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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
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Commission File Number 1-10259
HomeBase, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0109661
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
3345 Michelson Drive
Irvine, CA 92612
(Address of principal executive offices) (Zip Code)
(949) 442-5000
(Registrant's telephone number, including area code)
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- -----------------------------
Common Stock, par value $.01 New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on April 5, 1999 was $164,813,609.
There were 37,881,636 shares of the Registrant's Common Stock, $.01 par value,
outstanding as of April 5, 1999.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders(Part III)
------------------------
Exhibits to Form 10-K have been included only in copies of the Form 10-K filed
with the Securities and Exchange Commission.
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<PAGE>
PART 1
Item 1. Business
General
HomeBase(R), Inc. ("the Company" or "HomeBase") is the second largest operator
of home improvement warehouse stores in the western United States. At January
30, 1999, the Company operated 84 stores in 10 states. The Company's stores
average approximately 103,000 square feet of indoor space and include up to
30,000 square feet of additional exterior space for full-service garden and
landscaping centers. The Company offers a broad assortment of brand-name home
improvement and building supply products at competitive prices to both
Do-It-Yourself ("DIY") and professional customers. In certain categories, the
Company supplements its brand-name offerings with high quality private label
products.
The Company's goal is to be the first choice destination for shoppers of home
improvement products by offering product selection at competitive prices, with
superior customer service. By the end of the first fiscal quarter of 1998,
nearly every store in the chain had been remodeled or opened utilizing an
improved store design. The new design features a layout that is inviting and
attractive to DIY shoppers while providing easy access areas for merchandise
sold primarily to contractors and other professional customers. Products are
displayed to facilitate shopping for all companion products needed to complete a
home improvement project.
The Company operates within a conventional 52 or 53 week accounting fiscal year
that ends on the last Saturday in January. The 52 weeks ended January 30, 1999
is referred to herein as "fiscal 1998". The 53 weeks ended January 31, 1998 and
the 52 weeks ended January 25, 1997 are referred to herein as "fiscal 1997" and
"fiscal 1996", respectively.
The Company was established in 1989 when Zayre Corp. (now The TJX Companies,
Inc.) combined its BJ's Wholesale Club division ("BJ's") and HomeBase
division to form Waban Inc. ("Waban"), and distributed all of Waban's
outstanding common stock to Zayre Corp. shareholders on a pro-rata basis.
On July 26, 1997, Waban transferred all of the net assets of BJ's to BJ's
Wholesale Club, Inc. ("BJI"). On July 28, 1997, Waban distributed to its
stockholders, on a pro-rata basis, all of the outstanding common stock of BJI
(the "Distribution"). In connection with the Distribution, the Company changed
its name from Waban Inc. to HomeBase, Inc. The Company and BJI are independent
public companies, separately traded on the New York Stock Exchange.
Significant Growth Initiatives
In October 1997, the Board of Directors approved an accelerated timetable for
the completion of the 17 remaining stores in the Company's remodel program and
announced a more aggressive rate of new store openings through fiscal 2000.
During fiscal 1998, the Company successfully completed the remodel of all 17
stores and opened one new store in Everett, Washington. An additional six stores
(five in California and one in Arizona) have scheduled openings during fiscal
1999, with one store having opened in March 1999. The Company plans to continue
this expansion with the opening of approximately eight new stores before the end
of fiscal 2000.
To provide capital to finance its accelerated growth strategy, on November 17,
1997, the Company completed the private placement of $100 million principal
amount 5.25% convertible subordinated notes due November 1, 2004 through a Rule
144A/Regulation S offering, and received approximately $96 million, net of debt
issuance costs. The resale of the notes and the common stock into which the
notes are convertible were registered on Form S-3 on February 10, 1998.
Building on the momentum of its previous growth initiative, on February 2, 1999
the Company announced a new strategic program designed to enhance customer
service, increase customer traffic and improve same-store sales. The initiatives
involve an incremental investment during fiscal 1999 of approximately $13
million in payroll and advertising costs, which is designed to increase the
number of sales people in each store and reinforce the HomeBase brand to an
audience comprised of new and existing customers. In addition, the Company plans
to increase total inventory per store by approximately 10%, as a means of
further enhancing product selection.
Industry Outlook
The Company believes that demographic and lifestyle factors such as the maturing
of baby boomers, the increase in home-centered activities, the increase in home
ownership and the aging housing stock will create growing demand for home
improvement products and services.
The U.S. Census Bureau estimates that by the year 2000, home ownership by the
U.S. population will increase to 70% from 67% in 1997 and that the number of
households will increase to 103 million from approximately 100 million in 1998.
Homeowners are more likely to spend more to maintain and improve their homes
than renters do. The Home Improvement Research Institute projects annual
revenues in the home improvement market will reach $170 billion by the end of
1999.
Since the mid 1980's, warehouse-format home improvement retailers have gained
significant market share in the United States by offering lower prices, greater
product selection and more in-stock merchandise than traditional home center,
hardware and lumber yard operators. In addition, warehouse store operators have
been able to take advantage of economies of scale created by large sales
volumes. Although the home improvement industry remains fragmented, it has
experienced increasing consolidation during recent years. The Company believes
that this trend will continue. It intends to capitalize on its continuing
strategy that is targeted at promoting a service-oriented shopping experience in
a store format that has an attractive ambiance and a customer-friendly layout.
Store Growth
The Company is the second largest operator of home improvement stores in most of
the markets that it serves. The Company's new store opening plan is oriented
towards reinforcing its position in its current markets and expanding
selectively into adjoining markets. The Company focuses on retail locations that
are convenient for DIY and professional customers and that meet the criteria for
either having direct freeway access, being in highly visible locations, or in
neighborhoods with robust housing growth.
During fiscal 1998, the Company completed the remodel of the remaining 17 stores
in its remodel program and opened one new store. More importantly, a "pipeline"
of potential sites for new store openings was developed, in preparation for a
more vigorous pace of new store openings in the coming years. The Company is
scheduled to open six stores in fiscal 1999, and approximately eight stores in
fiscal 2000.
<PAGE>
The following table shows the number of Company stores opened and closed during
the last five fiscal years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Stores in Stores Stores Stores
Operation at Opened Closed in Operation
Beginning of During the During the at End of
Fiscal Year Period Period Period Period
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 82 3 8 77
1995 77 4 2 79
1996 79 5 - 84
1997 84 2 3 83
1998 83 1 - 84
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</TABLE>
Between 1993 and January 30, 1999, the Company has remodeled or relocated 61 of
its stores and opened 18 new stores incorporating the improved store design.
Customer Service
The Company is committed to providing superior service to its two targeted
customer groups. At each store, carefully selected home improvement specialists,
who have extensive experience in their respective fields, are available
throughout the store to assist DIY and professional customers. Nearly all of the
Company's stores also offer the services of professional ASID certified
designers who provide free consultations in customers' homes. The Company's
project and design centers feature computer aided design ("CAD") tools that
allow customers to work with design coordinators in the store, or in the
convenience of their own homes, to conceptualize and plan a variety of home
improvement projects. A unique feature of the in-home CAD consultation is
real-time delivery of home project designs to a customer before departing from
the residence. This immediate and tangible service builds customer excitement
and momentum and confidence in a decision to proceed with the selection of
HomeBase for these important home improvement projects.
The Company believes that it is important to expand its DIY business by
providing encouragement and skill enhancement programs for new and existing DIY
customers. Accordingly, the Company provides assistance and training to DIY
customers, including regularly scheduled customer clinics on a wide range of
home improvement projects. The Company also offers "How-To" brochures that can
be found on its website at www.homebase.com. Installation services are available
for over 100 product categories utilizing carefully screened professional
contractors, who must be highly recommended, licensed and bonded. This
installation program has solidified relationships with many of the Company's
best professional customers. Delivery services are also available for the
convenience of customers.
The Company's stores also offer services that specifically address the needs of
professional customers. Nearly all of the Company's stores have Contractor
Desks, with staff dedicated to handling contractors' special needs, including
the ability to receive faxed orders and pre-assemble them for pick-up, and to
quickly obtain special items and sizes. Bulk purchases can be delivered to job
sites for a nominal fee. To better serve the needs of the professional customer,
the Company has early and extended hours of operations.
In addition to accepting all major credit cards, the Company offers its own
private label credit card to DIY and professional customers under a non-recourse
program operated by a major financial institution. The utilization of this card
offers convenience to a customer and more importantly reinforces the pattern for
repeat purchases at HomeBase.
<PAGE>
Team Members
In support of its commitment to customer service, the Company seeks to hire only
the very best team members. HomeBase University provides team members with an
extensive on-going curriculum. Each store has skilled trades people who combine
extensive career experience with in-house education programs to ensure that
customers will have access to knowledgeable and courteous sales staff who can
assist them with their home improvement questions and projects. All of the
Company's sales team members receive extensive training through a comprehensive
in-house training program that combines on-the-job training with formal seminars
and meetings to emphasize the importance of customer service and to further
develop team member selling skills. In-house training includes periodic sessions
conducted by the Company's training staff or by manufacturers' representatives,
as well as frequent meetings with store managers, which provide sales training,
product updates and other information.
As of January 30, 1999, the Company had approximately 8,400 team members,
including approximately 500 who are engaged in various corporate administration
and store support functions. Of the Company's total personnel, approximately
3,500 are considered part-time (working less than 33 hours per week). In
February 1999, the Company announced a series of new initiatives designed to
increase sales, which will result in the addition of more team members at every
store throughout early fiscal 1999. Exclusive of the impact of this hiring
initiative, the number of team members employed fluctuates depending on the
selling season, and is typically higher during the second and third quarters,
which include the most active seasons for home improvement sales. None of the
Company's team members is a member of a union. The Company considers its
relations with its team members to be excellent.
Merchandising
With 14 departments offering broad categories of home improvement and decorative
goods, each HomeBase store regularly stocks over 30,000 items and offers
thousands of additional items through special order. The Company's stores
primarily merchandise quality, brand-name products. Special promotions of
brand-name products are regularly featured as "Base Buys" which provide
additional savings opportunities for customers. In select categories, the
Company supplements brand-name offerings with high quality private label
products, including the Infinity(R) line of paint, the Galleria(R) and Galleria
Gold(R) line in fashion lighting, and the PowerBuilt(R) brand of hand tools. The
Company continually evaluates its product mix for opportunities to add new and
exciting products in every aisle of the store to meet the ever-changing needs of
both the DIY and professional customer.
The table below sets forth the Company's percentage of net sales by product
categories for fiscal 1998:
<TABLE>
<CAPTION>
Product Category Percent
<S> <C>
Building Materials and Lumber 23%
Electrical and Plumbing 18
Paint and Decor 18
Garden, Nursery and Seasonal 16
Hardware and Tools 13
Project and Kitchen Design Center 12
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Total 100%
=============
</TABLE>
HomeBase has a centralized purchasing function located within its Corporate
Support Center. The Company attempts to maximize its distribution efficiencies
through a combination of shipments direct from vendors to the stores and from
its 410,000 square foot consolidation and distribution center located in Rancho
Cucamonga, California. Before the end of fiscal 1999, the Company will be
relocating this center to a larger 675,000 square foot facility located in
Ontario, California .
Seasonality
Sales and earnings for the Company have typically been higher in the second and
third quarter of the fiscal year, which include the most active seasons for home
improvement sales, and lower in the first and fourth quarters. Sales and
earnings can also be impacted favorably or adversely as a result of prevailing
regional weather patterns, such as El Nino and La Nina.
Marketing and Advertising
The Company addresses its primary target customers through a mix of newspaper,
direct mail, radio and television advertising. The primary advertising medium is
newspaper advertisements through freestanding inserts. Television and radio are
used to reinforce the Company's image of providing superior customer service and
a broad assortment of merchandise at competitive prices. Additionally, the
Company participates in or hosts a variety of home improvement trade shows,
supplier conferences and contractor product shows. Through co-operative
advertising agreements, vendors participate in many of the Company's advertising
programs. Consistent with its previously announced growth initiatives, the
Company intends to increase the frequency of its electronic and print media
offerings during fiscal 1999.
Management Information Systems
The Company utilizes state of the art technology and management information
systems ("MIS") to monitor sales, track inventory and provide rapid feedback on
the performance of its business. Advanced frame relay communications systems,
advanced inventory tracking and ordering, and in-store computer design tools to
help customers with their remodeling projects are examples of the Company's
commitment to technology.
The Company is currently in the process of implementing a new multi-level
merchandising system that allows for improved inventory and vendor information
management. The Company expects to complete the implementation of the new system
by the end of fiscal 1999.
In addition, the Company completed the implementation of a new Point-Of-Sale
("POS") system in February 1999. The new POS system enables the Company to more
effectively record its sales information and to better support merchandising,
inventory replenishment and promotional decisions. In addition to internal
efficiency gains, an important benefit of this investment is improved customer
service due to cashier ease of use that will help assure faster check out lines.
Competition
The home improvement, hardware and garden businesses are all highly competitive.
The Company competes with a large number and variety of wholesalers and
retailers, including several large national chains that use the home improvement
warehouse store format. Competition exists in the areas of customer service,
price, product selection, store location and name recognition. In addition, the
Company will experience competition for qualified personnel and for suitable new
store locations of sufficient size at acceptable prices.
The Company believes that its strong brand-name recognition, customer loyalty,
level of customer service, the value offered by its competitive prices and the
one-stop shopping available through its full range of home improvement products,
provide it an advantage over many of its traditional home center competitors.
Some markets in which the Company currently operates or might operate in the
future may already be at or near the saturation point in terms of warehouse
stores competing with the Company's stores. Certain of the Company's principal
competitors appear to have a strategy of clustering stores within markets they
operate, or of placing their warehouse stores so close to the Company's stores
as to directly challenge the Company's competitive position in such markets. The
major competitor in the Company's market areas that also uses the warehouse
store format is The Home Depot, Inc. The Company also competes with other major
national and regional operators such as Builders Square (a division of Hechinger
Company), Eagle Hardware & Garden, Inc. ("Eagle") and Orchard Supply & Hardware
(a division of Sears, Roebuck, and Co.). In April 1998, Lowe's Companies, Inc.
