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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 29, 2000
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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 3, 2000 was $77,111,731.
There were 37,603,148 shares of the Registrant's Common Stock, $.01 par value,
outstanding as of April 3, 2000.
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
29, 2000, the Company operated 88 stores in 10 states, with plans to open an
additional one to three more stores during the current fiscal year. 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 a broad product selection at competitive
prices, with superior customer service. By the end of April 1998, nearly every
store in the chain had been remodeled or opened utilizing an improved store
design. The store 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. Companion products and services
are displayed throughout the store to facilitate shopping for the complete 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 29, 2000
and January 30, 1999 are referred to herein as "fiscal 1999" and "fiscal 1998,"
respectively. The 53 weeks ended January 31, 1998 is referred to herein as
"fiscal 1997."
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. stockholders 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.
Recent Developments
In November 1999, the Company announced its intention to test a strategy
involving the creation of a new retail concept that could serve as an expansion
vehicle. In February 2000, further details were provided regarding this new
strategic direction. It was announced that the new retail concept would have a
completely independent identity from that of HomeBase stores, including a
different name and merchandising format. The product mix will address four broad
categories:
- -Outdoor living, including patio, barbecue, nursery and garden-related
items. This area will represent the single largest percentage of the
store's selling space;
- -Indoor living, including flooring, carpeting, lighting, storage and
selected furniture;
- -Home decor and accessories, from kitchen and bath accessories to linens and
various domestics items;
- -Seasonal goods for Christmas and other holidays, as well as for entertaining.
The new concept is designed to expand upon existing businesses that have been
consistently strong performers within the current HomeBase stores and that hold
greater potential in the new format. In addition, the Company will enter new
areas of the home furnishings market to bring together a unique combination of
related specialty businesses into one shopping environment.
The Company plans to commence in the second half of fiscal 2000 a five-store
test of the new concept in multiple markets that encompass a variety of
demographic, geographic and climatic considerations. The test is estimated to
cost between $7 million and $8 million, net of income taxes.
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 and home furnishing products and services.
Home ownership is at record levels in the United States, up 67% since 1970. Home
renovations are at an all-time high, having increased 74% over the last seven
years. Homeowners are likely to spend more to maintain and improve their homes
than renters.
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 centers,
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 in recent years. The Company believes this
trend will continue and intends to capitalize on this momentum by continuing its
strategy of promoting a service-oriented shopping experience in a store format
that has an attractive ambiance and a customer-friendly layout.
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. This service builds customer excitement and confidence in
their decision to select HomeBase for these important home improvement projects.
The Company believes that it is important to expand its DIY business and
believes it can do so 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 and assembly 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 stage 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's stores have 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 stores.
Team Members
In support of its commitment to customer service, the Company seeks to hire only
the very best team members. Each store has skilled tradespeople 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 29, 2000, the Company had approximately 9,400 team members,
including approximately 550 who are engaged in various corporate administration
and store support functions. Of the Company's total personnel, approximately
3,300 are considered part-time (working fewer than 33 hours per week). 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 brand name or private
label items and offers thousands of special order products. Special promotions
of brand name products are regularly featured as "Base Buys," which provide
customers additional savings opportunities. 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)
lines of 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 DIY and professional customers.
The table below sets forth the Company's percentage of net sales by product
categories for fiscal 1999 and 1998:
<TABLE>
<CAPTION>
Product Category 1999 1998
- ---------------- ------------- -------------
<S> <C> <C>
Building Materials and Lumber 23% 23%
Electrical and Plumbing 17 18
Paint and Decor 19 18
Garden, Nursery and Seasonal 16 16
Hardware and Tools 13 13
Project and Kitchen Design Center 12 12
------------- -------------
Total 100% 100%
============= =============
</TABLE>
HomeBase has a centralized purchasing function located within its Corporate
Support Center. The Company maximizes its distribution efficiencies through a
combination of direct shipments from vendors to the stores and from its
675,000-square-foot consolidation and distribution center located in Ontario,
California.
Seasonality
The Company's sales and earnings have typically been higher in the second and
third quarters of the fiscal year, which include the most active seasons for
home building and other improvements. Sales and earnings can also be impacted
favorably or adversely as a result of prevailing regional weather patterns.
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.
Management Information Systems
The Company regularly assesses and upgrades its 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.
In February 2000, the Company completed a conversion to a new, client
server-based multi-level merchandising system that allows for improved inventory
replenishment and inventory management. During the next two fiscal years, the
Company expects to select and complete the implementation of new financial,
payroll and human resource software applications.
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
improvements, an important benefit of this investment is better customer service
due to cashier ease of use, which helps assure faster check-out lines.
Competition
The home improvement retailing business is highly competitive. The Company
competes with a variety of wholesalers and retailers, including two large
national chains that use the home improvement warehouse store format.
Competition principally exists in the areas of customer service, price, product
selection, store location and name recognition.
HomeBase is the second largest operator of home improvement warehouse stores in
the western United States. Due to the large number and variety of competitors,
management is unable to precisely measure the Company's market share in its
existing market areas. The Company believes it has an advantage over many of its
traditional home center competitors with its strong brand name recognition,
customer loyalty, level of customer service, competitive prices and the
opportunity for one-stop shopping through its full range of home improvement
products.
During fiscal 1999, the nation's second largest retailer of home improvement
products affirmed its intentions for a major expansion into the western United
States. We believe they anticipate opening in excess of 100 locations by the end
of 2003.
Item 2. Properties
As of January 29, 2000, the Company operated 88 stores, of which 70 are leased
under long-term leases and 18 are owned. The unexpired terms of the leases range
from approximately two to 20 years, and average approximately 10 years. The
Company has options to renew all of its leases for periods that range from
approximately 5 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>
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Number of
State Stores
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<S> <C>
California 50
Washington 9
Colorado 7
Arizona 6
Oregon 4
Nevada 3
New Mexico 3
Utah 3
Texas 2
Idaho 1
-----------------------------------------------------------------------
Total 88
=======================================================================
</TABLE>
The average size of the Company's 88 stores in operation at January 29, 2000 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.
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 1999.
<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 1, 2000.
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> <C>
Herbert J. Zarkin 61 President, Chief Executive Officer of the Company since March 2000.
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).
Thomas F. Gallagher 48 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 43 Executive Vice President and Chief Financial Officer since July 1997;
Senior Vice President, Finance of the HomeBase division (1993 - 1997).
Scott L. Richards 42 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 49 Vice President, General Counsel and Secretary since July 1997;
Assistant General Counsel of 20th Century
Industries (1995 - 1997); private legal
practice (1991 - 1995).
- ---------------------------- ------ ------------------------------------------------------------------------
</TABLE>
<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) is listed on the New York
Stock Exchange (symbol HBI). The following are the quarterly high and low stock
prices for the fiscal years ended January 29, 2000 and January 30, 1999:
<TABLE>
<CAPTION>
- --------------------------------------- --------------------------------- ----------------------------------
Fiscal Year Ended Fiscal Year Ended
Quarters January 29, 2000 January 30, 1999
- --------------------------------------- --------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
High Low High Low
First 6 3/4 4 1/16 8 7/8 6 9/16
Second 6 15/16 4 7/8 10 1/8 7 5/8
Third 5 7/8 3 9/16 7 13/16 5 1/4
Fourth 4 2 7/8 7 5/8 5
- --------------------------------------- ---------------- ---------------- ---------------- -----------------
</TABLE>
The number of stockholders of record at April 3, 2000 was 3,229.
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 its common stock in the
future. The Senior Bank Facility does not permit the Company to pay cash
dividends.
<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 29, 2000 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 29, January 30, January 31, January 25, January 27,
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
(53 Weeks)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $1,525,275 $1,442,341 $1,477,442 $ 1,452,696 $ 1,448,776
Cost of sales, including buying and occupancy costs 1,196,465 1,124,250 1,159,253 1,136,997 1,124,460
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 328,810 318,091 318,189 315,699 324,316
Selling, general and administrative expenses 304,457 278,232 285,773 273,440 272,808
Pre-opening expenses 3,726 919 1,408 4,401 2,847
Store closures and other charges - - 27,000 - -
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 20,627 38,940 4,008 37,858 48,661
Interest on debt and capital leases (net) 3,440 2,817 5,136 10,506 8,790
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and extraordinary gain (loss) 17,187 36,123 (1,128) 27,352 39,871
Provision (benefit) for income taxes 6,358 13,760 (445) 11,005 15,386
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary gain (loss) 10,829 22,363 (683) 16,347 24,485
Income from discontinued operations, net of income taxes - - 20,575 60,313 48,492
Extraordinary gain (loss) on early extinquishment of
debt, net of income tax provision (benefit) 1,799 - (8,663) - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,628 $ 22,363 $ 11,229 $ 76,660 $ 72,977
================================================================================================================================
Basic net income (loss) per share (1):
Income (loss) from continuing operations before
extraordinary gain (loss) $ 0.28 $ 0.59 $ (0.02) $ 0.50 $ 0.74
Income from discontinued operations - - 0.57 1.83 1.47
Extraordinary gain (loss) 0.05 - (0.24) - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.33 $ 0.59 $ 0.31 $ 2.33 $ 2.21
================================================================================================================================
Diluted net income (loss) per share (1):
Income (loss) from continuing operations before
extraordinary gain (loss) $ 0.28 $ 0.54 $ (0.02) $ 0.49 $ 0.74
Income from discontinued operations - - 0.57 1.82 1.46
Extraordinary gain (loss) 0.05 - (0.24) - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.33 $ 0.54 $ 0.31 $ 2.31 $ 2.20
================================================================================================================================
Shares used in computation of net income (loss) per share:
(In thousands)
Basic 37,849 37,845 35,770 32,839 33,014
Diluted 37,936 48,013 35,770 33,205 33,220
Balance Sheet Data:
Working capital $ 267,698 $ 261,930 $ 240,828 $ 275,842 $ 265,450
Net assets of discontinued operations (2) - - - 423,688 403,713
Total assets 727,742 728,982 715,608 1,077,059 1,066,188
Long-term debt and obligations under capital leases 100,749 115,659 115,963 242,548 255,803
Stockholders' equity 394,686 382,499 359,667 631,925 555,120
Stores open at end of period 88 84 83 84 79
================================================================================================================================
</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 29, 2000
is referred to herein as "fiscal 1999". The 52 weeks ended January 30, 1999 and
the 53 weeks ended January 31, 1998 are referred to herein as "fiscal 1998" and
"fiscal 1997", 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 29, January 30, January 31,
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy costs 78.4 77.9 78.5
- ----------------------------------------------------------------------------------------------------------
Gross profit 21.6 22.1 21.5
Selling, general and administrative expenses 20.1 19.3 19.3
Pre-opening expenses 0.2 0.1 0.1
Store closures and other charges - - 1.8
- ----------------------------------------------------------------------------------------------------------
Operating income 1.3 2.7 0.3
Interest on debt and capital leases (net) 0.2 0.2 0.3
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before
income taxes and extraordinary gain (loss) 1.1 2.5 -
Provision for income taxes 0.4 0.9 -
- ----------------------------------------------------------------------------------------------------------
Income from continuing operations before
extraordinary gain (loss) 0.7 1.6 -
Income from discontinued operations, net of
income taxes - - 1.4
- ----------------------------------------------------------------------------------------------------------
Income before extraordinary gain (loss) 0.7 1.6 1.4
Extraordinary gain (loss) on early extinguishment of
debt, net of income taxes 0.1 - (0.6)
- ----------------------------------------------------------------------------------------------------------
Net income 0.8% 1.6% 0.8%
==========================================================================================================
</TABLE>
Fiscal Year Ended January 29, 2000 (Fiscal 1999) Compared to Fiscal Year Ended
January 30, 1999 (Fiscal 1998)
Net Sales
Net sales for fiscal 1999 increased 5.7% to $1,525.3 million from $1,442.3
million in fiscal 1998. The increase was driven, in part, by the previously
announced sales initiatives and by contributions from 5 new stores opened during
fiscal 1999. Comparable store sales grew 1.4%, the result of an increase in
average ticket that was partially offset by a decline in the number of
transactions.
