee of $1.5 million. G.
William Miller is the Chairman and principal owner of G. William Miller & Co.,
Inc. and has served as Chairman of the Board of HomePlace since the Merger. Mr.
Miller previously served as Chairman of the Board of Waccamaw prior to the
Merger.
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<PAGE> 33
COMPENSATION OF DIRECTORS
Non-employee directors receive compensation for serving on the Board of
Directors of HomePlace as indicated below. The Chairman of the Board receives an
annual fee of $100,000 for his services, while other non-employee directors
receive $24,000. Non-employee directors also receive a fee for attending board
and committee meetings ("Meeting Fees"). For each board meeting that a director
attends that is not conducted by telephone, he or she receives a Meeting Fee of
$1,250. For attending committee meetings that are not conducted by telephone,
the chairman of the committee receives $2,500 per meeting while the other
committee members receive $1,250 per meeting. Non-employee directors receive
$500 per telephonic board or committee meeting in which they participate. The
Chairman of the Board receives no Meeting Fees.
Pursuant to the Stock Incentive Plan, each non-employee director receives a
grant of options to purchase 5,000 shares of Common Stock upon his or her
initial election to the Board of Directors. In addition, each non-employee
director who has been a director for at least six months receives an additional
grant of options to purchase 1,000 shares of Common Stock on June 30 of each
year commencing June 30, 2000. Such options vest after one year and expire 10
years from the date of grant. All options granted to date to non-employee
directors under the Stock Incentive Plan have an exercise price of $12.00 per
share.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For services as an adviser to the Holdings Group on issues related to the
Chapter 11 Filing and the subsequent Merger, Peter J. Solomon Company, of which
David L. Resnick was a Principal/Managing Director, received $3.5 million. Mr.
Resnick has served as a director of HomePlace since the Merger. For additional
information concerning certain relationships and related transactions, see
"Compensation Committee Interlocks and Insider Participation" above.
ITEM 8. LEGAL PROCEEDINGS
We are a party to various legal proceedings that are considered to be
ordinary, routine litigation incidental to our business and not material to our
consolidated financial position, results of operations or cash flows.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Common Stock. As of
August 10, 2000, 25,000,000 shares of Common Stock are outstanding and there are
1,189 record holders of the Common Stock. Such shares were issued pursuant to an
exemption from the registration requirements of the Securities Act provided by
Section 1145 of the Bankruptcy Code. Consequently, such shares are unrestricted
in the hands of all holders other than The Government of Kuwait, and generally
may be freely traded without regard to registration for resale under the
Securities Act. The 12,750,000 shares held by The Government of Kuwait, the
majority stockholder of HomePlace, and the aggregate 883,216 shares held by the
directors and executive officers as a group may be resold pursuant to Rule 144
under the Securities Act, subject to its volume and other limitations. Also as
of August 10, 2000, a total of 1,222,000 shares of Common Stock are subject to
outstanding options under the Stock Incentive Plan. See "Security Ownership of
Certain Beneficial Owners and Management" and "Executive Compensation" for
further information. In addition, as of August 10, 2000, warrants to purchase an
additional 1,850,000 shares of the Common Stock are outstanding. See
"Description of Registrant's Securities to be Registered -- Warrants."
HomePlace has never paid dividends on its Common Stock and does not expect
to do so in the foreseeable future. The Revolving Credit Facility and Term Loan
currently restrict the payment of dividends.
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<PAGE> 34
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Except as set forth below, there were no sales of unregistered securities
by HomePlace during the past three years.
On June 15, 1999, HomePlace sold 4,054,054 shares of Common Stock to The
Government of Kuwait through its agent, the KIA, for gross proceeds of
$25,000,000. The sale was a private offering and was exempt under Section 4(2)
of the Securities Act, and Rule 506 of Regulation D under the Securities Act.
Proceeds of the transaction were paid to creditors and certain equity holders of
the Holdings Group pursuant to the Merger.
On June 15, 1999, pursuant to the Plan of Reorganization, the KIA, as agent
for The Government of Kuwait received 10,000,000 shares of the Common Stock and
warrants to purchase 600,000 additional shares of Common Stock at an exercise
price of $12.00 per share in consideration of the Merger and the surrender of
its equity interest in Waccamaw in connection therewith. These warrants expire
on January 15, 2001. These issuances were exempt from the registration
requirements of the Securities Act pursuant to Section 1145 of the Bankruptcy
Code.
Also on June 15, 1999, pursuant to the Plan of Reorganization, Trumbull
Services, LCC, the Reorganization Trustee, received 10,695,946 shares of Common
Stock for disbursement to satisfy approximately 1,340 claims of unsecured
creditors against the Holdings Group and 250,000 shares of Common Stock and
warrants to purchase an additional 1,250,000 shares of Common Stock at an
exercise price of $14.00 per share for disbursement to 380 holders of preferred
stock of Holdings in consideration of outstanding claims and interests. These
warrants expire on June 15, 2004. These issuances were also exempt from the
registration requirements of the Securities Act pursuant to Section 1145 of the
Bankruptcy Code.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
HomePlace's authorized capital stock consists of 40,000,000 shares of
Common Stock, $.001 par value per share, and 5,000,000 shares of preferred
stock, $.10 par value per share. HomePlace currently has outstanding 25,000,000
shares of Common Stock.
Common Stock. The holders of validly issued and outstanding shares of
Common Stock are entitled to one vote per share on all matters to be voted upon
by stockholders of HomePlace. At a meeting of stockholders at which a quorum is
present, a majority of the votes cast decides all questions, unless otherwise
expressly provided by applicable law or by HomePlace's Amended and Restated
Certificate of Incorporation or Bylaws. There is no cumulative voting with
respect to the election of directors.
The holders of Common Stock have no preemptive rights and have no rights to
convert the Common Stock into any other securities. Subject to the rights of
holders of preferred stock of HomePlace, if any, in the event of a liquidation,
dissolution, or winding up of HomePlace, holders of Common Stock are entitled to
participate equally, share for share, in all assets remaining after payment of
liabilities.
The holders of Common Stock are entitled to receive ratably such dividends
as the Board of Directors may declare out of funds legally available therefor,
when and if so declared. HomePlace's Revolving Credit Facility and Term Loan
contain negative covenants that, among other things, prohibit the payment of
dividends.
The Board of Directors of HomePlace is authorized to issue, from time to
time, up to 5,000,000 shares of preferred stock. The Board of Directors may
issue such preferred stock in one or more series and may fix the relative rights
and preferences for each such series, including annual dividend rates,
redemption prices, sinking fund provisions, liquidation preferences, conversion
rights and voting rights.
Pursuant to HomePlace's Bylaws, the following actions may be taken by the
Board of Directors when a quorum is present only by the affirmative vote of not
less than nine directors present at the meeting: (i) amendment of HomePlace's
Amended and Restated Certificate of Incorporation or the Bylaws, (ii) issuance
of any class or series of HomePlace's preferred stock, (iii) issuance of
additional shares of Common Stock (with certain limitations), (iv) any
recapitalization, stock split, stock dividend, or other
32
<PAGE> 35
reclassification of shares of Common Stock, (v) adoption of or amendments to
plans relating to the issuance of equity securities to officers, employees or
outside directors of, or consultants to, HomePlace, (vi) approval of any merger
of HomePlace (other than a merger involving only HomePlace and subsidiaries of
HomePlace existing on the day of the Merger) or sale of substantially all of the
assets of HomePlace, (vii) approval of the acquisition or disposition of a
business if the gross revenues of the business to be acquired or disposed of, as
the case may be, for the most recently ended fiscal year of the business exceed
25% of the gross revenues of HomePlace for the most recently ended fiscal year,
(viii) approval of HomePlace entering into any loan documents evidencing any
indebtedness of HomePlace for borrowed money in excess of $25,000,000, (ix)
approval of HomePlace entering into a new line of business that is not
reasonably related or incident to the business currently conducted by HomePlace,
(x) approval of material transactions between HomePlace and any stockholder of
HomePlace that owns at least 10% of the outstanding Common Stock and (xi)
redemptions of, or dividends declared on, any shares, except for redemptions in
connection with the termination of employment of an employee and the pro rata
cash redemption of, or declaration of cash dividends on, shares of Common Stock.
HomePlace's Bylaws may be altered, amended or repealed by the Board of
Directors or by the holders of at least 60% of the shares of Common Stock, and
new bylaws may be adopted by the Board of Directors or by the holders of at
least 60% of the shares of Common Stock. HomePlace's Amended and Restated
Certificate of Incorporation may be amended, altered or repealed upon an
affirmative vote of the holders of at least 60% of the Common Stock.
HomePlace's certificate contains provisions that enable the Board of
Directors to issue preferred stock without further stockholder action, which
could provide a means for the board to delay or frustrate the removal of
incumbent directors or a change in control of HomePlace, even if such removal or
change would be beneficial, in the short term, to our stockholders. These
provisions could also discourage or make more difficult a merger, tender offer
or proxy contest even if such event would be favorable to the interests of
stockholders.
Warrants. Pursuant to and subject to the limitations set forth in the Plan
of Reorganization, HomePlace issued the transferable Preferred Warrants to
purchase an aggregate of 1,250,000 shares of Common Stock to the holders of
preferred stock of Holdings and issued the Waccamaw Warrants to purchase an
aggregate of 600,000 shares of Common Stock to the KIA. The Preferred Warrants
entitle the holder to purchase Common Stock at an exercise price of $14.00 per
share. The Preferred Warrants are exercisable from June 15, 1999, until June 15,
2004. The Waccamaw Warrants entitle the holder to purchase Common Stock at an
exercise price of $12.00 per share. The Waccamaw Warrants are exercisable from
June 15, 1999, until January 15, 2001. The number of shares underlying the
warrants and the exercise prices therefor are subject to adjustment upon the
occurrence of certain transactions, such as a stock dividend, stock split,
reclassification or combination of the Common Stock, an issuance of rights or
warrants to all stockholders at an exercise price below the exercise price of
the Preferred Warrants or Waccamaw Warrants, certain distributions to
stockholders of indebtedness, assets, or securities of HomePlace, or a merger,
consolidation, sale of assets or recapitalization of HomePlace, to prevent
dilution of warrant holders.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person, including an officer or director, who was
or is, or is threatened to be made, a party to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
officer, director, employee or agent acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation and, for criminal actions and proceedings, has no reasonable cause
to believe that his conduct was unlawful. A Delaware corporation may indemnify
officers and directors in an action by or in the right of the corporation under
the same conditions, except that no indemnification is permitted without
judicial
33
<PAGE> 36
approval if the officer or director is adjudged to be liable to the corporation.
Whether an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director actually or reasonably
incurred.
HomePlace's Amended and Restated Certificate of Incorporation and Bylaws
provide that no director of HomePlace will be personally liable to HomePlace or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except that the foregoing do not eliminate or limit the liability of a
director (i) for any breach of such director's duty of loyalty to HomePlace or
its stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which such
director derived an improper personal benefit. However, HomePlace will indemnify
any such person seeking indemnity in connection with an action, suit or
proceeding (or part thereof) initiated by such person only if such action, suit
or proceeding (or part thereof) was authorized by the Board of Directors.
HomePlace maintains directors' and officers' liability insurance policies.
HomePlace has also entered into Indemnification Agreements with each of its
directors whereby HomePlace contractually binds itself to provide the
indemnification protection set out in its Bylaws to the directors. HomePlace's
Bylaws provide for indemnification of the officers and directors of HomePlace to
the fullest extent permitted by applicable law.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-46 of this document.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See the "Index to Financial Statements" that appears on page F-1 hereof.
(b) Exhibits
The following exhibits required to be filed in connection with this Form 10
Registration Statement are listed below and are included herewith.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*2.1 First Amended Joint Plan of Reorganization of the Holdings
Group under Chapter 11 of the Bankruptcy Code dated April
28, 1999, as confirmed by the United Stated Bankruptcy
Court for the District of Delaware by order dated June 3,
1999.
*2.2 Agreement and Plan of Merger between Waccamaw Corporation
and HomePlace of America, Inc. dated March 16, 1999.
*3.1 Amended and Restated Certificate of Incorporation of
HomePlace of America, Inc. dated June 9, 1999.
*3.2 Certificate of Merger of Waccamaw Corporation with and into
HomePlace of America, Inc. dated June 9, 1999.
*3.3 Bylaws of HomePlace of America, Inc. dated June 15, 1999.
*4.1 Warrant Agreement between HomePlace of America, Inc. and
First Union National Bank dated June 15, 1999.
*4.2 Form of Series A Warrant Certificate due June 15, 2004.
*4.3 Form of Series B Warrant Certificate due January 15, 2001.
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.1 Loan and Security Agreement among HomePlace of America,
Inc., HomePlace Stores, Inc., HomePlace Stores Two, Inc.,
and HomePlace Management, Inc., BankBoston Retail Finance
Inc., as agent, and the lenders named therein dated June
15, 1999 ("Loan and Security Agreement").
*10.2 First Amendment to the Loan and Security Agreement, dated
May 12, 2000.
*10.3 Amended and Restated Employment Agreement, dated as of May
14, 1999, between Gregory K. Johnson and Waccamaw
Corporation.
*10.4 Employment Agreement, dated as of March 28, 1996, between P.
Christian Beseler III and Waccamaw Corporation ("Beseler
Employment Agreement").
*10.4a Amendment to Beseler Employment Agreement, dated as of
February 6, 1998.
*10.5 Employment Agreement, dated as of February 22, 1996, between
Jeffrey J. Klosterman and Waccamaw Corporation
("Klosterman Employment Agreement").
*10.5a Amendment to Klosterman Employment Agreement, dated as of
February 6, 1998.
*10.6 Employment Agreement, dated as of September 5, 1995, between
Robert E. Jewell and Waccamaw Corporation ("Jewell
Employment Agreement").
*10.6a Amendment to Jewell Employment Agreement, dated as of
February 6, 1998.
*10.7 Employment Agreement, dated as of January 23, 1995, between
Marc C. Campbell and Waccamaw Corporation ("Campbell
Employment Agreement").
