UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number
October 25, 1997 1-10259
HOMEBASE, INC.
(Formerly Waban 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 (ZipcCode)
(714) 442-5000
(Registrant's telephone number, including area code)
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 .
At November 21, 1997, there were 37,594,036 shares outstanding.
<PAGE>
Part 1. FINANCIAL INFORMATION
HOMEBASE, INC.
(Formerly Waban Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
- ----------------------------------------------------------- --------------------------- ----------------------------------
October 25, October 26, October 25, October 26,
1997 1996 1997 1996
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 368,432 $ 366,410 $1,149,040 $ 1,142,923
Cost of sales, including buying and occupancy costs 289,527 287,973 898,835 889,059
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Gross profit 78,905 78,437 250,205 253,864
Selling, general and administrative expenses 68,635 68,281 213,355 216,261
Store closures and other charges 27,000 - 27,000 -
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Operating income (loss) (16,730) 10,156 9,850 37,603
Interest on debt and capital leases, net 355 2,711 4,528 7,660
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) from continuing operations before
income taxes and extraordinary loss (17,085) 7,445 5,322 29,943
Provision (benefit) for income taxes (6,797) 3,039 2,121 11,843
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) from continuing operations before
extraordinary loss (10,288) 4,406 3,201 18,100
Income from discontinued operations, net of
income taxes of $0, $7,787, $16,496 and $21,276 - 11,620 20,575 33,053
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) before extraordinary loss (10,288) 16,026 23,776 51,153
Extraordinary loss on early extinguishment of debt,
net of income tax benefit of $5,896 - - (8,663) -
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Net income (loss) $ (10,288) $ 16,026 $ 15,113 $ 51,153
=========================================================== =============== ================= ============== =============
Primary earnings (loss) per share:
Income (loss) from continuing operations before
extraordinary loss $ (0.27) $ 0.13 $ 0.09 $ 0.55
Income from discontinued operations - 0.36 0.57 0.99
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) before extraordinary loss (0.27) 0.49 0.66 1.54
Extraordinary loss - - (0.24) -
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Net income (loss) $ (0.27) $ 0.49 $ 0.42 $ 1.54
=========================================================== =============== ================= ============== =============
Fully diluted earnings (loss) per share:
Income (loss) from continuing operations before
extraordinary loss $ (0.27) $ 0.13 $ 0.09 $ 0.54
Income from discontinued operations - 0.33 0.57 0.90
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) before extraordinary loss (0.27) 0.46 0.66 1.44
Extraordinary loss - - (0.24) -
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Net income (loss) $ (0.27) $ 0.46 $ 0.42 $ 1.44
=========================================================== =============== ================= ============== =============
Number of common shares for earnings (loss) per share computations:
Primary 37,556 32,995 35,768 33,224
Fully diluted 37,556 37,499 35,981 37,704
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HOMEBASE, INC.
(Formerly Waban Inc.)
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------- --------------- --------------- --------------
October 25, January 25, October 26,
1997 1997 1996
- ------------------------------------------------------------------- --------------- --------------- --------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,714 $ 16,896 $ 15,860
Accounts receivable (net of allowance for doubtful
accounts of $725, $227 and $297) 35,128 25,261 33,647
Merchandise inventories 326,715 316,538 334,139
Current deferred income taxes 16,439 9,876 12,857
Prepaid expenses 5,161 4,975 5,448
Prepaid federal and state income taxes - 8,768 1,171
Net current assets of discontinued operations - 62,942 115,459
- ------------------------------------------------------------------- --------------- --------------- --------------
Total current assets 387,157 445,256 518,581
Property, net 245,540 249,035 246,784
Property under capital leases, net 5,747 6,090 6,229
Deferred income taxes 14,574 11,300 12,662
Other assets 10,092 4,632 4,894
Net noncurrent assets of discontinued operations - 360,746 355,722
- ------------------------------------------------------------------- --------------- --------------- --------------
Total assets $ 663,110 $ 1,077,059 $ 1,144,872
=================================================================== =============== =============== ==============
LIABILITIES
Current liabilities:
Accounts payable 136,580 84,903 131,710
Restructuring reserve 4,775 2,799 3,569
Accrued expenses and other current liabilities 89,413 69,058 78,322
Accrued federal and state income taxes 2,578 - -
Short-term debt - - 35,000
Current installments of long-term debt 70 12,474 12,472
Obligations under capital leases due within one year 203 180 214
- ------------------------------------------------------------------- --------------- --------------- --------------
Total current liabilities 233,619 169,414 261,287
Long-term debt 7,034 221,018 221,067
Obligations under capital leases, less portion due
within one year 8,716 8,876 8,918
Noncurrent restructuring reserve 8,764 10,738 10,346
Other noncurrent liabilities 41,658 35,088 37,543
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 authorized 190,000,000
shares; issued and outstanding 37,593,829, 33,269,537 and
33,270,685 shares 376 333 333
Additional paid-in capital 373,231 329,719 329,469
Retained earnings (deficit) (10,288) 311,873 286,366
Treasury stock, at cost, 0, 528,596, and 552,784 shares - (10,000) (10,457)
- ------------------------------------------------------------------- --------------- --------------- --------------
Total stockholders' equity 363,319 631,925 605,711
- ------------------------------------------------------------------- --------------- --------------- --------------
Total liabilities and stockholders' equity $ 663,110 $ 1,077,059 $ 1,144,872
=================================================================== =============== =============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HOMEBASE, INC.
(Formerly Waban Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended
- -------------------------------------------------------------------------- -----------------------------------
October 25, October 26,
1997 1996
- -------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,113 $ 51,153
Adjustments to reconcile net income to net cash provided by
operating activities:
Net income from discontinued operations (20,575) (33,053)
Depreciation and amortization 18,482 17,370
Extraordinary loss on extinguishment of debt 14,559 -
(Gain) loss on property disposals 66 864
Amortization of premium on marketable securities - 120
Other non-cash items (net) 213 210
Deferred income taxes (9,837) 3,041
Increase (decrease) in cash due to changes in:
Accounts receivable (9,867) (5,368)
Merchandise inventories (10,177) (35,341)
Prepaid expenses (186) (1,425)
Other assets (386) (588)
Accounts payable 51,677 24,862
Restructuring reserve (253) (13,883)
Accrued expenses and other current liabilities 21,270 4,182
Accrued federal and state income taxes 11,346 160
Other noncurrent liabilities 6,569 883
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by operating activities of:
Continuing operations 88,014 13,187
Discontinued operations 1,559 24,675
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by operating activities $ 89,573 $ 37,862
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (7,694) (20,873)
Sale of marketable securities - 37,927
Maturity of marketable securities - 3,140
Property additions (15,336) (42,253)
Property disposals 416 4,423
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash used in investing activities of:
Continuing operations (22,614) (17,636)
Discontinued operations (23,269) (58,890)
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash used in investing activities (45,883) (76,526)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt, net - 35,000
Repayment of long-term debt (130,728) (12,813)
Debt issuance costs (986) -
Repayment of capital lease obligations (137) (319)
Purchase of treasury stock - (11,392)
Proceeds from sale and issuance of common stock 8,044 10,642
Cash paid to BJ's Wholesale Club, Inc. in spin-off (5,000) -
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by (used in) financing activities of:
Continuing operations (128,807) 21,118
Discontinued operations 71,935 (200)
- -------------------------------------------------------------------------- ----------------- -----------------
Net cash provided by (used in) financing activities (56,872) 20,918
Net decrease in cash and cash equivalents (13,182) (17,746)
Cash and cash equivalents at beginning of year 16,896 33,606
- -------------------------------------------------------------------------- ----------------- -----------------
Cash and cash equivalents at end of period $ 3,714 $ 15,860
========================================================================== ================= =================
Supplemental cash flow information:
Interest paid (including discontinued operations) $ 9,251 $ 10,434
Income taxes paid (including discontinued operations) 29,729 37,179
Non-cash financing and investing activities:
Conversion of long-term debt to stock, net 107,061 -
========================================================================== ================= =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HOMEBASE, INC.