("Lowe's"), the nation's second largest retailer of home improvement products,
announced plans for a major expansion into California, Arizona and Nevada, with
the initial stores to begin opening in late 1999. On April 2, 1999, Lowe's
completed the acquisition of Eagle.
Item 2. Properties
The Company operated 84 stores as of January 30, 1999, of which 66 are leased
under long-term leases and 18 are owned. The unexpired terms of the leases range
from approximately three to 19 years, and average approximately 10 years. The
Company has options to renew all of its leases for periods that range from
approximately five to 25 years and average approximately 18 years. These leases
require fixed monthly rental payments which are subject to various adjustments.
In addition, certain leases require payment of a percentage of the store's gross
sales in excess of certain amounts. The Company also remains obligated under
leases for four additional stores that have been closed. Most leases require
that the Company pay all property taxes, insurance, utilities and other
operating costs of the store.
The following table sets forth the number and location of the Company's stores:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Number of
State Stores
-----------------------------------------------------------------------
<S> <C>
California 47
Washington 9
Colorado 7
Arizona 5
Oregon 4
Nevada 3
New Mexico 3
Utah 3
Texas 2
Idaho 1
-----------------------------------------------------------------------
Total 84
=======================================================================
</TABLE>
The average size of the Company's 84 stores in operation at January 30, 1999 was
approximately 103,000 square feet. Most of the Company's stores utilize up to
30,000 square feet of additional exterior selling space for full-service garden
and landscaping centers. The Company's stores are located in both free-standing
locations and shopping centers. In some locations, a HomeBase store shares a
center with a membership warehouse club or another large retailer.
Including space for parking, a typical new HomeBase store requires eight to ten
acres of land. Construction and site development costs for a new HomeBase store
average approximately $5.0 million, land acquisition costs generally range from
$2.0 million to $9.0 million, and the initial capital investment for fixtures
and equipment averages approximately $2.0 million. In addition to capital
expenditures, each new store requires an investment of approximately $3.0
million for inventory (net of accounts payable) and pre-opening expenses.
The Company's Corporate Support Center located in Irvine, California occupies
164,000 square feet under a lease expiring July 24, 2004, with options to extend
the lease through July 24, 2019. The Company's consolidation and distribution
center in Rancho Cucamonga, California occupies 410,000 square feet under a
lease expiring December 31, 1999. Prior to the lease expiration, the Company
will be relocating its consolidation and distribution center to a larger 675,000
square foot facility located in Ontario, California.
Item 3. Legal Proceedings
The Company is involved in various legal proceedings incident to the nature of
its business. Although it is not possible to predict the outcome of these
proceedings, or any claims against the Company related thereto, the Company
believes that such proceedings will not, individually or in the aggregate, have
a material adverse effect on either its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of fiscal 1998.
<PAGE>
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this Report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on June 3, 1999.
The following is a list of names and ages of all of the executive officers of
the registrant indicating all positions and offices with the registrant held by
each such person and each person's principal occupations or employment during
the past five years.
<TABLE>
<CAPTION>
- ---------------------------- ------ ------------------------------------------------------------------------
Office and Employment Experience
Name Age During Last Five Years
- ---------------------------- ------ ------------------------------------------------------------------------
<S> <C> <S>
Herbert J. Zarkin 60 Chairman of the Board of the Company since July 1997 and Director of
the Company since May 1993; President, Chief Executive Officer of the
Company (May 1993 - July 1997).
Allan P. Sherman 54 President, Chief Executive Officer and Director of the Company since
July 1997; Executive Vice President of the Company (May 1993 - July
1997); President of the HomeBase division (September 1993 - July
1997); President of BJ's (May 1993 - September 1993).
Thomas F. Gallagher 47 Executive Vice President, Store Operations since July 1997; Executive
Vice President, Store Operations of the HomeBase division (1996 -
1997); Vice President, Sales Operations of BJ's (1993 - 1996).
William B. Langsdorf 42 Executive Vice President and Chief Financial Officer since July 1997;
Senior Vice President, Finance of the HomeBase division (1993 - 1997).
Scott L. Richards 41 Executive Vice President, Merchandising since July 1997; Executive
Vice President, Merchandising of the HomeBase division (1996 - 1997);
Vice President, Merchandising of the HomeBase division (1993 - 1996).
John L. Price 48 Vice President, General Counsel and Secretary since July 1997;
Assistant General Counsel of 20th Century Industries (1995 - 1997);
private legal practice (1991 - 1995).
- ---------------------------- ------ ------------------------------------------------------------------------
</TABLE>
All officers hold office until the next annual meeting of the Board of Directors
in June 1999 and until their successors are elected and qualified.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
The common stock of HomeBase(R), Inc. (the "Company"), formerly Waban Inc., is
listed on the New York Stock Exchange (symbol HBI). The following are the
quarterly high and low stock prices for the fiscal years ending January 30, 1999
and January 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------- --------------------------------- ----------------------------------
Fiscal Year Ended Fiscal Year Ended
Quarters January 30, 1999 January 31, 1998
- --------------------------------------- --------------------------------- ----------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First 8 7/8 6 9/16 29 1/2 (1) 26 5/8 (1)
Second 10 1/8 7 5/8 35 5/16 (1) 26 3/8 (1)
Third 7 13/16 5 1/4 35 15/16(1) 7 11/16(1)
Fourth 7 5/8 5 10 1/16 6 3/4
- --------------------------------------- ---------------- ---------------- ---------------- -----------------
</TABLE>
(1) On July 26, 1997, the Company transferred all of the net assets of its BJ's
Wholesale Club division ("BJ's") to BJ's Wholesale Club, Inc. ("BJI"). On
July 28, 1997, the Company distributed to its stockholders, on a pro-rata
basis, all of the outstanding common stock of BJI (the "Distribution"). In
connection with the Distribution, the Company changed its name from Waban
Inc. to HomeBase, Inc. The Company and BJI became independent public
companies separately traded on the New York Stock Exchange. Stock prices on
or before July 28, 1997 have not been restated to reflect the Distribution.
The number of stockholders of record at April 5, 1999 was 3,286.
The Company has never paid or declared a cash dividend and the Company does not
presently intend to pay or declare any cash dividends on the common stock in the
future. The Senior Bank Facility does not permit the Company to pay cash
dividends. Any declaration and payment of dividends by the Company would be at
the discretion of the Board of Directors.
<PAGE>
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial and operating data of the Company
for each of the five fiscal years in the period ended January 30, 1999 are
extracted or derived from the audited Consolidated Financial Statements, and the
notes thereto, of the Company, which have been audited by PricewaterhouseCoopers
LLP, independent accountants. The selected consolidated financial and operating
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the notes thereto.
<TABLE>
<CAPTION>
Fiscal Year Ended
- --------------------------------------------------------------------------------------------------------------------------------
January 30, January 31, January 25, January 27, January 28,
(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
(53 Weeks)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 1,442,341 $1,477,442 $ 1,452,696 $ 1,448,776 $ 1,357,190
Cost of sales, including buying and occupancy costs 1,124,250 1,159,253 1,136,997 1,124,460 1,056,620
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 318,091 318,189 315,699 324,316 300,570
Selling, general and administrative expenses 279,151 287,181 277,841 275,655 248,112
Store closures and other charges - 27,000 - - -
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 38,940 4,008 37,858 48,661 52,458
Interest on debt and capital leases (net) 2,817 5,136 10,506 8,790 9,125
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and extraordinary loss 36,123 (1,128) 27,352 39,871 43,333
Provision (benefit) for income taxes 13,760 (445) 11,005 15,386 16,395
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary loss 22,363 (683) 16,347 24,485 26,938
Income from discontinued operations, net of income taxes - 20,575 60,313 48,492 38,052
Extraordinary loss on early extinquishment of debt, net
of income tax benefit - (8,663) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,363 $ 11,229 $ 76,660 $ 72,977 $ 64,990
================================================================================================================================
Basic net income (loss) per share (1):
Income (loss) from continuing operations before
extraordinary loss $ 0.59 $ (0.02) $ 0.50 $ 0.74 $ 0.81
Income from discontinued operations - 0.57 1.83 1.47 1.15
Extraordinary loss - (0.24) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.59 $ 0.31 $ 2.33 $ 2.21 $ 1.96
================================================================================================================================
Diluted net income (loss) per share (1):
Income (loss) from continuing operations before
extraordinary loss $ 0.54 $ (0.02) $ 0.49 $ 0.74 $ 0.81
Income from discontinued operations - 0.57 1.82 1.46 1.14
Extraordinary loss - (0.24) - - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.54 $ 0.31 $ 2.31 $ 2.20 $ 1.95
================================================================================================================================
Shares used in computation of net income per share:
(In thousands)
Basic 37,845 35,770 32,839 33,014 33,143
Diluted 48,013 35,770 33,205 33,220 33,405
Balance Sheet Data:
Working capital $ 261,930 $ 240,828 $ 275,842 $ 265,450 $ 308,749
Net assets of discontinued operations (2) - - 423,688 403,713 332,945
Total assets 728,982 715,608 1,077,059 1,066,188 1,011,705
Long-term debt and obligations under capital leases 115,659 115,963 242,548 255,803 269,223
Stockholders' equity 382,499 359,667 631,925 555,120 488,089
Stores open at end of period 84 83 84 79 77
================================================================================================================================
</TABLE>
(1) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS No. 128") in fiscal 1997. Net income (loss) per
share amounts for all periods prior to fiscal 1997 have been restated to
conform to the SFAS No. 128 requirements.
(2) On July 26, 1997, the Company transferred all of the net assets of BJ's to
BJI and on July 28, 1997, the Company completed the Distribution.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Organization and Presentation
The Company operates within a conventional 52 or 53 week accounting fiscal year
which ends on the last Saturday in January. The 52 weeks ended January 30, 1999
is referred to herein as "fiscal 1998". The 53 weeks ended January 31, 1998 and
the 52 weeks ended January 25, 1997 are referred to herein as "fiscal 1997" and
"fiscal 1996", respectively.
On July 26, 1997, HomeBase, Inc. (the "Company"), formerly known as Waban Inc.,
transferred all of the net assets of its BJ's Wholesale Club division ("BJ's")
to BJ's Wholesale Club, Inc. ("BJI"). On July 28, 1997, the Company distributed
to its stockholders, on a pro-rata basis, all of the outstanding common stock of
BJI (the "Distribution"). The financial statements for the periods prior to the
Distribution have been restated to present BJ's as a discontinued operation.
Income from discontinued operations for fiscal 1997 includes transaction costs
of $5.0 million (net of tax) incurred in connection with the Distribution. The
following discussion pertains to the continuing operations of the Company,
unless otherwise noted.
The following table presents the results of operations for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
Fiscal Year Ended
- ----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy
costs 77.9 78.5 78.3
- ----------------------------------------------------------------------------------------------------------
Gross profit 22.1 21.5 21.7
Selling, general and administrative expenses 19.4 19.4 19.1
Store closures and other charges - 1.8 -
- ----------------------------------------------------------------------------------------------------------
Operating income 2.7 0.3 2.6
Interest on debt and capital leases (net) 0.2 0.3 0.7
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and extraordinary loss 2.5 - 1.9
Provision for income taxes 0.9 - 0.8
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before
extraordinary loss 1.6 - 1.1
Income from discontinued operations, net of
income taxes - 1.4 4.2
- ----------------------------------------------------------------------------------------------------------
Income before extraordinary loss 1.6 1.4 5.3
Extraordinary loss on early extinguishment of
debt, net of income taxes - (0.6) -
- ----------------------------------------------------------------------------------------------------------
Net income 1.6% 0.8% 5.3%
==========================================================================================================
</TABLE>
<PAGE>
Fiscal Year Ended January 30, 1999 (Fiscal 1998) Compared to Fiscal Year Ended
January 31, 1998 (Fiscal 1997)
Net Sales
Fiscal 1998 consisted of 52 weeks compared to 53 weeks in fiscal 1997. Net sales
for fiscal 1998 decreased 2.4% to $1,442.3 million from $1,477.4 million in
fiscal 1997, down slightly due to the prior year having one more sales week. The
sales decrease was also the result of disruption caused by store remodel
construction during the first quarter of fiscal 1998 and increased competition
in many of the markets in which the Company operates. In addition, the Company
had one less store open during most of fiscal 1998 compared to the prior year.
Same store sales for the comparable 52 weeks declined 0.5% in fiscal 1998
primarily due to the disruption caused by store remodel construction during the
first quarter of fiscal 1998 and increased competition in many of the markets in
which the Company operates.
Gross Profit
Gross profit increased to 22.1% of net sales in fiscal 1998 compared to 21.5% in
fiscal 1997. The improvement was due to a number of factors, including higher
average selling margins caused by a change in the mix of products sold and
continuing buying efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") was 19.4% of net sales in
both fiscal 1998 and fiscal 1997.
Higher remodel related expenses of approximately $4 million and pre-tax
settlement costs of approximately $1.1 million associated with the termination
of the Waban Inc. Retirement Plan were offset by lower preopening costs due to
one less store opening in fiscal 1998 than in fiscal 1997 and to favorable cost
trends in self-insurance expenses.
Interest on Debt and Capital Leases, Net
Interest on debt and capital leases, net, was $2.8 million in fiscal 1998
compared to $5.1 million in fiscal 1997. Interest on debt and capital leases is
presented net of interest and investment income of $4.9 million and $2.6 million
in fiscal 1998 and 1997, respectively. Interest income increased due to higher
average marketable securities balances in fiscal 1998 as compared to fiscal
1997.