*10.7a Amendment to Campbell Employment Agreement, dated as of
February 6, 1998.
*10.8 HomePlace of America, Inc. Amended and Restated Stock
Incentive Plan.
*10.9 Form of Indemnification Agreement between HomePlace of
America, Inc. and each of its directors.
10.10 Continuing Commercial Credit Agreement by and between
Carolina First Bank, HomePlace and HomePlace's
subsidiaries dated July 7, 2000.
18 Letter, dated July 24, 2000, from Arthur Andersen LLP to
HomePlace regarding a change in accounting principle.
*21 Subsidiaries of HomePlace of America, Inc.
27.1 Financial Data Schedule for the year ended February 27, 1999
(for SEC use only).
27.2 Financial Data Schedule for the year ended February 26, 2000
(for SEC use only).
27.3 Financial Data Schedule for the three months ended May 27,
2000 (for SEC use only).
*99.1 Risk Factors.
</TABLE>
---------------
* Previously Filed.
35
<PAGE> 38
INDEX TO FINANCIAL STATEMENTS
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of February 26, 2000 and
February 27, 1999......................................... F-3
Consolidated Statements of Operations for the years ended
February 26, 2000, February 27, 1999, and February 28,
1998...................................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended February 26, 2000, February 27, 1999, and
February 28, 1998......................................... F-5
Consolidated Statements of Cash Flows for the years ended
February 26, 2000, February 27, 1999, and February 28,
1998...................................................... F-6
Notes to Consolidated Financial Statements for the years
ended February 26, 2000, February 27, 1999, and February
28, 1998.................................................. F-7
Unaudited Pro Forma Combined Financial Data................. F-22
Consolidated Balance Sheets as of May 27, 2000 and February
26, 2000 (Unaudited, except as noted)..................... F-23
Consolidated Statements of Operations for the Thirteen Weeks
Ended May 27, 2000 and May 29, 1999 (Unaudited)........... F-24
Consolidated Statements of Cash Flows for the Thirteen Weeks
Ended May 27, 2000 and May 29, 1999 (Unaudited)........... F-25
Notes to Consolidated Financial Statements (Unaudited)...... F-26
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-28
Consolidated Balance Sheets as of February 27, 1999 and
February 28, 1998......................................... F-29
Consolidated Statements of Operations for the years ended
February 27, 1999, February 28, 1998, and March 1, 1997... F-30
Consolidated Statements of Stockholders' Interest for the
years ended February 24, 1996, March 1, 1997, February 28,
1998, and February 27, 1999............................... F-31
Consolidated Statements of Cash Flows for the years ended
February 27, 1999, February 28, 1998, and March 1, 1997... F-32
Notes to Consolidated Financial Statements.................. F-33
Unaudited Consolidated Balance Sheets as of May 29, 1999 and
May 30, 1998.............................................. F-44
Unaudited Consolidated Statements of Operations for the
Three Months Ended May 29, 1999 and May 30, 1998.......... F-45
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended May 29, 1999 and May 30, 1998.......... F-46
</TABLE>
F-1
<PAGE> 39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HomePlace of America, Inc.
We have audited the accompanying consolidated balance sheets of HomePlace
of America, Inc. (a Delaware corporation) and subsidiaries as of February 26,
2000, and February 27, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended February 26,
2000, February 27, 1999, and February 28, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also included assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HomePlace of America, Inc. and subsidiaries as of February 26, 2000, and
February 27, 1999, and the consolidated results of their operations and their
cash flows for the years ended February 26, 2000, February 27, 1999, and
February 26, 1998, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Charlotte, North Carolina,
April 21, 2000
F-2
<PAGE> 40
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 26, 2000 AND FEBRUARY 27, 1999
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,787 $ 3,193
Accounts receivable....................................... 2,122 2,917
Merchandise inventories................................... 200,151 70,245
Other current assets...................................... 12,152 3,965
--------- ---------
Total current assets.............................. 217,212 80,320
PROPERTY AND EQUIPMENT, net................................. 80,217 31,142
GOODWILL, net............................................... 110,673 0
DEFERRED INCOME TAXES....................................... 3,419 4,055
OTHER ASSETS, net........................................... 2,615 377
--------- ---------
Total assets...................................... $ 414,136 $ 115,894
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 56,260 $ 23,010
Accrued expenses.......................................... 18,097 6,783
Accrued interest.......................................... 1,028 139
Current portion of capital lease obligation............... 2,883 0
--------- ---------
Total current liabilities......................... 78,268 29,932
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION................. 130,696 20,168
OTHER NONCURRENT LIABILITIES AND DEFERRED CREDITS........... 7,264 4,416
--------- ---------
Total liabilities................................. 216,228 54,516
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 5,000,000 shares
authorized; none issued and outstanding................ 0 0
Common stock, $0.001 par value; 40,000,000 shares
authorized; 25,000,000 shares issued and outstanding... 25 0
Common stock, $0.053375 stated value; 100,000,000 shares
authorized; 20,000,000 shares issued and outstanding... 0 1,068
Additional paid-in capital................................ 370,359 211,660
Retained deficit.......................................... (172,476) (151,350)
--------- ---------
Total stockholders' equity........................ 197,908 61,378
--------- ---------
Total liabilities and stockholders' equity........ $ 414,136 $ 115,894
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE> 41
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................... $ 576,941 $ 242,701 $ 228,307
COST OF SALES, including buying and warehousing costs... 372,751 155,098 147,513
----------- ----------- -----------
Gross profit.................................. 204,190 87,603 80,794
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES.... 204,536 86,638 84,838
BUSINESS INTEGRATION EXPENSES........................... 10,116 0 0
----------- ----------- -----------
Income (loss) from operations................. (10,462) 965 (4,044)
INTEREST EXPENSE........................................ (9,772) (1,926) (1,650)
OTHER NONOPERATING (EXPENSES) INCOME, net............... (831) (232) 112
----------- ----------- -----------
Loss before income taxes...................... (21,065) (1,193) (5,582)
(PROVISION) BENEFIT FOR INCOME TAXES.................... (61) 2,043 1,049
----------- ----------- -----------
Net income (loss)............................. $ (21,126) $ 850 $ (4,533)
=========== =========== ===========
NET INCOME (LOSS) PER SHARE -- Basic and Diluted........ $ (1.03) $ .09 $ (.45)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING..................... 20,549,451 10,000,000 10,000,000
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE> 42
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN RETAINED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
----------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, February 22, 1997............... 20,000,000 $1,068 $211,660 $(147,667) $ 65,061
Net loss....................... 0 0 0 (4,533) (4,533)
----------- ------ -------- --------- --------
BALANCE, February 28, 1998............... 20,000,000 1,068 211,660 (152,200) 60,528
Net income..................... 0 0 0 850 850
----------- ------ -------- --------- --------
BALANCE, February 27, 1999............... 20,000,000 1,068 211,660 (151,350) 61,378
Effect of Waccamaw stock conversion.... (10,000,000) (1,058) 1,058 0 0
Issuance of common stock to former
Waccamaw stockholder................ 4,054,054 4 24,996 0 25,000
Issuance of common stock to creditors
and preferred stockholders of
HomePlace Holdings.................. 10,945,946 11 131,389 0 131,400
Stock warrants issued.................. 0 0 1,256 0 1,256
Net loss....................... 0 0 0 (21,126) (21,126)
----------- ------ -------- --------- --------
BALANCE, February 26, 2000............... 25,000,000 $ 25 $370,359 $(172,476) $197,908
=========== ====== ======== ========= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE> 43
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL
-----------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(21,126) $ 850 $(4,533)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization.......................... 12,706 5,776 5,490
Deferred income taxes.................................. 0 (2,082) (1,101)
Loss (gain) on disposal of fixed assets................ 848 192 (91)
Changes in operating assets and liabilities, net of
effects of acquisition:
Receivables.......................................... 1,797 (1,677) (444)
Inventory............................................ (10,796) (466) (2,182)
Prepaid expenses and other current assets............ (3,697) 267 676
Other assets......................................... (2,224) 0 0
Accounts payable and accrued expenses................ (8,903) 2,417 2,424
Other liabilities.................................... 5,739 (245) 4,216
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... (25,656) 5,032 4,455
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (19,101) (10,081) (3,750)
Proceeds from sale of equipment........................... 81 15 5
Acquisition of HomePlace Holdings, net of cash acquired of
$3,038................................................. (25,530) 0 0
-------- -------- -------
Net cash used in investing activities............. (44,550) (10,066) (3,745)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 25,000 0 0
Net borrowings under revolving credit facilities.......... 121,681 4,775 2,742
Proceeds from long-term subordinated note................. 15,000 0 0
Repayment of Waccamaw credit facility..................... (26,507) 0 0
Repayment of HomePlace Holdings credit facilities......... (47,434) 0 0
Repayment of HomePlace Holdings note payable.............. (15,375) 0 0
Payments under capitalized leases......................... (2,565) 0 0
-------- -------- -------
Net cash provided by financing activities......... 69,800 4,775 2,742
-------- -------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.......... (406) (259) 3,452
CASH AND CASH EQUIVALENTS, beginning of year................ 3,193 3,452 0
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,787 $ 3,193 $ 3,452
======== ======== =======
CASH PAID DURING THE YEAR FOR:
Interest.................................................. $ 8,883 $ 1,932 $ 1,616
Income taxes.............................................. 61 39 52
======== ======== =======
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equity securities issued in connection with the Merger.... $132,645 $ 0 $ 0
Assets acquired in Merger................................. 170,143 0 0
Liabilities assumed in Merger............................. 121,588 0 0
======== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE> 44
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCLUDING SHARE DATA)
1. NATURE OF BUSINESS AND THE MERGER
NATURE OF BUSINESS AND OWNERSHIP
HomePlace of America, Inc. ("HomePlace"), together with its wholly owned
subsidiaries HomePlace Stores, Inc. (a Delaware Corporation), HomePlace Stores
Two, Inc. (a Delaware Corporation) and HomePlace Management, Inc. (an Ohio
Corporation) (collectively referred to as the "Company"), operate a chain of 115
retail stores in 27 states, selling primarily home decor and houseware products.
HomePlace was incorporated in Delaware on March 10, 1999 and was formed to be
the surviving entity resulting from the merger (the "Merger") of Waccamaw
Corporation ("Waccamaw") and HomePlace Holdings, Inc. ("Holdings"). The
Company's principal offices are located in Myrtle Beach, South Carolina.
MERGER
On June 15, 1999, Waccamaw and Holdings completed the Merger pursuant to
the Plan of Reorganization of Holdings and its subsidiaries (the "Holdings
Group"). The Holdings Group had been operating under the provisions of Chapter
11 of the United States Bankruptcy Code after having filed voluntary petitions
for relief on January 5, 1998. The following summarizes several of the key
components of the Plan of Reorganization and the Merger:
- Waccamaw and Holdings were merged with and into HomePlace, a newly formed
corporation established for purposes of effecting the Merger.
- All outstanding shares of Waccamaw common stock were converted into
10,000,000 shares of common stock of HomePlace (the "Common Stock").
- 4,054,054 additional shares of Common Stock were issued to the former
Waccamaw stockholder at a subscription price of $6.17 per share (of which
1,304,504 shares were subsequently sold by such stockholder in a
transaction exempt from the registration requirements of the Securities
Act of 1933, as amended).
- All existing common equity interests in Holdings were canceled. Holdings'
common stockholders did not receive any cash, securities or similar
consideration in exchange for the cancellation of their shares.
- 10,615,946 shares of Common Stock and $25 million in cash were paid in
respect of approximately 1,340 unsecured claims (representing
approximately $187 million in claims of unsecured creditors against the
Holdings Group) in full satisfaction of allowed unsecured claims against
the Holdings Group. Holdings Group secured creditors were generally paid
in full in cash or received the full collateral value of their security.
- 250,000 shares of Common Stock and warrants (the "Preferred Warrants") to
purchase an additional 1,250,000 shares of Common Stock were issued to
approximately 380 holders of preferred stock of Holdings in full
satisfaction of their interests in against the Holdings Group. The
Preferred Warrants entitle the holders to purchase Common Stock at an
exercise price of $14.00 per share and are exercisable from June 15, 1999
until June 15, 2004.
- Warrants ("Waccamaw Warrants") to purchase an additional 600,000 shares
of Common Stock were issued to the former Waccamaw stockholder. The
Waccamaw Warrants entitle the holder to purchase Common Stock at an
exercise price of $12.00 per share and are exercisable from June 15, 1999
until January 15, 2001.
- The then existing Waccamaw management team assumed the management of
HomePlace.
F-7
<PAGE> 45
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
The Merger has been treated as an acquisition of Holdings by Waccamaw and
has been accounted for under the purchase method of accounting. Accordingly, the
accompanying consolidated financial statements reflect the historical financial
position and results of operations of Waccamaw, combined with the effects of the
acquisition of Holdings occurring on June 15, 1999. The total purchase price of
the acquisition, including $3,568 of transaction costs, was approximately
$161,224 and has been allocated to the assets and liabilities acquired based on
estimates of their fair values as follows:
<TABLE>
<S> <C> <C> <C>
Purchase Price:
Common Stock and Warrants................................. $132,656
Cash...................................................... 25,000
Transaction Costs......................................... 3,568
--------
$161,224
Assets Acquired:
Inventory................................................. $119,204
Fixed Assets.............................................. 41,710
Other..................................................... 9,229
--------
$170,143
Liabilities Assumed:
Accounts Payable and Accrued Expenses..................... $ 49,959
Long-term debt............................................ 62,808
Non-current Liabilities................................... 8,821
--------
$121,588
--------
Net Assets Acquired: 48,555
--------
Excess of Purchase Price Over Net Assets Acquired........... $112,669
========
</TABLE>
The excess of cost over net fair value is being amortized over 40 years.
