-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PLYTcmL+6MWe5s1LsepFgZzQYx27NzOc6/AXROEuQKiAXfe6D3yqBujvN6QlqOcn oD3Evg8bGgcJJZOpMXc5LA== 0000850316-00-000003.txt : 20000413 0000850316-00-000003.hdr.sgml : 20000413 ACCESSION NUMBER: 0000850316-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000129 FILED AS OF DATE: 20000412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMEBASE INC CENTRAL INDEX KEY: 0000850316 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 330109661 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10259 FILM NUMBER: 598945 BUSINESS ADDRESS: STREET 1: 3345 MICHELSON DR STREET 2: SUPPORT CENTER OFFICES CITY: IRVINE STATE: CA ZIP: 92612 BUSINESS PHONE: 9494425000 MAIL ADDRESS: STREET 1: 3345 MICHELSON DRIVE CITY: IRVINE STATE: CA ZIP: 92612 FORMER COMPANY: FORMER CONFORMED NAME: WABAN INC DATE OF NAME CHANGE: 19920703 10-K 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- 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 ------------- 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. - -------------------------------------------------------------------------------- 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:
Product Category 1999 1998 - ---------------- ------------- ------------- 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% ============= =============
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:
----------------------------------------------------------------------- Number of State Stores ----------------------------------------------------------------------- California 50 Washington 9 Colorado 7 Arizona 6 Oregon 4 Nevada 3 New Mexico 3 Utah 3 Texas 2 Idaho 1 ----------------------------------------------------------------------- Total 88 =======================================================================
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. 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.
- ---------------------------- ------ ------------------------------------------------------------------------ Office and Employment Experience Name Age During Last Five Years - ---------------------------- ------ ------------------------------------------------------------------------ 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). - ---------------------------- ------ ------------------------------------------------------------------------
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:
- --------------------------------------- --------------------------------- ---------------------------------- Fiscal Year Ended Fiscal Year Ended Quarters January 29, 2000 January 30, 1999 - --------------------------------------- --------------------------------- ---------------------------------- 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 - --------------------------------------- ---------------- ---------------- ---------------- -----------------
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. 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.
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: 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 ================================================================================================================================
(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. 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.
Fiscal Year Ended - ---------------------------------------------------------------------------------------------------------- January 29, January 30, January 31, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- 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% ==========================================================================================================
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. 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 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 HOMEBASE, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Fiscal Year Ended - --------------------------------------------------------------------------------------------------------------------- January 29, January 30, January 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- (53 Weeks) 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
The accompanying notes are an integral part of these consolidated financial statements. HOMEBASE, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
- -------------------------------------------------------------------------------------------------------------------- January 29, January 30, 2000 1999 - -------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: 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 ====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. HOMEBASE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year Ended - ------------------------------------------------------------------------------------------------------------------ January 29, January 30, January 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ (53 Weeks) CASH FLOWS FROM OPERATING ACTIVITIES: 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 ==================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. HOMEBASE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Unrealized Common Stock Additional Holding Retained Treasury Stock Total ---------------- Paid-In Unearned Gains Earnings ----------------- Stockholders' Shares Amount Capital Compensation (Losses) (Deficit) Shares Amount Equity - ------------------------------------------------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. 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:
- ----------------------------------------------------------------------------------------------------------- January 29, January 30, (In thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================
Property under Capital Leases Property under capital leases consists of the following components:
- ----------------------------------------------------------------------------------------------------------- January 29, January 30, (In thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------- Property under capital leases $ 9,696 $ 9,696 Accumulated depreciation (4,937) (4,498) - ----------------------------------------------------------------------------------------------------------- Property under capital leases, net $ 4,759 $ 5,198 ===========================================================================================================
Accrued Expenses and Other Current Liabilities The following are the major components of accrued expenses and other current liabilities:
- ----------------------------------------------------------------------------------------------------------- January 29, January 30, (In thousands) 2000 1998 - ----------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================
Note 4 - Supplemental Cash Flow Information
Fiscal Year Ended - ------------------------------------------------------ ---------------------------------------------------- January 29, January 30, January 31, (In thousands) 2000 1999 1998 - ------------------------------------------------------ ----------------- ---------------- ----------------- Supplemental cash flow information: 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 - ------------------------------------------------------ ----------------- ---------------- -----------------
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:
Fiscal Year Ended - ------------------------------------------------------ ---------------------------------------------------- January 29, January 30, January 31, (In thousands) 2000 1999 1998 - ------------------------------------------------------ ----------------- ---------------- ----------------- Numerator: 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 ====================================================== ================= ================ =================
(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:
- ----------------------------------------------------------------------------------------------------------- January 29, January 30, (In thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================
The following are the aggregate maturities of long-term debt outstanding at January 29, 2000:
- -------------------------------------------------------------------------------- (In thousands) Total - -------------------------------------------------------------------------------- Fiscal years ending January: 2001 $ - 2002 - 2003 - 2004 92,382 - -------------------------------------------------------------------------------- Total $ 92,382 ================================================================================