Income Tax Provision (Benefit)
The income tax rate for income from continuing operations was 38.1% in fiscal
1998 compared to 39.5% in fiscal 1997. The decrease in the tax provision rate in
fiscal 1998 was primarily attributable to the realization of certain state tax
credits.
For fiscal 1999, the Company expects the tax provision rate to be between 39%
and 40%.
Income (Loss) From Continuing Operations Before Extraordinary Loss
Income from continuing operations before extraordinary loss for fiscal 1998 was
$22.4 million, or $0.54 per share, diluted, compared to a loss of $0.7 million,
or $0.02 per share in fiscal 1997. Excluding store closures and other charges,
income from continuing operations for fiscal 1997 was $15.6 million, or $0.44
per share, diluted.
<PAGE>
Net Income
Net income in fiscal 1998 was $22.4 million, or $0.54 per share, diluted,
compared to $11.2 million, or $0.31 per share, diluted, in fiscal 1997. Net
income for fiscal 1997 includes $20.6 million in income from discontinued
operations for periods prior to the Distribution and an extraordinary loss of
$8.7 million, net of tax benefit, recorded in July 1997, associated with the
early extinguishment of debt.
Fiscal Year Ended January 31, 1998 (Fiscal 1997) Compared to Fiscal Year Ended
January 25, 1997 (Fiscal 1996)
Net Sales
Fiscal 1997 consisted of 53 weeks compared to 52 weeks in fiscal 1996. Net sales
for fiscal 1997 increased 1.7% to $1,477.4 million from $1,452.7 million in
fiscal 1996. The increase in net sales was primarily attributable to the
additional week of sales in fiscal 1997, partially offset by declines in
comparable store sales and by store closures. During fiscal 1997 and 1996, two
and five stores were opened, respectively, and three and zero stores were
closed, respectively.
The decline in comparable store sales of 1.7% in fiscal 1997 was primarily
attributable to increased competition in many of the markets in which the
Company operates and to extensive remodel construction in the fourth quarter of
fiscal 1997.
Gross Profit
Gross profit was 21.5% in fiscal 1997 compared to 21.7% in fiscal 1996. The
decrease is primarily due to a combination of slightly lower average selling
margins, which were impacted by competitive conditions, and somewhat higher
buying and occupancy costs as a percentage of sales, due to comparable store
sales declines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") was 19.4% in fiscal 1997
compared to 19.1% in fiscal 1996. The increase as a percent of net sales is
primarily attributable to higher remodel related costs in the fourth quarter of
fiscal 1997 of approximately $4 million, partially offset by lower pre-opening
expenses due to fewer stores being opened in fiscal 1997 than in fiscal 1996.
Store Closures and Other Charges
In the third quarter of fiscal 1997, the Company recorded store closures and
other charges of $27.0 million, consisting of $22.3 million for store closures
and other related settlement costs, $1.7 million in asset impairment charges and
a $3.0 million increase in the fiscal 1993 restructuring reserve.
Costs included in the reserve for store closures primarily include lease
obligations on closed facilities, write-downs of fixed assets and other related
settlement costs. The Company increased the fiscal 1993 restructuring reserve by
$3.0 million for additional lease obligations due to delays in obtaining
subleases at terms acceptable to the Company.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, the recoverability test is performed
using undiscounted net cash flows of the individual stores. The Company's
quarterly SFAS No. 121 analysis performed in the third quarter of fiscal 1997
indicated that the long-lived assets at two stores were impaired. Accordingly,
the Company estimated the fair value of these assets based on their estimated
salvage value and recorded an impairment charge of $1.7 million, which is
included in store closures and other charges.
Interest on Debt and Capital Leases, Net
Interest on debt and capital leases, net, was $5.1 million in fiscal 1997
compared to $10.5 million in fiscal 1996. Interest on debt and capital leases is
presented net of interest and investment income of $2.6 million and $1.8 million
in fiscal 1997 and 1996, respectively. Net interest expense in fiscal 1996
excludes capitalized interest of $0.9 million. Interest expense was allocated to
discontinued operations based on the ratio of BJ's net assets to the sum of
consolidated net assets plus consolidated debt.
The decline in net interest expense in fiscal 1997 from fiscal 1996 is primarily
attributed to lower average outstanding debt balances in fiscal 1997. In July
1997, $106.7 million of the Company's 6.5% convertible subordinated debentures
was converted into common stock and the remaining $0.2 million was redeemed for
cash. Also in July 1997, the Company repaid all of its 9.58% senior notes due
May 31, 1998, totaling $12.0 million, and pursuant to a tender offer, repaid
$93.4 million of its 11% senior subordinated notes due May 15, 2004, replacing
this debt with short-term bank borrowings. BJI assumed $72 million of the bank
borrowings at the time of the Distribution.
Income Tax Provision (Benefit)
The income tax rate for income from continuing operations was 39.5% in fiscal
1997 compared to 40.2% in fiscal 1996. The lower effective rate in fiscal 1997
is primarily attributed to a decrease in the effective tax rate in the state of
California, where most of the Company's stores are located.
Income (Loss) From Continuing Operations Before Extraordinary Loss
Loss from continuing operations before extraordinary loss for fiscal 1997 was
$0.7 million, or $0.02 per share, diluted, compared to income of $16.3 million,
or $0.49 per share, diluted, in fiscal 1996. Excluding store closures and other
charges, income from continuing operations for fiscal 1996 was $15.6 million, or
$0.44 per share, diluted.
Excluding store closures and other charges, income from continuing operations
for both fiscal 1997 and fiscal 1996 was 1.1% of net sales. The fiscal 1997
percentage, when compared to fiscal 1996, reflects a slightly lower gross profit
percentage, slightly higher SG&A and lower interest expense, as described above.
Income from continuing operations includes all of the corporate overhead
expenses incurred by the Company prior to the Distribution and an allocation of
the Company's interest expense prior to the Distribution. As a result of the
Distribution, the conversion of the convertible subordinated debt into common
stock and the refinancing of $112 million of other indebtedness, income from
continuing operations for periods preceding the Distribution is not comparable
to the Company's income from continuing operations after the Distribution.
<PAGE>
Net Income
Net income was $11.2 million, or $0.31 per share, diluted, in fiscal 1997
compared to $76.7 million, or $2.31 per share, diluted, in fiscal 1996. These
amounts include income from discontinued operations for periods prior to the
Distribution.
Income from discontinued operations in fiscal 1997, which includes the net
income of BJ's for the first six months, reduced by $5.0 million of transaction
costs, net of tax, incurred in connection with the Distribution, was $20.6
million, or $0.57 per share, diluted, compared to $60.3 million, or $1.82 per
share, diluted, in fiscal 1996.
The results for fiscal 1997 include an extraordinary loss of $8.7 million, net
of tax, recorded in July 1997, associated with the early extinguishment of the
Company's 9.58% senior notes due May 31, 1998 and of $93.4 million of its 11%
senior subordinated notes due May 15, 2004.
Liquidity and Capital Resources
Cash flow from operating activities provides the Company with a significant
source of liquidity. Additionally, the Company has raised capital through a debt
offering and has a revolving credit facility so as to provide capital for
corporate growth and working capital purposes.
On November 17, 1997, the Company completed the private placement of $100
million principal amount 5.25% convertible subordinated notes due November 1,
2004 through a Rule 144A/Regulation S offering, and received approximately $96
million, net of debt issuance costs. The Company subsequently filed a shelf
registration statement on Form S-3, which was declared effective on February 10,
1998, registering the resale of the notes and the common stock into which the
notes are convertible. The notes are convertible, subject to adjustment in
certain events, into approximately 9.8 million shares of the Company's common
stock at a conversion price of $10.22 per share at any time after February 15,
1998 and prior to maturity unless earlier redeemed or repurchased. Subsequent to
November 1, 2000, the notes are redeemable at the option of the Company, in
whole or in part, initially at 103.15% of principal and thereafter at prices
declining to 100% on or after November 1, 2003, together with accrued interest.
Interest is payable semi-annually on May 1 and November 1 of each year,
commencing on May 1, 1998. In the event of a change of control of HomeBase, each
holder of the notes has the right to require the Company to repurchase the notes
held by the holder, in whole or in part, at a redemption price of 100% of the
principal amount of the notes put up for redemption, plus accrued interest
accrued through the repurchase date.
In July 1998, the Company increased its revolving credit facility to $105
million from $90 million, and extended the expiration date to July 9, 2001. The
credit facility includes a $40 million sub-facility for letters of credit and is
collateralized by inventory and accounts receivable. The Company is required to
pay an annual facility fee, which is currently 0.3% of the unused commitment.
Interest is payable at the Company's option either at (a) the Eurodollar rate,
plus a margin, which is currently 1.2%, or (b) the agent bank's prime rate, plus
a margin, which is currently zero. The facility fee and borrowing margins are
subject to adjustment based on the Company's fixed-charge coverage ratio. The
credit facility is subject to certain covenants, which include minimum tangible
net worth and fixed-charge coverage requirements, a maximum funded
debt-to-capital limitation and a prohibition on the payment of cash dividends.
At January 30, 1999, the Company had no borrowings under its revolving facility,
and had $22.7 million in letters of credit outstanding. At April 3, 1999, the
Company had $81.8 million available for borrowing under the revolving facility.
In connection with previously announced growth initiatives, the Company has six
stores with scheduled openings during fiscal 1999, with one store having opened
in March 1999. Further expansion plans include the opening of approximately
eight stores before the end of fiscal 2000. It is anticipated that the majority
of the new stores will be leased. The Company expects that it will cost between
approximately $4.0 and $5.0 million to open each of these stores, exclusive of
property acquisition and development costs. The Company estimates that total
capital expenditures, including store openings, will total between $40 million
to $45 million.
Additionally, during fiscal 1999 the Company expects to fund an incremental
investment of approximately $13 million in payroll and advertising costs and
increase total inventory per store by approximately 10%. This spending is part
of a strategic plan designed to enhance customer service, increase customer
traffic and improve same store sales.
At January 30, 1999, the Company had $63.5 million in cash, cash equivalents and
marketable securities. The Company believes that its current resources, cash
flows from operations and amounts available under its revolving credit facility
will be sufficient to support its planned store expansion and related strategic
initiatives and to finance operations through January 29, 2000.
Restructuring Reserves
As of January 31, 1998, $12.7 million of the Company's fiscal 1993 restructuring
charge remained accrued on the Company's consolidated balance sheet. During
fiscal 1998, the Company incurred cash expenditures of $6.8 million, primarily
for lease obligations on closed facilities and lease termination costs. As of
January 30, 1999, $5.9 million remained accrued on the Company's consolidated
balance sheet, consisting primarily of lease obligations on closed facilities,
which extend through 2007.
Recent Accounting Standards
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. The Company currently does not
have any derivative financial instruments and does not currently employ any
hedging activities.
Risk Factors
If our new operating and sales strategy does not attract enough new customers,
our operating results could be harmed.
On February 2, 1999 we announced a new operating and sales strategy program
designed to increase the number of sales people in each store to enhance
service, which we believe will increase customer traffic and improve same store
sales. If same store sales do not increase, the higher costs associated with the
program could harm our operating results. The program involves an incremental
investment during fiscal 1999 of approximately $13 million in payroll and
advertising costs. In addition, we will increase inventory per store by
approximately 10% as a means of further enhancing customer service.
If our accelerated growth strategy does not attract more customers to our
stores, our operating results could be harmed.
We have been implementing a strategy of improving the appearance and design of
our stores to strengthen our market position in the western United States and
improve our profitability. Under the accelerated growth strategy, we intend to
increase the pace of new store openings. We opened two new stores in fiscal 1997
and one new store in fiscal 1998. We expect to open six stores in fiscal 1999
and approximately eight stores in fiscal 2000. If the new stores do not achieve
substantial net sales our operating results and financial condition could be
harmed. We estimate that we will incur costs between approximately $4.0 and $5.0
million to open each of these new stores, excluding land acquisition and
building development costs. As we grow, we will need to continually analyze the
sufficiency of our warehouse and distribution space and may require additional
facilities to support the growth. Our new stores may not achieve sales, gross
profit or operating income comparable to existing stores. Although management
carefully selects new store locations, the opening of additional HomeBase stores
in existing markets may reduce sales at existing HomeBase locations.
We may not be able to open new stores on a timely and profitable basis under our
accelerated growth strategy.
We may not be able to open new stores on a timely and profitable basis if we
are not able to:
- - find suitable new store locations of sufficient size and at acceptable prices
- - acquire the necessary governmental and regulatory permits and approvals,
including zoning and development permits
- - construct the stores at budgeted cost and in a timely manner
- - hire and train sufficient numbers of qualified store managers and staff for
new stores
- - integrate these new stores in our operations.
Some of these success factors are beyond our control.
We may have difficulty employing enough additional trained personnel and/or
improving our management information systems under our accelerated growth
strategy.
The accelerated growth strategy will require us to employ more personnel,
particularly store managers and sales associates, who possess the training and
experience necessary to meet our customer service standards. We may find it
difficult to attract, develop and retain the personnel necessary to pursue our
accelerated growth strategy successfully. We also will need to continually
evaluate the adequacy of our management information systems, including inventory
control and distribution systems. In the future we may need to upgrade or
reconfigure our management information systems to support our planned expansion.
If we are not able to attract and retain the necessary personnel or to expand
and enhance our management information systems, our operating results and
financial condition could be harmed.
More competition could harm our operating results.
The home improvement, hardware and garden businesses are highly competitive. We
compete with a large number and variety of wholesalers and retailers, including
several large national chains in the home improvement warehouse merchandising
business, some of which have significantly greater financial and marketing
resources than we do. The Home Depot, Inc., Lowe's Companies, Inc., Eagle
Hardware & Garden, Inc. and Builder's Square (a division of Hechinger Company)
are our major competitors that use the warehouse store format.