Business integration expenses reflected on the accompanying statement of
operations for fiscal 1999 represent costs associated with the integration of
the businesses of Waccamaw and the Holdings Group. Such costs include $3,829
incurred to reformat existing Waccamaw and Holdings Group stores, $1,862 to
close existing Waccamaw stores, $2,080 in marketing costs promoting the "grand
re-opening" of the newly combined company, $1,347 in employee related expenses
and conversion of certain computer systems, and $998 of incremental costs
incurred to operate a dual replenishment system during a transitional period
that is expected to be completed during fiscal 2000.
In connection with the Merger, the Company recorded a $4,896 liability in
accordance with EITF 95-3, "Recognition of Liabilities in Connection with a
Purchase Business Combination" for severance costs related to the termination of
160 HomePlace Holdings' employees as part of the consolidation of certain
centralized operations. Since the Merger, the Company has charged payments of
$4,896 to this reserve. As of February 26, 2000, no additional liability has
been recorded for exit costs incurred in conjunction with the Merger.
F-8
<PAGE> 46
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
The activity associated with business integration expenses and liabilities
recorded in connection with, or resulting from, the Merger for the year ended
February 26, 2000 is as follows:
<TABLE>
<CAPTION>
PROVISION
LIABILITY FOR
RECORDED BUSINESS CASH ENDING
DUE TO INTEGRATION PAYMENTS ACCRUAL
MERGER EXPENSES MADE BALANCE
--------- ----------- -------- -------
<S> <C> <C> <C> <C>
Severance and relocation expenses for Holdings
Group personnel.................................. $4,896 $ 4,896 --
Waccamaw store closings, net of proceeds........... -- $ 1,862 1,356 $ 506
Reformatting stores and consolidation of
merchandise offerings............................ -- 3,829 3,139 690
Marketing expense to promote "grand re-opening".... -- 2,080 2,080 --
Incremental distribution expenses to operate dual
systems.......................................... -- 998 998 --
Other expenses for employee relocation and
retention........................................ -- 1,070 550 520
Conversion of certain computer systems............. -- 277 277 --
------ ------- ------- ------
$4,896 $10,116 $13,296 $1,716
====== ======= ======= ======
</TABLE>
The following unaudited pro forma information has been prepared as if the
Merger had occurred as of the beginning of fiscal 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Total revenues.............................................. $686,668 $672,658
======== ========
Net loss.................................................... (40,732) (61,927)
======== ========
EPS -- Basic and Diluted.................................... (1.63) (2.48)
======== ========
</TABLE>
The foregoing unaudited pro forma information is provided for illustrative
purposes only and does not purport to be indicative of results that actually
would have been achieved had the Merger been consummated at the beginning of
fiscal 1998, nor is it intended to be indicative of future results.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements reflect the historical financial
position and results of operations of Waccamaw. As discussed in Note 1, the
Merger has been accounted for as an acquisition of Holdings by Waccamaw under
the purchase method of accounting and, therefore, the accompanying statement of
operations for the year ended February 26, 2000, includes the results of the
acquired operations since the date of the acquisition.
FISCAL YEAR
The Company's year-end for financial reporting purposes is the Saturday
closest to the last day in the month of February. Prior to the Merger,
Waccamaw's fiscal year-end was the Saturday closest to January 31. The fiscal
years ended February 26, 2000, February 27, 1999, and February 28, 1998, each
contained 364 days and are referred to hereafter as fiscal 1999, fiscal 1998 and
fiscal 1997, respectively.
F-9
<PAGE> 47
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of overnight investments,
commercial paper and other short-term, highly liquid instruments with original
maturities at the time of purchase of three months or less. The carrying amount
in the accompanying balance sheets for cash and cash equivalents approximates
their fair value.
MERCHANDISE INVENTORIES
Merchandise inventories consist of finished goods merchandise purchased
from domestic and foreign vendors and are stated at the lower of cost or market.
Cost is determined using the retail inventory method of accounting and includes
certain buying and warehousing costs. Capitalized purchasing and warehousing
costs included in inventory at February 26, 2000 and February 27, 1999 were
$8,231 and $4,852, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are determined by the straight-line method over the estimated useful lives of
the respective assets or term of lease, if less. Fully depreciated property and
equipment is removed from the asset and related accumulated depreciation
accounts.
Maintenance and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the necessary adjustments
to the asset and accumulated depreciation accounts of the items renewed or
replaced.
NONOPERATING EXPENSES
Nonoperating expenses (income) for fiscal 1999, 1998, and 1997 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Loss (gain) on disposal of fixed assets..................... $848 $207 $ (90)
Interest income from an inactive subsidiary................. (17) (14) (22)
Other....................................................... -- 39 --
---- ---- -----
$831 $232 $(112)
==== ==== =====
</TABLE>
DEFERRED FINANCING COSTS
Costs incurred in obtaining short-term and long-term financing are deferred
and amortized over the term of the related financing arrangement. Amortization
of deferred financing costs amounted to $769, $54 and $235 in fiscal 1999, 1998
and 1997, respectively, and is included as a component of interest expense on
the accompanying statements of operations.
GOODWILL
The excess of acquisition costs over the fair value of net assets acquired
is amortized on a straight-line basis over 40 years. Accumulated amortization at
February 26, 2000, and February 27, 1999, totaled $1,995 and $0, respectively.
The recoverability of the carrying value of goodwill, along with the Company's
other long-lived assets, is assessed by management whenever events or
circumstances indicate an impairment may have occurred. Recoverability is
assessed based on expected future cash flows resulting from use of the related
asset.
F-10
<PAGE> 48
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
DEFERRED RENT AND TENANT ALLOWANCES
The Company accounts for scheduled rent increases contained in its leases
on a straight-line basis over the noncancelable lease term. Deferred tenant
allowances, principally beneficial leasehold costs, are amortized on a
straight-line basis over the remaining life of the leasehold. Deferred rent and
tenant allowances totaled $7,084 and $4,419 at February 26, 2000, and February
27, 1999, respectively, and are included in other noncurrent liabilities and
deferred credits on the accompanying consolidated balance sheets.
REVENUE RECOGNITION
The Company recognizes revenue at the time of sale of merchandise to its
customers.
STORE OPENING AND CLOSING COSTS
New store opening costs are charged to expense as incurred. In the event a
store is closed before its lease has expired, the total lease obligation, less
anticipated sublease rental income, is provided for in the year of closing.
During fiscal 1998 and 1997, the Company recorded charges of $446 and $1,753,
respectively, for estimated lease termination and other costs incurred in
connection with the closing of one of the Company's stores, of which $1,950 and
$265 were paid in fiscal 1998 and fiscal 1997, respectively.
ADVERTISING COSTS
Expenses associated with store advertising are charged to earnings as
incurred.
INCOME TAXES
The Company files a consolidated federal income tax return. Separate state
income tax returns are filed with each state in which the Company conducts
business.
The Company accounts for its income taxes using the asset and liability
method in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
the differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the year in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
earnings in the period that includes the enactment date.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted under SFAS No. 123, the Company has elected not to
adopt the fair value based method of accounting for its stock-based compensation
plans, but will continue to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issue to Employees" ("APB No. 25"). The
Company has complied with the disclosure requirements of SFAS No. 123.
EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") is calculated in accordance with SFAS
128, "Earnings Per Share." Basic EPS is calculated using income available to
common stockholders divided by the weighted average of common shares outstanding
during the year. Diluted EPS is similar to Basic EPS except that the weighted
average of common shares outstanding is increased to include the number of
additional common shares that
F-11
<PAGE> 49
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
would have been outstanding if the dilutive potential shares, such as options,
had been issued. The treasury stock method is used to calculate dilutive shares
which reduces the gross number of dilutive shares by the number of shares
purchasable from the proceeds of the options assumed to be exercised. All per
share amounts and weighted average shares presented herein have been restated to
reflect the effects of the stock conversion resulting from the Merger.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses, other
current liabilities and the Company's line of credit are reflected in the
consolidated financial statements at carrying value which approximates fair
value due to the short-term nature of these instruments. The carrying values of
the Company's long-term borrowings and capital lease obligations approximate
fair value based on current rates available to the Company for similar
instruments.
USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the balance sheet. Actual results could differ from these
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards requiring balance sheet recognition of all derivative instruments at
fair value. The statement specifies that changes in the fair value of derivative
instruments be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows derivative
gains and losses to offset related results on hedged items in the income
statement. Companies must formally document, designate and assess the
effectiveness of transactions utilizing hedge accounting. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
delays the original effective date of SFAS No. 133 until fiscal years beginning
after June 15, 2000. Management does not believe the adoption of SFAS No. 133
will have a material impact on the Company's financial position or results of
operations.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
2000 1999
------------ ------------
<S> <C> <C>
Due from vendors............................................ $1,422 $2,757
Other....................................................... 700 160
------ ------
$2,122 $2,917
====== ======
</TABLE>
F-12
<PAGE> 50
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
2000 1999
------------ ------------
<S> <C> <C>
Prepaid rent................................................ $ 5,865 $1,796
Other....................................................... 6,287 2,169
------- ------
$12,152 $3,965
======= ======
</TABLE>
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
2000 1999 DEPR. LIVES
------------ ------------ -----------
<S> <C> <C> <C>
Machinery and equipment............................. $ 13,473 $ 24,468 3-7 years
Furniture and fixtures.............................. 79,304 32,342 10 years
Property under capital leases....................... 8,776 0 3-10 years
Leasehold improvements.............................. 13,211 9,358 10 years
Construction-in-progress............................ 10,369 6,212
-------- --------
125,133 72,380
Less -- Accumulated depreciation.................. (44,916) (41,238)
-------- --------
$ 80,217 $ 31,142
======== ========
</TABLE>
Depreciation expense was $10,711, $5,776 and $5,490 during fiscal 1999,
1998 and 1997, respectively. At February 26, 2000, and February 27, 1999, assets
under capital lease amounted to $8,776 and $0, net of accumulated depreciation
of $929 and $0, respectively.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
2000 1999
------------ ------------
<S> <C> <C>
Salaries and employee benefits.............................. $ 6,105 $3,514
Leases payable.............................................. 3,728 1,736
Sales and property taxes payable............................ 3,122 1,142
Merchandise credits......................................... 2,194 211
Other....................................................... 2,948 180
------- ------
$18,097 $6,783
======= ======
</TABLE>
F-13
<PAGE> 51
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
2000 1999
------------ ------------
<S> <C> <C>
Senior secured revolving credit facility, interest rates as
follows:
At prime (8.75% at February 26, 2000)..................... $ 15,342 $20,168
At 30-day LIBOR (8.155%).................................. 30,000 0
At 60-day LIBOR (8.154%).................................. 40,000 0
At 30-day LIBOR (8.130%).................................. 30,000 0
-------- -------
115,342 20,168
-------- -------
Subordinated term note --
Principal (at 12% interest, paid monthly)................. 15,000 0
Paid-in-kind interest (at 3% interest, at maturity)....... 267 0
-------- -------
15,267 0
-------- -------
Long-term portion of capital lease obligation............... 87 0
-------- -------
$130,696 $20,168
======== =======
</TABLE>
In connection with the Merger, the Company entered into a revolving credit
facility with commercial banks which provides secured borrowings of up to $200
million. Available borrowings under the credit facility are based on a
percentage of eligible merchandise inventory at cost, as defined, and are
limited to 75% of eligible inventory during the period from December 16 to
September 14, and 79% of eligible inventory during the period from September 15
to December 15 of each year. The revolving credit facility expires in June 2002
and generally bears interest at the Prime Rate. Under the facility, the Company
has other borrowing options available which allow the Company to fix the
interest rate on portions of its outstanding indebtedness at the then LIBOR plus
2.25% for periods of between 30 days and 2 years. At February 26, 2000, the
Company had $30.0 million in a 30-day LIBOR advance at 8.155%, $30.0 million in
a 30-day LIBOR advance at 8.13% and $40.0 million in a 60-day LIBOR advance at
8.154%. An annual fee of .375% is payable quarterly on the unused portion of the
revolving credit facility. Outstanding letters of credit, which reduce available
borrowings, were $3,610 at February 26, 2000. The Company had additional
available borrowings under the credit facility of $16,277 as of February 26,
2000. The revolving credit facility expires in June 2002 and is collateralized
by all of the Company's assets.
Also in connection with the Merger, the Company entered into a term-loan
agreement, subordinated to the revolving credit facility, which provides secured
borrowings of $15 million at a rate of 12% per annum, payable monthly in
arrears. Additional paid-in-kind interest accrues on the unpaid principal
balance at 3% per annum (PIK interest) and is added to the then unpaid principal
balance of the term note on a monthly basis. The aggregate balance of PIK
interest so added to the term note accrues interest at a rate of 12% per annum.
Repayments of term loan borrowings are permitted beginning July 1, 2000, subject
to certain conditions. All outstanding indebtedness, including accrued PIK
interest, under the term loan agreement is due in full in June 2002. Borrowings
under the term loan agreement are collateralized, on a subordinated basis, by
all of the Company's assets.
The revolving credit facility and subordinated term note require the
Company to comply with certain financial performance covenants, including
meeting minimum earnings before interest, taxes, depreciation and amortization
(as defined) levels, and place restrictions on, among other things, the
Company's ability to incur additional indebtedness and prohibit the payment of
dividends. As of February 26, 2000, the Company was in compliance with all
financial performance covenants. Based on current estimates of cash flow,
management
F-14
<PAGE> 52
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
believes available borrowings under the revolving credit facility will be
sufficient to fund operations and new store growth during fiscal 2000.
Financing costs of $2,950 incurred to obtain the revolving credit facility
and subordinated term have been deferred and are being amortized over the
three-year term of the agreements.
Prior to entering into the new revolving credit facility and subordinated
term loan agreements in June 1999, the Company had a $35 million revolving
credit facility, with interest payable at the lender's prime rate and an annual
fee of .375% on the unused portion of the facility.
8. LEASES
The Company conducts all of its operations from leased facilities. The
leases are generally operating leases with initial terms of up to 20 years, and
most contain renewal options and rent escalation clauses. Rental payments
include minimum rentals plus real estate taxes, common area costs and other
contingent rental costs based on sales. Scheduled rent increases for store
leases are recognized on a straight-line basis over the respective term of the
lease. A deferred rent liability related to these scheduled rent increases of
$6,000 is included on the accompanying consolidated balance sheet as of February
26, 2000.