(Formerly Waban Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------- ----------------- ----------------- ----------------- ----------------- ---------------- --------------
Unrealized Total
Common Stock Additional Holding Gains Retained Treasury Stockholders'
Par Value $.01 Paid-In Capital (Losses) Earnings Stock Equity
- ---------------------------- ----------------- ----------------- ----------------- ----------------- ---------------- --------------
Balance, January 27, 1996 $ 333 $ 328,619 $ 22 $ 235,213 $ (9,067) $ 555,120
Net income - - - 51,153 - 51,153
Sale and issuance of
common stock - 850 - - 10,002 10,852
Unrealized holding losses - - (22) - - (22)
Purchase of treasury stock - - - - (11,392) (11,392)
- ---------------------------- ----------------- ----------------- ----------------- ----------------- ----------------- -------------
Balance, October 26, 1996 $ 333 $ 329,469 $ - $ 286,366 $ (10,457) $ 605,711
============================ ================= ================= ================= ================= ================= =============
- ---------------------------- ----------------- ----------------- --------------- ----------------- --------------- -----------------
Unrealized Total
Common Stock Additional Holding Gains Retained Treasury Stockholders'
Par Value $.01 Paid-In Capital (Losses) Earnings Stock Equity
- ------------------------------ -------------- ----------------- ---------------- ----------------- --------------- -----------------
<C> <S> <S> <S> <S> <S> <S>
Balance, January 25, 1997 $ 333 $ 329,719 $ - $ 311,873 $ (10,000) $ 631,925
Net income - - - 15,113 - 15,113
Sale and issuance of
common stock 3 4,224 - - 4,031 8,258
Conversion of 6.5%
debentures 40 101,052 - - 5,969 107,061
Equity transfer in spin-off
of BJ's Wholesale Club, Inc. - (61,764) - (337,274) - (399,038)
- ------------------------------ -------------- ----------------- ---------------- ----------------- --------------- -----------------
Balance, October 25, 1997 $ 376 $ 373,231 $ - $ (10,288) $ - $ 363,319
============================== ============== ================= ================ ================= =============== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
HOMEBASE, INC.
(Formerly Waban Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
As of July 26, 1997, HomeBase, Inc. (the "Company"), formerly known as Waban
Inc. ("Waban"), transferred all of the net assets of its BJ's Wholesale Club
division ("BJ's") to BJ's Wholesale Club, Inc. ("BJI"), a wholly owned
subsidiary. On July 28, 1997, the Company distributed to its stockholders of
record on July 18, 1997, on a pro-rata basis, all of the outstanding common
stock of BJI (the "Distribution").
2. Basis of Presentation
The accompanying consolidated financial statements are unaudited and have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, all adjustments (consisting of
normal and recurring accruals) considered necessary for a fair presentation have
been included. These interim financial statements should be read in conjunction
with the consolidated financial statements and related notes contained in the
Annual Report on Form 10-K for the fiscal year ended January 25, 1997. The
January 25, 1997 balances reported herein are derived from the audited financial
statements included in the Annual Report on Form 10-K for the fiscal year ended
January 25, 1997.
The financial statements as of and for the 39 weeks ended October 25, 1997 and
as of and for the 13 and 39 weeks ended October 26, 1996 have been restated to
present BJ's as a discontinued operation. Corporate 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. Income from
discontinued operations for the 39 weeks ended October 25, 1997 includes
transaction costs of $5.0 million, net of tax, incurred in connection with the
Distribution. The assets and liabilities of BJ's, which have been reclassified
in the balance sheets of prior periods for comparative purposes as net current
and noncurrent assets, consist primarily of merchandise inventories, property
and equipment, accounts payable and accrued expenses.
The results for the first nine months are not necessarily indicative of results
for the full fiscal year because, among other things, the Company's business is
subject to seasonal influences. Sales and profits have typically been lower in
the first and fourth quarters of the fiscal year and higher in the second and
third quarters, which include the most active seasons for home improvement.
The consolidated financial statements of the Company include the financial
statements of the Company's subsidiaries, all of which are wholly owned.
3. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
4. Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year presentation.
5. Discontinued Operations
Net sales from discontinued operations were $1,464.4 million, $697.8 million,
and $2,053.9 million for the 39 weeks ended October 25, 1997 and the 13 and 39
weeks ended October 26, 1996, respectively.
6. Recent Accounting Pronouncements
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was issued, and is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements. Adoption of
this statement will not have a material effect on historical results of
operations.
7. Earnings (Loss) Per Share
Primary and fully diluted loss per common share for the 13 weeks ended October
25, 1997 have been computed by dividing net loss by the weighted average number
of common shares outstanding during the period. Common stock equivalents are
considered anti-dilutive and are excluded from this calculation.
Primary and fully diluted earnings per share for the 39 weeks ended October 25,
1997, and the 13 and 39 weeks ended October 26, 1996 have been calculated by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents and other dilutive securities outstanding in each
period.
8. Pension Plan
The Company's Board of Directors has approved the termination of the Waban Inc.
Retirement Plan (the "Plan") effective July 26, 1997. However, in accordance
with generally accepted accounting principles, the additional cost to terminate
the Plan will not be recognized until the Plan termination is settled. Prior to
the Distribution, the Company contributed to the Plan amounts sufficient to make
the Plan's assets equal to its estimated termination liabilities, based on
actuarial projections. The Company's share of these amounts is included in
prepaid expenses on its balance sheet. The Company expects to record an expense
of approximately $0.5 million, net of taxes, in the fourth quarter of fiscal
1997 or in the first quarter of fiscal 1998, when the Plan termination is
settled.
9. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
October 25, January 25, October 26,
- ----------------------------------------------------------------------------------------------------------
1997 1997 1996
<S> <C> <C> <C>
Land and buildings $ 157,354 $ 156,862 $ 155,133
Leasehold improvements 57,947 58,762 56,086
Furniture, fixtures and equipment 134,018 132,409 130,170
- ----------------------------------------------------------------------------------------------------------
349,319 348,033 341,389
Accumulated depreciation (103,779) (98,998) (94,605)
- ----------------------------------------------------------------------------------------------------------
Total $ 245,540 $ 249,035 $ 246,784
==========================================================================================================
</TABLE>
10. Marketable Securities
The Company classifies its marketable securities as either available for sale or
held-to-maturity securities in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". As of October 26, 1996 there were no marketable securities. As of
October 25, 1997, marketable securities classified as held-to-maturity consisted
of U.S. Treasury securities, which are included in other assets on the balance
sheet at their amortized cost of $7.8 million. These securities were purchased
and deposited in escrow with the trustee of the Company's senior subordinated
notes to be used to retire the debt and pay interest through May 1999.
The contractual maturities of held-to-maturity securities as of October 25, 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
<S> <C>
Less than one year $ 731
1-5 years 7,732
- ---------------------------------------------------------------------------------------
Total $ 8,463
=======================================================================================
</TABLE>
11. Debt
In July 1997, $106.7 million of the Company's 6.5% convertible subordinated
debentures was converted into common stock and the remaining $0.2 million was
redeemed for cash. In July 1997, the Company repaid all of its 9.58% senior
notes due May 31, 1998 totaling $12.0 million, and pursuant to a tender offer,
$93.4 million of its 11% senior subordinated notes due May 15, 2004, replacing
this debt with $96 million in short-term borrowings under its then existing
credit agreement. BJI assumed $72 million of these borrowings at the time of the
Distribution. Results for the 39 weeks ended October 25, 1997 included an
extraordinary loss of $8.7 million, net of tax, related to the early
extinguishment of Company debt, primarily consisting of call premiums and the
write-off of debt issue costs.
A total of $6.6 million of the Company's 11% senior subordinated notes remains
outstanding, which the Company intends to call and repay on May 15, 1999. In
July 1997, the Company purchased U.S. Treasury securities and deposited them in
escrow with the trustee of the notes, to be used to retire the debt and pay
interest through May 1999.