Competition is most intense in the areas of price, product selection, location,
service and name recognition. Competitive factors could require price reductions
or cause an increase in operating costs, including increases in expenditures for
marketing and customer service, that would harm our operating results.
Some of the markets in which we now operate or in which we might operate in the
future may already be at or near the saturation point in terms of home
improvement stores. Some of our major competitors appear to have a strategy of
clustering stores within or saturating markets in which they operate, or of
placing their warehouse stores so close to our stores as to directly challenge
our competitive position in such markets. These strategies of our major
competitors could harm our current operations and endanger the profitability of
our accelerated growth strategy. Almost all of our stores have at least one home
improvement warehouse retailer within their trading area, at an average distance
of approximately three miles. Some of our major competitors either have
expansion plans in place or may seek to imitate our strategy. We expect that our
major competitors will open additional stores in our current market areas, which
could harm our competitive position.
We will be harmed unless comparable store sales stop declining.
A significant measure of our performance is the change in same store sales,
which calculates the change from year to year in the sales of each of our
stores, and then averages the results. Our same store sales have declined in
recent years. A variety of factors affects our same store sales, including,
among others:
- - the timing and concentration of new store openings
- - actions of competitors, including the opening of additional stores in our
markets
- - the retail sales environment
- - general economic
- - conditions weather
- - conditions our ability to execute our business strategy effectively.
If these and other factors result in further declines or fluctuations in same
store sales, our operating results and financial condition could be harmed.
Our relatively short history as a separate company could harm our ability to
access credit facilities and the capital market.
Our business was operated as a division of a much larger company until July
1997, so we do not have a significant operating history as a separate,
stand-alone company. Before July 1997, the two divisions, BJ's and HomeBase,
each had access to the cash flow generated by the other and to the combined
credit of the enterprise, which was based on the combined assets and operating
results of the BJ's and HomeBase divisions. If our financial performance as a
separate, stand-alone company is not good, it could harm our ability to access
credit facilities and capital markets in the future. To the extent we experience
reduced access to capital or higher capital costs, we may have difficulty
financing our accelerated growth strategy or our new operating and sales
strategy, which could harm our operating results and financial condition.
Reliance on the western U.S. market could harm our operating results.
Our home improvement stores are located in the western United States, with more
than half of them in California. We have been harmed in the past by economic
downturns experienced in our geographic markets, and future economic downturns
in the western U.S. could again harm us.
The extent of our real estate holdings subjects us to substantial environmental
risks and regulations.
We are subject to a variety of federal, state and local governmental laws and
regulations relating to the use, storage, discharge, emission and disposal of
hazardous materials. We have engaged and may continue to engage in real estate
development projects and we own 18 parcels of real estate on which our stores
are located. If we do not comply with environmental laws, it could result in the
imposition of severe penalties or restrictions on operations by governmental
agencies or courts of law, which could harm our operating results or financial
condition. We do not have environmental liability insurance to cover these
events. We do not know of any significant environmental hazard on properties we
own or have owned, or operate or have operated. However, if significant
environmental hazards occur or are discovered, we could be subject to severe
penalties, including the costs of remediation, which could harm our operating
results or financial condition.
Failure to qualify as tax free spin-off could harm us and our stockholders.
Prior to the spin-off of the BJ's division in July 1997, we received a letter
ruling from the IRS to the effect that, for federal income tax purposes, the
spin-off and related asset transfers would be tax-free to us and to the holders
of our common stock at the time of the spin-off. The IRS letter ruling is based
on and subject to assumptions, facts, representations and advice provided to the
IRS by us, BJI, which is the corporation to which the assets of the BJ's
division were transferred, holders of 5% or more of our common stock and our
financial advisor at the time of the spin-off. Although we are not aware of any
facts or circumstances that would make those assumptions, facts, representations
and advice unobtainable or untrue, future events not within the control of
HomeBase and BJI, including, for example, an IRS challenge to the spin-off in
the event that BJI or HomeBase is acquired before July 28, 1999, could cause the
spin-off not to qualify for tax-free treatment, resulting in adverse
consequences to us and our stockholders.
Potential conflicts of interest; management overlap.
Our interests and those of BJI may conflict due to the ongoing relationships
between the companies. Sources of conflict include our continuing liability for
some of BJI's contractual obligations, including BJI leases, and the other
arrangements between the parties regarding lease liabilities. In addition,
Herbert J. Zarkin currently holds the executive offices of chairman of our board
of directors and chairman of BJI's board of directors; Lorne R. Waxlax is a
director of both HomeBase and BJI; and Edward J. Weisberger serves as an officer
and director of both HomeBase and BJI. We have implemented procedures to limit
the involvement of Messrs. Zarkin, Waxlax and Weisberger in conflict situations,
including requiring them to abstain from voting as directors of HomeBase on some
matters.
Continuing obligations of HomeBase for lease liabilities after the spin-off.
Under the terms of the spin-off, BJI assumed all liabilities to third-party
lessors for leases entered into by HomeBase before the spin-off for use by the
former BJ's division. While we will continue to be liable, by law, with respect
to those lease liabilities, BJI has agreed to indemnify us for those
liabilities. However, if BJI is not able to make payments under the indemnity,
we would be harmed.
We may be harmed if holders of our notes require us to repurchase some or all
of the notes upon a change of control and we do not have sufficient funds to
complete the repurchase.
We have issued $100 million principal amount of 5.25% senior subordinated
convertible notes. In the event of a change of control of HomeBase, each holder
of our notes has the right to require us to repurchase the notes held by the
holder, in whole or in part, at a redemption price of 100% of the principal
amount of the notes put up for redemption, plus interest accrued through the
repurchase date. If a change of control were to occur, we might not have the
financial resources or be able to arrange financing on acceptable terms to pay
the repurchase price for all the notes as to which the repurchase option is
exercised. Any repurchase in connection with a change of control could,
depending on the circumstances and absent a waiver from the holders of our
senior debt, be blocked due to the subordination provisions of the notes. If we
do not repurchase the notes when required, an event of default with respect to
the notes and with respect to senior debt may occur, whether or not the
repurchase is permitted by the subordination provisions. Such an event of
default, and its consequences, could harm our operating results or financial
condition.
Our failure to be Year 2000 compliant or such a failure by our key suppliers or
customers could disrupt our operations and harm our operating results or
financial condition.
We have conducted a review of our computer systems and have identified the
systems that could be affected by the Year 2000 issue. The Year 2000 issue
relates to the inability of information systems to recognize and process
date-sensitive information beyond December 31, 1999. In addition, many systems
and equipment that are not typically thought of as "computer-related" contain
imbedded hardware and software that may be date-sensitive and can be impacted by
the Year 2000 issue. If our computer systems cannot recognize a date using "00"
as the Year 2000, it could result in miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoice payments or engage in other normal business
activities.
Early in fiscal 1996, we commenced a program to address the Year 2000 issue and
to pursue compliance with vendors. The scope of the project includes: ensuring
the compliance of all applications, operating systems and hardware on mainframe,
personal computer and local area network platforms; addressing issues related to
systems and equipment that do not contain embedded hardware and software; and
addressing the compliance of third party vendors.
We estimate the total cost of this compliance program to be less than $2.0
million, including internal staff costs and the cost to write off any
unamortized existing hardware and software that may need to be replaced. We have
incurred approximately $0.8 million through fiscal 1998, with a remaining $1.2
million in projected expenditures in fiscal 1999.
We believe that more than 90% of our mainframe applications, including all
financial and accounting systems, are now Year 2000 compliant. We expect that
the remaining mainframe systems will be Year 2000 compliant by the second
quarter of fiscal 1999. All other equipment and systems, including personal
computers, local area networks, and other peripherals are expected to be Year
2000 compliant by the third quarter of fiscal 1999.
Although we anticipate that our systems and applications will be Year 2000
compliant on a timely basis, there can be no assurance that the systems of other
companies with which we do business will be Year 2000 compliant on a timely
basis. In March 1998, we established a Year 2000 committee, which includes
members from various business units within HomeBase. The committee members
identified the major third party vendors from their respective business units.
We sent Year 2000 compliance questionnaires and, as of March 31, 1999, we have
received responses from approximately 75% of the vendors polled. We are
reviewing their responses and assessing the need to develop contingency plans
for those vendors who may not be Year 2000 compliant. The risks involved with
not solving the Year 2000 issue include, but are not limited to, the following:
loss of local or regional electric power, loss of telecommunication services,
delays or cancellations of shipping or transportation, the inability to process
credit card transactions and bank errors.
The discussion of our efforts, and management's expectations, relating to Year
2000 compliance are forward-looking statements. Our ability to achieve Year 2000
compliance could be affected by, among other things, the availability of
programming and testing resources, failure to identify all susceptible systems,
non-compliance by third parties, and other similar uncertainties. These and
other unforeseen factors could harm our financial position, liquidity and
results of operations.
- --------------------------------------------------------------------------------
Forward-Looking Information
- --------------------------------------------------------------------------------
This report on Form 10-K contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used in this
report, the words "believe," "estimate," "expect," "anticipate," "plans," and
similar expressions are intended to identify forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those expected. Although the Company believes that
comments reflected in such forward-looking statements are reasonable, they are
based on information existing at the time made. Important factors that could
cause actual results to differ materially from expectations include, but are not
limited to, the successful implementation of the Company's accelerated growth
strategy, general economic conditions prevailing in the Company's markets,
competition and other factors.
- --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has not entered into any transactions using derivative financial
instruments.
The Company's major market risk exposure is the potential loss arising from
changing interest rates and its impact on short-term investments. At January 30,
1999, marketable securities consisted of $27.9 million in state and corporate
bonds, classified as available-for-sale. Currently, the Company only has
investments in fixed rate bonds. If interest rates were to increase and the fair
value of the bonds were to decrease, the Company has the ability to hold the
bonds until maturity.
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Report of Independent Accountants.............................................24
Report on Management's Responsibility.........................................24
Consolidated Statements of Income for the fiscal years ended
January 30, 1999, January 31, 1998 and January 25, 1997.......................25
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.......26
Consolidated Statements of Cash Flows for the fiscal years ended
January 30, 1999, January 31, 1998 and January 25, 1997.......................27
Consolidated Statements of Stockholders' Equity for the fiscal years
ended January 30, 1999, January 31, 1998 and January 25, 1997.................28
Notes to Consolidated Financial Statements....................................29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of HomeBase, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of HomeBase, Inc. and
subsidiaries at January 30, 1999 and January 31, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 30, 1999, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Los Angeles, California
March 2, 1999
REPORT ON MANAGEMENT'S RESPONSIBILITY
The consolidated financial statements and related financial information in this
annual report have been prepared by and are the responsibility of management.
The consolidated financial statements were prepared in accordance with generally
accepted accounting principles and necessarily include amounts which are based
upon judgments and estimates made by management.
The company maintains a system of internal controls designed to provide, at
appropriate cost, reasonable assurance that the assets are safeguarded,
transactions are executed in accordance with management's authorization and the
accounting records may be relied upon for the preparation of the consolidated
financial statements. The accounting and control systems are continually
reviewed by management and modified as necessary in response to changing
business conditions and the recommendations of the Company's internal auditors
and independent accountants.
The Audit Committee, which is comprised of members of the Board of Directors who
are neither officers nor employees, meets periodically with management, the
internal auditors and the independent accountants to review matters relating to
the Company's financial reporting, the adequacy of internal accounting control
and the scope and results of audit work. The internal auditors and the
independent accountants have free access to the Committee.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, whose opinion as to their fair presentation in
accordance with generally accepted accounting principles appears above.