The Company also has noncancelable leases with terms up to three years
related to store fixtures and computer equipment, the majority of which are
operating in nature. In connection with the Merger, the Company assumed certain
fixture and equipment leases which have been accounted for as capital leases due
to bargain-purchase options available at the end of the lease term. Obligations
under capital leases have been capitalized using the Company's incremental cost
of borrowing at the time of the Merger.
Future minimum lease payments required under noncancelable leases with
initial or remaining terms of more than one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
<S> <C> <C>
2000........................................................ $ 3,030 $ 60,436
2001........................................................ 89 61,161
2002........................................................ 0 59,989
2003........................................................ 0 58,162
2004........................................................ 0 57,171
Thereafter.................................................. 0 439,594
------- --------
Total minimum lease payments, including interest............ 3,119 $736,513
========
Less -- Interest.......................................... (149)
-------
Present value of net minimum lease payments, less
interest.................................................. 2,970
Less -- Current portion of capital lease obligations...... (2,883)
-------
Long-term portion of capital lease obligations.............. $ 87
=======
</TABLE>
Rent expense for all operating leases was $42,843, $17,848 and $17,410 for
1999, 1998 and 1997, respectively.
9. RETIREMENT PLANS
The Company has two defined benefit pension plans covering most employees.
Salaried employees' benefits are based on the employees' years of service and
compensation. Hourly employees' benefits are based solely on years of service.
F-15
<PAGE> 53
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
During fiscal 1999, the Company amended its defined benefit plans such that
plan participants ceased to accrue additional pension benefits as of December
31, 1999. The portion of the projected benefit obligation based on future
compensation levels beyond December 31, 1999, exceeded the accumulated benefit
obligation. As a result, the Company recognized a net curtailment gain of $215.
The Company is currently in the process of obtaining appropriate regulatory
approval for termination of the defined benefit pension plans.
The following table, derived from the Company's most recent actuarial
valuation, sets forth the pension plans' funded status at December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Change in benefit obligation --
Benefit obligation at beginning of year:.................. $1,766 $1,319
Service cost........................................... 326 250
Interest cost.......................................... 138 113
Actuarial (gain) loss.................................. (133) 202
Curtailment............................................ (284) 0
Benefits paid.......................................... (84) (118)
------ ------
Benefit obligation at end of year........................... $1,729 $1,766
====== ======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Change in plan assets --
Fair value of plan assets at beginning of year:........... $1,476 $ 951
Actual return on plan assets........................... 91 91
Employer contributions................................. 72 552
Benefits paid.......................................... (84) (118)
------ ------
Fair value of plan assets at end of year.................... $1,555 $1,476
====== ======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Consisting of --
Funded status at end of year.............................. $(174) $(290)
Unrecognized net actuarial loss........................... 132 265
Unrecognized prior service cost........................... 0 66
----- -----
(Accrued) prepaid benefit cost.................... $ (42) $ 41
===== =====
</TABLE>
The Plans' assets consist primarily of units of certain collective trust
funds administered by the trustee and cash equivalents. A 7.75%, 6.75% and 7.50%
weighted average discount rate was used for both plans for the Plans' year
ending December 31, 1999, 1998 and 1997. A 3.00% rate of increase in future
payroll costs was used for the salaried plan in determining the actuarial
present value of the projected benefit obligations for the year ending December
31, 1999, 1998 and 1997. The expected long-term rate of return on assets was
8.00% for the Plans' year ending December 31, 1999, 1998 and 1997.
F-16
<PAGE> 54
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
The net periodic pension cost of the Company's defined benefit plans for
the plan years ending December 31 consisted of the following components:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
<S> <C> <C> <C>
Service cost................................................ $ 326 $250 $195
Interest cost............................................... 137 113 96
Expected return on plan assets.............................. (121) (87) (71)
Net amortization and deferral............................... 28 13 13
Curtailment gain, net....................................... (215) 0 0
----- ---- ----
Net periodic pension cost......................... $ 155 $289 $233
===== ==== ====
</TABLE>
The Company also sponsors a defined contribution savings plan covering the
majority of its full-time employees. Contributions by the employees are
partially matched by the Company. The participants' contributions are 100%
vested at all times and the Company's contributions vest over a three-year
period. The Company's expense under this plan was $561, $397 and $219 in fiscal
1999, fiscal 1998 and fiscal 1997, respectively.
10. INCOME TAXES:
Components of the (provision) benefit for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ------ ------
<S> <C> <C> <C>
Current provision........................................... $(61) $ (39) $ (52)
Deferred benefit............................................ 0 2,082 1,101
---- ------ ------
Total (provision) benefit for income taxes........ $(61) $2,043 $1,049
==== ====== ======
</TABLE>
A reconciliation of the differences between the statutory U.S. federal
income tax rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income tax benefit at statutory rate...................... $(7,373) $ (418) $(1,954)
State income taxes........................................ 61 44 52
Change in valuation allowance............................. 7,373 (1,669) 853
------- ------- -------
$ 61 $(2,043) $(1,049)
======= ======= =======
</TABLE>
F-17
<PAGE> 55
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
2000 1999
------------ ------------
<S> <C> <C>
Deferred tax assets --
Net operating loss carryforwards.......................... $ 78,495 $11,265
Deferred rent and tenant allowances....................... 2,692 1,698
Reserves not currently deductible......................... 4,102 779
Book depreciation in excess of tax........................ 644 0
-------- -------
85,933 13,742
Less -- Valuation allowance............................... (81,316) (5,568)
-------- -------
Total net deferred tax assets..................... 4,617 8,174
-------- -------
Deferred tax liabilities --
Tax depreciation in excess of book........................ 0 3,340
Prepaid expenses.......................................... 86 303
-------- -------
Total deferred tax liabilities.................... 86 3,643
-------- -------
Net deferred tax asset............................ $ 4,531 $ 4,531
======== =======
</TABLE>
At February 26, 2000, the Company had approximately $197,000 of federal and
state net operating loss carryforwards ("NOLs") and $193,000 of state NOL's
available to reduce future taxable income, the majority of which were acquired
in connection with the Merger discussed in Note 1. Utilization of the Company's
NOLs is subject to annual limitations under the Internal Revenue Code and is
entirely dependent on the Company's ability to generate sufficient taxable
income prior to the expiration of the NOLs. The Company's NOLs expire in various
amounts during the period 2009 to 2019, with the majority of the NOLs expiring
between years 2012 and 2019.
Recognition of a deferred tax asset related to the expected utilization of
tax loss carryforwards is conditioned on the existence of sufficient positive
evidence indicating it is more likely than not that the asset will be realized.
Based on the Company's projections of future operations, the Company believes it
will generate sufficient taxable income to utilize all of its NOLs. Under
generally accepted accounting principles, however, projected financial
performance alone is not sufficient to warrant the recognition of a tax asset to
the extent the Company has not demonstrated an ability to achieve profitability
in recent years. Rather, the presumption exists that absent historical evidence
of the Company's ability to generate taxable income, a valuation reserve against
deferred tax assets should be established. Accordingly, The Company has provided
a full valuation allowance against NOL and other deferred tax assets acquired as
a result of the Merger, which has had the effect of increasing goodwill
recognized as a result of the Merger by approximately $68,000. Further, the
Company has not provided any tax benefit for the loss experienced in the current
year.
The valuation allowance established by the Company is subject to periodic
review and adjustment based on changes in facts and circumstances. Adjustments
to the valuation allowance related to deferred tax assets exclusive of those
acquired as part of the Merger are recorded as adjustments to the Company's
income tax expense in the year of change. Any reductions in the allowance
related to NOL and other deferred tax assets acquired as part of the Merger will
be treated as a direct reduction of goodwill in the year in which the reduction
is deemed warranted.
F-18
<PAGE> 56
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
11. CAPITAL STOCK, WARRANTS AND OPTIONS
CAPITAL STOCK AND WARRANTS
Prior to the Merger, Waccamaw's capital stock consisted of 20,000,000
outstanding shares of common stock (no par value) with a stated value of
$0.053375 per share. On June 15, 1999, pursuant to the Merger, all 20,000,000
outstanding shares of Waccamaw common stock were converted into 10,000,000
shares of HomePlace common stock with a par value of $0.001 per share. An
additional 4,054,054 shares of HomePlace common stock were issued to the former
Waccamaw stockholder for total proceeds of $25,000.
Pursuant to the Plan of Reorganization of the Holdings Group and the
Merger, 10,945,946 shares of HomePlace common stock were issued to certain
creditors and preferred stockholders of Holdings.
Under the term of the Plan of Reorganization, warrants to purchase 600,000
shares of HomePlace common stock were issued to the former Waccamaw stockholder
and warrants to purchase 1,250,000 shares of HomePlace common stock were issued
to holders of certain equity interests in the Holdings Group. The warrants
issued to the former Waccamaw stockholder are exercisable over a period of 19
months at an exercise price of $12.00 per share. The warrants issued to former
holders of preferred equity interests in Holdings and its subsidiaries are
exercisable over a period of five years at an exercise price of $14.00 per
share.
As of February 26, 2000, HomePlace was authorized to issue 40,000,000
shares of common stock and 5,000,000 shares of preferred stock with a par value
of $0.10 per share. As of February 26, 2000, 25,000,000 shares of common stock
and no shares of preferred stock are issued and outstanding.
OPTIONS
In May 1995, the Board of Directors approved the HomePlace of America, Inc.
amended and restated Stock Incentive Plan (Stock Incentive Plan) (formerly the
Waccamaw Stock Incentive Plan), which covers the award of incentive stock
options and nonqualified stock options to employees and nonemployee directors.
The objectives of the Stock Incentive Plan include attracting and retaining the
best personnel, providing for additional performance incentives, and promoting
the success of the Company by providing employees the opportunity to acquire
common stock. The Stock Incentive Plan also provides incentives to nonemployee
directors to remain on the Board of Directors and share in the future
profitability of the Company. Each option to purchase shares of the common stock
of Waccamaw Corporation which was outstanding immediately prior to the Merger,
whether vested or unvested, was adjusted such that each Waccamaw stock option
was deemed to constitute an option to acquire one-half of a share of common
stock of HomePlace of America, Inc. at the exercise price of the Waccamaw stock
option multiplied by two. Options outstanding under the Company's Stock
Incentive Plan have been granted at prices which are either equal to or above
the market value of the stock on the date of grant, generally vest over a period
of five years (one year for non-employee directors), and expire ten years after
the grant date.
F-19
<PAGE> 57
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
The status of the Company's stock option plan, restated to reflect the
conversion of Waccamaw stock options, is summarized below as of February 26,
2000:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
OUTSTANDING AT FEBRUARY 22, 1997............................ 300,000 $11.20
Granted................................................... 42,500 11.20
Exercised................................................. 0 0.00
Canceled.................................................. 0 0.00
--------- ------
OUTSTANDING AT FEBRUARY 28, 1998............................ 342,500 11.20
Granted................................................... 5,000 11.20
Exercised................................................. 0 0.00
Canceled.................................................. 0 0.00
--------- ------
OUTSTANDING AT FEBRUARY 27, 1999............................ 347,500 11.20
Granted................................................... 930,000 11.97
Exercised................................................. 0 0.00
Canceled.................................................. 106,500 11.76
--------- ------
OUTSTANDING (HELD BY 30 OPTIONEES) AT FEBRUARY 26, 2000..... 1,171,000 11.76
========= ======
OPTIONS EXERCISABLE AT --
February 26, 2000......................................... 241,000 11.20
February 27, 1999......................................... 175,000 11.20
February 28, 1998......................................... 105,000 11.20
========= ======
</TABLE>
The outstanding options expire at various dates through June 2009. As of
February 26, 2000, the Company is authorized to grant options for up to
2,000,000 common shares under the Plan.
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," under which no compensation cost is
recognized for stock options granted at or above fair market value. Had
compensation expense for the Company's stock option awards been determined based
upon fair values at the grant dates in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below. The pro forma
effects of applying SFAS No. 123 are not indicative of future amounts because
this statement does not apply to awards granted prior to fiscal year 1996.
Additional stock option awards are anticipated in future years.
<TABLE>
<CAPTION>
1999 1998 1997
-------- ---- -------
<S> <C> <C> <C>
Net earnings (loss):
As reported............................................... $(21,126) $850 $(4,533)
Pro forma................................................. (21,378) 679 (4,697)
Earnings (loss) per share:
As reported............................................... (1.03) .09 (.45)
Pro forma................................................. (1.04) .07 (.47)
======== ==== =======
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and
1997 as estimated on the date of grant using the Black-Scholes option-pricing
model was $3.82, $4.21 and $4.21. The fair value of 1999, 1998 and 1997 options
granted is estimated on the date of grant using the following assumptions:
dividend yield of 0%, expected volatility of 0%, risk-free interest rate range
of 5.4% to 6.9% depending on grant date and an expected life of seven years.
F-20
<PAGE> 58
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 26, 2000, FEBRUARY 27, 1999, AND FEBRUARY 28, 1998
Summary information about the Company's stock options outstanding at
February 26, 2000:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE OUTSTANDING AT PERIODS IN EXERCISE EXERCISABLE EXERCISE
PRICE 2/26/00 YEARS PRICE AT 2/26/00 PRICE
-------- -------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$11.20-$12.00..................... 1,171,000 8.38 $11.76 241,000 $11.20
========= ==== ====== ======= ======
</TABLE>
12. CALCULATIONS OF EARNINGS PER SHARE
The basic and diluted earnings per share calculations are presented in the
following table:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Basic and diluted earnings (loss) per share --
Net income (loss):............................ $ (21,126) $ 850 $ (4,533)
Weighted average number of common shares
outstanding during the period.............. 20,549,451 10,000,000 10,000,000
----------- ----------- -----------
Basic and diluted earnings per share.......... $ (1.03) $ .09 $ (.45)
=========== =========== ===========
</TABLE>
Options and warrants to purchase shares of common stock were outstanding
during 1999, 1998 and 1997, but were not included in the computation of diluted
EPS because the effect was anti-dilutive.