In July 1997, the Company entered into a new $125 million credit agreement ("New
Credit Agreement") with a group of banks which expires July 9, 2000. This
agreement replaced the Company's $150 million credit facility which was
scheduled to expire March 30, 1999, but was terminated immediately following the
Distribution. In October 1997, the New Credit Agreement was amended and the
total facility was reduced to $90 million. The New Credit Agreement includes a
$40 million sub-facility for letters of credit and is secured by inventory and
accounts receivable. The Company is required to pay an annual facility fee which
is currently 0.35% of the total commitment. Interest on borrowings is payable at
the Company's option either at (a) the Eurodollar rate plus a margin, which is
currently 1.45% or (b) the agent bank's prime rate plus a margin, which is
currently 0.2%. The facility fee and borrowing margins are subject to adjustment
based upon the Company's fixed-charge coverage ratio. The credit facility is
subject to certain covenants which include minimum tangible net worth and
fixed-charge coverage requirements, a maximum funded debt-to-capital limitation,
and a prohibition on the payment of cash dividends.
12. Store Closures and Other Charges
In October 1997, the Board of Directors approved an accelerated growth strategy
that includes remodeling the remaining 17 stores in the Company's remodel
program over the following six months and increasing the rate of new store
openings. In connection with this strategy, the Company announced it will close
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, a $3.0 million
increase in the fiscal 1993 restructuring reserve and $1.7 million in asset
impairment charges.
Costs included in the reserve for store closures primarily include lease
obligations on closed facilities and write-downs of fixed assets and other
related settlement costs. The Company expects to close two stores in the fourth
quarter of fiscal 1997 and close a third store by the end of fiscal 1999. The
Company increased the fiscal 1993 restructuring reserve by $3.0 million for
additional lease obligations due to delays in obtaining subleases on terms
acceptable to the Company.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 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 warehouse stores.
The Company updated its analysis in the quarter ended October 25, 1997 and
concluded 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.
13. Stock Option Plans
In connection with the Distribution, all outstanding options issued from the
Company's stock option plans that were held by directors and employees who
transferred to BJI were canceled and all outstanding options held by remaining
directors and employees of the Company were converted based upon a ratio of the
average closing price of the Company's common stock for the 10 days immediately
following the Distribution to the market price of the Company's common stock
before the Distribution. Immediately after conversion, approximately 2.4 million
options were outstanding.
14. Restructuring Reserves
As of January 25, 1997, $13.5 million of the Company's fiscal 1993 restructuring
charge remained accrued on the Company's consolidated balance sheet. During the
first three quarters of fiscal 1997, the Company incurred cash expenditures of
$2.7 million, primarily for lease obligations on closed facilities, and non-cash
charges of $0.3 million for write-downs of fixed assets. As of October 25, 1997,
$13.5 million remained accrued on the Company's balance sheet (including
additions to the reserve described above), consisting primarily of lease
obligations on closed facilities, which extend through 2007.
15. Subsequent Event
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 issue costs. The notes are convertible into approximately 9.8 million
shares of the Company's common stock at a conversion price of $10.2175 per share
at any time after February 15, 1998 and prior to maturity. 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% at maturity, together with accrued interest. Interest is
payable semi-annually on May 1 and November 1 of each year, commencing on May 1,
1998.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Organization and Presentation
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 presented
have been restated to present BJ's as a discontinued operation. Income from
discontinued operations in the 39 weeks ended October 25, 1997 also included
transaction costs of $5.0 million, net of tax, incurred in connection with the
Distribution. The discussion which follows pertains to the continuing operations
of the Company unless otherwise noted.
The Company operates within a conventional 52 or 53 week accounting fiscal year
which ends on the last Saturday in January. The fiscal year ended January 25,
1997 is referred to herein as fiscal 1996. The fiscal year ending January 31,
1998 is referred to herein as fiscal 1997. The 13 weeks ended October 25, 1997
and October 26, 1996 are referred to herein as the third quarter of fiscal 1997
and the third quarter of fiscal 1996, respectively.
The following table presents the results of operations for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
- ----------------------------------------------------------- --------------------------- ----------------------------------
October 25, October 26, October 25, October 26,
Income Statement Data: 1997 1996 1997 1996
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy costs 78.6 78.6 78.2 77.8
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Gross profit 21.4 21.4 21.8 22.2
Selling, general and administrative expenses 18.6 18.6 18.6 18.9
Store closures and other charges 7.3 - 2.3 -
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Operating income (loss) (4.5) 2.8 0.9 3.3
Interest on debt and capital leases, net 0.1 0.8 0.4 0.7
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) from continuing operations before
income taxes and extraordinary loss (4.6) 2.0 0.5 2.6
Provision (benefit) for income taxes (1.8) 0.8 0.2 1.0
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) from continuing operations before
extraordinary loss (2.8) 1.2 0.3 1.6
Income from discontinued operations, net of income tax - 3.2 1.8 2.9
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Income (loss) before extraordinary loss (2.8) 4.4 2.1 4.5
Extraordinary loss on early extinguishment of debt, net
of income tax benefit - - (0.8) -
- ----------------------------------------------------------- --------------- ----------------- -------------- -------------
Net income (loss) (2.8)% 4.4% 1.3% 4.5%
=========================================================== =============== ================= ============== =============
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
Net Sales
Net sales for the 13 weeks ended October 25, 1997 increased 0.6% to $368.4
million from $366.4 million in the comparable prior-year period. Net sales for
the 39 weeks ended October 25, 1997 increased 0.5% to $1,149.0 million from
$1,142.9 million in the comparable prior-year period. The increase in net sales
over these periods was primarily due to new store openings, partially offset by
declines in comparable store sales and store closures. Since the beginning of
fiscal 1996, eight stores have been opened and two stores have been closed.
Comparable store sales declined 1.2% and 1.9% for the 13 and 39 weeks ended
October 25, 1997, respectively. The declines were primarily attributable to
increased competition in many of the markets in which the Company operates.
Cost of Sales
Cost of sales, including buying and occupancy costs, as a percentage of sales
for the 13 weeks ended October 25, 1997 was consistent with the comparable
prior-year period. Cost of sales, including buying and occupancy costs, as a
percentage of sales for the 39 weeks ended October 25, 1997 was 78.2% compared
to 77.8% in the comparable prior-year period. The increase is primarily due to a
combination of slightly lower average selling margins, which were impacted by
competitive conditions, an increase in the provision for inventory shrinkage and
somewhat higher buying and occupancy costs as a percentage of sales, due to
comparable store sales declines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") as a percentage of sales
for the 13 weeks ended October 25, 1997 were consistent with the comparable
prior-year period. SG&A was 18.6% of net sales for the 39 weeks ended October
25, 1997 compared to 18.9.% in the comparable prior-year period. The decrease
was primarily attributable to lower preopening and remodel related costs due to
fewer stores being opened or remodeled in the current year.
In October 1997, the Board of Directors approved an accelerated growth strategy
that includes remodeling the remaining 17 stores in the Company's remodel
program over the following six months and increasing the rate of new store
openings. The Company expects to open between two and four new stores in fiscal
1998 and to open between eight and 10 new stores in each of the following two
fiscal years. As a result, the Company expects to experience higher costs in
connection with these remodels and expansions. In the fourth quarter of fiscal
1997 and in the first quarter of fiscal 1998, the Company expects to incur costs
of approximately $4 million per quarter related to the accelerated remodel
program.
Store Closures and Other Charges
In connection with the Company's accelerated growth strategy, the Board of
Directors 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, a $3.0 million increase in the fiscal 1993 restructuring
reserve and $1.7 million in asset impairment charges.
Costs included in the reserve for store closures primarily include lease
obligations on closed facilities and write-downs of fixed assets and other
related settlement costs. The Company expects to close two stores in the fourth
quarter of fiscal 1997 and close a third store by the end of fiscal 1999. The
Company increased the fiscal 1993 restructuring reserve by $3.0 million for
additional lease obligations due to delays in obtaining subleases at terms
acceptable to the Company.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 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 warehouse stores.
The Company updated its analysis in the quarter ended October 25, 1997 and
concluded that the long-lived assets at two stores were impaired. Accordingly,
the Company estimated the fair value of these assets based on their estimated
salvage value and recorded an impairment charge of $1.7 million, which is
included in store closures and other charges.