Allan P. Sherman William B. Langsdorf
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE>
<TABLE>
<CAPTION>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(53 Weeks)
<S> <C> <C> <C>
Net sales $ 1,442,341 $ 1,477,442 $ 1,452,696
Cost of sales, including buying and
occupancy costs 1,124,250 1,159,253 1,136,997
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 318,091 318,189 315,699
Selling, general and administrative
expenses 279,151 287,181 277,841
Store closures and other charges - 27,000 -
- ---------------------------------------------------------------------------------------------------------------------
Operating income 38,940 4,008 37,858
Interest on debt and capital leases, net 2,817 5,136 10,506
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and extraordinary loss 36,123 (1,128) 27,352
Provision (benefit) for income taxes 13,760 (445) 11,005
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary loss 22,363 (683) 16,347
Income from discontinued operations, net of
income taxes of $0, $16,496, and $38,661 - 20,575 60,313
- ---------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 22,363 19,892 76,660
Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $5,896 - (8,663) -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 22,363 $ 11,229 $ 76,660
=====================================================================================================================
Basic net income per share:
Income (loss) from continuing operations before
extraordinary loss $ 0.59 $ (0.02) $ 0.50
Income from discontinued operations - 0.57 1.83
Extraordinary loss - (0.24) -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 0.59 $ 0.31 $ 2.33
=====================================================================================================================
Diluted net income per share:
Income (loss) from continuing operations before
extraordinary loss $ 0.54 $ (0.02) $ 0.49
Income from discontinued operations - 0.57 1.82
Extraordinary loss - (0.24) -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 0.54 $ 0.31 $ 2.31
=====================================================================================================================
Shares used in computation of net income per share:
Basic 37,845 35,770 32,839
Diluted 48,013 35,770 33,205
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMEBASE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
- --------------------------------------------------------------------------------------------------------------------
January 30, January 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 35,578 $ 44,603
Marketable securities 27,939 5,515
Accounts receivable (net of allowance for doubtful accounts
of $220 and $293) 20,759 27,781
Merchandise inventories 339,650 314,188
Current deferred income taxes 9,803 11,973
Prepaid expenses and other current assets 17,044 9,857
Prepaid federal and state income taxes - 10,265
- --------------------------------------------------------------------------------------------------------------------
Total current assets 450,773 424,182
Property, net 256,835 258,697
Property under capital leases, net 5,198 5,637
Deferred income taxes 10,205 13,965
Other assets 5,971 13,127
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 728,982 $ 715,608
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 103,248 $ 96,122
Restructuring reserve 2,066 6,151
Accrued expenses and other current liabilities 75,838 80,783
Accrued income taxes 691 -
Current installments of long-term debt 6,716 72
Obligations under capital leases due within one year 284 226
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 188,843 183,354
Long-term debt 100,293 107,015
Obligations under capital leases, less portion due within one year 8,366 8,650
Noncurrent restructuring reserve 3,862 6,537
Other noncurrent liabilities 45,119 50,385
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share, authorized 190,000,000 shares,
issued and outstanding 37,879,044 and 37,707,372 shares 379 377
Additional paid-in capital 374,705 375,026
Unearned compensation (798) (1,570)
Unrealized holding gains 22 6
Retained earnings (deficit) 8,191 (14,172)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 382,499 359,667
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 728,982 $ 715,608
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended
- ------------------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(53 Weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 22,363 $ 11,229 $ 76,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Net income from discontinued operations - (20,575) (60,313)
Depreciation and amortization 27,210 25,409 23,620
Extraordinary loss - 8,663 -
Loss on property disposals 14 620 1,037
Amortization of premium (discount) on marketable
securities (367) - 122
Other noncash items (net) 676 1,755 375
Deferred income taxes 5,930 (4,762) 7,384
Increase (decrease) in cash due to changes in:
Accounts receivable 4,638 (136) 3,018
Merchandise inventories (25,462) 2,350 (17,740)
Prepaid expenses and other current assets (604) (4,882) (952)
Other assets (1,136) (74) (488)
Accounts payable 7,126 11,219 (21,945)
Restructuring reserve (6,564) (1,135) (14,591)
Accrued expenses and other current liabilities 8,084 (345) (6,988)
Accrued income taxes 11,422 6,601 (5,315)
Other noncurrent liabilities (5,266) 15,297 (1,572)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities of:
Continuing operations 48,064 51,234 (17,688)
Discontinued operations - 1,559 111,851
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,064 52,793 94,163
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (71,088) (13,203) (29,903)
Sale of marketable securities 11,589 - 46,957
Maturity of marketable securities 38,553 365 3,140
Property additions (36,548) (26,431) (48,393)
Property disposals 303 489 4,438
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of:
Continuing operations (57,191) (38,780) (23,761)
Discontinued operations - (23,269) (71,282)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (57,191) (62,049) (95,043)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt - 100,000 -
Repayment of long-term debt (78) (130,746) (12,828)
Debt issuance costs (226) (4,861) -
Repayment of capital lease obligations (254) (180) (395)
Purchase of treasury stock - - (11,392)
Proceeds from sale and issuance of common stock 660 5,815 9,016
Cash paid to BJ's Wholesale Club, Inc. in spin-off - (5,000) -
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities of:
Continuing operations 102 (34,972) (15,599)
Discontinued operations - 71,935 (231)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 102 36,963 (15,830)
Net increase (decrease) in cash and cash equivalents (9,025) 27,707 (16,710)
Cash and cash equivalents at beginning of year 44,603 16,896 33,606
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 35,578 $ 44,603 $ 16,896
==================================================================================================================
Supplemental cash flow information:
Interest paid (including discontinued operations) $ 1,570 $ 9,480 $ 21,229
Income taxes paid (refunded) (including discontinued (4,485) 35,713 45,937
operations)
Noncash financing and investing activities:
Conversion of long-term debt to stock (net) $ - $ 107,061 $ 24
Tax benefit of employee stock options 466 2,202 2,122
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Common Stock Additional Holding Retained Treasury Stock Total
----------------- Paid-In Unearned Gains Earnings ---------------- Stockholders'
Shares Amount Capital Compensation (Losses) (Deficit) Shares Amount Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 27, 1996 33,297 $ 333 $329,868 $ (1,249) $ 22 $235,213 (568) $(9,067) $ 555,120
Net income - - - - - 76,660 - - 76,660
Unrealized holding losses - - - - (22) - - - (22)
Purchase of treasury stock - - - - - - (570) (11,392) (11,392)
Exercise of stock options - - (715) - - - 567 9,731 9,016
Income tax benefit of stock
options - - 2,122 - - - - - 2,122
Restricted stock grants - - 248 (940) - - 41 704 12
Amortization of restricted
stock grants - - - 397 - - - - 397
Cancellation of restricted
stock (27) - (582) 570 - - - - (12)
Conversion of 6.5% debentures - - - - - - 1 24 24
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 25, 1997 33,270 333 330,941 (1,222) - 311,873 (529) (10,000) 631,925
Net income - - - - - 11,229 - - 11,229
Unrealized holding gains - - - - 6 - - - 6
Exercise of stock options 158 2 1,780 - - - 213 4,031 5,813
Income tax benefit of stock
options - - 2,202 - - - - - 2,202
Restricted stock grants 263 3 1,959 (1,962) - - - - -
Amortization of restricted
stock grants - - - 469 - - - - 469
Cancellation of restricted
stock (46) (1) (1,144) 1,145 - - - - -
Conversion of 6.5% debentures 4,062 40 101,052 - - - 316 5,969 107,061
Equity transfer in spin-off
of BJ's Wholesale Club, Inc. - - (61,764) - - (337,274) - - (399,038)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 37,707 377 375,026 ( 1,570) 6 (14,172) - - 359,667
Net income - - - - - 22,363 - - 22,363
Unrealized holding gains - - - - 16 - - - 16
Exercise of stock options 184 2 657 - - - - - 659
Income tax benefit of stock
options - - 466 - - - - - 466
Amortization of restricted
stock grants - - - 699 - - - - 699
Cancellation of restricted
stock (12) - (95) 73 - - - - (22)
Equity transfer adjustment
related to spin-off of BJ's
Wholesale Club, Inc. - - (1,349) - - - - - (1,349)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 30, 1999 37,879 $ 379 $374,705 $ (798) $ 22 $ 8,191 - $ - $ 382,499
================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization
HomeBase, Inc.(R) ("the Company" or "HomeBase") is the second largest operator
of home improvement warehouse stores in the western United States. At January
30, 1999, the Company operated 84 stores in 10 states. The Company's stores
average approximately 103,000 square feet of indoor space and include up to
30,000 square feet of additional exterior full-service garden and landscaping
centers. The Company offers a broad assortment of brand-name home improvement
and building supply products at competitive prices to both Do-It-Yourself
("DIY") and professional customers. In certain categories, the Company
supplements its brand-name offerings with high quality private label products.
On July 26, 1997, the Company transferred all of the net assets of its BJ's
Wholesale Club division ("BJ's") to BJ's Wholesale Club, Inc. ("BJI"). On July
28, 1997, the Company distributed to its stockholders on a pro-rata basis all of
the outstanding common stock of BJI (the "Distribution"). The financial
statements for the periods presented have been restated to present BJ's as a
discontinued operation. Income from discontinued operations for the fiscal year
ended January 31, 1998 includes transaction costs of $5.0 million (net of tax)
incurred in connection with the Distribution.
Note 2 - Summary of Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company include the financial
statements of the Company's subsidiaries, all of which are wholly owned.
Fiscal Year
The Company operates within a conventional 52 or 53 week accounting fiscal year
that ends on the last Saturday in January. The 52 weeks ended January 30, 1999
is referred to herein as "fiscal 1998". The 53 weeks ended January 31, 1998 and
the 52 weeks ended January 25, 1997 are referred to herein as "fiscal 1997" and
"fiscal 1996", respectively.
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 reported amounts of assets and liabilities (e.g., co-operative
advertising and rebate reserves, self-insurance reserves, and inventory
reserves) and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents. Investments
with maturities exceeding three months are classified as marketable securities.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Marketable Securities
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity.
Marketable equity securities and debt securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
investment income.
Merchandise Inventories
Inventories are stated at the lower of cost, determined under the weighted
average cost method, or market. The Company recognizes the write-down of
slow-moving or obsolete inventory in cost of sales when such write-downs are
probable and estimatable.
Property and Equipment
Property and equipment are stated at cost. Depreciation expense includes
amortization of property under capital leases. Depreciation and amortization is
provided using the straight-line method using the following estimated useful
lives.
<TABLE>
- --------------------------------------------------------------------------------------------------------------
<S> <C>
Buildings 33 years
Property under capital leases and leasehold improvements Shorter of lease term or useful life
Furniture, fixtures, and equipment 3-10 years
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Preopening Costs
Preopening costs consist of direct incremental costs of opening a facility and
are charged to operations as incurred.
Interest on Debt and Capital Leases
Interest on debt and capital leases in the consolidated statements of income is
presented net of interest and investment income of $4.9 million, $2.6 million,
and $1.8 million in fiscal 1998, 1997, and 1996, respectively.
Capitalized Interest
The Company capitalizes interest related to the development of owned facilities.
No interest was capitalized in fiscal 1998 and fiscal 1997. Interest in the
amount of $1.6 million was capitalized in fiscal 1996.
Long-Lived Assets
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". In accordance with SFAS No. 121,
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the individual stores and
consolidated undiscounted net cash flows for long-lived assets not identifiable
to individual stores. Impairment losses are calculated based on the estimated
salvage value of the impaired assets.
Advertising Costs
Advertising costs are expensed as incurred. Net advertising expense was $20.7
million, $19.5 million and $18.9 million for fiscal years 1998, 1997 and 1996,
respectively.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". SFAS No. 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS No. 109
generally considers all expected future events other than proposed changes in
the tax law or rates.
Discontinued Operations
Net sales from discontinued operations were $1,464.4 million and $2,922.8
million for fiscal 1997 and fiscal 1996, respectively. Interest expense was
allocated to discontinued operations based on the ratio of BJ's net assets to
the sum of consolidated net assets plus consolidated debt. In the first quarter
of fiscal 1998, the Company recorded an additional equity transfer to BJI of
approximately $1.3 million, related to a net asset adjustment of BJ's as of the
time of the Distribution.
Stock-Based Compensation
During fiscal 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 encourages the use of a fair-value-based
method of accounting for stock-based awards under which the fair value of stock
options is determined on the date of grant and expensed over the vesting period.
Under SFAS No. 123, companies may, however, measure compensation costs for those
plans using the method prescribed by Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees." Companies that apply APB
Opinion No. 25 are required to include pro forma disclosures of net earnings and
earnings per share as if the fair-value-based method of accounting had been
applied. The Company elected to account for such plans under the provisions of
APB Opinion No. 25.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year presentation.
New Accounting Standards
Effective January 30, 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits". The provisions
of SFAS No. 132 revises employers' disclosures about pension and other
post-retirement benefit plans. SFAS No. 132 does not change the measurement or
recognition of these plans, and standardizes the disclosure requirements for
pensions and other post-retirement benefits to the extent practicable.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company currently does not have any derivative financial instruments and does
not currently employ any hedging activities.
Note 3 - Supplemental Balance Sheet Information
Property and Equipment
Property and equipment consists of the following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 30, January 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 157,760 $ 157,488
Leasehold improvements 69,577 62,310
Furniture, fixtures and equipment 148,674 144,662
- -----------------------------------------------------------------------------------------------------------
376,011 364,460
Accumulated depreciation (119,176) (105,763)
- -----------------------------------------------------------------------------------------------------------
Property and equipment, net $ 256,835 $ 258,697
===========================================================================================================
</TABLE>
Property under Capital Leases
Property under capital leases consists of the following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 30, January 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property under capital leases $ 9,696 $ 9,696
Accumulated depreciation (4,498) (4,059)
- -----------------------------------------------------------------------------------------------------------
Property under capital leases, net $ 5,198 $ 5,637
===========================================================================================================
</TABLE>
Accrued Expenses and Other Current Liabilities
The following are the major components of accrued expenses and other current
liabilities:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 30, January 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Self-insurance reserves $ 18,370 $ 16,972
Employee compensation 21,427 16,655
Sales and use taxes 12,724 7,241
Rent, utilities, advertising and other 23,317 39,915
- -----------------------------------------------------------------------------------------------------------
Total accrued expenses and other current liabilities $ 75,838 $ 80,783
===========================================================================================================
</TABLE>
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4 - Net Income Per Share
The Company adopted SFAS No. 128, "Earnings per Share" in fiscal 1997. SFAS No.
128 replaced the calculation of primary and fully diluted net income per share
with basic and diluted net income per share. Unlike primary net income per
share, basic net income per share excludes any dilutive effects of stock options
and convertible securities. Diluted net income per share is similar to the
previously reported fully diluted net income per share. Net income per share
amounts for fiscal 1996 have been restated to conform to the SFAS No. 128
requirements.
The following table sets forth the computation of net income per share:
<TABLE>
<CAPTION>
Fiscal Year Ended
- ------------------------------------------------------ ----------------------------------------------------
January 30, January 31, January 25,
(In thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations
before extraordinary loss $ 22,363 $ (683) $ 16,347
Income from discontinued operations (net
of income taxes) - 20,575 60,313
Extraordinary loss (net of income taxes) - (8,663) -
- ------------------------------------------------------ ----------------- ---------------- -----------------
Numerator for basic net income per share $ 22,363 $ 11,229 $ 76,660
Effect of dilutive securities:
5.25% convertible subordinated notes (1) 3,574 - -
- ------------------------------------------------------ ----------------- ---------------- -----------------
Numerator for diluted net income per share $ 25,937 $ 11,229 $ 76,660
====================================================== ================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
- ------------------------------------------------------ ----------------- ---------------- -----------------
January 30, January 31, January 25,
(In thousands) 1999 1998 1997
- ------------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Denominator:
Denominator for basic net income per share-
weighted average shares 37,845 35,770 32,839
Effect of dilutive securities:
Employee stock options (2) 381 - 366
Assumed conversion of 5.25%
convertible subordinated notes (1) 9,787 - -
- ------------------------------------------------------ ----------------- ---------------- -----------------
Denominator for diluted net income per share 48,013 35,770 33,205
====================================================== ================= ================ =================
</TABLE>
(1) In fiscal 1997, the effect of the conversion of the convertible securities
has been excluded from the computation of diluted net income per share
because it was antidilutive.