13. RELATED-PARTY TRANSACTIONS
As discussed in Note 1, in connection with the Merger, 4,054,054 shares of
HomePlace's common stock were issued to the former Waccamaw stockholder at an
aggregate price of $25,000. Warrants valued at $156 to purchase 600,000 shares
of HomePlace's common stock were also issued to the former Waccamaw stockholder
as part of the Merger.
For services as investment and financial advisers in connection with the
Merger, the Company paid G. William Miller & Co., Inc. a fee of $1,500. G.
William Miller is the Chairman and principal owner of G. William Miller & Co.,
Inc. and has served as Chairman of the Board of the Company since the Merger. G.
William Miller previously served as Chairman of the Board of Waccamaw prior to
the Merger.
For services in connection with the Merger, Peter J. Solomon Company, of
which David L. Resnick was a Principal/Managing Director, received $3,500. David
L. Resnick has served as a director of the Company since the Merger.
14. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company maintains insurance coverage for workers' compensation and
medical and dental claims, subject to certain deductibles and/or stop-loss
coverages. The Company accrues liabilities under these programs based on the
loss and loss adjustment expenses as estimated, in part, by an outside
administrator.
LITIGATION AND CLAIMS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-21
<PAGE> 59
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited Pro Forma Consolidated Statement of Operations and
explanatory notes are presented to show the impact of the results of operations
if the Merger had been consummated on February 28, 1998. They reflect the
consolidation of the results of operations of HomePlace Holdings, Inc. and of
HomePlace of America, Inc., and certain expense adjustments. The financial data
below is provided for informational purposes only and is not intended to be
indicative of future performance.
HOMEPLACE OF AMERICA, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 26, 2000
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 26, 2000
-----------------------------------------------------------
HOMEPLACE HOMEPLACE OF
HOLDINGS, INC. AMERICA, INC. ADJUSTMENTS TOTAL
-------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales................................. $109,727 $ 576,941 $ 686,668
Cost of sales, including buying and
warehousing costs....................... 64,488 372,751(1) 437,239
-------- ---------- -----------
Gross profit............................ 45,239 204,190 249,429
Store operating, general and
administrative expenses................. 48,583 204,536 822(2) 253,941
Business integration expenses............. 0 10,116 10,116
-------- ---------- -----------
Loss from operations.................... (3,344) (10,462) (14,628)
Interest expense.......................... (2,765) (9,772) 110(3) (12,427)
Other non-operating expenses, net......... 0 (831) (831)
-------- ---------- -----------
Loss before reorganization items........ (6,109) (21,065) (27,886)
Reorganization items...................... (12,785) 0 (12,785)
-------- ---------- -----------
Loss before taxes....................... (18,894) (21,065) (40,671)
Provision for income taxes................ 0 (61) (61)
-------- ---------- -----------
Net Loss........................ $(18,894) $ (21,126) $ (40,732)
======== ========== ===========
Net loss per share -- Basic and
Diluted(4).............................. $ (1.22)
===========
Weighted average shares outstanding(4).... 25,000,000
===========
</TABLE>
---------------
(1) Includes $14,043 of clearance markdowns to liquidate inventory and align the
merchandise assortments of the new combined HomePlace.
(2) Store operating, general and administrative expenses have been adjusted to
reflect annualized amortization of goodwill.
(3) Interest expense has been adjusted downward reflecting the reduction in
interest rate on the $15 million term note of HomePlace of America, Inc.
that replaced the HomePlace Holdings, Inc. term note.
(4) Reflects stock conversion pursuant to the Merger.
F-22
<PAGE> 60
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MAY 27, 2000 AND FEBRUARY 28, 2000
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 27, FEBRUARY 26,
2000 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,898 $ 2,787
Accounts receivable....................................... 6,106 2,122
Merchandise inventories................................... 215,993 200,151
Other current assets...................................... 14,633 12,152
--------- ---------
Total current assets.............................. 240,630 217,212
PROPERTY AND EQUIPMENT, Net................................. 82,085 80,217
GOODWILL, Net............................................... 109,969 110,673
DEFERRED INCOME TAXES....................................... 3,419 3,419
OTHER ASSETS, Net........................................... 2,608 2,615
--------- ---------
Total assets...................................... $ 438,711 $ 414,136
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 74,912 $ 56,260
Accrued expenses.......................................... 14,959 18,097
Accrued interest.......................................... 1,124 1,028
Current portion of capital lease obligation............... 2,274 2,883
--------- ---------
Total current liabilities......................... 93,269 78,268
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION................. 147,795 130,696
OTHER NONCURRENT LIABILITIES AND DEFERRED CREDITS........... 8,222 7,264
--------- ---------
Total liabilities................................. 249,286 216,228
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 5,000,000 shares
authorized; none issued and outstanding................ 0 0
Common stock, $0.001 par value; 40,000,000 shares
authorized; 25,000,000 shares issued and outstanding... 25 25
Additional paid-in capital................................ 370,359 370,359
Retained deficit.......................................... (180,959) (172,476)
--------- ---------
Total stockholders' equity........................ 189,425 197,908
--------- ---------
Total liabilities and stockholders' equity........ $ 438,711 $ 414,136
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
F-23
<PAGE> 61
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED MAY 27, 2000 AND MAY 29, 1999
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
MAY 27, MAY 29,
2000 1999
----------- -----------
<S> <C> <C>
NET SALES................................................... $ 155,477 $ 59,351
COST OF SALES, including buying and warehousing costs....... 96,904 37,071
----------- -----------
Gross profit.............................................. 58,573 22,280
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES........ 61,770 23,187
BUSINESS INTEGRATION EXPENSES............................... 1,450 --
----------- -----------
Loss from operations................................... (4,647) (907)
INTEREST EXPENSE............................................ (3,836) (504)
----------- -----------
Loss before income taxes............................... (8,483) (1,411)
PROVISION FOR INCOME TAXES.................................. 0 (12)
----------- -----------
Net loss.......................................... $ (8,483) $ (1,423)
=========== ===========
NET LOSS PER SHARE -- Basic and Diluted..................... $ (0.34) $ (0.14)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 25,000,000 10,000,000
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-24
<PAGE> 62
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MAY 27, 2000 AND MAY 29, 1999
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
---------------------------
MAY 27, 2000 MAY 29, 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (8,483) $(1,423)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 3,862 1,427
(Gain) loss on disposal of fixed assets................ (5) 2
Changes in operating assets and liabilities:
Receivables.......................................... (3,984) 229
Inventory............................................ (15,842) (1,904)
Other current assets................................. (2,481) (1,521)
Other assets......................................... 6 14
Accounts payable and accrued expenses................ 15,611 (490)
Other liabilities.................................... 1,097 (25)
-------- -------
Net cash used in operating activities............. (10,219) (3,691)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (5,026) (1,646)
Proceeds from sale of equipment, net...................... 5 0
-------- -------
Net cash used in investing activities............. (5,021) (1,646)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility............ 17,012 4,969
Payments under capitalized leases......................... (661) 0
-------- -------
Net cash provided by financing activities......... 16,351 4,969
-------- -------
(INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS.......... 1,111 (368)
CASH AND CASH EQUIVALENTS, beginning of year................ 2,787 3,193
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,898 $ 2,825
======== =======
CASH PAID DURING THE PERIOD FOR:
Interest............................................... $ 3,740 $ 467
Income taxes........................................... 0 12
-------- -------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-25
<PAGE> 63
HOMEPLACE OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 27, 2000 AND MAY 29, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
On June 15, 1999, Waccamaw Corporation and its subsidiaries ("Waccamaw")
completed a merger (the "Merger") pursuant to the Plan of Reorganization of
HomePlace Holdings, Inc. and its subsidiaries (the "Holdings Group"). HomePlace
of America, Inc. ("HomePlace" or the "Company") was formed to be, and is, the
surviving entity of the Merger. The Merger has been treated as an acquisition of
the Holdings Group by Waccamaw and has been accounted for under the purchase
method of accounting. Accordingly, the accompanying consolidated financial
statements represent the results of operations of HomePlace and its subsidiaries
for the first quarter of 2000 compared to the results of operations of Waccamaw
for the first quarter of 1999. As a result, the results of operations for the
first quarter of 2000 are not comparable to the results of operations for the
first quarter of 1999.
The accompanying consolidated financial statements have been prepared by
the Company and, except for the consolidated balance sheet as of February 26,
2000, have not been audited. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
of the Company and the results of its operations and cash flows. Because of the
seasonality of the retailing business, operating results for the Company on a
quarterly basis may not be indicative of operating results for the full year.
These financials statements should be read in conjunction with the
Company's audited consolidated financial statements for the fiscal year ended
February 26, 2000, included in the Company's amended Form 10 filed with the
Securities and Exchange Commission on August 14, 2000. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.
2. CHANGE IN ACCOUNTING METHOD
Effective February 27, 2000, the Company changed its method of valuing
inventory from the conventional retail method to the weighted average cost
method. In fiscal 2000, the Company completed the implementation of new computer
software (SAP) that enables it to better track costs and movements of individual
items on a perpetual basis. This accounting change had no material impact on the
results of operations or financial position of the Company for current interim
period or for prior fiscal periods.
3. REVOLVING CREDIT FACILITY, TERM NOTE, AND COMMERCIAL CREDIT AGREEMENT
In connection with the Merger, the Company entered into a revolving credit
facility (the "Revolving Credit Facility") with commercial banks that provides
secured borrowings of up to $200 million. The Revolving Credit Facility was
amended, as discussed below, on May 12, 2000. Available borrowings under the
Revolving Credit Facility, as amended, are based on a percentage of eligible
merchandise inventory at cost, as defined, and are limited to 75% of eligible
inventory during the period from December 16 to September 14, 79% of eligible
inventory during the period of September 15 to December 15 of each year.
Outstanding letters of credit, which reduce available borrowings, were $6.1
million at May 27, 2000. The Company had additional available borrowings under
the Revolving Credit Facility of $7.9 million at May 27, 2000. The Revolving
Credit Facility expires in June 2002 and is generally collateralized by all of
the Company's assets.
Also in connection with the Merger, the Company entered into a term loan
(the "Term Loan"), subordinated to the Revolving Credit Facility. The Term Loan
was amended, as discussed below, on May 12, 2000. The Term Loan, as amended,
provides secured borrowings of $15 million (exclusive of PIK interest as defined
hereinafter) at a rate of 12.5% per annum, payable monthly in arrears.
Additional paid-in-kind interest ("PIK Interest") accrues at a rate of 3% per
annum on the unpaid principal balance and is added to the then
F-26
<PAGE> 64
unpaid principal balance of the Term Loan. The aggregate balance of PIK Interest
so added to the Term Loan accrues interest at a rate of 12.5% per annum.
Repayments of the Term Loan are permitted beginning July 1, 2000, subject to
certain conditions. All outstanding indebtedness under the Term Loan, including
accrued PIK Interest, is due in full in June 2002. Borrowings under the Term
Loan are collateralized on a subordinated basis by all of the Company's assets.
On May 12, 2000, the Company amended the Revolving Credit Facility and the
Term Loan. Per the amendment, the interest rates on advances under the Revolving
Credit Facility and on the Term Loan were increased by 0.25% and 0.50%,
respectively, and the EBITDA covenant (as defined in the Revolving Credit
Facility) was amended, reducing the required EBITDA.
On August 3, 2000, the Company entered into an $5 million unsecured
commercial credit agreement with Carolina First Bank (the "Carolina First
Agreement"). The Carolina First Agreement will be used exclusively for letters
of credit, which the Company generally issues in connection with its import
purchases. The Carolina First Agreement contains certain financial performance
covenants, including adjusted net worth and working capital (both as defined
therein).
The Revolving Credit Facility and the Term Loan, both as amended, require
the Company to comply with certain financial performance covenants, including
minimum levels of EBITDA as defined, and place restrictions on, among other
things, the Company's ability to incur additional indebtedness and prohibit the
payment of dividends. As of May 27, 2000, the Company was in compliance with all
financial performance covenants.
4. MERGER RELATED LIABILITIES AND EXPENSES
Business integration expenses reflected on the accompanying statement of
operations for thirteen weeks ended May 27, 2000 represent costs associated with
the integration of the businesses of Waccamaw and the Holdings Group. Such costs
include $1.0 million incurred to reformat existing Waccamaw and Holdings Group
stores, $0.2 million in marketing costs promoting the "grand re-opening" of the
stores, $0.1 million in employee-related expenses, and $0.2 of incremental costs
incurred to operate a dual replenishment system.
The activity associated with business integration expenses and liabilities
resulting from the Merger for the thirteen weeks ended May 27, 2000, is as
follows (in thousands):
<TABLE>
<CAPTION>
ACCRUAL PROVISION FOR
AT BUSINESS CASH ENDING
FEBRUARY 26, INTEGRATION PAYMENTS ACCRUAL
2000 EXPENSES MADE BALANCE
------------ ------------- -------- -------
<S> <C> <C> <C> <C>
Waccamaw store closings, net of proceeds...... $ 506 -- $ 224 $282
Reformatting stores and consolidation of
merchandise offerings....................... 690 967 1,425 232
Marketing expense to promote "grand
re-opening"................................. -- 181 181 --
Incremental distribution expenses to operate
dual systems................................ -- 190 190 --
Other expenses for employee relocation and
retention................................... 520 112 632 --
------ ------ ------ ----
$1,716 $1,450 $2,652 $514
====== ====== ====== ====
</TABLE>
5. LEASES
During the first quarter of 2000, the Company entered into various leases
related to the opening of its new stores and distribution centers. These leases
are operating leases and are similar to the Company's other facilities' leases
with respect to initial terms, renewal options, rent escalation clauses, payment
of executory costs, etc. The Company expects to lease substantially all of the
machinery and equipment for its distribution centers.