Gross Profit
Gross profit was 21.6% of net sales in fiscal 1999 versus 22.1% for fiscal 1998.
The sales mix in fiscal 1999 reflected a larger proportion of lumber sales,
which generally have a lower gross profit than does the overall mix of goods.
During the second half of fiscal 1999, the Company saw a return to a more normal
seasonal mix of sales, with a larger portion of sales in the home decor,
seasonal and patio categories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were 20.1% of net sales in
fiscal 1999 versus 19.3% in fiscal 1998. The current year's results include
additional costs related to the Company's sales initiatives that include
increased store payroll costs and approximately $1.0 million in costs associated
with the development of the new retail concept. Fiscal 1998 included a pre-tax
charge of $1.1 million associated with the termination of the Waban Inc.
Retirement Plan.
Pre-opening Expenses
Store pre-opening expenses were $3.7 million in fiscal 1999 versus $0.9 million
in fiscal 1998. The increase is attributable to the opening of one store in
March 1999, three stores in May 1999 and one store in October 1999, whereas only
one store opened in fiscal 1998.
Interest on Debt and Capital Leases, Net
Interest on debt and capital leases, net, was $3.4 million in fiscal 1999
compared to $2.8 million in fiscal 1998. Interest on debt and capital leases is
presented net of interest and investment income of $4.7 million and $4.9 million
in fiscal 1999 and 1998, respectively.
Income Tax Provision
The income tax rate for income from continuing operations was 37.0% in fiscal
1999 compared to 38.1% in fiscal 1998. The decrease in the tax provision rate in
fiscal 1999 was primarily attributable to the realization of certain federal tax
credits and interest income from municipal bond investments not subject to
federal income taxation. For fiscal 2000, the Company expects the tax provision
rate to be between 37% and 38%.
Income (Loss) From Continuing Operations Before Extraordinary Gain (Loss)
Income (loss) from continuing operations before extraordinary gain (loss) for
fiscal 1999 was $10.8 million, or $0.28 per share, diluted, compared to $22.4
million, or $0.54 per share, diluted, in fiscal 1998.
Net Income
Net income for fiscal 1999 was $12.6 million, or $0.33 per share, diluted,
compared to $22.4 million, or $0.54 per share, diluted, in fiscal 1998. Net
income for fiscal 1999 includes an extraordinary after-tax gain of $1.8 million,
or $0.05 per share, diluted, associated with the Company's repurchase of its
convertible notes. The decrease in net income for fiscal 1999 from the prior
year was primarily the result of increased spending for store payroll as part of
the Company's sales initiatives, as well as $3.7 million in store pre-opening
expenses, partially offset by the extraordinary after-tax gain of $1.8 million.
Fiscal 1999 results also included pre-tax costs of approximately $1.0 million
associated with the development of the new retail concept. Fiscal 1998 results
included a pre-tax charge of $1.1 million for the termination of the Waban Inc.
Retirement Plan and $4.0 million of incremental costs related to store
remodeling.
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, due to one less sales week in fiscal 1998. 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 fewer 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 19.3% of net sales in
both fiscal 1998 and fiscal 1997.
Higher expenses of $4.0 million related to store remodeling and pre-tax
settlement costs of $1.1 million associated with the termination of the Waban
Inc. Retirement Plan in fiscal 1998 were offset primarily by favorable trends in
self-insurance expenses.
Pre-opening Expenses
Store pre-opening expenses were $0.9 million in fiscal 1998 versus $1.4 million
in fiscal 1997. The decrease is attributable to the opening of one store in
fiscal 1998 versus two stores in the prior year.
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 (loss) 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.
Income (Loss) From Continuing Operations Before Extraordinary Loss
Income (loss) 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, diluted, 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.
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 income tax benefit, associated with the early
extinguishment of debt recorded in July 1997.
Liquidity and Capital Resources
Cash flows from operating activities provide the Company with a significant
source of liquidity. Additionally, the Company raised capital in 1997 through a
$100 million convertible debt offering and also has up to $250 million available
from a revolving credit facility, based upon eligible collateral, for corporate
growth and working capital purposes.
At January 29, 2000, the Company had $41.8 million in cash, cash equivalents and
marketable securities. Also at that date, there were no borrowings under the
Company's $250 million revolving credit facility. Letters of credit outstanding
as of January 29, 2000 were $15.3 million.
On December 3, 1999, the Company entered into a new five-year, $250 million
revolving line of credit that replaced the previous $105 million credit line and
provides the Company with greater financial flexibility to pursue its growth
objectives. Borrowings under the new credit line are collateralized by eligible
inventory and accounts receivable. The Company paid a one-time underwriting fee
of 0.85% and is required to pay an unused line fee of 0.375% annually. Interest
on borrowings will be calculated based on the LIBOR rate, plus a 1.5% to 2.0%
margin. The new credit line is subject to certain financial covenants should
excess availability under the line fall below $40 million.
On November 16, 1999, the Company announced several important initiatives
intended to build shareholder value. These included a securities repurchase
program and an initiative to develop a new retail concept that could serve as an
expansion vehicle. It is envisioned that the new retail concept could provide an
opportunity to the Company to have a more dominant position within some of the
existing key categories in which the Company now operates, as well as allow for
entry into new, related businesses in which the Company does not currently
participate. A five-store test of the new concept is expected to commence in the
second half of fiscal 2000 at an estimated cost between $7 million and $8
million, net of income taxes.
As announced in November 1999, the board of directors has authorized the Company
to spend up to $20 million to repurchase HomeBase common stock and 5.25%
convertible subordinated notes periodically in the open market, as market
conditions warrant. As of January 29, 2000, the Company had repurchased 270,400
shares of common stock at an average price of $3.00 per share, and $7.6 million
in face value of convertible notes for $4.6 million. The repurchase program is
authorized to extend through December 31, 2001.
In light of the decision to pursue a new retail concept and the need to further
refine the strategies for existing HomeBase stores, the Company now estimates
opening one to three new stores during fiscal 2000.
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 growth plans and related strategic initiatives and to finance
operations through January 27, 2001.
Restructuring Reserve
As of January 30, 1999, $5.9 million of the fiscal 1993 restructuring charge
remained accrued on the Company's consolidated balance sheet. During fiscal
1999, the Company incurred cash expenditures of $2.5 million primarily related
to lease obligations on closed facilities and costs associated with the closure
in July of an older, under-performing store. In addition, the Company
reevaluated its Restructuring and Closed Store Reserves and determined that an
additional $3.3 million was required in the Restructuring Reserve to meet its
lease obligations. At year end, the $3.3 million was reclassified from the
Closed Store Reserve to the Restructuring Reserve. As of January 29, 2000, $6.8
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
Effective January 30, 1999, the Company adopted Statement of Financial
Accounting Standards ("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.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133 (an
amendment of FASB Statement 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, 2000. The
Company currently does not invest in any derivative financial instruments and
does not currently employ any hedging activities.
Year 2000
The Company used internal and external resources to remediate and test its
systems. Costs incurred in addressing the Year 2000 (Y2K) issue were expensed as
incurred and were not material to the Company's financial results. The Company
did not experience any significant malfunctions or errors in its operating or
business systems when the date changed from 1999 to 2000. Based on operations
since January 1, 2000, the Company does not expect any significant impact to its
ongoing business as a result of the Y2K issue. However, it is possible that the
full impact of the date change has not been fully recognized. The Company
currently is not aware of any significant Y2K or similar problems that have
arisen for its customers and suppliers.
Risk Factors
If we cannot develop and test our new retail concept successfully, we may not
have a new expansion vehicle, and our operating results could be harmed.