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:
- ---------------------------------------------------------------------------------------- ----------------- Capital Operating (In thousands) Leases Leases - ---------------------------------------------------------------------------------------- ----------------- Fiscal years ending January: 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 ========================================================================================
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:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 29, January 30, January 31, (In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Income (loss) before income taxes: 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 ===========================================================================================================
The following are the significant components of the provision (benefit) for income taxes attributable to continuing operations:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 29, January 30, January 31, (In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Current: 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) ===========================================================================================================
The following is a reconciliation of the statutory federal income tax rate and the effective income tax rate for income from continuing operations:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 29, January 30, January 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- 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% ===========================================================================================================
The following are the significant components of the Company's deferred tax assets and (liabilities) as of January 29, 2000 and January 30, 1999:
- ----------------------------------------------------------------------------------------------------------- January 29, January 30, (In thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------- Deferred tax assets: 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 ===========================================================================================================
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:
Fiscal Year Ended January 29, 2000 - ----------------------------------------------------------------------------------------------------------- Amortized Gross Unrealized Gross Unrealized Estimated (In thousands) Cost Gains Losses Fair Value - ----------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================
The following are contractual maturities of available-for-sale securities at January 29, 2000:
- -------------------------------------------------------------------------------- Amortized Estimated (In thousands) Cost Fair Value - -------------------------------------------------------------------------------- Less than one year $ 10,811 $ 10,777 1-5 years 4,283 4,243 - -------------------------------------------------------------------------------- $ 15,094 $ 15,020 ================================================================================
The following is other information on available-for-sale securities:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 29, January 30, January 31, (In thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- Sales proceeds $ 8,586 $ 11,589 $ - Gross realized losses - (1) - - -----------------------------------------------------------------------------------------------------------
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:
January 29, 2000 January 30, 1999 - ----------------------------------------------------------------------------------------------------------- Carrying Carrying (In thousands) Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------------------------- 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) - -----------------------------------------------------------------------------------------------------------
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:
Fiscal Year Ended - -------------------------------------------------------------------------------- January 29, January 30, January 31, 2000 1999 1998 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 29, January 30, January 31, (In thousands, except per share amounts) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
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:
- -------------------------------------------------------------------------------- Number Of Weighted-Average Options Exercise Price - -------------------------------------------------------------------------------- Fiscal Year Ended January 31, 1998: 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 - --------------------------------------------------------------------------------
The following is additional information related to stock options outstanding at January 29, 2000:
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 - ----------------------------------------------------------------------- ----------------------------------- $ 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 ======================================================================= ===================================
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.
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: 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% ===========================================================================================================
Net periodic pension and other post-retirement medical benefit costs include the following components:
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: 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 ===========================================================================================================
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:
- ----------------------------------------------------------------------------------------------------------- 1-Percentage Point 1-Percentage Point Increase Decrease - ----------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 15 $ (13) Effect on postretirement medical benefit obligation $ 61 $ (53) - -----------------------------------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------- ------------------ ------------------- Fiscal 1997 Fiscal 1993 Store Closures Restructuring and Other Charges (In thousands) Reserve Reserve - ------------------------------------------------------------------- ------------------ ------------------- 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) =================================================================== ================== ===================
(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)
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 - --------------------------------------------- --------------- -------------- -------------- -------------- 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 - --------------------------------------------- --------------- -------------- -------------- --------------
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 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. 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. 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.
Signature Title Date - ----------------------------------------------------------------------------------------------------------- /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
EX-10 2 10.34 REPLACEMENT EQUITY 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. 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 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. EX-10 3 10.35 RELEASE OF CLAIMS 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. 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 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 EX-10 4 10.36 AMEND EMPLOY AGREE 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 EX-21 5 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 EX-23 6 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 EX-27 7
5 12-MOS JAN-29-2000 JAN-31-1999 JAN-29-2000 26,747 15,020 29,478 (39) 371,060 452,449 401,043 (143,317) 727,742 184,751 92,382 0 0 379 394,307 727,742 1,525,275 1,525,275 1,196,465 1,196,465 308,183 0 3,440 17,187 6,358 10,829 0 1,799 0 12,628 0.33 0.33
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