F-27
<PAGE> 65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
HomePlace Holdings, Inc. and Subsidiaries, Debtors and
Debtors-in-Possession:
We have audited the accompanying consolidated balance sheets of HomePlace
Holdings, Inc. (a Nevada corporation) and Subsidiaries, Debtors and
Debtors-in-Possession, as of February 27, 1999 and February 28, 1998, and the
related consolidated statements of operations, stockholders' interest and cash
flows for each of the three years in the period ended February 27, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of HomePlace Holdings, Inc. and
Subsidiaries, Debtors and Debtors-in-Possession, as of February 27, 1999 and
February 28, 1998, and the results of their operations and their cash flows for
each of three years in the period ended February 27, 1999, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 3 to the consolidated financial statements, on January 5, 1998, the
Company filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code. In addition, the Company has experienced losses before
reorganization items in each of the last three years ending February 27, 1999,
and as of February 27, 1999 had a stockholder's deficit. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon, among
other things, (i) acceptance of the Plan of Reorganization by the Company's
creditors, with confirmation by the Bankruptcy Court, (ii) compliance with all
covenants under the debtor-in-possession credit facility and senior subordinated
notes, (iii) the success of future operations and (iv) resolution of the
uncertainties of the reorganization case, as discussed further in Note 3.
Management's plans in regard to these matters are also discussed in Note 1 to
the consolidated financial statements.
The eventual outcome of the matters discussed in the previous paragraph is
not presently determinable. The consolidated financial statements do not include
any adjustments relating to the resolution of these uncertainties or the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Arthur Andersen LLP
Cleveland, Ohio,
April 29, 1999.
F-28
<PAGE> 66
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 2,259.5 $ 4,886.8
Accounts receivable....................................... 5,477.2 4,540.9
Receivable from liquidator................................ -- 14,625.3
Merchandise inventories................................... 125,457.3 138,717.3
Prepaid expenses and other current assets................. 9,846.4 11,206.3
----------- -----------
Total current assets.............................. 143,040.4 173,976.6
PROPERTY AND EQUIPMENT, NET................................. 38,392.3 50,156.5
OTHER ASSETS................................................ 83.0 96.9
----------- -----------
Total assets...................................... $ 181,515.7 $ 224,230.0
=========== ===========
LIABILITIES AND STOCKHOLDERS' INTEREST
CURRENT LIABILITIES:
Current portion of capital lease obligations.............. $ 3,856.9 $ 8,439.6
Accounts payable.......................................... 24,642.2 12,859.5
Accrued expenses.......................................... 14,858.4 14,545.2
----------- -----------
Total current liabilities......................... 43,357.5 35,844.3
LONG-TERM DEBT.............................................. 62,311.2 76,242.6
DEFERRED RENT............................................... 13,549.6 13,159.3
OTHER LIABILITIES........................................... 481.4 1,172.4
LIABILITIES SUBJECT TO COMPROMISE........................... 181,454.5 151,607.4
CAPITAL LEASE OBLIGATIONS................................... 481.1 5,988.4
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INTEREST:
Preferred stock........................................... 0.6 0.6
Common stock.............................................. 0.3 0.3
Additional paid-in capital................................ 87,453.9 87,453.8
Accumulated deficit....................................... (207,574.4) (147,239.1)
----------- -----------
Total stockholders' interest...................... (120,119.6) (59,784.4)
----------- -----------
Total liabilities and stockholders' interest...... $ 181,515.7 $ 224,230.0
=========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are
an integral part of these balance sheets.
F-29
<PAGE> 67
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 27, 1999, FEBRUARY 28, 1998, AND MARCH 1, 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28, MARCH 1,
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Net sales.................................................. $429,957.4 $443,869.5 $269,903.1
Cost of goods sold......................................... 258,933.4 273,692.3 165,350.4
---------- ---------- ----------
Gross profit............................................. 171,024.0 170,177.2 104,552.7
---------- ---------- ----------
Operating, store and administrative expenses:
Store operating and selling.............................. 150,321.2 171,004.1 100,830.4
Store pre-opening........................................ -- 12,423.4 10,193.6
Administrative........................................... 18,794.0 21,719.1 15,856.0
---------- ---------- ----------
169,115.2 205,146.6 126,880.0
---------- ---------- ----------
Income (loss) from operations.............................. 1,908.8 (34,969.4) (22,327.3)
Interest expense, net...................................... (8,721.0) (16,225.7) (596.3)
---------- ---------- ----------
Net loss before reorganization items.................. (6,812.2) (51,195.1) (22,923.6)
Reorganization items (Note 3).............................. 53,523.1 46,587.9 --
---------- ---------- ----------
Net loss......................................... $(60,335.3) $(97,783.0) $(22,923.6)
========== ========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-30
<PAGE> 68
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INTEREST
FOR THE YEARS ENDED FEBRUARY 24, 1996, MARCH 1, 1997, FEBRUARY 28, 1998, AND
FEBRUARY 27, 1999
(THOUSANDS OF DOLLARS AND SHARES)
<TABLE>
<CAPTION>
CLASS 1 CLASS 1 CLASS 1
SERIES A SERIES B SERIES C CLASS B CLASS C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------- --------------- --------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance of February 24,
1996................... 320.0 $ .3 106.7 $ .1 188.7 $ .2 154.2 $ .1 154.2 $ .1
Exercise of stock
options.............. -- -- -- -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Balance of March 1,
1997................... 320.0 .3 106.7 .1 188.7 .2 154.2 .1 154.2 .1
Exercise of stock
options.............. -- -- -- -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Balance of February 28,
1998................... 320.0 .3 106.7 .1 188.7 .2 154.2 .1 154.2 .1
Exercise of stock
options.............. -- -- -- -- -- -- -- -- -- --
Net loss............... -- -- -- -- -- -- -- -- -- --
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Balance at February 27,
1999................... 320.0 $ .3 106.7 $ .1 188.7 $ .2 154.2 $ .1 154.2 $ .1
===== ==== ===== ==== ===== ==== ===== ==== ===== ====
<CAPTION>
CLASS D
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance of February 24,
1996................... 11.6 $ .1 $87,450.0 $ (26,532.5) $ 60,918.4
Exercise of stock
options.............. .1 -- -- -- --
Net loss............... -- -- -- (22,923.6) (22,923.6)
---- ---- --------- ----------- -----------
Balance of March 1,
1997................... 11.7 .1 87,450.0 (49,456.1) 37,994.8
Exercise of stock
options.............. 1.1 -- 3.8 -- 3.8
Net loss............... -- -- -- (97,783.0) (97,783.0)
---- ---- --------- ----------- -----------
Balance of February 28,
1998................... 12.8 .1 87,453.8 (147,239.1) (59,784.4)
Exercise of stock
options.............. 1.8 -- .1 -- .1
Net loss............... -- -- -- (60,335.3) (60,335.3)
---- ---- --------- ----------- -----------
Balance at February 27,
1999................... 14.6 $ .1 $87,453.9 $(207,574.4) $(120,119.6)
==== ==== ========= =========== ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-31
<PAGE> 69
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 27, 1999, FEBRUARY 28, 1998, AND MARCH 1, 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28, MARCH 1,
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (60,335.3) $ (97,783.0) $(22,923.6)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities before reorganization
items:
Depreciation and amortization........................... 8,603.8 13,103.0 882.2
Reorganization items.................................... 53,523.1 46,587.9 --
Changes in assets and liabilities:
Accounts receivable................................... (936.3) (2,292.5) (3,406.0)
Receivable from liquidator............................ 14,625.3 (14,625.3) --
Merchandise inventories............................... 6,705.2 (6,182.2) (88,518.5)
Prepaid expenses and other current assets............. 1,032.5 (6,973.6) (6,358.8)
Accounts payable...................................... 13,092.7 59,699.7 32,642.0
Accrued expenses...................................... (5,738.7) 6,893.0 2,865.4
Deferred rent......................................... 2,905.4 6,969.4 5,247.5
Other................................................. (1,423.2) 820.9 (189.5)
----------- ----------- ----------
Net cash provided by (used in) operating activities
before reorganization items....................... 32,054.5 6,217.3 (79,759.3)
----------- ----------- ----------
Reorganization items:
Bankruptcy-related professional fees paid............... (5,958.1) (1,115.7) --
Other reorganization expenses paid, net................. (3,328.3) -- --
----------- ----------- ----------
Net cash provided by (used in) operating
activities........................................ 22,768.1 5,101.6 (79,759.3)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (3,258.4) (29,945.4) (3,117.5)
Purchase of assets held for sale.......................... -- -- (21,935.5)
Proceeds from sale of assets held for sale................ -- 7,816.6 13,809.6
Purchase of investments................................... -- -- (97,473.0)
Proceeds from maturity of investments..................... -- -- 10,953.6
Proceeds from sale of investments......................... -- -- 86,519.4
----------- ----------- ----------
Net cash used in investing activities............... (3,258.4) (22,128.8) (11,243.4)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowings....................... -- -- (6,525.0)
Proceeds from long-term debt.............................. 150,482.9 189,278.1 99,005.4
Repayments of long-term debt.............................. (164,414.2) (161,423.6) (50,617.3)
Repayments of capital lease obligations................... (8,205.8) (8,052.0) --
Net proceeds from private placement subscription of
Class 1 Series C Preferred Stock.................. -- -- 41,557.1
----------- ----------- ----------
Net cash (used in) provided by financing
activities........................................ (22,137.0) 19,802.5 83,420.2
----------- ----------- ----------
NET (DECREASE) INCREASE IN CASH............................. (2,627.3) 2,775.3 (7,582.5)
----------- ----------- ----------
CASH AT BEGINNING OF PERIOD................................. 4,886.8 2,111.5 9,694.0
----------- ----------- ----------
CASH AT END OF PERIOD....................................... $ 2,259.5 $ 4,886.8 $ 2,111.5
=========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 7,949.2 $ 16,817.6 $ 923.5
Income taxes............................................ -- -- --
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-32
<PAGE> 70
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
1. CHAPTER 11 PROCEEDINGS AND BASIS OF PRESENTATION
HomePlace Holdings, Inc., a Nevada Corporation, and its subsidiaries,
HomePlace Stores, Inc., a Delaware Corporation, HomePlace Stores Two, Inc., a
Delaware Corporation, and HomePlace Management, Inc., an Ohio Corporation,
(collectively "HomePlace" or the "Company") operate a national chain of home-
fashion superstores offering high quality home textiles and housewares.
The Company filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") on January 5, 1998 (the "Filing")
and is presently operating as debtors and debtors-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the District of Delaware
(the "Bankruptcy Court"). Accordingly, the Company's consolidated financial
statements have been prepared in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
As stated in SOP 90-7, entering Chapter 11 does not change the application
of generally accepted accounting principles. However, the financial statements
distinguish transactions and events that are directly associated with the Filing
from the ongoing operations of the business. These transactions and events are
discussed in more detail in Note 3.
The United States Trustee for the District of Delaware appointed an
Official Committee of Unsecured Creditors ("Committee") for the Chapter 11 case.
The role of the Committee includes, among other things: (a) consultation with
the Company concerning the administration of the Chapter 11 case, (b)
investigation of the acts, conduct, assets, liabilities, financial condition and
operations of the Company and the desirability of the continuation of its
business and other relevant matters and (c) participation in the formulation of
a plan of reorganization. In discharging these responsibilities, the Committee
has standing to raise issues with the Bankruptcy Court relating to the business
of the Company and the conduct and course of the Chapter 11 case. The Company is
required to pay certain expenses of the Committee, including professional fees,
to the extent allowed by the Bankruptcy Court.
Since the Filing, the Company closed twenty-three unprofitable stores; ten
of which began liquidating in February 1998, an additional ten which began
liquidating in June 1998 and the remaining three which began liquidating in
January 1999. The respective real estate leases at each of the twenty-three
closed stores were rejected. In addition, the Company successfully terminated
nine real estate leases on store locations which were not opened as of the
Filing and rejected four others. The Company also rejected certain fixture
leases. The majority of these rejected lease obligations remain unsettled as of
February 27, 1999 and are classified as liabilities subject to compromise on the
accompanying consolidated balance sheets.
On April 1, 1999, the Company filed its plan of reorganization (the "Plan")
and the related disclosure statement with the Bankruptcy Court and, subject to
confirmation of the Plan, currently anticipates emergence from Chapter 11 in
June 1999. On April 28, 1999, the Bankruptcy Court approved the Company's
disclosure statement for solicitation of acceptance from its creditors and
shareholders. The Company currently retains the exclusive right to file a plan
of reorganization and related disclosure statement until April 30, 1999, and to
solicit acceptance thereof until June 30, 1999.
The Company's Plan is premised upon a merger of HomePlace and the Waccamaw
Corporation ("Waccamaw") pursuant to a merger agreement executed on March 16,
1999 (the "Agreement"). Waccamaw is a leading home decor retailer based in
Myrtle Beach, South Carolina which operates 45 stores located predominantly in
the Southeast United States. On the terms and subject to the conditions set
forth in the Agreement, HomePlace Holdings, Inc., through its
successor-in-interest in HomePlace of America, Inc. (a newly formed Delaware
corporation), and Waccamaw will merge, with HomePlace of America, Inc. being the
surviving corporation. On the effective date of the merger, common stock of
HomePlace of America, Inc.
F-33
<PAGE> 71
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will be distributed to Waccamaw shareholders and the Company, pursuant to the
terms of the Agreement. Subsequently, the Company's shares will be distributed
to HomePlace creditors and preferred shareholders pursuant to the Plan. The
merger is expected to be accounted for as a purchase by Waccamaw.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company's ability to
continue as a going concern is dependent upon, among other things, (a)
confirmation of the Plan, (b) compliance with all covenants under the
debtor-in-possession credit facility and senior subordinated notes, (c) the
success of future operations and (d) resolution of the uncertainties of the
reorganization case, as discussed further in Note 3. A confirmed plan of
reorganization could materially change the amounts reported in the accompanying
consolidated financial statements. The accompanying consolidated financial
statements do not include any adjustments relating to the resolution of these
uncertainties or the recoverability of the value of recorded asset amounts or
the amounts and classification of liabilities that might be necessary as a
consequence of a confirmed plan of reorganization.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
HomePlace Holdings, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
FISCAL YEAR
The Company reports its operating results on a 52 or 53 week fiscal year,
which typically ends on the last Saturday in February. Fiscal years are
identified according to the calendar year preceding the year in which they end.