In November 1999, we announced our intent to create a new retail concept that
could serve as an expansion vehicle. The new retail concept would have a
completely independent identity from our HomeBase stores, with a different name,
merchandising format and product mix. We plan to start a five-store test of the
new concept in the second half of fiscal 2000, costing between $7 million and $8
million after taxes. If we cannot successfully develop and test the concept, the
cost of the test may harm our operating results, and we may not have a new
expansion vehicle to grow our operating results and counteract the other
pressures on our business.
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
two large national chains in the home improvement warehouse merchandising
business which have significantly greater financial and marketing resources than
we do. The Home Depot, Inc. and Lowe's Companies, Inc. 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 our financial
condition. 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 have expansion plans in place. 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 if comparable store sales decline or do not improve.
A significant measure of our performance is the change in annual same store
sales, which calculates the change from year to year in the sales of our stores
open for two full years. While our same store sales improved somewhat last year,
they have generally declined in recent years. A variety of factors affect our
same store sales, including:
- -- 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 strategies effectively.
If same store sales do not continue to improve, our operating results and
financial condition could be harmed.
If we have difficulty employing and retaining enough trained personnel to
support our business, it could harm our operating results.
To support our business, we must hire and retain an adequate number of
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
support our business. If we are not able to attract and retain the necessary
personnel, 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 of Waban Inc., 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 poor, 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 business strategies, 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.
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 the board
of directors, president and chief executive officer with us 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.
On January 29, 2000, we had outstanding the principal amount of $92.4 million 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 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 and financial
condition.
- --------------------------------------------------------------------------------
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 matters discussed in this document include forward-looking
statements that involve risks and uncertainties that could cause results to
differ materially from those expressed. Such risks and uncertainties include,
but are not limited to, the development of a new retail concept; the ability
to continue to improve HomeBase's core business; general economic conditions
prevailing in the Company's markets; the competitive marketplace 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 29,
2000, marketable securities consisted of $15.0 million in municipal bonds and
commercial paper, 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.............................................20
Report on Management's Responsibility.........................................20
Consolidated Statements of Income for the fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998.......................21
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.......22
Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998.......................23
Consolidated Statements of Stockholders' Equity for the fiscal years ended
January 29, 2000, January 30, 1999 and January 31, 1998.......................24
Notes to Consolidated Financial Statements....................................25
<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 29, 2000 and January 30, 1999, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 29, 2000, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards generally accepted in the
United States, which require that we plan and perform the audits 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
February 24, 2000
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 accounting principles generally accepted in the United States
appears above.
Herbert J. Zarkin William B. Langsdorf
Chairman of the Board, President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
<PAGE>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(53 Weeks)
<S> <C> <C> <C>
Net sales $ 1,525,275 $ 1,442,341 $ 1,477,442
Cost of sales, including buying and occupancy costs 1,196,465 1,124,250 1,159,253
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 328,810 318,091 318,189
Selling, general and administrative expenses 304,457 278,232 285,773
Pre-opening expenses 3,726 919 1,408
Store closures and other charges - - 27,000
- ---------------------------------------------------------------------------------------------------------------------
Operating income 20,627 38,940 4,008
Interest on debt and capital leases, net 3,440 2,817 5,136
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income
taxes and extraordinary gain (loss) 17,187 36,123 (1,128)
Provision (benefit) for income taxes 6,358 13,760 (445)
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
extraordinary gain (loss) 10,829 22,363 (683)
Income from discontinued operations, net of
income taxes of $16,496 - - 20,575
- ---------------------------------------------------------------------------------------------------------------------
Income before extraordinary gain (loss) 10,829 22,363 19,892
Extraordinary (loss) on early extinguishment
of debt, net of income tax benefit of $5,896 - - (8,663)
Extraordinary gain on early extinguishment of debt,
net of income tax of $1,056 1,799 - -
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 12,628 $ 22,363 $ 11,229
=====================================================================================================================
Basic net income per share:
Income (loss) from continuing operations before
extraordinary gain (loss) $ 0.28 $ 0.59 $ (0.02)
Income from discontinued operations - - 0.57
Extraordinary gain (loss) 0.05 - (0.24)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 0.33 $ 0.59 $ 0.31
=====================================================================================================================
Diluted net income per share:
Income (loss) from continuing operations before
extraordinary loss $ 0.28 $ 0.54 $ (0.02)
Income from discontinued operations - - 0.57
Extraordinary gain (loss) 0.05 - (0.24)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 0.33 $ 0.54 $ 0.31
=====================================================================================================================
Shares used in computation of net income per share:
Basic 37,849 37,845 35,770
Diluted 37,936 48,013 35,770
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
HOMEBASE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
January 29, January 30,
2000 1999
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 26,747 $ 35,578
Marketable securities 15,020 27,939
Accounts receivable (net of allowance for doubtful accounts
of $39 and $220) 29,439 20,759
Merchandise inventories 371,060 339,650
Current deferred income taxes 5,676 9,803
Prepaid expenses and other current assets 4,507 17,044
- --------------------------------------------------------------------------------------------------------------------
Total current assets 452,449 450,773
Property, net 257,726 256,835
Property under capital leases, net 4,759 5,198
Deferred income taxes 6,856 10,205
Other assets 5,952 5,971
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 727,742 $ 728,982
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 108,823 $ 103,248
Restructuring reserve 1,771 2,066
Accrued expenses and other current liabilities 73,195 75,838
Accrued income taxes 635 691
Current installments of long-term debt - 6,716
Obligations under capital leases due within one year 327 284
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 184,751 188,843
Long-term debt 92,382 100,293
Obligations under capital leases, less portion due within one year 8,040 8,366
Noncurrent restructuring reserve 5,003 3,862
Other noncurrent liabilities 42,880 45,119
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 per share; 10,000,000 shares authorized;
none outstanding - -
Common stock, par value $.01 per share; 190,000,000 shares authorized;
37,874,798 and 37,879,044 shares issued and outstanding, respectively 379 379
Additional paid-in capital 374,728 374,705
Retained earnings 20,819 8,191
Common stock in treasury at cost, 270,400 shares (818) -
Unearned compensation (348) (798)
Unrealized holding gains (losses) (74) 22
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 394,686 382,499
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 727,742 $ 728,982
====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
- ------------------------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(53 Weeks)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 12,628 $ 22,363 $ 11,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Net income from discontinued operations - - (20,575)
Depreciation and amortization 29,039 27,210 25,409
Extraordinary (gain) loss (2,855) - 8,663
(Gain) loss on property disposals (669) 14 620
Amortization of discount on marketable securities (210) (367) -
Income tax benefit of employee stock options 57 466 2,202
Other noncash items, net 398 676 1,755
Deferred income taxes 7,475 5,930 (4,762)
Increase (decrease) in cash due to changes in:
Accounts receivable (8,680) 4,638 (136)
Merchandise inventories (31,410) (25,462) 2,350
Prepaid expenses and other current assets 12,537 (604) (4,882)
Other assets 585 (1,136) (74)
Accounts payable 5,575 7,126 11,219
Restructuring reserve 1,630 (6,564) (1,135)
Accrued expenses and other current liabilities (2,514) 8,084 (345)
Accrued income taxes (56) 10,956 4,399
Other noncurrent liabilities (2,239) (5,266) 15,297
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of:
Continuing operations 21,291 48,064 51,234
Discontinued operations - - 1,559
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,291 48,064 52,793
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (12,728) (71,088) (13,203)
Sale of marketable securities 8,586 11,589 -
Maturity of marketable securities 17,164 38,553 365
Property additions (28,503) (36,548) (26,431)
Property disposals 169 303 489
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities of:
Continuing operations (15,312) (57,191) (38,780)
Discontinued operations - - (23,269)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,312) (57,191) (62,049)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt - - 100,000
Repayment of long-term debt (7,009) (78) (130,746)
Early extinguishment of long-term debt (4,609)
Debt issuance costs (2,110) (226) (4,861)
Repayment of capital lease obligations (283) (254) (180)
Purchase of treasury stock (818) - -
Proceeds from sale and issuance of common stock 19 660 5,815
Cash paid to BJ's Wholesale Club, Inc. in spin-off - - (5,000)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities of:
Continuing operations (14,810) 102 (34,972)
Discontinued operations - - 71,935
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (14,810) 102 36,963
Net increase (decrease) in cash and cash equivalents (8,831) (9,025) 27,707
Cash and cash equivalents at beginning of year 35,578 44,603 16,896
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 26,747 $ 35,578 $ 44,603
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
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 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
Net income - - - - - 12,628 - - 12,628
Unrealized holding losses - - - - (96) - - - (96)
Exercise of stock options 5 - 20 - - - - - 20
Income tax benefit of stock options - - 57 - - - - - 57
Amortization of restricted stock grants - - - 402 - - - - 402
Cancellation of restricted stock (9) - (54) 48 - - - - (6)
Repurchase of common shares - - - - - - (270) (818) (818)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 2000 37,875 $ 379 $ 374,728 $ (348) $ (74) $ 20,819 (270) $ (818) $ 394,686
====================================================================================================================================
</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(R), Inc. (the "Company" or "HomeBase") is the second largest operator
of home improvement warehouse stores in the western United States. At January
29, 2000, the Company operated 88 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 fiscal year ended January 31, 1998 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 29, 2000
is referred to herein as "fiscal 1999". The 52 weeks ended January 30, 1999 and
the 53 weeks ended January 31, 1998 are referred to herein as "fiscal 1998" and
"fiscal 1997", 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, restructuring 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.
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 estimable.
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.
- --------------------------------------------------------------------------------
Buildings 33 years
Property under capital leases and
leasehold improvements Shorter of lease term or useful life
Furniture, fixtures, and equipment 3-10 years
- --------------------------------------------------------------------------------
Pre-opening Costs
Pre-opening 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 $4.7 million, $4.9 million
and $2.6 million in fiscal 1999, 1998 and 1997, respectively.
Long-Lived Assets
The Company follows the provisions of 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 that the carrying amount of
an asset may not be recoverable. Certain long-lived assets and identifiable
intangibles to be disposed of must be reported at the lower of carrying amount
or fair value less cost to sell. 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 discontinued cash flows and the estimated
salvage value of the impaired assets.