Interest Expense
The components of consolidated net interest expense were as follows (in
thousands):
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
- -------------------------------------------- ---------------------------- ----------------------------------
October 25, October 26, October 25, October 26,
1997 1996 1997 1996
- -------------------------------------------- ---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest expense on debt $ 284 $ 4,901 $ 8,501 $ 14,652
Interest and investment income (235) (302) (1,515) (1,478)
- -------------------------------------------- ---------------- ---------------- -------------- --------------
Interest on debt, net 49 4,599 6,986 13,174
Interest on capital leases 306 389 1,066 1,180
- -------------------------------------------- ---------------- ---------------- -------------- --------------
Interest on debt and capital leases, net 355 4,988 8,052 14,354
Less: interest allocated to discontinued
operations - (2,277) (3,524) (6,694)
- -------------------------------------------- ---------------- ---------------- -------------- --------------
Net interest - continuing operations $ 355 $ 2,711 $ 4,528 $ 7,660
============================================= ================ ================ ============== ==============
</TABLE>
Net interest expense from continuing operations for the quarter ended October
25, 1997 was $0.4 million compared to $2.7 million for the comparable prior-year
period. Net interest expense from continuing operations for the nine-months
ended October 25, 1997 was $4.5 million compared to $7.7 million for the
comparable prior-year period. Corporate interest expense was allocated to
discontinued operations based on the ratio of BJ's net assets to the sum of
consolidated net assets plus consolidated debt.
The decline in net interest expense from continuing operations for both periods
is primarily attributed to lower average outstanding debt balances in the 13 and
39 weeks ended October 25, 1997 compared to the comparable prior-year periods.
In July 1997, $106.7 million of the Company's 6.5% convertible subordinated
debentures was converted into common stock and the remaining $0.2 million was
redeemed for cash. Also in July 1997, the Company repaid all of its 9.58% senior
notes due May 31, 1998, totaling $12.0 million, and pursuant to a tender offer,
$93.4 million of its 11% senior subordinated notes due May 15, 2004, replacing
this debt with short-term borrowings under its then existing bank credit
agreement. BJI assumed $72 million of these borrowings at the time of the
Distribution. Partially offsetting these declines in interest expense was a
lower amount of interest capitalized in the current year, compared to the
prior-year periods.
Interest expense from continuing operations for the 13 and 39 weeks ended
October 26, 1996 excludes capitalized interest of $0.2 million and $0.9 million,
respectively.
Income Tax Provision
The income tax provision rate for the nine months ended October 25, 1997 was
39.8% compared to 39.6% in the comparable prior-year period. The increase in the
effective rate is primarily attributed to lower interest income earned on
tax-exempt investments in the current year than in the prior year.
Income (Loss) From Continuing Operations Before Extraordinary Loss
Income (loss) from continuing operations before extraordinary loss for the
quarter ended October 25, 1997 was ($10.3) million, or $(0.27) per share, fully
diluted, compared to $4.4 million, or $0.13 per share, fully diluted, in the
comparable prior-year period. Excluding the store closures and other charges,
income from continuing operations was $6.0 million, or $0.16 per share, fully
diluted. Excluding the store closures and other charges, the improvement in
income from continuing operations is primarily attributable to lower interest
expense in the current year.
Income (loss) from continuing operations before extraordinary loss for the nine
months ended October 25, 1997 was $3.2 million, or $0.09 per share, fully
diluted, compared to $18.1 million, or $0.54 per share, fully diluted, in the
comparable prior-year period. Excluding the store closures and other charges,
income from continuing operations was $19.5 million, or $0.54 per share, fully
diluted. Excluding the store closures and other charges, the improvement in
income (loss) from continuing operations for the nine months ended October 25,
1997 is primarily attributable to lower interest expense and lower SG&A,
partially offset by a lower gross profit percentage.
Income from continuing operations includes all of the corporate overhead
expenses incurred by Waban prior to the Distribution and an allocation of
Waban's historical interest expense. As a result of the Distribution, the
conversion of the convertible subordinated debt into common stock and the
refinancing of $112 million of other indebtedness, income from continuing
operations for periods preceding the Distribution is not comparable to the
Company's income from continuing operations after the Distribution.
Net Income (loss)
Net income (loss) for the quarter ended October 25, 1997 was $(10.3) million, or
$(0.27) per share, fully diluted, compared to $16.0 million, or $0.46 per share,
fully diluted in the comparable prior-year period. Net income for the nine
months ended October 25, 1997 was $15.1 million, or $0.42 per share, fully
diluted, compared to $51.2 million, or $1.44 per share, fully diluted in the
comparable prior-year period. These amounts include income from discontinued
operations for periods prior to the Distribution.
Income from discontinued operations, which includes the net income of BJ's
reduced by $5.0 million of transaction costs, net of tax, incurred in connection
with the Distribution, was $20.6 million, or $0.57 per share, fully diluted, for
the nine months ended October 25, 1997. Income from discontinued operations for
the three and nine months ended October 26, 1996 was $11.6 million, or $0.33 per
share, fully diluted, and $33.1 million, or $0.90 per share, fully diluted,
respectively.
The results for the nine months ended October 25, 1997 include an extraordinary
loss of $8.7 million, net of tax, recorded in July 1997, associated with the
early extinguishment of the Company's 9.58% senior notes due May 31, 1998 and
$93.4 million of its 11% senior subordinated notes due May 15, 2004.
Restructuring Reserves
As of January 25, 1997, $13.5 million of the Company's fiscal 1993 restructuring
charge remained accrued on the Company's consolidated balance sheet. During the
first three quarters of fiscal 1997, the Company incurred cash expenditures of
$2.7 million, primarily for lease obligations on closed facilities, and non-cash
charges of $0.3 million for write-downs of fixed assets. As of October 25, 1997,
$13.5 million remained accrued on the Company's balance sheet (including
additions to the reserve described above), consisting primarily of lease
obligations on closed facilities, which extend through 2007.
Seasonality
The Company's business is subject to seasonal influences. Sales and profits have
typically been lower in the first and fourth quarters of the fiscal year and
higher in the second and third quarters, which include the most active seasons
for home improvement.
Recent Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was issued, and is effective for fiscal years beginning
after December 15, 1997. This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements. Adoption of
this statement will not have a material effect on historical results of
operations.
Pro forma Financial Information
Presented below are tables that recast income from continuing operations on a
pro forma basis to reflect the estimated effects of the Distribution, which
include reductions in administrative expenses and interest costs. On this pro
forma basis, income from continuing operations for the nine months ended October
25, 1997 (which includes the actual results for the quarter ended October 25,
1997 after the Distribution) was $5.4 million, compared to $21.8 million for the
comparable prior-year period. Excluding the store closures and other charges,
pro forma income from continuing operations was $21.6 million.
The following unaudited pro forma financial information for the six quarters
ended July 26, 1997 is based on management's good faith estimate of what the
Company's operating performance would have been as a stand-alone corporation,
and is provided for comparative analytical purposes only. Also shown is the
actual results for the quarter ended October 25, 1997, after the Distribution.
Selling, general, and administrative expenses reflect a pro forma estimate of
costs that the Company would have incurred related to corporate overhead
activities performed by the Waban corporate staff. These costs, estimated at
$5.8 million in the fiscal years ended January 1997 and ending January 1998,
have been allocated evenly between quarters. Pro forma interest expense for all
periods assumes that the capital structure that was established immediately
after the Distribution had been in place for all periods presented. The
components of interest expense are capital lease interest, mortgage interest,
and credit agreement costs, all of which have been spread evenly by quarter, and
bank borrowing interest expense, which has been spread to reflect the typical
seasonal requirements of the business. The average estimated draw under the
revolving credit facility is assumed to be $23 million. These unaudited
financial data do not purport to represent the actual changes in the historical
cash/borrowing position. The provision for income taxes is estimated at 39.8%.
The number of shares used in the calculation of fully diluted earnings per share
is 37.9 million for all periods shown, except for the quarter ended October 25,
1997, which reflects the weighted average shares outstanding of 37.6 million.
Common stock equivalents are considered anti-dilutive and are excluded from this
calculation. All pro forma adjustments are based upon available information and
assumptions that management believes are reasonable under the circumstances.
This information does not purport to represent what the results of operations of
the Company would have actually been if the Distribution had in fact been
consummated in prior periods or at any future date or what the results of
operations of the Company will be for any future period.