(2) In fiscal 1997, the effect of stock options was antidilutive because the
Company reported a net loss from continuing operations. These shares have
been excluded from the computation of diluted net income per share.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5 - Debt
At January 30, 1999 and January 31, 1998, long-term debt consisted of the
following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 30, January 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate debt, interest at 9.25%, maturing through March 1,
2003 (repaid February 26, 1999) $ 372 $ 450
Senior subordinated notes, interest at 11%,
maturing May 15, 2004 (1) 6,637 6,637
Convertible subordinated notes, interest at 5.25%,
maturing November 1, 2004 100,000 100,000
- -----------------------------------------------------------------------------------------------------------
107,009 107,087
Less current installments (6,716) (72)
- -----------------------------------------------------------------------------------------------------------
Total long-term debt $ 100,293 $ 107,015
===========================================================================================================
</TABLE>
The following are the aggregate maturities of long-term debt outstanding at
January 30, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Real Senior Convertible
Estate Subordinated Subordinated
(In thousands) Debt Debt (1) Debt Total
- -----------------------------------------------------------------------------------------------------------
Fiscal years ending January:
<S> <C> <C> <C> <C>
2000 $ 79 $ 6,637 $ - $ 6,716
2001 87 - - 87
2002 95 - - 95
2003 105 - - 105
2004 6 - 100,000 100,006
- -----------------------------------------------------------------------------------------------------------
Total $ 372 $ 6,637 $ 100,000 $ 107,009
===========================================================================================================
</TABLE>
(1) The Company intends to call and repay the $6.6 million, 11% senior
subordinated notes on May 15, 1999. In July 1997, the Company purchased
U.S. Treasury securities and deposited them in escrow with the trustee of
the notes, to be used to retire the debt and pay interest through May 1999.
As of January 30, 1999, long-term real estate debt was collateralized by land
and buildings with a net book value of approximately $8.3 million.
On November 17, 1997, the Company completed the private placement of $100
million, 5.25% convertible subordinated notes due November 1, 2004 through a
Rule 144A/Regulation S offering, and received approximately $96 million, net of
debt issuance costs. The Company subsequently filed a registration statement on
Form S-3, which was declared effective on February 10, 1998, registering the
notes and the common stock into which the notes are convertible. The notes are
convertible, subject to adjustment in certain events, into approximately 9.8
million shares of the Company's common stock at a conversion price of $10.22 per
share at any time after February 15, 1998 and prior to maturity unless earlier
redeemed or repurchased. Subsequent to November 1, 2000, the notes are
redeemable at the option of the Company, in whole or in part, initially at
103.15% of principal and thereafter at prices declining to 100% on or after
November 1, 2003, together with accrued interest. Interest is payable
semi-annually on May 1 and November 1 of each year, commencing on May 1, 1998.
In the event of a change of control of HomeBase, each holder of the notes has
the right to require the Company to repurchase the notes held by the holder, in
whole or in part, at a redemption price of 100% of the principal amount of the
notes put up for redemption, plus accrued interest accrued through the
repurchase date.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In July 1998, the Company increased its revolving credit facility to $105
million from $90 million, and extended the expiration to July 9, 2001. The
credit agreement includes a $40 million sub-facility for letters of credit and
is collateralized by inventory and accounts receivable. The Company is required
to pay an annual facility fee, which is currently 0.30% of the total commitment.
Interest on borrowings is payable at the Company's option either at (a) the
Eurodollar rate plus a margin, which is currently 1.20%, or (b) the agent bank's
prime rate plus a margin, which is currently zero. The facility fee and
borrowing margins are subject to adjustment based upon the Company's
fixed-charge coverage ratio. The credit facility is subject to certain
covenants, which include minimum tangible net worth and fixed-charge coverage
requirements, a maximum funded debt-to-capital limitation, and a prohibition on
the payment of cash dividends.
At January 30, 1999, the Company had letters of credit outstanding of
approximately $22.7 million primarily to support the purchase of inventories.
Note 6 - Leases
The Company is obligated under long-term leases for the rental of real estate
and fixtures and equipment, some of which are classified as capital leases under
the provisions of SFAS No. 13, "Accounting for Leases", as amended. In addition,
the Company is generally required to pay insurance, real estate taxes and other
operating expenses and, in some cases, additional rentals based on a percentage
of sales or increases in the Consumer Price Index. The real estate leases range
up to 25 years and have varying renewal options. The fixture and equipment
leases range up to 10 years.
Future minimum lease payments as of January 30, 1999 were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------- -------------------
Capital Operating
(In thousands) Leases Leases
- --------------------------------------------------------------------------------------- -------------------
Fiscal years ending January:
<S> <C> <C>
2000 $ 1,455 $ 71,979
2001 1,455 72,045
2002 1,455 71,118
2003 1,455 64,595
2004 1,507 63,398
Thereafter 10,259 393,616
- --------------------------------------------------------------------------------------- -------------------
Total minimum lease payments 17,586 $ 736,751
===================
Less amount representing interest (8,936)
- ---------------------------------------------------------------------------------------
Present value of net minimum capital lease payments $ 8,650
=======================================================================================
</TABLE>
Rental expense under operating leases amounted to $66.8 million, $64.8 million
and $65.1 million in fiscal 1998, 1997 and 1996, respectively. These amounts
exclude rent of $3.8 million, $2.4 million and $3.5 million in fiscal 1998, 1997
and 1996, respectively, which was charged to the restructuring or closed store
reserves. Future minimum lease payments have not been reduced by future minimum
sublease rentals of $4.0 million under an operating lease.
The table of future minimum lease payments above includes lease commitments for
two stores that were closed in connection with the Company's fiscal 1993
restructuring and two stores that were closed in fiscal 1997. During fiscal
1998, the Company entered into a sublease agreement for one of the locations.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7 - Income Taxes
Income (loss) before income taxes and the related provision (benefit) for income
taxes consist of the following components:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes:
Continuing operations $ 36,123 $ (1,128) $ 27,352
Discontinued operations - 37,071 98,974
Extraordinary loss - (14,559) -
- -----------------------------------------------------------------------------------------------------------
Total $ 36,123 $ 21,384 $ 126,326
===========================================================================================================
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes attributable
to income from continuing operations $ 13,760 $ (445) $ 11,005
Provision for income taxes attributable to income
from discontinued operations - 16,496 38,661
Benefit for income taxes attributable to
extraordinary loss - (5,896) -
- -----------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 13,760 $ 10,155 $ 49,666
===========================================================================================================
</TABLE>
The following are the significant components of the provision (benefit) for
income taxes attributable to continuing operations:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 6,183 $ 3,475 $ 3,710
State 1,647 842 (73)
- -----------------------------------------------------------------------------------------------------------
Total current $ 7,830 $ 4,317 $ 3,637
- -----------------------------------------------------------------------------------------------------------
Deferred:
Federal $ 5,652 $ (3,847) $ 5,822
State 278 (915) 1,546
- -----------------------------------------------------------------------------------------------------------
Total deferred $ 5,930 $ (4,762) $ 7,368
- -----------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes attributable
to income from continuing operations $ 13,760 $ (445) $ 11,005
===========================================================================================================
</TABLE>
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a reconciliation of the statutory federal income tax rate and
the effective income tax rate for income from continuing operations:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
State income taxes, net of federal tax
benefit 2 4 4
Other 1 1 1
- -----------------------------------------------------------------------------------------------------------
Effective income tax rate 38% 40% 40%
===========================================================================================================
</TABLE>
The following are the significant components of the Company's deferred tax
assets and liabilities as of January 30, 1999 and January 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 30, January 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Self-insurance reserves $ 15,557 $ 16,754
Rental step liabilities 4,531 4,940
Restructuring reserve 2,792 5,748
Closed store reserve 7,108 7,866
Capital leases 1,491 1,399
Compensation and benefits 2,217 2,255
Other 5,227 4,416
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 38,923 $ 43,378
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $ 8,898 $ 10,225
Other 10,017 7,215
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ 18,915 $ 17,440
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 20,008 $ 25,938
===========================================================================================================
</TABLE>
The Company has not established a valuation allowance because its deferred tax
assets can be realized by offsetting taxable income mainly in the carryback
period, and also against deferred tax liabilities and future taxable income,
which management believes will more likely than not be earned based on the
Company's historical earnings record.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8 - Investments In Marketable Securities
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Fiscal Year Ended January 30, 1999
- -----------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. corporate securities $ 14,743 $ - $ - $ 14,743
Obligations of state and
political subdivisions 13,174 22 - 13,196
- -----------------------------------------------------------------------------------------------------------
Total debt securities $ 27,917 $ 22 $ - $ 27,939
===========================================================================================================
Fiscal Year Ended January 31, 1998
- -----------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
U.S. corporate securities $ - $ - $ - $ -
Obligations of state and
political subdivisions 5,509 7 (1) 5,515
- -----------------------------------------------------------------------------------------------------------
Total debt securities $ 5,509 $ 7 $ (1) $ 5,515
===========================================================================================================
</TABLE>
The following are contractual maturities of available-for-sale securities at
January 30, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Amortized Estimated
(In thousands) Cost Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than one year $ 19,830 $ 19,845
1-5 years 8,087 8,094
- -----------------------------------------------------------------------------------------------------------
$ 27,917 $ 27,939
===========================================================================================================
</TABLE>
The following is other information on available-for-sale securities:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
(In thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales proceeds $ 11,589 $ - $ 46,957
Gross realized gains (losses) (1) - 13
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The specific identification method is used to compute realized gains or losses
on the sale of marketable securities.
As of January 30, 1999, marketable securities classified as held-to-maturity
consisted of U.S. Treasury securities, which are included in "Prepaid expenses
and other current assets" on the consolidated balance sheet at their amortized
cost of $7.2 million. These securities were purchased and deposited in escrow
with the trustee of the Company's senior subordinated notes to be used to retire
the debt and pay interest through May 1999.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following are contractual maturities of held-to-maturity securities as of
January 30, 1999 (in thousands):
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Less than one year $ 7,367
1-5 years -
- --------------------------------------------------------------------------------
Total $ 7,367
================================================================================
</TABLE>
Note 9 - Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
Marketable Securities
The fair value of the Company's marketable securities is based on quoted values
provided by an independent pricing service utilized by broker dealers and mutual
fund companies.
Real Estate Debt and General Corporate Debt
The fair value of the Company's real estate debt and general corporate debt is
estimated based on the current rates for similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
Subordinated Debt
The fair value of the Company's subordinated debt is based on quoted market
prices.
The following are the estimated fair values of the Company's financial
instruments:
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
- -----------------------------------------------------------------------------------------------------------
Carrying Carrying
(In thousands) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 35,578 $ 35,578 $ 44,603 $ 44,603
Marketable securities 27,939 27,939 5,515 5,515
Real estate debt (372) (387) (450) (479)
Senior subordinated debt (1) (6,637) (7,228) (6,637) (7,538)
Convertible subordinated debt (100,000) (80,690) (100,000) (92,500)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) A total of $6.6 million of the Company's 11% senior subordinated notes
remains outstanding, which the Company intends to call and repay on May 15,
1999. In July 1997, the Company purchased U.S. Treasury securities and
deposited them in escrow with the trustee of the notes, to be used to retire
the debt and pay interest through May 1999. Therefore, the fair value of the
senior subordinated debt at January 30, 1999 is deemed to be the amortized
cost of the treasury securities.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 10 - Capital Stock, Stock Options and Stock Purchase Plans
At January 30, 1999, the Company had two stock-based employee compensation
plans.
Under its 1989 Stock Incentive Plan ("1989 Plan"), the Company has granted
options to certain key employees, which expire 10 years from the grant date, to
purchase common stock at prices equal to 100% of the fair value on the grant
date. Options outstanding are exercisable over various periods generally
starting one year after the grant date. The Company has also issued restricted
stock awards to certain key employees at no cost under the 1989 Plan. The
restrictions on the transferability of those shares which are tied to the
Company's performance lapse over periods that range up to eight years. For other
awards, restrictions on the sale of shares lapse over periods that range up to
four years. The 1989 Plan expired in January 1998, except as to options and
restricted shares then outstanding. At January 30, 1999, 2,050,020 options
issued under the 1989 Plan remained outstanding at prices ranging from $2.20 to
$6.45 per share.
Under its 1995 Director Stock Option Plan, the Company has granted its
non-employee directors options to purchase common stock at prices equal to 100%
of the fair value on the grant date. These options, which expire 10 years from
the grant date, are exercisable over periods starting one year after they are
granted. A maximum of 150,000 shares may be issued under the 1995 Director Stock
Option Plan. In the third quarter of fiscal 1998, the Board of Directors elected
to suspend the 1995 Director Stock Option Plan. Any grants to Directors after
that date will be issued under the Company's 1997 Stock Incentive Plan.
Under its 1997 Stock Incentive Plan, the Company has granted options to certain
key employees, which expire 10 years from the grant date, to purchase common
stock at prices equal to 100% of the fair value on the grant date. Options
outstanding are exercisable over various periods generally starting one year
after the grant date. The Company has also issued restricted stock awards to
certain key employees at no cost under its 1997 Stock Incentive Plan. The
restrictions on the transferability of those shares lapse over periods that
range up to four years. A maximum of 3,500,000 shares may be issued under the
1997 Stock Incentive Plan.
In connection with the Distribution, all outstanding options of directors and
employees who transferred to BJI were canceled. All outstanding options held by
the remaining directors and employees of the Company were replaced; the number
of options was proportionately adjusted and the exercise prices were decreased
using a ratio of the average closing price of the Company's common stock for the
10 days immediately following the Distribution to the fair value of the
Company's common stock before the Distribution. The adjustment preserved the
economic value of the options that existed prior to the Distribution date. In
July 1997, the number of options issuable under the 1989 Plan was increased by
1.5 million shares as a result of the proportionate option adjustment.