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
For fiscal 1997, 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.
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.
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133 (an
amendment of FASB Statement 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, 2000. 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 29, January 30,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and buildings $ 157,932 $ 157,760
Leasehold improvements 72,795 69,577
Furniture, fixtures and equipment 170,316 148,674
- -----------------------------------------------------------------------------------------------------------
401,043 376,011
Accumulated depreciation (143,317) (119,176)
- -----------------------------------------------------------------------------------------------------------
Property and equipment, net $ 257,726 $ 256,835
===========================================================================================================
</TABLE>
Property under Capital Leases
Property under capital leases consists of the following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 29, January 30,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Property under capital leases $ 9,696 $ 9,696
Accumulated depreciation (4,937) (4,498)
- -----------------------------------------------------------------------------------------------------------
Property under capital leases, net $ 4,759 $ 5,198
===========================================================================================================
</TABLE>
Accrued Expenses and Other Current Liabilities
The following are the major components of accrued expenses and other current
liabilities:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 29, January 30,
(In thousands) 2000 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Self-insurance reserves $ 14,209 $ 18,370
Employee compensation 18,036 21,427
Sales and use taxes 13,696 12,724
Rent, utilities, advertising and other 27,254 23,317
- -----------------------------------------------------------------------------------------------------------
Total accrued expenses and other current liabilities $ 73,195 $ 75,838
===========================================================================================================
</TABLE>
Note 4 - Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Fiscal Year Ended
- ------------------------------------------------------ ----------------------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------ ----------------- ---------------- -----------------
Supplemental cash flow information:
<S> <C> <C> <C>
Interest paid (including discontinued operations) $ 6,433 $ 7,260 $ 9,480
Income taxes paid (refunded), including
discontinued operations (2,722) (4,485) 35,713
Noncash financing and investing activities:
Conversion of long-term debt to stock, net $ - $ - $ 107,061
- ------------------------------------------------------ ----------------- ---------------- -----------------
</TABLE>
Note 5 - 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.
The following table sets forth the computation of net income per share:
<TABLE>
<CAPTION>
Fiscal Year Ended
- ------------------------------------------------------ ----------------------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------ ----------------- ---------------- -----------------
Numerator:
<S> <C> <C> <C>
Income (loss) from continuing operations
before extraordinary (gain) loss $ 10,829 $ 22,363 $ (683)
Income from discontinued operations (net of
income taxes) - - 20,575
Extraordinary gain (loss) (net of income taxes) 1,799 - (8,663)
- ------------------------------------------------------ ----------------- ---------------- -----------------
Numerator for basic net income per share $ 12,628 $ 22,363 $ 11,229
Effect of dilutive securities:
5.25% convertible subordinated notes (1) - 3,574 -
- ------------------------------------------------------ ----------------- ---------------- -----------------
Numerator for diluted net income per share $ 12,628 $ 25,937 $ 11,229
====================================================== ================= ================ =================
Fiscal Year Ended
- ------------------------------------------------------ ----------------- ---------------- -----------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- ------------------------------------------------------ ----------------- ---------------- -----------------
Denominator:
Denominator for basic net income per share-
weighted average shares 37,849 37,845 35,770
Effect of dilutive securities:
Employee stock options (2) 87 381 -
Assumed conversion of 5.25%
convertible subordinated notes (1) - 9,787 -
- ------------------------------------------------------ ----------------- ---------------- -----------------
Denominator for diluted net income per share 37,936 48,013 35,770
====================================================== ================= ================ =================
</TABLE>
(1) In fiscal 1999 and 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.
Note 6 - Debt
At January 29, 2000 and January 30, 1999, long-term debt consisted of the
following components:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 29, January 30,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate debt, interest at 9.25%, maturing through March 1,
2003 (paid February 26, 1999) $ - $ 372
Senior subordinated notes, interest at 11%,
maturing May 15, 2004 (paid May 17, 1999) - 6,637
Convertible subordinated notes, interest at 5.25%,
maturing November 1, 2004 92,382 100,000
- -----------------------------------------------------------------------------------------------------------
92,382 107,009
Current installments of long-term debt - (6,716)
- -----------------------------------------------------------------------------------------------------------
Total long-term debt $ 92,382 $ 100,293
===========================================================================================================
</TABLE>
The following are the aggregate maturities of long-term debt outstanding at
January 29, 2000:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(In thousands) Total
- --------------------------------------------------------------------------------
Fiscal years ending January:
<S> <C>
2001 $ -
2002 -
2003 -
2004 92,382
- --------------------------------------------------------------------------------
Total $ 92,382
================================================================================
</TABLE>
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 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
interest accrued through the repurchase date.
In November 1999, the Board of Directors authorized the Company to spend up to
$20 million to repurchase HomeBase common stock and 5.25% convertible
subordinated notes periodically in the open market, as market conditions
warrant. As of January 29, 2000, the Company had repurchased $7.6 million in
face value of the convertible notes for $4.6 million. In connection with these
purchases, the Company recognized a $1.8 million extraordinary gain on the early
extinguishment of debt, net of income taxes. The repurchase program is
authorized to extend through December 31, 2001.
On December 3, 1999, the Company entered into a new, five-year, $250 million
revolving line of credit. This agreement replaced the previous $105 million
credit line and provides the Company with greater financial flexibility to
pursue its growth objectives. Borrowings under the new credit line are
collateralized by eligible inventory and accounts receivable. The Company paid a
one-time underwriting fee of $2,125,000 (0.85%) and is required to pay an unused
line fee of 0.375% annually. Interest on borrowings will be calculated based on
the LIBOR rate plus a 1.5% to 2.0% margin. The new credit line is subject to
certain financial covenants should excess availability under the line fall below
$40 million.
At January 29, 2000, the Company had letters of credit outstanding of
approximately $15.3 million primarily to support the purchase of inventories.
Note 7 - 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 29, 2000 were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------- -----------------
Capital Operating
(In thousands) Leases Leases
- ---------------------------------------------------------------------------------------- -----------------
Fiscal years ending January:
<S> <C> <C>
2001 $ 1,455 $ 72,577
2002 1,455 72,390
2003 1,455 65,887
2004 1,508 64,447
2005 1,543 61,508
Thereafter 8,716 339,694
- ---------------------------------------------------------------------------------------- -----------------
Total minimum lease payments 16,132 $ 676,503
=================
Less amount representing interest (7,765)
- ----------------------------------------------------------------------------------------
Present value of net minimum capital lease payments $ 8,367
========================================================================================
</TABLE>
Rental expense under operating leases amounted to $70.8 million, $66.8 million
and $64.8 million in fiscal 1999, 1998 and 1997, respectively. These amounts
exclude rent of $3.0 million, $3.8 million and $2.4 million in fiscal 1999, 1998
and 1997, 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 $3.6 million under an operating lease.
The table of future minimum lease payments above includes lease commitments for
three stores that were closed in connection with the Company's fiscal 1993
restructuring and two stores that were closed in fiscal 1997.
Note 8 - 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 29, January 30, January 31,
(In thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes:
<S> <C> <C> <C>
Continuing operations $ 17,187 $ 36,123 $ (1,128)
Discontinued operations - - 37,071
Extraordinary gain (loss) 2,855 - (14,559)
- -----------------------------------------------------------------------------------------------------------
Total $ 20,042 $ 36,123 $ 21,384
===========================================================================================================
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes attributable
to income from continuing operations $ 6,358 $ 13,760 $ (445)
Provision for income taxes attributable to income
from discontinued operations - - 16,496
Provision (benefit) for income taxes attributable to
extraordinary gain (loss) 1,056 - (5,896)
- -----------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 7,414 $ 13,760 $ 10,155
===========================================================================================================
</TABLE>
The following are the significant components of the provision (benefit) for
income taxes attributable to continuing operations:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ (744) $ 6,183 $ 3,475
State (373) 1,647 842
- -----------------------------------------------------------------------------------------------------------
Total current $ (1,117) $ 7,830 $ 4,317
- -----------------------------------------------------------------------------------------------------------
Deferred:
Federal $ 5,776 $ 5,652 $ (3,847)
State 1,699 278 (915)
- -----------------------------------------------------------------------------------------------------------
Total deferred $ 7,475 $ 5,930 $ (4,762)
- -----------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes
attributable to income from continuing operations $ 6,358 $ 13,760 $ (445)
===========================================================================================================
</TABLE>
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 29, January 30, January 31,
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
State income taxes, net of federal tax
benefit 4 2 4
Other (2) 1 1
- -----------------------------------------------------------------------------------------------------------
Effective income tax rate 37% 38% 40%
===========================================================================================================
</TABLE>
The following are the significant components of the Company's deferred tax
assets and (liabilities) as of January 29, 2000 and January 30, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
January 29, January 30,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Self-insurance reserves $ 14,502 $ 15,557
Rental step liabilities 4,055 4,531
Restructuring and closed store reserves 7,627 9,900
Capital leases 1,533 1,491
Compensation and benefits 2,510 2,217
Other 4,444 5,227
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 34,671 $ 38,923
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation $ (13,711) $ (8,898)
Purchase discounts (3,323) (1,890)
Other (5,105) (8,127)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ (22,139) $ (18,915)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 12,532 $ 20,008
===========================================================================================================
</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.
Note 9 - Investments In Marketable Securities
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Fiscal Year Ended January 29, 2000
- -----------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. corporate securities $ 1,000 $ - $ - $ 1,000
Obligations of state and
political subdivisions 14,094 - (74) 14,020
- -----------------------------------------------------------------------------------------------------------
Total debt securities $ 15,094 $ - $ (74) $ 15,020
===========================================================================================================
Fiscal Year Ended January 30, 1999
- -----------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
(In thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
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
===========================================================================================================
</TABLE>
The following are contractual maturities of available-for-sale securities at
January 29, 2000:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amortized Estimated
(In thousands) Cost Fair Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Less than one year $ 10,811 $ 10,777
1-5 years 4,283 4,243
- --------------------------------------------------------------------------------
$ 15,094 $ 15,020
================================================================================
</TABLE>
The following is other information on available-for-sale securities:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
(In thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales proceeds $ 8,586 $ 11,589 $ -
Gross realized losses - (1) -
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The specific identification method is used to compute realized gains or losses
on the sale of marketable securities.