The pro forma results for the Company are as follows:
Fiscal Year Ending January 31, 1998
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
- ------------------------------- -------------- --------------- -------------
Q1 Q2 Q3
(Pro forma) (Pro forma) (Actual)
- ------------------------------- -------------- --------------- -------------
<S> <C> <C> <C>
Sales $ 360,204 $ 420,404 $ 368,432
Cost of sales, including
buying and occupancy costs 282,259 327,049 289,527
Selling, general and
administrative expenses 70,642 72,768 68,635
Store closures and other
charges - - 27,000
- ------------------------------- -------------- -------------- --------------
Operating income (loss) 7,303 20,587 (16,730)
Interest on debt and capital
leases, net 1,012 853 355
Provision (benefit) for income
taxes 2,504 7,854 (6,797)
- ------------------------------- -------------- -------------- --------------
Income (loss) from continuing
operations $ 3,787 $ 11,880 $ (10,288)
=============================== ============== ============== ==============
Fully diluted earnings (loss)
per share from continuing
operations $ 0.10 $ 0.31 $ (0.27)
=============================== ============== ============== ==============
</TABLE>
Pro forma Fiscal Year Ended January 25, 1997
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
- ----------------------------------- -------------- -------------- -------------- ----------------- ------------------
Q1 Q2 Q3 Q4 Full Year
- ----------------------------------- -------------- -------------- -------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 352,242 $ 424,271 $ 366,410 $ 309,773 $ 1,452,696
Cost of sales, including
buying and occupancy costs 272,484 328,602 287,973 247,938 1,136,997
Selling, general and
administrative expenses 72,953 74,181 67,878 61,363 276,375
- ----------------------------------- -------------- -------------- -------------- ----------------- ------------------
Operating income 6,805 21,488 10,559 472 39,234
Interest on debt and capital
leases, net 1,012 853 771 1,153 3,789
Provision (benefit) for income
taxes 2,306 8,213 3,896 (272) 14,143
- ----------------------------------- -------------- -------------- -------------- ----------------- ------------------
Income (loss) from continuing
operations $ 3,487 $ 12,422 $ 5,892 $ (409) $ 21,392
=================================== ============== ============== ============== ================= ==================
Fully diluted earnings (loss)
per share from continuing
operations $ 0.09 $ 0.33 $ 0.16 $ (0.01) $ 0.56
=================================== ============== ============== ============== ================= ==================
</TABLE>
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents totaled $3.7 million as of October 25, 1997. Cash flow
from operations and amounts available under the Company's revolving credit
facility are the Company's principal sources of liquidity.
In July 1997, the Company entered into a new $125 million credit agreement ("New
Credit Agreement") with a group of banks which expires July 9, 2000. This
agreement replaced the Company's $150 million credit facility which was
scheduled to expire March 30, 1999, but was terminated immediately following the
Distribution. In October 1997, the New Credit Agreement was amended and the
total facility was reduced to $90 million. The New Credit Agreement includes a
$40 million sub-facility for letters of credit and is secured by inventory and
accounts receivable. The Company is required to pay an annual facility fee which
is currently 0.35% of the total commitment. Interest on borrowings is payable at
the Company's option either at (a) the Eurodollar rate plus a margin, which is
currently 1.45% or (b) the agent bank's prime rate plus a margin, which is
currently 0.2%. The facility fee and borrowing margins are subject to adjustment
based upon the Company's fixed-charge coverage ratio. The credit facility is
subject to certain covenants which include minimum tangible net worth and
fixed-charge coverage requirements, a maximum funded debt-to-capital limitation,
and a prohibition on the payment of cash dividends.
At October 25, 1997, the Company had no borrowings under its Revolving Facility,
and had $15.5 million of letters of credit outstanding. At November 21, 1997,
the Company had $75.7 million available for borrowing under the Revolving
Facility.
During the nine months ended October 25, 1997, net cash provided by operating
activities of continuing operations was $88.0 million compared to $13.2 million
in the comparable prior-year period. The increase in the current year was
primarily attributable to a lower accounts payable-to-inventory ratio at the
beginning of this year as compared to the beginning of last year.
Net cash used in investing activities of continuing operations was $22.6 million
for the nine months ended October 25 1997, compared to $17.6 million in the
prior-year period. Investing activities primarily consist of capital
expenditures and investments in marketable securities.
Year-to-date capital expenditures for property additions for continuing
operations were $15.3 million this year versus $42.3 million in the comparable
prior-year period. During the first nine months of fiscal 1997, the Company
opened two new warehouse stores and closed one warehouse store. In the
comparable prior-year period, the Company opened six new warehouse stores and
closed one store. Capital expenditures for the first nine months of fiscal 1997
also include the remodeling of 10 stores (eight of which have been completed),
compared to capital expenditures for the remodeling of 16 stores (14 of which
had been completed) in the comparable prior-year period. The Company's capital
expenditures are expected to total approximately $35 million to $40 million in
fiscal 1997. The timing of actual store openings and renovations and the amount
of related expenditures could vary from these estimates due, among other things,
to the complexity of the real estate development process.
As a result of the Company's accelerated growth strategy, the Company expects to
incur additional costs of approximately $4 million per quarter in the fourth
quarter of fiscal 1997 and the first quarter of fiscal 1998 related to the
accelerated remodel program. In addition, the Company expects capital
expenditures on these remodels to be approximately $17 million in the aggregate
over these two quarters. The Company expects to finance these capital
expenditures with the proceeds of a $100 million convertible debt offering,
which was completed November 17, 1997.
During the nine months ended October 25 ,1997, the Company had purchases of $7.7
million of marketable securities, compared to net proceeds of $20.2 million in
the comparable prior-year period. Current year purchases of marketable
securities were for U.S. Treasury securities, which the Company deposited in
escrow with the Trustee of its 11% senior subordinated notes to cover interest
and principal payments for the outstanding balance of $6.6 million at October
25, 1997.
Net cash used in financing activities of continuing operations was $128.8
million for the nine months ended October 25, 1997, compared to net cash
provided by financing activities of continuing operations of $21.1 million in
the comparable prior year period. Current year activities primarily consisted of
repayment of $130.7 million in long-term debt, including approximately $12.7
million of call premiums, and cash paid to BJ's of $5.0 million in connection
with the spin-off. Partially offsetting these cash payments were the proceeds
from the sale and issuance of common stock of $8.0 million.
During the second quarter of fiscal 1997, the Company repaid its 9.58% senior
notes totaling $24.0 million (including $12.0 million currently due and $12.0
million due May 15, 1998), and repaid $93.4 million of its 11% senior
subordinated notes, replacing this debt with $96 million of short-term
borrowings under its then existing bank credit facility. BJI assumed $72 million
of these borrowings at the time of the Distribution. A total of $6.6 million of
the Company's 11% senior subordinated notes remains outstanding, which the
Company intends to call and repay on May 15, 1999, with the maturities of the
U.S. Treasury Securities deposited with the trustee of the notes.
During the quarter ended July 26, 1997, $106.7 million of the Company's 6.5%
convertible subordinated debentures was converted into common stock and the
remaining $0.2 million was redeemed for cash.
The Company expects that its current resources, including the Revolving
Facility, together with anticipated cash flow from operations and proceeds from
the $100 million convertible debt offering, will be sufficient to finance its
operations and capital expenditures through January 30, 1999.
Subsequent Event
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, receiving net proceeds of approximately $96
million, net of debt issue costs. The notes are convertible into 9.8 million
shares of the Company's common stock at a conversion price of $10.2175 per share
at any time after February 15, 1998 and prior to maturity. 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% at maturity, together with accrued interest. Interest is
payable semi-annually on May 1 and November 1 of each year, commencing on May 1,
1998. The Company expects to use the proceeds to finance its accelerated growth
strategy as follows: (i) approximately $17 million will be used to remodel 17
existing stores with completion expected in the spring of 1998; (ii)
approximately $25 million and $50 million will be used to fund capital
expenditures in connection the new store opening plan during fiscal 1998 and
fiscal 1999, respectively; and (iii) the remainder will be used for working
capital and other general corporate purposes.