All references to 1998 refer to the 52 week year ended February 27, 1999. All
references to 1997 refer to the 52 week year ended February 28, 1998. All
references to 1996 refer to the 53 week year ended March 1, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The recorded values of the Company's financial instruments, which include
accounts receivable, accounts payable (post-petition) and long term debt,
approximate fair value based upon their short maturities, current market rates
and conditions. The fair value of the Company's liabilities subject to
compromise is not presently determinable as a result of the Chapter 11
proceedings.
ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from vendors, credit card
companies and other miscellaneous receivables.
In addition, the Company has an agreement with a financial institution
which provides, on a non-recourse basis, private label credit card services to
its customers. The financial institution owns the credit card receivable and
provides a full range of credit card services for the Company.
F-34
<PAGE> 72
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECEIVABLE FROM LIQUIDATOR
This receivable for 1997 relates to the court authorized sale of inventory
from the ten stores which liquidated in February 1998. The amount was collected
in full subsequent to year end.
INVENTORIES
Merchandise inventories are stated at the lower of cost or market using the
weighted average costing method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
major classes of assets and ranges of estimated useful lives are as follows:
<TABLE>
<S> <C>
Leasehold improvements...................................... 15 years
Furniture and fixtures...................................... 7-10 years
Capital lease assets........................................ 7 years
Machinery and equipment..................................... 3-5 years
</TABLE>
Depreciation expense amounted to $8.4, $13.1 and $0.9 million in 1998, 1997
and 1996, respectively.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121 "Accounting for Impairment of Long Lived Assets", the Company is required to
periodically evaluate the recoverability of the net carrying value of its
property and equipment. As discussed in Note 3, the Company has and will be
continuing to review its store locations and has closed twenty-three in the two
most recent fiscal years. Effectively, any adjustments which might have been
required under SFAS No. 121 have been included in closed store provision.
ADVERTISING
The Company expenses advertising as incurred. Advertising expense (net of
cooperative advertising and other credits), including pre-opening advertising,
for 1998, 1997, and 1996 was $1.0, $6.1, and $8.5 million, respectively.
PRE-OPENING COSTS
Pre-opening costs, including advertising, related to new store openings are
expensed as incurred.
3. REORGANIZATION CASE
HomePlace was founded in April 1994 to operate a chain of home fashion
"superstores" located throughout the United States. Each HomePlace store
features a complete selection of predominantly better quality brand name home
fashion textiles and housewares, typically found in better department and
specialty stores, and sold at everyday low prices.
Since the first store opened in September 1994 in suburban Dallas, Texas,
the Company grew to 98 stores at November 1997. This rapid growth was funded by
equity investment, bank debt, real estate and fixture lease financing and vendor
financing. The costs of this expansion, along with the costs associated with
building an infrastructure to support this expansion, were substantial and
higher than expected. In addition, many store locations were less profitable
than anticipated due primarily to lower than planned sales productivity. The
F-35
<PAGE> 73
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
influence of these factors, and the inability to obtain an additional equity
infusion in 1997 as planned, created a liquidity crisis for the Company,
resulting in the Filing.
The effect of the Filing, including the impact from the vendors' initial
resistance to ship merchandise, on the Company's operations was significant. The
Company evaluated the direct impact the Filing had on inventory realization,
various credits due from vendors and store assets and has provided for the
direct effect of the reorganization as follows:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
($ MILLIONS) ($ MILLIONS)
------------ ------------
<S> <C> <C>
Closed store provision...................................... $45.5 $27.0
Provision for inventory impairment.......................... (1.0) 8.1
Write-off of other assets................................... -- 6.0
Write-off of financing fees................................. -- 2.8
Professional fees........................................... 6.6 2.1
Retention, severance and other.............................. 2.4 .6
----- -----
$53.5 $46.6
===== =====
</TABLE>
The closed store provision consists of estimated net lease liabilities,
losses on inventory and fixture disposition and other expenses directly related
to store closings. In 1997, $27.0 million was recorded related to the ten stores
turned over to liquidators in February 1998 and closed by May 1998 and the four
unopened store locations (out of the thirteen store locations) with rejected
real estate leases. In 1998, the Company recorded $45.5 million related to the
ten stores turned over to liquidators in June 1998 and closed by August 1998,
three additional stores turned over to liquidators in January 1999 and closed by
March 1999 and the finalization of the estimated lease liabilities for the
stores closed in the prior year. The cumulative $72.5 million of closed store
provisions include $16.2 million related to realized losses on closed store
inventory and the write off of fixed assets and deferred rent, $52.8 million of
liabilities subject to compromise for rejected real estate and fixture leases
(discussed in Note 8) and $3.5 million related to future occupancy related and
other miscellaneous expenses, of which $1.7 million has been paid to date. Any
provision required for further store closings, if any, will be recorded at the
time the decision to close is made.
In 1997, the Company recorded a one-time charge for estimated losses on
inventory in continuing store locations purchased from major vendors who chose
not to do business with the Company after the Filing. The product purchased from
these vendors are marketed as entire ensemble assortments. As certain items in a
group were depleted, it became more difficult for the Company to sell the
remaining items. The Company found vendors who shipped replacement merchandise
consisting of different styles, but existing merchandise had to be liquidated
over time. Another one-time charge was recorded for the estimated exposure from
vendors refusing to accept defective or damaged merchandise for a period of time
after the Filing. In 1998, actual results were better than estimated, resulting
in the reversal of a portion of these charges. As of February 27, 1999, the net
remaining investment in such inventory was approximately $2.0 million.
The write-off of other assets during 1997 significantly relates to the
write-off of receivables for vendor merchandise and advertising credits that the
Company was unable to realize due to the Filing. The remaining portion of the
asset write-off related to expensing certain information system consulting
costs. Due to the nature of these costs and the Company's Chapter 11 status,
management did not believe these costs should remain capitalized.
The write-off of deferred financing fees and expenses during 1997 was due
to legal, professional, and bank fees paid for previous bank facilities which
were expensed in conjunction with the establishment of the new
debtor-in-possession credit facility.
F-36
<PAGE> 74
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
To retain valued employees and maintain employee morale through the
reorganization period, the Company instituted a retention and severance program
that the Bankruptcy Court approved on March 2, 1998. To receive the maximum
retention payment, each covered employee must remain with the Company through
the reorganization period, up to the consummation of the Plan. Employees who
voluntarily resign or are terminated for cause are not eligible for severance
benefits under the program. Amounts charged to date represent severance payments
to employees terminated without cause and retention payments earned by employees
through interim milestone dates. The Company estimates it will make additional
payments to current employees of approximately $4.9 million upon successful
consummation of the Plan and subsequent merger with Waccamaw.
Professional fees represent various bankruptcy consulting, legal and
professional fees paid related to the restructuring.
4. LIABILITIES SUBJECT TO COMPROMISE
Substantially all liabilities as of the date of the Filing are subject to
settlement under the Plan, to be voted upon by the Company's creditors and
stockholders and confirmed by the Bankruptcy Court. The Bankruptcy Court
established September 21, 1998 as the bar date, from which the Company and its
creditors will investigate and resolve claim differences. Since that date, the
Company has resolved or objected to numerous claims. Furthermore, under the
Bankruptcy Code, the Company may elect to assume or reject real estate leases,
employment contracts, personal property leases, service contracts and other
executory pre-petition leases and contracts, subject to Bankruptcy Court
approval. Obligations for rejected real estate and fixture leases, as well as
settlements for certain fixture leases, are recorded as liabilities subject to
compromise, as shown below.
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
($ MILLIONS) ($ MILLIONS)
------------ ------------
<S> <C> <C>
Accounts payable and accrued expenses....................... $122.3 $129.9
Liability for rejected real estate and fixture
leases -- closed stores................................... 52.8 21.7
Liability for settled fixture leases -- open stores......... 3.8 --
Liability for settled fixture leases -- closed stores....... 2.6 --
------ ------
Liabilities subject to compromise........................... $181.5 $151.6
====== ======
</TABLE>
Pre-petition accounts payable and accrued expenses have been recorded at
historical values and have not been materially adjusted as the result of
reconciliation with creditors to date. However, certain amounts related to
rejection and settlement of leases have been reclassified accordingly.
Liabilities for rejected leases have been estimated based upon Section 502 of
the Bankruptcy Code, as discussed further in Note 8. Liabilities resulting from
the settlement of certain fixture leases have been recorded at the amounts
negotiated with various lessors. The ultimate amount and settlement terms of
liabilities subject to compromise are subject to the Plan. Accordingly, no
adjustments have been made to the above amounts in anticipation of the final
payments to be determined by the Bankruptcy Court.
F-37
<PAGE> 75
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
($ MILLIONS) ($ MILLIONS)
------------ ------------
<S> <C> <C>
Leasehold improvements...................................... $ 3.0 $ 3.9
Furniture and fixtures...................................... 32.0 33.8
Capital lease assets........................................ 19.0 21.1
Machinery and equipment..................................... 2.8 3.5
Less: Accumulated depreciation.............................. (18.4) (12.1)
------ ------
Property and equipment, net....................... $ 38.4 $ 50.2
====== ======
</TABLE>
6. LONG-TERM DEBT:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
($ MILLIONS) ($ MILLIONS)
------------ ------------
<S> <C> <C>
Credit facility............................................. $47.1 $61.2
Senior subordinated notes................................... 15.0 15.0
Notes payable for interest.................................. .2 --
----- -----
Total long term debt.............................. $62.3 $76.2
===== =====
</TABLE>
The Company has a $130 million debtor-in-possession secured credit facility
with a syndication of banks and commercial lenders which matures on the earlier
of January 5, 2000 or the effective date of a plan of reorganization. This
credit facility allows for the combination of borrowings and letters of credit
up to $130 million, subject to a borrowing base limitation. The Company has the
option to borrow at the Prime Rate or LIBOR plus 2.25% and is required to pay a
line fee of .25% per annum on the unused borrowing capacity. The Company had
$30.3 million in availability and $2.9 million of letters of credit outstanding
under the facility at year-end.
The $15 million senior subordinated notes bear interest at 17.5% per annum,
which is payable at 15.5% in cash and 2% payable in kind. Each quarter, interest
payable in kind is evidenced by a non-interest bearing note payable. Interest
incurred until the issuance of a note is classified as interest payable and
included in current liabilities. Both the senior subordinated notes and the
notes payable for interest mature on the earlier of January 5, 2000 or the
effective date of a plan of reorganization. There are also certain prepayment
options available to the Company, subject to the approval of the Bankruptcy
Court and senior debt lenders.
Borrowings under the credit facility and senior subordinated notes are
secured by substantially all of the Company's assets. The facility also contains
covenants which, among other items, restrict additional borrowings and requires
maintenance of certain financial ratios. The Company is in compliance with both
credit facility and senior subordinated note covenants at year end.
The Company believes that its cash flow from operations, along with its
borrowing capacity, will be adequate to fund the ongoing operations and
restructuring of the business during Fiscal 1999. However, the Company's ability
to continue as a going concern is dependent upon the confirmation of the Plan by
the Bankruptcy Court, the ability to maintain compliance with covenants under
the credit facility and senior subordinated notes, the success of future
operations and the resolution of the uncertainties of the reorganization case
discussed further in Note 3.
F-38
<PAGE> 76
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
($ THOUSANDS) ($ THOUSANDS)
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $44,454.3 $30,409.3
Inventory reserves........................................ 5,419.3 9,042.0
Store rental obligations.................................. 6,302.5 7,145.0
Miscellaneous accruals.................................... 519.8 909.6
Closed store reserves..................................... 21,820.4 8,863.0
Self insurance reserves................................... 226.4 716.6
Accrued legal & professional.............................. -- 602.6
Start-up expenditures..................................... 87.6 226.4
Accrued corporate taxes................................... 132.0 208.4
Depreciation and amortization............................. 4,403.7 --
Other..................................................... 61.5 43.9
--------- ---------
83,427.5 58,167.0
Valuation allowance for deferred tax assets............... (82,823.6) (57,946.0)
Net deferred tax assets..................................... 603.9 221.0
--------- ---------
Deferred tax liabilities:
Depreciation and amortization............................. -- 193.1
Other..................................................... 603.9 27.9
--------- ---------
Total deferred tax liabilities.................... 603.9 221.0
--------- ---------
Net deferred taxes.......................................... $ -- $ --
========= =========
</TABLE>
The Company establishes deferred tax assets and liabilities in accordance
with the provisions of FASB Statement No. 109, "Accounting for Income Taxes".
Realization of the future tax benefits related to deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. A valuation allowance
has been recorded to fully reserve against the net deferred tax assets because
of the uncertainty of future taxable income to utilize or benefit these assets.
Due to the Company's loss position and the uncertainty about realization of
tax benefits in the future, the Company has no tax benefit included in the
accompanying statements of operations. As such, the Company's effective tax rate
is 0%. The Company's statutory federal income tax rate is 34%, and 6% is used as
the state income tax rate. The difference between the effective and statutory
federal income tax rate is primarily due to the increase in net operating loss
carryforward. At February 27, 1999, the Company has approximately $111.1 million
of net operating loss carryforwards for income tax purposes which expire
beginning in 2011. The Company's ability to realize this net operating loss
carryforward may be impacted by the Plan, as well as the merger with Waccamaw.
8. RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996 certain directors, stockholders and officers,
and the firms with which they are affiliated, provided legal and insurance
services to the Company in the normal course of business amounting to $1.3, $2.6
and $1.6 million, respectively. The Company also purchased merchandise from
certain of these
F-39
<PAGE> 77
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related parties in 1998, 1997, and 1996 totaling $12.6, $13.5 and $9.7 million,
respectively. The Company had amounts payable to related parties of $4.0 million
at February 27, 1999 and $2.9 million at February 28, 1998. The amount payable
at February 27, 1999 consists of $3.2 million of pre-petition payables
classified as liabilities subject to compromise and $0.8 million of
post-petition payables classified as accounts payable in the accompanying
consolidated balance sheets.