At January 30, 1999, marketable securities classified as held-to-maturity
consisted of U.S. Treasury securities, which were 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 and were used to
retire the debt and pay interest through May 1999.
Note 10 - 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.
General Corporate Debt
The fair value of the Company's 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 29, 2000 January 30, 1999
- -----------------------------------------------------------------------------------------------------------
Carrying Carrying
(In thousands) Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 26,747 $ 26,747 $ 35,578 $ 35,578
Marketable securities 15,020 15,020 27,939 27,939
Real estate debt - - (372) (387)
Senior subordinated debt - - (6,637) (7,228)
Convertible subordinated debt (92,382) (55,429) (100,000) (80,690)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Note 11 - Capital Stock, Stock Options and Stock Purchase Plans
At January 29, 2000, 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 seven to 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 29, 2000, 1,999,749 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 seven to 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, 263,391 shares of restricted stock were issued
at a weighted-average grant-date fair value of $7.45. Total pre-tax compensation
cost charged to income for stock-based employee compensation awards in fiscal
1999, 1998 and 1997 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.
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 29, January 30, January 31,
2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 6.63% 4.62% 5.64%
Expected volatility 41.1% 37.0% 36.0%
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 29, January 30, January 31,
(In thousands, except per share amounts) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma income (loss) from continuing
operations before extraordinary gain $ 8,589 $ 20,617 $ (1,772)
Extraordinary gain on early extinguishment of debt 1,799 - -
- -----------------------------------------------------------------------------------------------------------
Pro forma net income $ 10,388 $ 20,617 $ 10,140
===========================================================================================================
Pro forma income (loss) per share--Income from
continuing operations before extraordinary gain
Basic $ 0.23 $ 0.54 $ (0.05)
Diluted $ 0.23 $ 0.43 $ (0.05)
Pro forma income per share--Net income:
Basic $ 0.27 $ 0.54 $ 0.28
Diluted $ 0.27 $ 0.43 $ 0.28
- -----------------------------------------------------------------------------------------------------------
</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.
The following is a summary of the Company's stock option activity and related
information:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Of Weighted-Average
Options Exercise Price
- --------------------------------------------------------------------------------
Fiscal Year Ended January 31, 1998:
<S> <C> <C>
Outstanding at beginning of year 2,539,624 $ 18.88
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
================================================================================
Fiscal Year Ended January 29, 2000:
Granted 737,150 $ 4.21
Exercised (4,417) 4.45
Forfeited (652,427) 6.56
Expired - -
- --------------------------------------------------------------------------------
Outstanding at January 29, 2000 3,376,145 $ 4.99
================================================================================
- --------------------------------------------------------------------------------
Number Of Weighted-Average
Options Exercise Price
- --------------------------------------------------------------------------------
Exercisable at:
January 31, 1998 1,100,056 3.82
January 30, 1999 1,594,476 4.42
January 29, 2000 2,282,277 4.96
- --------------------------------------------------------------------------------
Weighted-average fair value of options granted during the year:
Fiscal 1997 3.55
Fiscal 1998 2.32
Fiscal 1999 1.85
- --------------------------------------------------------------------------------
</TABLE>
The following is additional information related to stock options outstanding at
January 29, 2000:
<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>
$ 2.00 to $ 3.23 347,488 $ 2.83 4.2 347,488 $ 2.83
3.24 to 4.64 1,791,457 4.15 5.4 1,120,107 4.13
4.65 to 6.45 765,226 6.01 6.8 449,951 6.00
6.46 to 9.00 471,974 8.14 7.7 364,731 8.24
- ----------------------------------------------------------------------- -----------------------------------
$ 2.00 to $ 9.00 3,376,145 $ 4.99 5.9 2,282,277 $ 4.96
======================================================================= ===================================
</TABLE>
As of January 29, 2000, January 30, 1999 and January 31, 1998, 2,241,283,
2,363,860 and 2,723,306 shares, respectively, were reserved for future stock
awards under the Company's stock option plans.
In April 1999, the Company adopted a replacement stockholder rights plan
designed to discourage attempts to acquire the Company on terms not approved by
the Board of Directors. The replacement rights plan replaced an existing rights
plan that expired by its terms in April 1999. Under the replacement 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 $50. 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 12 - 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 were 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.
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
-----------------------------------------------------------------
Fiscal Year Ended Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
January 29, January 30, January 29, January 30,
(In thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ - $ 3,331 $ 767 $ 595
Service cost - - 90 118
Interest cost - - 30 40
Actuarial (gain) loss - 670 (370) 14
Benefits paid - (4,001) - -
- -----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ - $ - $ 517 $ 767
===========================================================================================================
Change in Plan Assets:
Fair value of assets at beginning of
year $ - $ 3,450 $ - $ -
Actual return on plan assets - 94 - -
Employer contribution - 457 - -
Benefits paid - (4,001) - -
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of
year $ - $ - $ - $ -
===========================================================================================================
Funded status - - 517 767
Unrecognized net actuarial gain - - 370 24
- -----------------------------------------------------------------------------------------------------------
Accrued benefit cost $ - $ - $ 887 $ 791
===========================================================================================================
Weighted-average assumptions:
Discount rate - - 7.75% 6.50%
===========================================================================================================
</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 29, January 30, January 29, January 30,
(In thousands) 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
<S> <C> <C> <C> <C>
Service cost $ - $ - $ 90 $ 119
Interest cost - - 30 40
Recognized net actuarial gain - - (25) -
Loss due to settlement of plan - 1,100 - -
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ - $ 1,100 $ 95 $ 159
===========================================================================================================
</TABLE>
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 $ 15 $ (13)
Effect on postretirement medical benefit
obligation $ 61 $ (53)
- -----------------------------------------------------------------------------------------------------------
</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 1999, 1998 and 1997, 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 in each
of fiscal years 1999, 1998 and 1997.
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 $2.2 million, $1.8 million
and $1.8 million in fiscal years 1999, 1998 and 1997, respectively.
Note 13 - Restructuring Reserve and Store Closures and Other Charges Reserve
The following is a summary of the restructuring reserve and store closures and
other charges reserve:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- ------------------ -------------------
Fiscal 1997
Fiscal 1993 Store Closures
Restructuring and Other Charges
(In thousands) Reserve Reserve
- ------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
Fiscal Year Ended January 30, 1999 $ 5,927 $ 16,452
Cash expenditures incurred during the year (2,500) (1) (1,934) (2)
Reserve re-evaluation adjustment 3,347 (3,347)
- ------------------------------------------------------------------- ------------------ -------------------
Fiscal Year Ended January 29, 2000 $ 6,774 (3) $ 11,171 (4)
=================================================================== ================== ===================
</TABLE>
(1) Cash expenditures during the year consisted primarily of lease obligations
on closed facilities and costs associated with the closure in July 1999 of
an older, under-performing store
(2) Cash expenditures during the year consisted primarily of lease obligations
on closed facilities and other related operating costs.
(3) The ending balance consists primarily of lease obligations on closed
facilities, which extend through 2006.
(4) The ending balance consists primarily of lease obligations on closed
facilities, which extend through 2011.
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 for
additional lease obligations due to delays in obtaining subleases on terms
acceptable to the Company. Costs included in the reserve for store closures
primarily include lease obligations on closed or yet to be closed facilities,
write-downs of fixed assets and other related settlement costs.
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.
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, cash flows, or
results of operations.
Note 15 - Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Fiscal Year ended January 29, 2000: Quarter Ended
- --------------------------------------------- --------------- -------------- -------------- --------------
May 1, July 31, October 30, January 29,
(In thousands, except per share data) 1999 1999 1999 2000
- --------------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 365,293 $ 453,667 $ 379,167 $ 327,148
Gross profit 78,297 100,603 82,931 66,979
Income (loss) from operations 2,149 16,712 6,350 (4,584)
Income (loss) before extraordinary gain 653 10,153 3,853 (3,830)
Net income (loss) 653 10,153 3,853 (2,031)
Basic net income per share:
Income (loss) before extraordinary gain $ 0.02 $ 0.27 $ 0.10 $ (0.10)
Extraordinary gain - - - 0.05
Net income $ 0.02 $ 0.27 $ 0.10 $ (0.05)
Diluted net income per share:
Income (loss) before extraordinary gain $ 0.02 $ 0.23 $ 0.10 $ (0.10)
Extraordinary gain - - - 0.05
Net income $ 0.02 $ 0.23 $ 0.10 $ (0.05)
- --------------------------------------------- --------------- -------------- -------------- --------------
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
- --------------------------------------------- --------------- -------------- -------------- --------------
Net sales $ 348,897 $ 424,625 $ 360,067 $ 308,753
Gross profit 76,937 97,417 79,800 63,937
Income from operations 91 14,693 7,165 414
Net income 91 14,693 7,165 414
Net income per share:
Basic $ - $ 0.39 $ 0.19 $ 0.01
Diluted $ - $ 0.32 $ 0.17 $ 0.01
- --------------------------------------------- --------------- -------------- -------------- --------------
</TABLE>
Net income for the first quarter of fiscal 1998 includes a $1.1 million charge,
before taxes, related to the termination of the Waban Inc. Retirement Plan.
In fiscal 1999 and 1998, 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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
<PAGE>
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 29, 2000 (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 19. 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 Form 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 Form 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 Form 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 Form 10-K for the fiscal
year ended January 27, 1990).
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 Form
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
Form 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
Form 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
Form 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
Form 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 Form 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 (incorporated herein by reference
to the Registrant's Form 10-K (File No. 1-10259), dated January
31, 1998).