Forward-Looking Information
This report on Form 10-Q contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used in this
report, the words "believe," "estimate," "expect," "anticipate," "plans," and
similar expressions are intended to identify forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Such statements
are subject to certain risks and uncertainties, including those discussed below,
that could cause actual results to differ materially from those expected.
Although the Company believes that comments reflected in such forward-looking
statements are reasonable, they are based on information existing at the time
made. Important factors that could cause actual results to differ materially
from expectations include, but are not limited to, the successful implementation
of the Company's accelerated growth strategy, general economic conditions
prevailing in the Company's markets, competition (including a major competitor's
recently announced expansion plans in California) and the other factors included
in the Company's report on Form 8-K dated November 12, 1997.
<PAGE>
Part 2. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.26 Employment Agreement, dated July 28, 1997 with Allan P. Sherman
11 Statement regarding computation of per share earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
On July 29, 1997, the Company filed a report on Form 8-K, reporting under
Item 5 thereof, announcing that on July 28, 1997, Waban Inc. ("Waban")
announced that it had consummated the spin-off of its BJ's Wholesale Club
division ("BJ's") through a tax-free distribution in the form of a
special dividend to its stockholders.
On August 5, 1997, the Company filed a report on Form 8-K, reporting
under Item 2 thereof, announcing that on July 28, 1997, Waban consummated
the spin-off of BJ's through a tax-free distribution in the form of a
special dividend to its stockholders pursuant to the terms of a
Separation and Distribution Agreement (the "Distribution Agreement"), by
and between Waban and BJ's Wholesale Club, Inc. ("BJI"), a Delaware
corporation and, as of the date of the Distribution Agreement, a wholly
owned subsidiary of Waban. Pursuant to the Distribution Agreement, BJ's
was transferred to BJI and all of the outstanding shares of BJI Common
Stock were distributed, on a one-for-one basis, to the holders of Waban
Common Stock. In accordance with the transactions contemplated by the
Distribution Agreement and previously announced plans, Waban changed its
name to HomeBase, Inc., effective 5:00 p.m. Eastern time, July 28, 1997.
As of Tuesday, July 29, 1997, HomeBase, Inc. Common Stock began trading
on the New York Stock Exchange under the symbol "HBI."
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeBase, Inc.
--------------------------
Date: December 8, 1997 /s/ ALLAN P. SHERMAN
---------------- --------------------------
Allan P. Sherman
President and
Chief Executive Officer
Date: December 8, 1997 /s/ WILLIAM B. LANGSDORF
---------------- ------------------------
William B. Langsdorf
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Allan P. Sherman
EMPLOYMENT AGREEMENT
AGREEMENT dated as of July 28, 1997 between Allan P. Sherman of 2198
Ruby Place, Laguna Beach, California 92651 ("Executive") and HomeBase, Inc., a
Delaware corporation (the "Company"), whose principal office is in Irvine,
California.
RECITALS
The Company desires that Executive serve as President and Chief
Executive Officer of the Company and Executive is willing to serve in such
capacity.
The Company and Executive deem it desirable to enter into this
Agreement.
AGREEMENT
In consideration of the mutual agreements hereinafter contained, the
parties agree as follows:
1. EFFECTIVE DATE; TERM OF AGREEMENT; DEFINITIONS. This
----------------------------------------------
Agreement shall become effective as of July 28, 1997 (the
"Effective Date"). This Agreement shall supersede any existing
employment agreement between Executive and the Company or any of
its Subsidiaries. Notwithstanding the foregoing, the Change of
Control Severance Agreement between the Company and Executive of
even date herewith (the "Change of Control Agreement"), shall
remain in full force and effect. The employment shall continue
on the terms provided herein until July 31, 1998 and thereafter
for an unspecified period until terminated by either Executive or
the Company, subject to earlier termination as provided herein
(such period of employment hereinafter called the "Employment
Period"). The terms defined in Exhibit A hereto are used as so
defined.
2. SCOPE OF EMPLOYMENT.
(a) Nature of Services. Executive shall diligently perform the
duties and the responsibilities of President and Chief Executive Officer of the
Company and such additional executive duties and responsibilities as shall from
time to time be agreed by Executive and the Board of Directors.
(b) Extent of Services. Except for illnesses and vacation
periods, Executive shall devote substantially all his working time and attention
and his best efforts to the performance of his duties and responsibilities under
this Agreement. However, Executive may (a) make any passive investments where he
is not obligated or required to, and shall not in fact, devote any managerial
efforts, (b) participate in charitable or community activities or in trade or
professional organizations or (c) subject to approval of the Board, hold
<PAGE>
directorships in public companies, except only that the Board shall have the
right to limit such services as a director or such participation whenever the
Board shall believe that the time spent on such activities infringes in any
material respect upon the time required by Executive for the performance of his
duties under this Agreement or is otherwise incompatible with those duties.
3. COMPENSATION AND BENEFITS.
(a) Base Salary. Executive shall be paid a base salary at the
annualized rate of not less than $520,000 per year, to be reviewed annually by
the Committee (the "Base Salary"). Base Salary shall be payable in such manner
and at such times as the Company shall pay base salary to other executive
employees.
(b) MIP Awards. Executive shall be eligible to receive awards under the
Company's Management Incentive Plan ("MIP") applicable to Executive. In each
fiscal year, Executive shall be eligible to earn up to a specified percentage of
his Base Salary as a Target Award or as a Maximum Award, as the case may be. The
Target Award shall equal 50% of the Executive's Base Salary, and the Maximum
Award shall not exceed $1,000,000 or, if less, 100% of Executive's Base Salary
annualized as of the beginning of the applicable performance period.
(c) Policies and Fringe Benefits. Executive shall be subject to Company
policies applicable to its executives generally and Executive shall be entitled
to receive all such fringe benefits as the Company shall from time to time make
available to other executives generally (subject to the terms of the applicable
fringe benefits plan).
(d) Real Estate Assistance. In connection with Executive's relocation
in 1993 from Massachusetts to California, the Company agreed to extend to
Executive an interest-free loan of $700,000 for the purchase by Executive of a
residence in California. The current loan balance is $400,000 and the Company
shall forgive $100,000 principal outstanding amount of the loan on each of
January 25, 1998, 1999, 2000 and 2001, whether or not Executive shall then be
employed hereunder. In addition, the Company shall pay for Executive's benefit a
total of $248,000 of federal and state withholding taxes (the "Loan Cash
Payment"). The Loan Cash Payment shall be paid in installments on one or more
dates of forgiveness of principal in an amount proportionate to the amount of
the Loan which Executive recognizes as forgiven on his federal tax return for
any year (so that the Loan Cash Payment would be $62,000 in each of four years
if such tax recognition occurred in equal annual amounts over four years). The
loan shall automatically be accelerated and become due 60 days after termination
in the event Executive shall voluntarily terminate
2
<PAGE>
his employment hereunder or shall be terminated by the Company for Cause. The
loan and the Company's obligation to make Loan Cash Payments shall remain in
effect following termination for any other reason, including but not limited to
a Qualified Termination pursuant to the Change of Control Agreement. The loan is
secured by a valid and perfected first mortgage on Executive's residence in
California. The net proceeds from any sale of such residence shall be applied to
reduce or eliminate the loan and such net proceeds shall be subsequently
reloaned by the Company to Executive on a similar secured basis by the Company
at the closing of Executive's subsequent purchase of another residence within or
outside California. Such reloan shall have the same terms and maturity date as
the original loan and shall be treated as constituting part of the original
loan, if any part of the original loan is then outstanding. Upon a reloan,
Executive shall receive credit for any debt forgiveness and Loan Cash Payments
which would have occurred had the loan been continuously outstanding. Such
repayment and relending provisions shall apply to all subsequent sales and
purchases of residences by Executive.
4. TERMINATION OF EMPLOYMENT; IN GENERAL.
(a) The Company shall have the right to end the Employment Period (and
thereby terminate Executive's employment) at any time, with or without notice,
and for any reason with or without Cause.
(b) Unless otherwise prohibited by law, the Employment Period shall
terminate when Executive becomes Disabled. In addition, if by reason of
Incapacity Executive is unable to perform his duties for at least six continuous
months, the Employment Period will be terminated for Incapacity upon written
notice by the Company to Executive.