The Company believes the terms of each of the related party arrangements
are at least as favorable as those that could be transacted with unrelated
parties.
9. LEASES
The Company leases retail stores, as well as office facilities, under
agreements expiring at various dates through 2019. Most lease agreements contain
renewal options and rent escalation clauses. The Company also has fixture and
equipment leases which have three year terms.
Scheduled rent increases for store leases are recognized on a straight-line
basis over the respective terms of the lease, which is generally 15-20 years.
The accompanying consolidated balance sheets include a deferred rent liability
of $13.5 and $13.2 million as of February 27, 1999 and February 28, 1998,
respectively, relating to the scheduled store rent increases.
Certain leases also provide for contingent rents based upon a percentage of
store sales. The Company is obligated under a majority of the leases to pay for
taxes, insurance, and common area maintenance charges.
As of February 27, 1999, future minimum lease payments, excluding the
twenty-three stores closed since the Filing and the four unopened store
locations with rejected real estate leases, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
($ MILLIONS) ($ MILLIONS)
------------ ------------
<S> <C> <C>
1999........................................................ 48.7 4.1
2000........................................................ 47.8 .4
2001........................................................ 45.8 .1
2002........................................................ 44.7 --
2003........................................................ 44.7 --
Thereafter.................................................. 423.0 --
----- ---
Total minimum lease payments, including
interest........................................ 654.7 4.6
Less interest............................................... -- .3
----- ---
Total minimum lease payments, excluding
interest........................................ 654.7 4.3
===== ===
</TABLE>
Rent expense for all operating leases was $57.9, $61.0, and $39.5 million
for 1998, 1997, and 1996 respectively.
The present value of remaining capital lease payments, including estimated
acquisition payments, was $4.6 million and $14.4 million as of February 27, 1999
and February 28, 1998, respectively, using imputed interest rates ranging from
9-13%.
Under Chapter 11, the Company may elect to assume or reject real estate
leases, employment contracts, personal property leases, service contracts and
other executory pre-petition contracts, subject to Bankruptcy Court approval.
Under Section 502 of the Bankruptcy Code, a lessor's claim for damages resulting
from the rejection of a real property lease is limited to the rent provided
under such lease, without acceleration, for the greater of one year or 15% of
the remaining term of the lease, not to exceed three years, following the
earlier of the date of the Filing or the date on which the property is returned
to the landlord.
F-40
<PAGE> 78
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the Filing, the Company has rejected the real estate leases for the
twenty-three unprofitable stores that were closed between February 1998 and
January 1999. Furthermore, the Company had executed real estate leases in 1997
for thirteen stores planned for opening in 1998 and 1999. These stores were
never opened due to the Filing. The Company has successfully terminated leases
for nine of these stores and rejected the remaining four.
In 1997, the Company recorded a $21.7 million reserve for pre-petition
claims related to the rejected real estate and fixture leases and executory
contracts for the ten stores which began liquidating in February 1998 and four
store locations previously expected to open in 1998 and 1999. As discussed in
Note 3, the Company recorded an additional reserve in 1998 of $8.0 million for
these stores based upon finalized estimates of gross lessor claims.
Additionally, the Company recorded a reserve of $25.7 million related to the
rejected real estate and fixture leases and executory contracts for the ten
stores that began liquidating in June 1998 and the three stores that began
liquidating in January 1999. The total reserve of $55.4 million is classified as
liabilities subject to compromise at February 27, 1999. The Company has been
negotiating with all real estate and fixture lessors to reduce rent costs for
open stores. As of April 29, 1999, the Company has successfully negotiated 1
temporary real estate lease agreement, subject to completion of a permanent
agreement, and 25 permanent real estate lease agreements for open stores. These
agreements have resulted in a reduction of future operating lease payments and
are reflected in the above table. Rent reduction settlements and amendments of
certain fixture leases have resulted in a reduction of future capital lease
payments, which are also reflected above. Additionally, approximately $3.8
million of capital lease obligations have been reclassified to liabilities
subject to compromise at February 27, 1999 as the result of these fixture lease
settlements.
10. COMMITMENTS AND CONTINGENCIES
The Company, exclusive of matters relating to the Filing (Note 3), is party
to various legal actions and administrative proceedings and subject to various
claims arising in the ordinary course of business. The Company believes that the
disposition of these matters will not have a material adverse effect on its
financial position, results of operations or liquidity. All civil litigation
commenced against the Company prior to the Filing has been stayed by operation
of law. There were no material legal proceedings pending against the Company
prior to the Filing.
11. STOCKHOLDERS' EQUITY
The shares of each class of Preferred Stock are convertible at the holder's
option into Class A Common Stock at a rate of one share Class A Common Stock for
each share of Preferred Stock. Upon the completion of the sale of any equity
security pursuant to a public offering registered under the Securities Act of
1933, all shares of Series A and Series B Preferred Stock are converted
automatically into fully paid and nonassessable shares of Class A Common Stock
and any dividends in arrears are payable in full.
The Series A Preferred Stock accumulates dividends at a rate of 7% per
annum and at February 27, 1999 the amount in arrears was $6.9 million. The
Series A Preferred Stock has a base liquidation preference of $62.50 per share
and a participation feature which provides for an additional distribution upon
the liquidation, dissolution and winding up of the Company. The participation
feature was set at $29 per share through June 1, 1998, at which time it became
fixed at $41 per share.
The Series B Preferred Stock accumulates dividends at a rate of 7% per
annum and at February 27, 1999 the amount in arrears was $5.5 million. The
Series B Preferred Stock has a base liquidation preference of $187.50 per share.
F-41
<PAGE> 79
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series C Preferred Stock accumulates dividends at a rate of 7% per
annum and at February 27, 1999 the amount in arrears was $10.4 million. The
Series C Preferred Stock has a base liquidation preference of $265. The Series C
Preferred Stock will automatically convert into fully paid and nonassessable
shares of Class A Common Stock and any dividends in arrears are payable in full
upon the first to occur of the following: (i) completion by the Company of a
public offering underwritten by a major bracket investment bank raising gross
proceeds of $30 million or more, and at an offering price per share greater than
or equal to 130% of the then applicable conversion price; or (ii) upon the
written consent of the holders of at least a majority of the Series C Preferred
Stock then outstanding. All series of Preferred Stock have parity in respect of
the distribution of assets.
12. STOCK OPTION PLAN
Under the Company's stock option plan, incentive and/or nonqualified stock
options may be granted to employees, directors and consultants of the Company.
Incentive stock options are not available to non-employee directors or
consultants. Options issued under the plan generally become exercisable as to
the shares covered by the options in 25% increments, commencing on each
anniversary of the grant date. Options expire ten years from the date of grant,
and the Board of Directors has discretion to set the terms and conditions of the
options. At February 27, 1999, 75,000 shares of Class D Common Stock remain
reserved for issuance under the stock option plan.
Option activity for each of the last three years was as follows:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE
(IN THOUSANDS) OPTION PRICE
-------------- ------------
<S> <C> <C>
Outstanding at February 24, 1996............................ 18.9 $ 5.40
Granted................................................... 18.2 13.38
Canceled.................................................. (3.7) 1.22
Exercised................................................. (0.1) 0.04
----- ------
Outstanding at March 1, 1997................................ 33.3 9.58
Granted................................................... 1.9 13.38
Canceled.................................................. (1.8) 9.29
Exercised................................................. (1.1) 3.19
----- ------
Outstanding at February 28, 1998............................ 32.3 10.04
Canceled.................................................. (12.2) 12.59
Exercised................................................. (1.8) .04
----- ------
Outstanding at February 27, 1999............................ 18.3 $ 9.20
===== ======
</TABLE>
Exercisable options outstanding were 12,069, 10,206, and 5,866 at year end
1998, 1997, and 1996, respectively, with weighted average option prices of
$7.99, $7.82, and $3.52.
In 1996, the Company adopted the disclosure requirements of SFAS No. 123.
However, the Company continues to account for these plans under APB No. 25,
under which no compensation expense has been recognized. Had compensation cost
for these plans been determined in accordance with SFAS No. 123, the impact on
the Company's net losses for 1998, 1997 and 1996 would have been insignificant.
F-42
<PAGE> 80
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. PREFERRED STOCK
Preferred stock consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
($ THOUSANDS) ($ THOUSANDS)
------------- -------------
<S> <C> <C>
Class 1 Serial, 920,000 shares authorized:
Series A 7%, cumulative, convertible, participating
$0.001 par value, 320,000 shares issued and
outstanding........................................... 0.3 0.3
Series B 7%, cumulative, convertible, $0.001 par value,
106,667 shares issued and outstanding................. 0.1 0.1
Series C 7%, cumulative, convertible, $0.001 par value,
188,680 shares issued and outstanding................. 0.2 0.2
Class 2 Serial, 100,000 shares authorized:
$.001 par value, no shares issued or outstanding......... -- --
--- ---
Total preferred stock............................ 0.6 0.6
=== ===
</TABLE>
14. COMMON STOCK
Common stock consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
($ THOUSANDS) ($ THOUSANDS)
------------- -------------
<S> <C> <C>
Class A, $0.001 par value, 920,000 shares authorized; no
shares issued or outstanding............................. -- --
Class B, $0.001 par value, 154,200 shares authorized,
issued and outstanding................................... 0.1 0.1
Class C, $0.001 par value, 154,200 shares authorized,
issued and outstanding................................... 0.1 0.1
Class D, $0.001 par value, 143,600 shares authorized,
12,837.5 issued and outstanding.......................... 0.1 0.1
--- ---
Total common stock............................... 0.3 0.3
=== ===
</TABLE>
F-43
<PAGE> 81
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
AS OF MAY 29, 1999 AND MAY 30, 1998
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 29, MAY 30,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 1,915.8 $ 3,593.0
Accounts receivable....................................... 4,195.4 6,618.8
Merchandise inventories................................... 123,448.0 135,173.4
Prepaid expenses and other current assets................. 8,405.5 9,377.8
----------- -----------
Total current assets.............................. 137,964.7 154,763.0
PROPERTY AND EQUIPMENT, NET................................. 47,735.7 50,818.9
OTHER ASSETS................................................ 76.2 91.3
----------- -----------
Total assets...................................... $ 185,776.6 $ 205,673.2
=========== ===========
<CAPTION>
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.......................................... $ 29,735.3 $ 21,409.4
Accrued expenses.......................................... 20,384.0 20,703.4
----------- -----------
Total current liabilities......................... 50,119.3 42,112.8
LONG-TERM DEBT.............................................. 63,355.9 64,826.9
DEFERRED RENT............................................... 14,367.7 13,790.5
OTHER LIABILITIES........................................... 293.7 1,385.5
LIABILITIES SUBJECT TO COMPROMISE........................... 188,573.5 141,535.7
CAPITAL LEASE OBLIGATIONS................................... 8,533.0 14,428.0
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INTEREST:
Preferred stock........................................... 0.6 0.6
Common stock.............................................. 0.3 0.3
Additional paid-in capital................................ 87,453.9 87,453.9
Accumulated deficit....................................... (226,921.3) (159,861.0)
----------- -----------
Total stockholders' interest...................... (139,466.5) (72,406.2)
----------- -----------
Total liabilities and stockholders' interest...... $ 185,776.6 $ 205,673.2
=========== ===========
</TABLE>
F-44
<PAGE> 82
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 29, 1999 AND MAY 30, 1998
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 29, MAY 30,
1999 1998
---------- ----------
<S> <C> <C>
Net sales................................................... $ 92,895.2 $ 94,967.6
Cost of goods sold.......................................... 54,432.2 55,665.7
---------- ----------
Gross profit...................................... 38,463.0 39,301.9
---------- ----------
Operating, store and administrative expenses:
Store operating and selling............................... 41,226.5 43,570.7
Store pre-opening......................................... 221.3 --
Administrative............................................ 4,641.2 4,785.8
---------- ----------
46,089.0 48,356.5
---------- ----------
Loss from operations........................................ (7,626.0) (9,054.6)
Interest expense, net....................................... (2,064.7) (1,679.5)
---------- ----------
Net loss before reorganization items.............. (9,690.7) (10,734.1)
Reorganization items........................................ 9,656.2 1,887.8
---------- ----------
Net loss.......................................... $(19,346.9) $(12,621.9)
========== ==========
</TABLE>
F-45
<PAGE> 83
HOMEPLACE HOLDINGS, INC. AND SUBSIDIARIES
(OPERATING AS DEBTORS AND DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MAY 29, 1999 AND MAY 30, 1998
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
MAY 29, MAY 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(19,346.9) $(12,621.9)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities before reorganization
items:
Depreciation and amortization.......................... 2,253.3 1,113.8
Changes in assets and liabilities:
Accounts receivable.................................. 1,281.7 12,547.3
Merchandise inventories.............................. 2,009.4 3,543.8
Prepaid and other current assets..................... 1,440.9 1,828.5
Accounts payable..................................... 9,000.1 2,650.8
Accrued expenses..................................... 6,014.2 2.670.3
Closed store reserve................................. 2,535.1 (471.9)
Deferred rent........................................ 818.1 631.2
---------- ----------
Net cash provided by operating activities......... 6,005.9 11,891.9
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (11,589.3) (1,770.1)
---------- ----------
Net cash used in investing activities............. (11,589.3) (1,770.1)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit line, net............................ 1,044.7 (11,415.6)
New (repayments of) capital lease obligations............. 4,195.0 --
---------- ----------
Net cash (used in) provided by financing activities....... 5,239.7 (11,415.6)
---------- ----------
NET (DECREASE) INCREASE IN CASH............................. (343.7) (1,293.8)
CASH AT BEGINNING OF PERIOD................................. 2,259.5 4,886.8
---------- ----------
CASH AT END OF PERIOD....................................... $ 1,915.8 $ 3,593.0
========== ==========
</TABLE>
F-46
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
HOMEPLACE OF AMERICA, INC.
By: /s/ Gregory K. Johnson
------------------------------------
Gregory K. Johnson
President and Chief Executive
Officer
August 14, 2000