The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation. During fiscal 1997 and 1996, 263,391 and 41,000 shares of
restricted stock were issued at a weighted-average grant-date fair value of
$7.45 and $22.92, respectively. Total pre-tax compensation cost charged to
income for stock-based employee compensation awards in fiscal 1998, fiscal 1997
and 1996 was $0.7, $0.5 and $0.4 million, respectively, and consisted entirely
of compensation expense related to restricted stock, which is charged to income
ratably over the period during which the restrictions lapse. No compensation
cost was recognized for the Company's stock options under APB Opinion No. 25
because the exercise price equaled the market price of the underlying stock on
the date of the grant.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro forma information regarding net income and net income per share is required
by SFAS No. 123, "Accounting for Stock-Based Compensation," and has been
determined as if the Company had accounted for its stock options under the fair
value method of that statement. The fair value for these options was estimated
at the grant date using the Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 4.62% 5.64% 6.47%
Expected volatility 37.0% 36.0% 37.0%
Dividend yield - - -
Expected option life 4.5 years 4.5 years 4.5 years
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models may not provide a reliable single measure of the
fair value of its stock options.
For purposes of the following pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 25,
(In thousands, except per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma income (loss) from continuing
operations $ 20,617 $ (1,772) $ 15,246
Pro forma net income $ 20,617 $ 10,140 $ 75,559
Pro forma income (loss) per share--Income
from continuing operations:
Basic $ 0.54 $ (0.05) $ 0.46
Diluted $ 0.43 $ (0.05) $ 0.46
Pro forma income per share--Net income:
Basic $ 0.54 $ 0.28 $ 2.30
Diluted $ 0.43 $ 0.28 $ 2.28
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The effects of applying the provisions of SFAS No. 123 for pro forma disclosure
purposes are not necessarily representative of the effects on reported net
income for future years because options vest over several years and additional
awards generally are made each year. In accordance with the transition
requirements of SFAS No. 123, the pro forma disclosures above only include stock
options awarded after January 28, 1995.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of the Company's stock option activity and related
information:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Number Of Weighted-Average
Options Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fiscal Year Ended January 25, 1997:
Outstanding at beginning of year 2,479,550 $ 16.56
Granted 789,625 24.13
Exercised (566,923) 15.96
Forfeited (162,628) 19.22
Expired - -
- -----------------------------------------------------------------------------------------------------------
Outstanding at January 25, 1997 2,539,624 $ 18.88
===========================================================================================================
Fiscal Year Ended January 31, 1998:
Granted 817,650 $ 9.26
BJ's spin-off adjustments 1,213,988 -
Exercised (422,337) 17.35
Forfeited (1,040,860) 17.82
Expired - -
- -----------------------------------------------------------------------------------------------------------
Outstanding at January 31, 1998 3,108,065 $ 5.30
===========================================================================================================
Fiscal Year Ended January 30, 1999:
Granted 531,850 $ 6.15
Exercised (184,172) 3.58
Forfeited (159,904) 6.43
Expired - -
- -----------------------------------------------------------------------------------------------------------
Outstanding at January 30, 1999 3,295,839 $ 5.48
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Number Of Weighted-Average
Options Exercise Price
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exercisable at:
January 25, 1997 1,064,190 16.67
January 31, 1998 1,100,056 3.82
January 30, 1999 1,594,476 4.42
- -----------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted during the year:
Fiscal 1996 $ 10.40
Fiscal 1997 3.55
Fiscal 1998 2.32
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The following is additional information related to stock options outstanding at
January 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- -----------------------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Range Of Number Exercise Contractual Number Exercise
Exercise Prices Outstanding Price Life (Years) Exercisable Price
- ----------------------------------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2.20 to $ 3.23 348,214 $ 2.83 5.2 320,214 $ 2.80
3.24 to 4.64 1,149,188 4.13 5.9 899,657 4.11
4.65 to 6.45 1,071,789 6.04 8.2 258,430 5.99
6.46 to 9.00 726,648 8.05 8.7 116,175 7.83
---------------- -----------------
$ 2.20 to $ 9.00 3,295,839 $ 5.48 7.2 1,594,476 $ 4.42
================ =================
</TABLE>
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of January 30, 1999, January 31, 1998 and January 25, 1997, 2,363,860,
2,723,306 and 1,687,373 shares, respectively, were reserved for future stock
awards under the Company's stock option plans.
In 1989 the Company adopted a stockholder rights plan designed to discourage
attempts to acquire the Company on terms not approved by the Board of Directors.
Under the plan, stockholders were issued one Right for each share of common
stock owned, which entitles them to purchase 1/100 share of Series A Junior
Participating Preferred Stock ("Series A Preferred Stock") at an exercise price
of $75. The Company has designated 1,900,000 shares of Series A Preferred Stock
for use under the rights plan; none has been issued. Generally, the terms of the
Series A Preferred Stock are designed so that 1/100 share of Series A Preferred
Stock is the economic equivalent of one share of the Company's common stock. In
the event any person acquires 15% or more of the Company's outstanding stock,
the Rights become exercisable for the number of common shares which, at the
time, would have a market value of two times the exercise price of the Right.
The Company has authorized 10,000,000 shares of preferred stock, $0.01 par
value, of which no shares have been issued.
Note 11 - Pensions and Other Post-Retirement Benefits
The Waban Inc. Retirement Plan (the "Retirement Plan") was a non-contributory
defined benefit retirement plan covering full-time employees who have attained
21 years of age and have completed one year of service. Benefits are based on
compensation earned in each year of service. No benefits have accrued under this
plan since July 4, 1992, when it was frozen. On July 26, 1997, the Board of
Directors approved the termination of the Retirement Plan. In accordance with
generally accepted accounting principles, the costs to terminate the Retirement
Plan were not recognized until the Plan was settled, which occurred in the first
quarter of fiscal 1998. The Plan was settled through cash payments and through
the purchase of non-participating annuity contracts.
The Company sponsors a defined benefit post-retirement medical plan
("Post-Retirement Medical Plan") that covers employees and their spouses who
retire after age 55 with at least 10 years of service, who are not eligible for
Medicare, and who participated in a Company-sponsored medical plan. Amounts
contributed by retired employees under this plan are based on years of service
prior to retirement. The Post-Retirement Medical Plan is not funded.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table provides a reconciliation of the Company's benefit
obligations, plan assets and funded status of the plans.
<TABLE>
<CAPTION>
Post-Retirement
Retirement Plan Medical Plan
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 30, January 31,
(In thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 3,331 $ 3,204 $ 595 $ 393
Service cost - 62 118 102
Interest cost - 203 40 32
Actuarial loss 670 65 14 68
Benefits paid (4,001) (203) - -
- -----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ - $ 3,331 $ 767 $ 595
===========================================================================================================
Change in Plan Assets:
Fair value of assets at beginning of
year $ 3,450 $ 3,206 $ - $ -
Actual return on plan assets 94 67 - -
Employer contribution 457 380 - -
Benefits paid (4,001) (203) - -
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of
year $ - $ 3,450 $ - $ -
===========================================================================================================
Funded status - 119 (767) (595)
Unrecognized net actuarial (gain)/loss - 676 (24) (41)
Unrecognized prior service cost - - - -
- -----------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ - $ 795 $ (791) $ (636)
===========================================================================================================
Weighted-average assumptions:
Discount rate - 6.75% 6.50% 6.75%
Expected return on plan assets - 9.00% - -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Net periodic pension and other post-retirement medical benefit costs include the
following components:
<TABLE>
<CAPTION>
Post-Retirement
Retirement Plan Medical Plan
-------------------------------- -------------------------------
Fiscal Year Ended Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 30, January 31, January 30, January 31,
(In thousands) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ - $ 62 $ 119 $ 102
Interest cost - 203 40 32
Expected return on plan assets - (260) - -
Amortization of prior service cost - 18 - (2)
Loss due to settlement of plan 1,100 - - -
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,100 $ 23 $ 159 $ 132
===========================================================================================================
</TABLE>
For measurement purposes, an annual rate of increase in the per capita cost of
medical coverage of 8.0% in 1998 grading down to 4.5% after seven years was
assumed as of January 31, 1998.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Assumed health care cost trend rates have a significant effect on the amounts
reported for the Post-Retirement Medical Plan. A one-percentage-point change in
the assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1-Percentage Point 1-Percentage Point
Increase Decrease
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest
cost components $ 20 $ (18)
Effect on postretirement medical benefit
obligation $ 92 $ (82)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
In 1994, the Company established a non-contributory defined contribution
retirement plan for certain key employees. Under the plan, the Company funds
annual retirement contributions for the designated participants on an after-tax
basis. For fiscal years 1998, 1997 and 1996, the Company's contribution equaled
5% of participants' base salary. Participants become fully vested in their
contribution accounts at the end of the fiscal year in which they complete four
years of service. The Company's expense under this plan was $0.5 million, $0.5
million, and $0.4 million in fiscal years 1998, 1997 and 1996, respectively.
Under the Company's 401(k) Savings Plans, participating employees may make
pre-tax contributions up to 15% of covered compensation. The Company matches
employee contributions at 100% of the first one percent of covered compensation
and 50% of the next four percent and is payable as of the end of each calendar
quarter. The Company's expense under these plans was $1.8 million, $1.8 million
and $2.1 million in fiscal years 1998, 1997 and 1996, respectively.
Note 12 - Store Closures and Other Charges
In October 1997, the Board of Directors approved an accelerated growth strategy
that provided for a more rapid completion of its store remodel program and an
increased rate for new store openings. In connection with this strategy, the
Board of Directors also approved the closure of three under-performing stores.
In the third quarter of fiscal 1997, the Company recorded store closures and
other charges of $27.0 million consisting of $22.3 million for store closures
and other related settlement costs, $1.7 million in asset impairment charges,
and a $3.0 million increase in the fiscal 1993 restructuring reserve. Costs
included in the reserve for store closures primarily include lease obligations
on closed facilities, write-downs of fixed assets and other related settlement
costs.
During fiscal 1997, the Company increased the fiscal 1993 restructuring reserve
by $3.0 million for additional lease obligations due to delays in obtaining
subleases on terms acceptable to the Company.
In accordance with SFAS No. 121, long-lived assets held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the individual stores. The
Company's quarterly SFAS No. 121 analysis performed in the third quarter of
fiscal 1997 indicated that the long-lived assets at two stores were impaired.
Accordingly, the Company estimated the fair value of these assets based on their
estimated salvage value and recorded an impairment charge of $1.7 million, which
is included in "Store closures and other charges" in the consolidated statement
of income.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 13 - Restructuring Reserves
As of January 31, 1998, $12.7 million of the Company's fiscal 1993 restructuring
charge remained accrued on the Company's consolidated balance sheet. During
fiscal 1998, the Company incurred cash expenditures of $6.8 million, primarily
for lease obligations on closed facilities and lease termination costs. As of
January 30, 1999, $5.9 million remained accrued on the Company's consolidated
balance sheet, consisting primarily of lease obligations on closed facilities,
which extend through 2007.
Note 14 - Commitments and Contingencies
The Company is involved in various legal proceedings incident to the character
of its business. Although it is not possible to predict the outcome of these
proceedings, or any claims against the Company related thereto, the Company
believes that such proceedings will not, individually or in the aggregate, have
a material adverse effect on either its financial condition or results of
operations.
Note 15 - Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Fiscal Year ended January 30, 1999: Quarter Ended
- --------------------------------------------- --------------- -------------- -------------- --------------
May 2, August 1, October 31, January 30,
(In thousands, except per share data) 1998 1998 1998 1999
- --------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 348,897 $ 424,625 $ 360,067 $ 308,753
Gross profit 76,937 97,417 79,800 63,937
Income from continuing operations 91 14,693 7,165 414
Net income 91 14,693 7,165 414
Basic net income per share:
Net income $ - $ 0.39 $ 0.19 $ 0.01
Diluted net income per share:
Net income $ - $ 0.32 $ 0.17 $ 0.01
- --------------------------------------------- --------------- -------------- -------------- --------------
Fiscal Year ended January 31, 1998: Quarter Ended
- --------------------------------------------- --------------- -------------- -------------- --------------
April 26, July 26, October 25, January 31,
(In thousands, except per share data) 1997 1997 1997 1998
- --------------------------------------------- --------------- -------------- -------------- --------------
(14 Weeks)
Net sales $ 360,204 $ 420,404 $ 368,432 $ 328,402
Gross profit 77,936 93,355 78,905 67,993
Income (loss) from continuing operations 2,271 11,218 (10,288) (3,884)
Income from discontinued operations 8,532 12,043 - -
Net income (loss) 10,803 14,598 (10,288) (3,884)
Basic net income per share:
Income (loss) from continuing
operations $ 0.07 $ 0.32 $ (0.27) $ (0.10)
Income from discontinued operations 0.25 0.34 - -
Net income (loss) 0.32 0.42 (0.27) (0.10)
Diluted net income per share:
Income (loss) from continuing operations $ 0.07 $ 0.31 $ (0.27) $ (0.10)
Income from discontinued operations 0.25 0.34 - -
Net income (loss) 0.32 0.41 (0.27) (0.10)
- --------------------------------------------- --------------- -------------- -------------- --------------
</TABLE>
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net income for the first quarter of fiscal 1998 includes a $1.1 million charge
related to the termination of the Waban Inc. Retirement Plan.
Net income for the second quarter of fiscal 1997 included an extraordinary loss
of $8.7 million, net of tax, related to the early extinguishment of certain of
the Company's debt, primarily consisting of call premiums and the write-off of
debt issuance costs.