(c) Whenever the Employment Period shall terminate, Executive shall
resign all offices or other positions he shall hold with the Company and any
affiliated corporations, including any position on the Board.
5. BENEFITS UPON TERMINATION OF EMPLOYMENT.
(a) Certain Terminations. If the Employment Period shall have
terminated prior to, on or after July 31, 1998 (i) by reason of death,
Disability or Incapacity of Executive, or (ii) by termination by the Company for
any reason other than Cause, then all compensation and benefits for Executive
shall be as follows:
(i) For 52 weeks after such termination, the Company will
continue to pay to Executive Base Salary at the rate in effect at
termination of employment. Base Salary shall be
3
<PAGE>
paid for the first three months of the period without reduction for
compensation earned from other employment or self-employment, and shall
thereafter be reduced by such compensation earned from other employment
or self-employment.
(ii) Until the expiration of the period of Base Salary
payments described in (i) above, except to the extent that Executive
shall obtain the same from another employer or from self-employment,
the Company will provide such medical and hospital insurance and life
insurance for Executive and his family, comparable to the insurance
provided for executives generally, as the Company shall determine, and
upon the same terms and conditions as the same shall be provided for
other Company executives generally; provided, however, that in no event
shall such benefits or the terms and conditions thereof be less
favorable to Executive than those afforded to him as of the date of
termination.
(iii) The Company will pay to Executive, without offset for
compensation earned from other employment or self-employment, the
following amounts under the Company's MIP applicable to Executive:
o First, if not already paid, any amounts to which Executive is
entitled under MIP for the fiscal year of the Company ended
immediately prior to Executive's termination of employment.
These amounts will be paid at the same time as other awards
for such prior year are paid.
o Second, such amount as Executive would have earned under MIP
if Executive's employment had continued until the end of the
fiscal year in which termination of employment occurs
(prorated for Executive's period of service during such year
prior to termination). This amount will be paid at the same
time as other MIP awards for the year of termination are paid.
In addition, the Company will pay to Executive such amounts as
Executive shall have deferred (but not received) under the Company's
General Deferred Compensation Plan in accordance with the provisions of
that Plan.
(iv) Executive shall also be entitled to payments or benefits
under other plans of the Company to the extent that such plans provide
benefits following a termination of employment.
4
<PAGE>
(v) If termination occurs by reason of Incapacity or
Disability, Executive shall be entitled to such compensation, if any,
as is payable pursuant to the Company's long-term disability plan or
any successor Company disability plan. Any payments made to Executive
under any long-term disability plan of the Company with respect to the
salary continuation period in clause (i) above shall be offset against
such salary continuation payments and to the extent not so offset,
Executive shall promptly make reimbursement payments to the Company of
such disability payments.
(b) Certain Voluntary Terminations; Termination for Cause; Violation of
Certain Agreements. If Executive should end his employment voluntarily at any
time or if the Company should at any time end Executive's employment for Cause,
or, notwithstanding (a) above, if Executive should at any time violate the
provisions of Section 6, all compensation and benefits otherwise payable
pursuant to this Agreement shall cease, other than (x) such amounts as Executive
shall have deferred (but not received) under the Company's General Deferred
Compensation Plan in accordance with the provisions of that Plan, and (y) any
payments or benefits under the Company's 401(k) Savings Plan to the extent that
such plan provides benefits following a termination of employment. The Company
does not waive any rights, including rights it may have for damages or for
injunctive relief.
(c) Benefits Upon Change of Control. Upon a Change of Control (as
defined in the Change of Control Agreement) any stock options then held by
Executive shall automatically become fully exercisable and all restrictions and
conditions, including vesting conditions, applicable to any shares of restricted
stock (including Performance-Accelerated Restricted Stock) then held by
Executive shall be deemed automatically waived. Following a Change of Control
(as defined in the Change of Control Agreement), any rights of Executive under
this Agreement or any other agreement or plan with respect to uncompleted MIP
periods or cycles shall be governed solely by the Change of Control Agreement.
Upon a Qualified Termination (as defined in the Change of Control Agreement),
all rights of Executive with respect to salary continuation, life insurance,
medical insurance and disability benefits and auto allowance or auto lease
benefits shall be governed solely by the Change of Control Agreement but Section
3(d) hereof shall remain in effect notwithstanding the occurrence of a Change of
Control or Qualified Termination.
6. AGREEMENT NOT TO SOLICIT OR COMPETE.
(a) Upon the termination of employment at any time for any reason, then
for a period of two years after the termination of the Employment Period,
Executive shall not under any
5
<PAGE>
circumstances employ, solicit the employment of, or accept unsolicited the
services of, any "protected person" or recommend the employment of any
"protected person" to any other business organization. A "protected person"
shall be a person known by Executive (i) to be employed by the Company or its
Subsidiaries or (ii) to have been employed by Company or its Subsidiaries within
six months prior to the commencement of conversations with such person with
respect to employment.
As to (i) each "protected person" to whom the foregoing applies (ii)
each limitation on (A) employment, (B) solicitation and (C) unsolicited
acceptance of services of each "protected person" and (iii) each month of the
period during which the provisions of this Subsection (a) apply to each of the
foregoing, the provisions set forth in this Subsection (a) are deemed to be
separate and independent agreements and in the event of unenforceability of any
such agreement, such unenforceable agreement shall be deemed automatically
deleted from the provisions hereof and such deletion shall not affect the
enforceability of any other provision of this Subsection (a) or any other term
of this Agreement.
(b) During the course of his employment, Executive will have learned
many trade secrets of the Company and will have had access to confidential
information and business plans of the Company. Therefore, if Executive should
end his employment voluntarily at any time, including by reason of retirement or
disability, or if the Company should end Executive's employment at any time for
Cause, then for a period of two years thereafter, Executive will not engage,
either as a principal, employee, partner, consultant or investor (other than a
less-than-1% stock interest in a corporation), in a business which is a
competitor of the Company (a "Competitive Business"). A business shall be deemed
a Competitive Business if it shall operate a chain of home improvement stores
(such as Home Depot, Lowe's, Eagle Hardware, Orchard Supply & Hardware, or
Builders Square) that includes a store located within 10 miles of any "then
existing" HomeBase warehouse store. The term "then existing" in the previous
sentence shall refer to any such store that is, at the time of termination of
the Employment Period, operated by the Company or any of its subsidiaries or
divisions or under lease for operation as aforesaid. Nothing herein shall
restrict the right of Executive to engage in a business that operates
exclusively a chain of membership warehouse clubs, conventional or full mark-up
department stores, general merchandise discount department stores, or apparel
stores. In addition, if during a period of salary continuation under Section
5(a)(i) following Executive's termination by the Company for any reason other
than Cause, Executive so engages in a Competitive Business, Executive's rights
to any further salary continuation or benefits continuation under Sections
5(a)(i) and 5(a)(ii) shall terminate. Executive agrees that if, at any time,
pursuant to action of any court or administrative or governmental body, the
operation of
6
<PAGE>
any part of this paragraph shall be determined to be unlawful or otherwise
unenforceable, then the coverage of this paragraph shall be deemed to be
restricted as to duration, geographical scope or otherwise, to the extent, and
only to the extent, necessary to make this paragraph lawful and enforceable in
the particular jurisdiction in which such determination is made.
(c) During the Employment Period and upon termination for any reason,
Executive shall keep confidential and not disclose Company plans or other
confidential or proprietary information of the Company to any unauthorized
person unless legally required to do so, in which case Executive will first
notify the Company and cooperate with the Company to obtain a judicial or
administrative order protecting such confidentiality. If the Employment Period
terminates, Executive agrees (i) to notify the Company promptly upon his
securing employment or becoming self-employed during any period when Executive's
compensation from the Company shall be subject to reduction or his benefits
provided by the Company shall be subject to termination as provided in Section 5
and (ii) to furnish to the Company written evidence of his compensation earned
from any such employment or self-employment as the Company shall from time to
time reasonably request. In addition, upon termination of the Employment Period
for any reason other than the death of Executive, Executive shall immediately
return all Company property and all written trade secrets, confidential
information and business plans of the Company and shall execute a certificate
certifying that he has returned all such items in his possession or under his
control. In the event of the death of Executive, Executive's estate shall comply
with this obligation.