10.15.2 Second Amendment to Credit Agreement, dated November 7, 1997
among the Company and certain banks (incorporated herein by
reference to the Registrant's Form 10-K (File No. 1-10259), dated
January 31, 1998).
10.15.3 Third Amendment to Credit Agreement, dated December 24, 1997
among the Company and certain banks (incorporated herein by
reference to the Registrant's Form 10-K (File No. 1-10259), dated
January 31, 1998).
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 Form 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 Form 10-Q (File No. 1-10259), dated October 31,
1998).
10.23 * Employment Agreement, dated June 1, 1998 with Allan P. Sherman
(incorporated herein by reference to the Registrant's Form 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 Form 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 Form 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 Form 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 Form 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 Form 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 Form 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 Form 10-Q (File No. 1-10259), dated October 31,
1998).
10.31 * Equity Unit Agreement, dated February 8, 1999, with Thomas F.
Gallagher (incorporated herein by reference to the Registrant's
Form 10-K (File No. 1-10259), dated January 30, 1999).
10.32 * Equity Unit Agreement, dated February 8, 1999, with William B.
Langsdorf (incorporated herein by reference to the Registrant's
Form 10-K (File No. 1-10259), dated January 30, 1999).
10.33 * Equity Unit Agreement, dated February 8, 1999, with Scott L.
Richards (incorporated herein by reference to the Registrant's
Form 10-K (File No. 1-10259), dated January 30, 1999).
10.34 * # Replacement Equity Unit Agreement, dated December 9, 1999, with
John L. Price.
10.35 * # Agreement and Release of All Claims with Allan P. Sherman, dated
March 2, 2000.
10.36 * # Amendment to Employment Agreement, dated March 2, 2000, with
Herbert J. Zarkin
21.0 # Subsidiaries of the Company.
23.0 # Consent of Independent Accountants.
27.0 # Financial Data Schedule--Fiscal 2000.
* Management contract or other compensatory plan or arrangement.
# Filed herewith.
Reports on Form 8-K
-----------------------------------------------------------------
On November 11, 1999, the Company filed a report on Form 8-K
which coincided with a press release announcing the preliminary
results for the third quarter ended October 30, 1999, of an
underwritten commitment it had obtained for a new senior
collateralized five-year, $250 million revolving line of credit,
of a $20 million stock and note repurchase program and of the
creation of a preliminary new merchandising concept.
On December 8, 1999, the Company filed a report on Form 8-K which
coincided with a press release announcing the closing of an
agreement for a new senior collateralized five-year $250 million
revolving line of credit facility, led by BankBoston Retail
Finance Inc.
On March 7, 2000, the Company filed a report on Form 8-K which
coincided with a press release reporting that the Board of
Directors has named Herbert J. Zarkin President and Chief
Executive Officer to succeed Allan P. Sherman, who resigned from
these positions and as a Director of the Company.
<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 11, 2000 By: /s/ Herbert J. Zarkin
--------------------------
Herbert J. Zarkin
Chairman of the Board,
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> <C>
/s/ HERBERT J. ZARKIN Chairman of the Board, President, Chief April 11, 2000
---------------------------------
Herbert J. Zarkin Executive Officer of the Company and Director
(Principal Executive Officer)
/s/ WILLIAM B. LANGSDORF Executive Vice President, Chief Financial April 11, 2000
---------------------------------
William B. Langsdorf Officer (Principal Financial Officer and
Principal Accounting Officer)
/s/ JOHN D. BARR Director April 11, 2000
---------------------------------
John D. Barr
/s/ ROBERT W. COX Director April 11, 2000
---------------------------------
Robert W. Cox
/s/ HAROLD LEPPO Director April 11, 2000
---------------------------------
Harold Leppo
/s/ ERNEST T. KLINGER Director April 11, 2000
---------------------------------
Ernest T. Klinger
/s/ LORNE R. WAXLAX Director April 11, 2000
---------------------------------
Lorne R. Waxlax
/s/ EDWARD J. WEISBERGER Director April 11, 2000
---------------------------------
Edward J. Weisberger
</TABLE>
HOMEBASE, INC. REPLACEMENT EQUITY UNIT AGREEMENT
This Replacement Equity Unit Agreement ("Agreement") is made and
entered into as of December 9, 1999, by and between HomeBase, Inc., a Delaware
corporation (the "Company"), and John L. Price ("Employee").
WHEREAS, the Executive Compensation Committee of the Board of Directors
of the Company ("ECC") has approved, and Employee has hereby agreed to, the
cancellation of options to purchase shares of the Company's Common Stock, $.01
par value per share (the "Common Stock"), granted to Employee by the Company and
listed on Schedule I attached hereto and incorporated herein ("Old Options");
and
WHEREAS, furthermore, the ECC has approved the replacement of the Old
Options by granting to Employee the number of Replacement Units ("Units")
indicated below, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto agree as follows:
1. Cancellation and Replacement of Old Options. The Company and
Employee hereby acknowledge and agree that (i) concurrently herewith the Old
Options are hereby cancelled and are no longer of any force and effect, and (ii)
the Units hereby granted to Employee are in replacement of and not in addition
to the Old Options.
2. Grant of Units: Certain Terms and Conditions. The Company hereby
grants to Employee, and Employee hereby accepts, 20,000 Units, subject to the
vesting schedule indicated below and all of the terms and conditions set forth
in this Agreement.
Number of Units Vesting Date
4,000 April 1, 2001
6,000 April 1, 2002
10,000 April 1, 2003
Notwithstanding any other provision hereof, if a Change of Control
Event (as defined in Annex A hereto) occurs, all of the Units granted hereby
shall become fully vested and non-forfeitable.
3. Payment of Vested Units. A cash payment in respect of vested Units
shall be made to Employee not later than the 15th of April following the date
such Unit vests and shall equal the applicable number of vested Units multiplied
by the lesser of (a) $8.00 or (b) the greater of (i) $5.00 or (ii) the average
closing price of the Common Stock (as reported in the Wall Street Journal) for
the first five trading days immediately following the Company's annual earnings
release in respect of the Company's fiscal years ending in January 2001, 2002,
or 2003, as the case may be. Notwithstanding the foregoing, if Units vest by
reason of a Change of Control Event, a cash payment in respect of such Units
shall be made to Employee as soon as practicable after the Change of Control
Event and shall equal the applicable number of Units multiplied by the lesser of
(x) $8.00, or (y) the greater of (i) $5.00 or (ii) the tender offer price per
share of Common Stock in the case of a cash transaction or the average closing
price for the Common Stock (as reported in the Wall Street Journal) for the five
trading days immediately preceding the Change of Control Event date in the case
of a noncash transaction.
4. Forfeitures. If Employee's employment with the Company terminates
for any reason, any Units remaining unvested as of the date of employment
termination shall be forfeited.
5. Adjustment to Common Stock. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, the number of Units and/or the cash payment for
Units described in Section 3 hereof shall be appropriately adjusted by the
Company (or substituted awards may be made, if applicable) to the extent the
Board of Directors shall determine, in good faith, that such an adjustment (or
substitution) is necessary and appropriate.
6. Transferability of Units. Neither the Units nor any interest therein
may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner.
7. Payment of Withholding Tax. If the Company is obligated to withhold
an amount on account of any federal, state or local tax imposed as a result of
the redemption of the Units, including, without limitation, any federal, state
or other income tax, or any F.I.C.A., state disability insurance tax or other
employment tax, then the Company shall deduct such amount from the amount
otherwise payable to Employee upon payment in respect of the Units.
8. Employment Rights. No provision of this Agreement or of the Units
granted hereunder shall (a) confer upon Employee the right to continue in the
employ of the Company, (b) affect the right of the Company to terminate the
employment of Employee, with or without cause, or (c) confer upon Employee any
right to participate in any employee welfare or benefit plan or other program of
the Company. Employee hereby acknowledges and agrees that the Company may
terminate the employment of Employee at any time and for any reason, or for no
reason, unless Employee and the Company are parties to a written employment
agreement that expressly provides otherwise.
9. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Company and Employee have duly executed this
Agreement as of the date just noted above.
HomeBase, Inc.
By: /s/Allan P. Sherman
---------------------------
Allan P. Sherman
Chief Executive Officer
and President
/s/John L.Price
John L. Price
Vice President, General
Counsel and Secretary
<PAGE>
DEFINITION OF CHANGE OF CONTROL EVENT
For the purpose of the Plan, a "Change of Control Event" shall mean:
(a) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of Common Stock (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this subsection (a), the following acquisitions shall not
constitute a Change of Control Event: (i) any acquisition directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, or (iv) any acquisition by any
corporation pursuant to a transaction which satisfies the criteria set forth in
clauses (i), (ii) and (iii) of subsection (c) of this definition; or
(b) Individuals who, as of the date hereof, constitute the Board of
Directors (the "Incumbent Board") cease for any reason to constitute at least a
majority of the board; provided, however, that any individual becoming a
director subsequently to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors when comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board
(except that this proviso shall not apply to any individual whose initial
assumption of office as a director occurs as a result of an, actual or
threatened election contest with respect to the election or removal of directors
or other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board); or
(c) Consummation of a reorganization, merger or consolidation involving
the Company or a sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
immediately following such Business Combination, (i) all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 60% of, respectively, the then-outstanding shares of
common stock and the combined voting power of the then-outstanding voting
securities entitled to vote generally in the election of directors, of the
corporation resulting from such Business Combination (which as used in section
(c) of this definition shall include, without limitation, a corporation which as
a result of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such
Business Combination, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then-outstanding shares of common stock of the corporation
resulting from such Business Combination, or the combined voting power of the
then-outstanding voting securities of such corporation and (iii) at least half
of the members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing for
such Business Combination; or
(d) Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
AGREEMENT AND RELEASE OF ALL CLAIMS
This AGREEMENT AND RELEASE OF ALL CLAIMS (the "Agreement") is by and
between HomeBase, Inc., a Delaware corporation (the "Company") and Allan P.
Sherman, an individual ("Sherman"), as of March 2, 2000.