Net income for the third quarter of fiscal 1997 includes $27.0 million ($16.3
million, net of tax) in store closures and other charges.
In fiscal 1998 and 1997, the quarterly per share amounts do not sum to the per
share amounts for the respective year-to-date periods due to differences in the
weighted average number of shares outstanding in each quarterly reporting period
versus the weighted average number of shares outstanding for the respective
year-to-date periods.
The quarterly per share amounts for fiscal 1997 have been restated in accordance
with SFAS No. 128.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement no later than 120 days after the close of its fiscal
year ended January 30, 1999 (the "Proxy Statement"). The information required by
this Item that is not set forth below or under the heading "Executive Officers
of the Registrant" in Part I of this report is incorporated herein by reference
to the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference
to the Proxy Statement. However, information under "Executive Compensation
Committee Report" and "Performance Graph" in the Proxy Statement is not so
incorporated.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference
to the Proxy Statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K
A. The Financial Statements and Financial Statement Schedules filed as part of
this report are listed and indexed on page 23. Schedules other than those listed
in the index have been omitted because they are not included elsewhere in this
report.
B. Listed below are all exhibits filed as part of this report. Certain exhibits
are incorporated by reference to documents previously filed by the Registrant
with the Securities and Exchange Commission pursuant to Rule 12b-32 under the
Securities Exchange Act of 1934, as amended.
Exhibit
No. Exhibit
- -------- -----------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated herein by reference to the Registrant's Form S-8
(#333-32473), dated July 30, 1997).
3.2 By-Laws, as Amended, of the Company (incorporated herein by
reference to the Registrant's Form S-8 (#333-32473), dated July
30, 1997).
4.0 Instruments Defining Rights of Security Holders (See Exhibits
3.1, 3.2, 4.7 and 10.13).
4.1 Specimen Common Stock Certificate (incorporated herein by
reference to the Registrant's Form S-3 (Registration No.
333-43789), dated February 10, 1998).
4.2 5.25% Convertible Subordinated Note (Rule 144A) (incorporated
herein by reference to the Registrant's From S-3 (Registration
No. 333-43789), dated February 10, 1998).
4.3 5.25% Convertible Subordinated Note (Regulation S) (incorporated
herein by reference to the Registrant's From S-3 (Registration
No. 333-43789), dated February 10, 1998).
4.4 Indenture, dated as of November 10, 1997, between the Company and
State Street Bank and Trust Company of California, N.A.
(incorporated herein by reference to the Registrant's Form S-3
(Registration No. 333-43789), dated February 10, 1998).
4.5 Registration Rights Agreement, dated as of November 10, 1997, by
and between the Company and Prudential Securities Incorporated
(incorporated herein by reference to the Registrant's Form S-3
(Registration No. 333-43789), dated February 10, 1998).
4.6 Purchase Agreement, dated as of December 10, 1997, between the
Company and Prudential Securities Incorporated (incorporated
herein by reference to the Registrant's Form S-3 (Registration
No. 333-43789), dated February 10, 1998).
4.7 Rights Agreement dated as of April 6, 1999 between the Company
and First Chicago Trust Company of New York (incorporated herein
by reference to the Registrant's Form 8-A (Registration No. 001-
10259), dated April 6, 1999).
4.8 5.25% Convertible Subordinated Note (Registered) (incorporated
herein by reference to the Registrant's Form S-3 (Registration
No. 333-43789), dated February 10, 1998).
10.0 * Change of Control Severance Benefit Plan for Key Employees,
dated January 28, 1998 (incorporated herein by reference to the
Registrant's Form S-3 (Registration No. 333-43789), dated
February 10, 1998).
10.1 * HomeBase, Inc. 1989 Stock Incentive Plan, as amended
(incorporated herein by reference to the Registrant's From 10-Q
(File No. 1-10259), dated July 26, 1997).
10.2 * Waban Inc. Executive Retirement Plan (incorporated herein by
reference to the Registrant's Form 10-K for the fiscal year ended
January 29, 1994).
10.3 * Waban Inc. Retirement Plan for Directors, as amended September
17, 1990 (incorporated herein by reference to the Registrant's
Form 10-Q for the fiscal quarter ended October 27, 1990).
10.4 * Waban Inc. General Deferred Compensation Plan (incorporated
herein by reference to the Registrant's Form 10-K for the fiscal
year ended January 27, 1990).
10.5 * Waban Inc. Growth Incentive Plan, as amended (incorporated
herein by reference to the Registrant's From 10-K for the fiscal
year ended January 27, 1990).
<PAGE>
Exhibit
No. Exhibit
- -------- -----------------------------------------------------------------
10.6 * Amendment dated as of January 29, 1994 between the Company and
The TJX Companies, Inc. to Executives Services Agreement with
respect to Arthur F. Loewy (incorporated herein by reference to
the Registrant's Form 10-K for the fiscal year ended January 29,
1994).
10.7 * Employment Agreement dated as of July 28, 1997 with Herbert J.
Zarkin (incorporated herein by reference to the Registrant's From
10-Q (File No. 1-10259), dated July 26, 1997).
10.8 * Employment Agreement dated as of July 28, 1997 with Edward J.
Weisberger (incorporated herein by reference to the Registrant's
From 10-Q (File No. 1-10259), dated July 26, 1997).
10.9 * Employment Agreement dated as of July 28, 1997 with Allan P.
Sherman (incorporated herein by reference to the Registrant's
Form 10-Q (File No. 1-10259), dated October 25, 1997).
10.9.1 * Loan Agreement dated as of January 19, 1994 with Allan P.
Sherman (incorporated herein by reference to the Registrant's
Form 10-K for the fiscal year ended January 29, 1994).
10.9.2 * Promissory Note dated as of January 19, 1994 with Allan P.
Sherman to the Company (incorporated herein by reference to the
Registrant's Form 10-K for the fiscal year ended January 29,
1994).
10.10 * Employment Agreement, dated as of July 28, 1997 with Thomas F.
Gallagher (incorporated herein by reference to the Registrant's
From 10-Q (File No. 1-10259), dated July 26, 1997).
10.11 * Employment Agreement, dated as of July 28, 1997 with Scott
Richards (incorporated herein by reference to the Registrant's
From 10-Q (File No. 1-10259), dated July 26, 1997).
10.12 * Employment Agreement, dated as of July 28, 1997 with William B.
Langsdorf (incorporated herein by reference to the Registrant's
From 10-Q (File No. 1-10259), dated July 26, 1997).
10.13 * Form of Indemnification Agreement between the Company and its
officers and directors (incorporated herein by reference to the
Registrant's Form 10-K for the fiscal year ended January 27,
1990).
10.14 * Form of Change of Control Severance Agreement between the
Company and officers of the Company (incorporated herein by
reference to the Registrant's From 10-Q (File No. 1-10259), dated
July 26, 1997).
10.15 Credit Agreement dated as of July 9, 1997 among the Company and
certain banks (incorporated herein by reference to the
Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997)
10.15.1 First Amendment to Credit Agreement, dated October 28, 1997 among
the Company and certain banks.
10.15.2 Second Amendment to Credit Agreement, dated November 7, 1997
among the Company and certain banks.
10.15.3 Third Amendment to Credit Agreement, dated December 24, 1997
among the Company and certain banks.
10.16 * Waban Inc. 1995 Director Stock Option Plan (incorporated herein
by reference to the Registrant's definitive Proxy Statement on
Schedule 14A (File No. 1-10259) for the Registrant's 1995 Annual
Meeting of Stockholders).
10.17 Separation and Distribution Agreement, dated as of July 10, 1997,
between the Company and BJ's Wholesale Club, Inc. (incorporated
herein by reference to the Registrant's Form 8-K (File No.
1-10259), dated July 28, 1997).
10.18 Services Agreement, dated as of July 28, 1997, between the
Company and BJ's Wholesale Club, Inc. (incorporated herein by
reference to the Registrant's Form 8-K (File No. 1-10259), dated
July 28, 1997).
10.19 Tax Sharing Agreement, dated as of July 28, 1997, between the
Company and BJ's Wholesale Club, Inc. (incorporated herein by
reference to the Registrant's Form 8-K (File No.
1-10259), dated July 28, 1997).
10.20 * Employee Benefits Agreement, dated as of July 28, 1997, between
the Company and BJ's Wholesale Club, Inc. (incorporated herein by
reference to the Registrant's Form 8-K (File No. 1-10259), dated
July 28, 1997).
10.21 * HomeBase, Inc. 1997 Stock Incentive Plan (incorporated herein
by reference to the Registrant's From 10-Q (File No. 1-10259),
dated July 26, 1997).
10.22 * Change of Control Severance Agreement, dated August 31, 1998
with Herbert J. Zarkin (incorporated herein by reference to the
Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
<PAGE>
Exhibit
No. Exhibit
- -------- -----------------------------------------------------------------
10.23 * Employment Agreement, dated June 1, 1998 with Allan P. Sherman
(incorporated herein by reference to the Registrant's From 10-Q
(File No. 1-10259), dated October 31, 1998).
10.24 * Change of Control Severance Agreement, dated August 31, 1998
with Allan P. Sherman (incorporated herein by reference to the
Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
10.25 * Change of Control Severance Agreement, dated August 31, 1998
with Thomas F. Gallagher (incorporated herein by reference to the
Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
10.26 * Change of Control Severance Agreement, dated August 31, 1998
with William B. Langsdorf (incorporated herein by reference to
the Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
10.27 * Change of Control Severance Agreement, dated August 31, 1998
with Scott L. Richards (incorporated herein by reference to the
Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
10.28 * Change of Control Severance Agreement, dated August 31, 1998
with Edward J. Weisberger (incorporated herein by reference to
the Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
10.29 * Change of Control Severance Benefit Plan for Key Employees,
dated August 31, 1998 (incorporated herein by reference to the
Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
10.30 * HomeBase, Inc. Executive Retirement Plan, First Amendment,
dated August 31, 1998 (incorporated herein by reference to the
Registrant's From 10-Q (File No. 1-10259), dated October 31,
1998).
21.0 # Subsidiaries of the Company.
23.0 # Consent of Independent Accountants.
27.0 # Financial Data Schedule--Fiscal 1998.
* Management contract or other compensatory plan or arrangement.
# Filed herewith.
Reports on Form 8-K
-----------------------------------------------------------------
No reports on Form 8-K were filed in the fourth quarter of fiscal
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HomeBase, Inc.
Dated April 9, 1999 By: /s/ALLAN P. SHERMAN
------------------------
Allan P. Sherman
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------------------------------------------------------------------
<S> <C>
/s/ HERBERT J. ZARKIN Chairman of the Board of April 9, 1999
-------------------------------- Directors
Herbert J. Zarkin
/s/ ALLAN P. SHERMAN President, Chief Executive Officer of April 9, 1999
-------------------------------- the Company and Director
Allan P. Sherman (Principal Executive Officer)
/s/ WILLIAM B. LANGSDORF Executive Vice President, Chief April 9, 1999
-------------------------------- Financial Officer (Principal
William B. Langsdorf Financial Officer and Principal
Accounting Officer)
/s/ JOHN D. BARR Director April 9, 1999
--------------------------------
John D. Barr
/s/ ROBERT W. COX Director April 9, 1999
--------------------------------
Robert W. Cox
/s/ HAROLD LEPPO Director April 9, 1999
--------------------------------
Harold Leppo
/s/ ARTHUR F. LOEWY Director April 9, 1999
--------------------------------
Arthur F. Loewy
/s/ LORNE R. WAXLAX Director April 9, 1999
--------------------------------
Lorne R. Waxlax
/s/ EDWARD J. WEISBERGER Director April 9, 1999
--------------------------------
Edward J. Weisberger
</TABLE>
EXHIBIT 21
Name of Subsidiary Jurisdiction of Incorporation
HomeClub, Inc. Nevada
HomeClub, Inc. of Texas Delaware
Fullerton Corporation Delaware
HCI Development Corp. California
HomeClub First Realty Corp. Colorado
HCWA Realty Corp. Washington
HCCA Realty Corp. California
HBNM Realty Corp. New Mexico
HBCA 1993 Realty Corp. California
HBOR Realty Corp. Oregon
HBUT Realty Corp. Utah
HCWA 1993 Realty Corp. Washington
HBCO Realty Corp. Colorado
HBNM 1994 Realty Corp. New Mexico New Mexico
HBCO 1994 Realty Corp. Colorado
HBCA Pomona Realty Corp. California
HBCA Vacaville Realty Corp. California
HBI Holdings Nevada
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
HomeBase, Inc. and subsidiaries on Form S-8 (file Nos. 33-29473, 33-40155,
33-60335, 33-60337 and 333-32473) and on Form S-3 (File No. 333-43789) of our
report dated March 2, 1999 on our audits of the consolidated financial
statements of HomeBase, Inc. as of January 30, 1999 and January 31, 1998, and
for the three years ended January 30, 1999, January 31, 1998 and January 25,
1997, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
April 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 35,578
<SECURITIES> 27,939
<RECEIVABLES> 20,979
<ALLOWANCES> (293)
<INVENTORY> 339,650
<CURRENT-ASSETS> 450,773
<PP&E> 376,011
<DEPRECIATION> (119,176)
<TOTAL-ASSETS> 728,982
<CURRENT-LIABILITIES> 188,843
<BONDS> 108,659
0
0
<COMMON> 379
<OTHER-SE> 382,120
<TOTAL-LIABILITY-AND-EQUITY> 382,499
<SALES> 1,442,341
<TOTAL-REVENUES> 1,442,341
<CGS> 1,124,250
<TOTAL-COSTS> 1,124,250
<OTHER-EXPENSES> 279,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,817
<INCOME-PRETAX> 36,123
<INCOME-TAX> 13,760
<INCOME-CONTINUING> 22,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,363
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.54
</TABLE>