7. ASSIGNMENT. The rights and obligations of the Company (including,
without limitation, the provisions of Section 3(d)) shall inure to the benefit
of and shall be binding upon the successors and assigns of the Company. The
rights and obligations of Executive are not assignable except only that payments
payable to him after his death shall be made by devise or descent.
8. NOTICES. All notices and other communications required hereunder
shall be in writing and shall be given by mailing the same by certified or
registered mail, return receipt requested, postage prepaid. If sent to the
Company, the same shall be mailed to the Company at 3345 Michelson Drive,
Irvine, CA 92612, Attention: Chairman of the Board, or such other address as the
Company may hereafter designate by notice to Executive; and if sent to
Executive, the same shall be mailed to Executive at 2198 Ruby Place, Laguna
Beach, CA 92651 or at such other address as Executive may hereafter designate by
notice to the Company.
9. WITHHOLDING. Anything to the contrary notwithstanding, all payments
required to be made by the Company hereunder to Executve shall be subject to the
withholding of such amounts, if any, relating to tax and other payroll
deductions as
7
<PAGE>
the Company may reasonably determine it should withhold pursuant
to any applicable law or regulation.
10. GOVERNING LAW. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and construed in accordance with the
domestic substantive laws of the State of California without giving effect to
any choice or conflict of laws rule or provision that would cause the
application of the domestic substantive laws of any other jurisdiction.
11. CONSENT TO JURISDICTION, ETC. Each party hereto (i) irrevocably
submits to the nonexclusive jurisdiction of the state courts of the State of
California and to the nonexclusive jurisdiction of the United States District
Court for the Central District of California for the purpose of any suit,
action, or other proceeding arising out of or based upon this Agreement or the
subject matter hereof or in any way connected with or related or incidental to
the dealings of either party hereto in connection with any of the above; (ii)
agrees that any such proceeding shall be brought or maintained only in such
courts; (iii) waives to the extent not prohibited by applicable law, and agrees
not to assert (by way of motion, as a defense, or otherwise) in any such
proceeding, any claim that it or he is not subject personally to the
jurisdiction of the above-named courts, that it or he is immune from
extraterritorial injunctive relief or other injunctive relief, that its or his
property is exempt or immune from attachment or execution, that any such
proceeding may not be properly brought or maintained in one of the above-named
courts, that any such proceeding brought or maintained in one of the above-named
courts should be dismissed on grounds of forum non conveniens, should be
transferred to any court other than one of the above-named courts, or should be
stayed by reason of the pendency of some other proceeding in any court other
than one of the above-named courts, or that this Agreement or the subject matter
hereof may not be enforced in or by any of the above-named courts; (iv) agrees
that service of process in any such proceeding may be made in any manner
permitted by the law applicable in the court where any such proceeding is
brought or maintained or by registered or certified mail, return receipt
requested, at its or his principal place of business to its or his notice
address for purpose of this Agreement; (v) agrees that service of process made
in accordance with clause (iv) is reasonably calculated to give actual notice of
any such proceeding; and (vi) waives and agrees not to assert (by way of motion,
as a defense, or otherwise) in any such proceeding any claim that service of
process made in accordance with clause (iv) does not constitute good and
sufficient service of process.
8
<PAGE>
12. SEVERABILITY. In the event that any provision of this Agreement
shall be determined to be invalid or unenforceable, such provision shall be
enforceable in any other jurisdiction in which valid and enforceable and in any
event the remaining provisions shall remain in full force and effect to the
fullest extent permitted by law.
13. AMENDMENT OF MODIFICATION, WAIVER. This Agreement may not be
amended unless agreed to in writing by Executive and the Company. No waiver by
either party of any breach of this Agreement shall be deemed a waiver of a
subsequent breach.
14. ENTIRE AGREEMENT. This Agreement, including Exhibit A incorporated
herein, supersedes all prior written or oral agreements between the Company and
Executive and represents the entire agreement between the parties relating to
the terms of the Executive's employment by the Company, except the Change of
Control Agreement.
/s/ Allan Sherman
-----------------
Executive
HOMEBASE, INC.
By: /s/ Herbert J. Zarkin
---------------------
Herbert J. Zarkin
Chairman of the Board
9
<PAGE>
EXHIBIT A
Certain Definitions
In this Agreement, the following terms shall have the following meanings:
(a) "Base Salary" means, for any period, the amount
described in Section 3(a).
(b) "Board" means the Board of Directors of the Company.
(c) "Committee" means the Executive Compensation Committee of the
Board.
(d) "Cause" means dishonesty of Executive in the performance of his
duties, conviction of a felony (other than a conviction arising solely under a
statutory provision imposing criminal liability upon Executive on a per se basis
due to the Company offices held by Executive, so long as any act or omission of
Executive with respect to such matter was not taken or omitted in contravention
of any applicable policy or directive of the Board), gross neglect of duties
(other than as a result of Incapacity, Disability or death), or conflict of
interest which conflict shall continue for 30 days after the Company gives
written notice to Executive requesting the cessation of such conflict.
(e) "Date of Termination" means the date on which Executive's
employment is terminated.
(f) "Disability" has the meaning given it in the Company's long-term
disability plan. Executive's employment shall be deemed to be terminated for
Disability on the date on which Executive is entitled to receive long-term
disability compensation pursuant to such long-term disability plan.
(g) "Incapacity" means a disability (other than Disability within the
meaning of (f) above) or other impairment of health that renders Executive
unable to perform his duties to the reasonable satisfaction of the Board.
(h) "Stock" means the common stock, $0.01 par value, of the Company.
(i) "Subsidiary" means any corporation in which the Company owns,
directly or indirectly, 50 percent or more of the total combined voting power of
all classes of stock.
10
<PAGE>
EXHIBIT 11
HOMEBASE, INC.
(FORMERLY WABAN, INC.)
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) 13 Weeks Ended 39 Weeks Ended
- ---------------------------------------------------------------------------------------------------
October 25, October 26, October 25, October 26,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C>
Net income (loss) as reported $ (10,288) $ 16,026 $ 15,113 $ 51,153
===================================================================================================
Net income (loss) used for
primary computation (10,288) 16,026 15,113 51,153
Add (where dilutive):
Tax effected interest and
amortization of debt expense
on convertible debt - 1,085 - 3,256
- ---------------------------------------------------------------------------------------------------
Net income (loss) used for
fully diluted computation $ (10,288) $ 17,111 $ 15,113 $ 54,409
===================================================================================================
Weighted average number of
common shares outstanding 37,556 32,711 35,162 32,876
Add (where dilutive):
Effect of stock options
treated as equivalents by
applying the treasury stock
method - 284 606 348
- --------------------------------------------------------------------------------------------------
Number of common shares for
primary earnings (loss) per
share computations 37,556 32,995 35,768 33,224
Add (where dilutive):
Effect of additional stock
options treated as equivalents
for fully diluted computations
due to the use of period-end
market price when higher than
average price - 116 213 92
Assumed exercise of convertible
securities - 4,388 - 4,388
- --------------------------------------------------------------------------------------------------
Number of common shares for
fully diluted earnings (loss)
per share computations 37,556 37,499 35,981 37,704
==================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-25-1997
<CASH> 3,714
<SECURITIES> 0
<RECEIVABLES> 35,853
<ALLOWANCES> (725)
<INVENTORY> 326,715
<CURRENT-ASSETS> 387,157
<PP&E> 359,015
<DEPRECIATION> 107,728
<TOTAL-ASSETS> 663,110
<CURRENT-LIABILITIES> 233,619
<BONDS> 15,750
0
0
<COMMON> 376
<OTHER-SE> 362,943
<TOTAL-LIABILITY-AND-EQUITY> 663,110
<SALES> 1,149,040
<TOTAL-REVENUES> 1,149,040
<CGS> 898,835
<TOTAL-COSTS> 898,835
<OTHER-EXPENSES> 240,355
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 4,528
<INCOME-PRETAX> 5,322
<INCOME-TAX> 2,121
<INCOME-CONTINUING> 3,201
<DISCONTINUED> 20,575
<EXTRAORDINARY> (8,663)
<CHANGES> 0
<NET-INCOME> 15,113
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