RECITALS
Sherman was employed by the Company from February 1991 through March 2,
2000.
Sherman served as President and Chief Executive Officer of the Company
from July 1997 until his voluntary resignation from those and all other officer
positions and directorships with the Company and any affiliated entities,
effective March 2, 2000.
The Company and Sherman are parties to an Employment Agreement, dated
as of June 1, 1998, attached hereto as Exhibit A (the "Employment Agreement")
certain provisions of which are expressly modified by the terms hereof.
In consideration of the mutual agreements set forth below, the parties
agree as follows:
1. Resignation of Employment. Sherman acknowledges that he voluntarily
resigned his employment and all officer positions and directorships with the
Company and any affiliated entities, effective March 2, 2000.
2. Forgiveness of Home Purchase Debt and Reconveyance of Deed of Trust.
On the third business day following the seventh day after the execution of this
Agreement by the parties, and so long as the Company receives from Sherman the
assurances set forth in Section 18 below, the Company shall forgive the
remaining $100,000 of principal balance outstanding (the "Home Purchase Debt")
pursuant to that certain Promissory Note dated January 19, 1994 from Sherman to
the Company in the original principal amount of $700,000 (the "Note"). Within
three business days thereafter, the Company shall return to Sherman marked paid
in full the original Note and deliver to Sherman a document reconveying that
certain Deed of Trust in favor of the Company encumbering Sherman's residence in
Laguna Beach, California.
3. Tax Obligations.
(a) On the third business day following the seventh day after
the execution of this Agreement by the parties and so long as the Company
receives from Sherman the assurances set forth in Section 18 below, the Company
shall pay to the applicable tax authorities a total of $72,000 on behalf of
Sherman, $62,000 of which shall relate to state and federal withholding taxes
arising in connection with the forgiveness of Note indebtedness under Section 2
of this Agreement, and $10,000 of which shall relate to additional consideration
under this Agreement.
(b) Sherman shall be responsible for the payment of all taxes
arising out of the execution of this Agreement and the transactions contemplated
hereby.
(c) The Company reserves the right to withhold payroll and
income taxes from any payments made to Sherman, as required by applicable law
and regulations.
4. Retiree Health Plan Coverage. The parties agree that solely for
purposes of determining Sherman's eligibility for coverage under the Company's
Retiree Health Plan, Sherman shall be credited with his period of employment by
Zayre Corp. from September 1986 through October 28, 1988, during which time
Zayre Corp. and HomeClub, Inc. (the predecessor to the Company) were part of the
same affiliated group which filed consolidated federal income tax returns
pursuant to Section 1501 of the Internal Revenue Code. The parties further agree
that as a result of this credit for his employment with Zayre Corp., Sherman has
satisfied the 10-year service requirement of the Company's Retiree Health Plan.
Sherman may thus elect to receive coverage under the Retiree Health Plan
immediately upon termination of the health plan coverage provided pursuant to
Section 5(a)(ii) of the Employment Agreement.
5. No Changes Concerning Stock Options. This Agreement shall not modify
or in any way change the existing terms and conditions governing stock options
previously granted by the Company to Sherman.
6. Continuing Obligations under the Employment Agreement. Excepting
only as expressly provided in this Agreement, the parties agree to be bound by
any and all surviving terms of the Employment Agreement including, without
limitation, Section 6 of the Employment Agreement; provided, however: (a)
Section 5(a)(i) of the Employment Agreement shall hereby be amended by
continuing the first sentence thereof as follows: ", and for 13 weeks thereafter
the Company will pay to Executive the weekly gross amount of $7,000 (subject to
reduction pursuant to the next sentence as if such payments were Base Salary
thereunder), and the period for all such payments made pursuant to this sentence
shall be deemed 'the period of Base Salary payments' for purposes of Section
5(a)(ii) of this Agreement.", and (b) Section 6(b) of the Employment Agreement
shall hereby be amended by adding the following sentence after the end of the
fourth sentence of such Section 6(b): "Notwithstanding the foregoing, the
provisions of this Section 6(b) shall terminate and no longer be effective at
the time, if ever, the Company no longer operates any retail stores in the home
improvement business."
7. Release by Sherman. In consideration of the promises set forth in
this Agreement and the complete release of claims given by the Company in this
Agreement, Sherman, for himself and his heirs, successors and assigns, does
hereby and forever release and discharge the Company and its past, present and
future affiliated entities and the directors, officers, employees, agents,
attorneys, accountants, representatives, successors and assigns of them and any
of them from any and all causes of action, actions, judgments, liens,
indebtedness, damages, losses, claims, liabilities and demands of whatsoever
kind and character in any manner whatsoever arising prior to the date of this
Agreement, on any theory of pleading or proof, including but not limited to any
claim for breach of contract, breach of implied covenant, breach of oral or
written promise, wrongful termination, infliction of emotional distress,
defamation, interference with contract relations or prospective economic
advantage, negligence, misrepresentation or employment discrimination, and
including without limitation alleged violations of the California Labor Code,
the California Family Rights Act, the Unruh Act, the California Constitution,
the California Fair Employment and Housing Act prohibiting discrimination based
on race, religious creed, color, national origin, ancestry, physical disability,
mental disability, medical condition, marital status, sex or age over 40, Title
VII of the 1964 Civil Rights Act prohibiting discrimination based on race,
color, religion, sex or national origin, the Americans With Disabilities Act
prohibiting discrimination based on disability, the Family and Medical Leave Act
respecting leaves of absence, and the Age Discrimination in Employment Act
prohibiting discrimination based on age over 40, as these statutes have been
from time to time amended, excepting only (i) those obligations expressly
recited herein or to be performed hereunder, (ii) workers' compensation claims
preserved by law notwithstanding this Agreement, (iii) obligations arising under
any provisions of the Employment Agreement which survive termination of
employment and are not expressly varied by the terms of this Agreement, and (iv)
any rights Sherman may have pursuant to the express provisions of any employee
benefit plans identified in Exhibit B.
8. Release by the Company. In consideration of the complete release of
claims promised by Sherman in this Agreement, the Company does hereby and
forever release and discharge Sherman and his heirs, successors, assigns,
attorneys, and representatives from any and all causes of action, actions,
judgments, liens, indebtedness, damages, losses, claims, liabilities and demands
of whatsoever kind and character in any manner whatsoever arising prior to the
date of this Agreement, on any theory of pleading or proof, including but not
limited to any claim for breach of contract, breach of implied covenant, breach
of oral or written promise, wrongful termination, infliction of emotional
distress, defamation, interference with contract relations or prospective
economic advantage, negligence, misrepresentation or employment discrimination,
and including without limitation alleged violations of the California Labor
Code, the California Family Rights Act, the California Constitution, the
California Fair Employment and Housing Act prohibiting discrimination based on
race, religious creed, color, national origin, ancestry, physical disability,
mental disability, medical condition, marital status, sex or age over 40, Title
VII of the 1964 Civil Rights Act prohibiting discrimination based on race,
color, religion, sex or national origin, the Americans With Disabilities Act
prohibiting discrimination based on disability, the Family and Medical Leave Act
respecting leaves of absence, and the Age Discrimination in Employment Act
prohibiting discrimination based on age over 40, as these statutes have been
from time to time amended, excepting only those obligations expressly recited
herein or to be performed hereunder.
9. Unknown Claims Released. Sherman and the Company each assumes the
risk of any mistake of fact and of any facts which are unknown, and thereby each
waives the benefits of Section 1542 of the Civil Code of the State of
California, to the extent that such section may apply to this Agreement. Civil
Code Section 1542 provides:
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with debtor."
10. Mutual Agreement Regarding Confidentiality and Nondisparagement.
Sherman and the Company agree not to make public the terms of this Agreement or
negative matters pertaining to Sherman's employment, and not to disparage each
other or state contentions of wrongful conduct by Sherman or his agents,
relatives, lawyers or representatives or by the Company or its directors,
officers, employees, agents, lawyers or representatives except: as may be
required by applicable law, as may be necessary in a proceeding to secure
compliance with or enforcement of the terms of this Agreement, upon lawful
inquiry by federal or state tax authorities or other governmental agencies, or
in response to a lawful subpoena or court order.
(a) Nothing in this Agreement shall be construed to affect the
obligations of the parties to testify truthfully or to provide truthful report
upon lawful inquiry by governmental agencies, or in response to a lawful
subpoena or court order.
(b) Notwithstanding any other provision of this Agreement,
Sherman may disclose the terms of this Agreement to his immediate family
members, attorneys and accountants, provided he advises each such individual of
this confidentiality provision and such individual agrees that he or she shall
not further disclose any of the terms of this Agreement except for the purposes
expressly provided in this Section 10.
(c) The Company shall refer inquiries about Sherman from
potential future employers to the Company's Vice President, Human Resources. The
Company further agrees to respond to such inquiries only by stating that Sherman
was employed by the Company from February 1991 to March 2000, that he resigned
his employment, that pursuant to the Company's standard policies no further
information can be provided, and that all matters between Sherman and the
Company respecting his employment have been amicably resolved.
(d) Proof of breach of this Section 10 shall be by clear and
convincing evidence in arbitration pursuant to this Agreement.
11. Continuing Availability to Consult on Certain Matters. Sherman
acknowledges that he has information that may be or may become relevant to the
Company's operations or claims that may be brought against the Company. As a
result, Sherman agrees to make himself available at reasonable times and places
to provide the Company with his full and accurate recollection of such matters
at the request of the Company and further agrees to provide truthful testimony
at the Company's request in any court proceedings on such matters. The Company
agrees to indemnify and hold Sherman harmless from and against any and all
claims concerning his provision of such consulting services to the Company;
provided, however, that the indemnification obligations of the Company pursuant
to this sentence shall not apply to Sherman's acts or omissions which constitute
willful misconduct or gross negligence.
12. Arbitration. Sherman and the Company agree that, to the extent
permitted by law and to the extent the enforceability of this Agreement is not
thereby impaired, any and all disputes, controversies or claims between Sherman,
his heirs, successors, attorneys, and assigns, on the one hand, and the Company,
its past and present directors, officers, employees, agents, attorneys,
accountants, representatives, successors and assigns, on the other hand, arising
from this Agreement shall be determined exclusively by final and binding
arbitration before a single arbitrator in Los Angeles, California, under the
National Rules For the Resolution of Employment Disputes of the American
Arbitration Association and the provisions of the California Code of Civil
Procedure governing arbitrations. Sherman and the Company further agree that
judgment upon the award rendered by the arbitrator may be entered in any court
of competent jurisdiction.
(a) Claims subject to exclusive final and binding arbitration
under this Agreement include, without limitation, claims that otherwise could be
tried in court to a jury in the absence of this Agreement. Sherman and the
Company expressly waive all rights to a jury trial in court on all claims
arising under this Agreement.
(b) The arbitration shall be administered by the American
Arbitration Association, and the arbitrator shall be selected from a list of
arbitrators provided by the American Arbitration Association following a request
by the party seeking arbitration for a list of retired or former jurists with
substantial professional experience in employment matters.
(c) This Agreement shall be construed according to California
law without reference to California law governing conflict of laws. Each party
has had the assistance of legal counsel in connection with this Agreement and,
accordingly, this Agreement shall be construed according to its fair meaning and
not for or against any party. The arbitrator's authority and jurisdiction shall
be limited to determining the dispute in arbitration in conformity with law, to
the same extent as if such dispute were determined as to liability and any
remedy by a court without a jury. The arbitrator shall render an award which
shall include a written statement of opinion setting forth the arbitrator's
findings of fact and conclusions of law.
(d) To the extent permitted by law and to the extent the
enforceability of this Agreement is not thereby impaired, each party shall
initially pay its or his own costs of arbitration including, without limitation,
attorneys' fees and costs and fees and costs of any experts. However, the
arbitrator shall award reasonable attorneys' fees (with or without expert fees)
and costs to the prevailing party.
(e) Any controversy over whether a dispute is an arbitrable
dispute or as to the interpretation or enforceability of this Section 12 with
respect to such arbitration shall be determined by the arbitrator.
(f) Notwithstanding the foregoing provisions of this Section
12, Sherman and the Company agree that breaches of continuing obligations under
the Employment Agreement or this Agreement concerning confidential information
and trade secrets and concerning restrictions on competition and solicitation of
employees of the Company by Sherman cannot adequately be remedied at law or in
arbitration, and that Sherman or the Company may seek and obtain otherwise
available injunctive relief, including ancillary monetary relief, in Court for
any violation or breach of such obligations; provided, however, that final
resolution of disputes shall be by arbitration and neither the grant nor the
denial of injunctive relief shall prejudice the result of such arbitration.
13. No Admissions. Neither this Agreement nor any statement or action
of any of the parties to this Agreement constitutes any admission of wrongful
act or omission, and no finding of any wrongful act or omission has been made by
any person, entity or agency.
14. No Assignments. Each of the parties hereby represents and warrants
that he or it has not heretofore assigned or transferred or purported to assign
or transfer to any person or entity not a signatory to this Agreement any claim,
including fee or cost claims, or matter herein released, disclaimed, discharged
or terminated. Each party also represents and warrants that he or it has no
knowledge of any such assignment to any individual or entity who is not a party
to the Agreement. In the event of any such assignment or transfer of any claim
to another individual or entity of matters herein released, discharged,
terminated or disclaimed, the party making such assignment or transfer agrees to
indemnify and hold harmless the other party from and against any liability or
loss, and for any cost, expense or judgment or settlement arising out of or
occasioned by, or arising in connection with any such assignment or transfer.
15. Sherman and the Company Each Relies On Own Judgment and Own
Counsel. Each party to this Agreement respectively represents and declares that
in executing this Agreement such party relies solely upon such party's own
judgment, belief and knowledge, and the advice and recommendations of such
party's independently selected counsel, concerning the nature, extent and
duration of such party's rights and claims. Each party acknowledges that no
other party nor any agent or attorney of any other party has made any promise,
representation or warranty, express or implied, not expressly contained in this
Agreement, to induce acceptance or execution of this Agreement. Each party to
this Agreement further acknowledges that such party is not executing this
Agreement in reliance on any promise, representation or warranty not expressly
contained in this Agreement. Sherman acknowledges that neither the Company nor
any of its directors, officers, employees, agents, attorneys, accountants or any
other person associated with the Company has advised Sherman as to the tax
consequence of his receipt of payments under this Agreement and that he is
solely responsible for any and all taxes resulting from his receipt of such
payments, unless otherwise provided by this Agreement.
16. Integrated Complete Agreement. This Agreement integrates, cancels
and supersedes all other prior and contemporaneous written and oral agreements
and understandings of every character between Sherman and the Company and
comprises the entire agreement between Sherman and the Company; provided,
however, that the parties shall continue to be bound by Sherman's resignation
letter to the Company dated March 2, 2000, that certain Indemnification
Agreement by and between Sherman and the Company dated as of May 25, 1993, any
and all surviving terms of the Employment Agreement and the express provisions
of the employee benefit plans identified in Schedule B. Sherman and the Company
understand and agree that this Agreement may be amended only by a further
express written agreement between Sherman and the Company, signed by Sherman and
the Chief Executive Officer of the Company and stating an intention to amend
this Agreement, and that this Agreement cannot be amended by oral or written
statements or communications.
17. Partial Invalidity. The invalidity or unenforceability of any
provision or portion of this Agreement, including, without limitation, any
provision or portion of Section 12 of this Agreement, will not affect the
validity or enforceability of the other provisions or portions of this
Agreement. The parties intend that this Agreement be construed in favor of
arbitration as the final and binding means for resolving any disputes between
them arising out of the matters settled herein that are not resolved informally.
18. Revocation of Acceptance. Sherman acknowledges that he has had
twenty-one (21) days within which to consider this Agreement if he has wished to
do so, that he has seven (7) days from the date of his acceptance of this
Agreement within which to revoke his acceptance, that he is hereby advised to
consult with a lawyer representing him concerning this Agreement and has had an
opportunity to do so, and that no payments will be made to Sherman by the
Company hereunder until after such seven (7) days and until after Sherman
provides reasonable written assurances that he has not revoked his acceptance of
this Agreement.
19. THE PARTIES FURTHER STATE THAT HE/IT HAS CAREFULLY READ THIS
AGREEMENT, THAT IT HAS BEEN FULLY EXPLAINED TO THEM BY THEIR LEGAL COUNSEL, THAT
THEY FULLY UNDERSTAND ITS FINAL AND BINDING EFFECT, THAT THE ONLY PROMISES MADE
TO THEM TO SIGN THIS AGREEMENT ARE THOSE STATED ABOVE, AND THAT THEY ARE SIGNING
THIS AGREEMENT VOLUNTARILY.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and at the location set forth below.
Dated March 21, 2000 at Laguna Beach California.
/s/ ALLAN P. SHERMAN
-----------------------
Allan P. Sherman
Dated March 21, 2000 at Irvine, California.
HomeBase, Inc.
By: /s/ HERBERT J ZARKIN
-----------------------
Herbert J Zarkin
Title: Chairman of the Board,
President and Chief
Executive Officer
<PAGE>
I RECEIVED THIS AGREEMENT AND RELEASE OF ALL CLAIMS on March 2, 2000.
I understand that I have had twenty-one (21) days within which to consider this
Agreement if I wished to do so, that I have been encouraged to consult with
legal counsel, that I have seven (7) days from the date of my execution of this
Agreement within which to revoke my acceptance, and that no payments will be
made to me under this Agreement until after such seven (7) days.
No promises have been made to me other than as expressly stated in the
Agreement and Release of All Claims, which I voluntarily accept on the date
shown by my signature.
Dated: March 21, 2000 at Laguna Beach, California.
/s/ ALLAN P. SHERMAN
-----------------------
Allan P. Sherman
March 3, 2000
Mr. Herbert J. Zarkin
3345 Michelson Drive
Irvine, CA 92612
Re: Letter Agreement
Dear Herb:
The purpose of this letter is to make certain amendments to the Employment
Agreement dated as of July 27, 1997 between you and HomeBase, Inc., (the
"Employment Agreement") with such amendments to be effective March 3, 2000, as
follows:
1. Paragraph 2 (a) of the Employment Agreement shall be amended and
restated in full to read as follows:
(a) Nature of Services. Executive shall diligently perform the duties
and the responsibilities of Chairman of the Board of Directors,
President, and Chief Executive Officer of the Company and such
additional duties and responsibilities as an employee of the Company as
shall from time to time be agreed by him and the Board.
2. The first sentence of Paragraph 2(b) of the Employment Agreement shall
be amended and restated in full to read as follows:
Executive shall devote approximately one-half (1/2) of his working time
and attention and his best efforts to the performance of his duties and
responsibilities under this Agreement, provided that, to the extent of
any conflicts between the time required to be devoted under this
Agreement and under the BJI Employment Agreement, the Employee shall
allocate his time between the Company and BJI in such manner as he and
the Company's Executive Compensation Committee deem reasonably
appropriate under the circumstances.
In all other respects the Employment Agreement is ratified, confirmed and
approved.
Sincerely,
HomeBase, Inc.
By: /s/ John D. Barr
---------------------------
John D. Barr
Chairman, Executive Compensation Committee,
on behalf of the Board of Directors
ACCEPTED AND AGREED TO:
/s/Herbert J Zarkin
---------------------------
Herbert J Zarkin
Dated: March 3, 2000
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. (formerly Waban 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.
43789) of our report dated February 24, 2000; on our audits of the consolidated
financial statements of HomeBase, Inc. as of January 29, 2000 and January 30,
1999, and for the three years ended January 29, 2000, January 30, 1999 and
January 31, 1998, which reports are included in this Annual Report on Form 10-K.
Los Angeles, California
April 8, 1999
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<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
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0
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<COMMON> 379
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