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
August 1, 1998 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)
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 suchreports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
At August 29,1998, there were 37,879,622 shares outstanding.
<PAGE>
Part 1. FINANCIAL INFORMATION
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 424,625 $ 420,404 $ 773,521 $ 780,608
Cost of sales, including buying and
occupancy costs 327,208 327,049 599,166 609,308
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Gross profit 97,417 93,355 174,355 171,300
Selling, general and administrative
expenses 73,036 73,276 148,705 144,720
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Operating income 24,381 20,079 25,650 26,580
Interest on debt and capital leases, net 649 1,409 1,767 4,173
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Income from continuing operations before
income taxes and extraordinary loss 23,732 18,670 23,883 22,407
Provision for income taxes 9,039 7,452 9,099 8,918
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Income from continuing operations before
extraordinary loss 14,693 11,218 14,784 13,489
Income from discontinued operations, net of
income taxes of $0, $11,055, $0 and
$16,496 - 12,043 - 20,575
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Income before extraordinary loss 14,693 23,261 14,784 34,064
Extraordinary loss on early extinguishment
of debt, net of income tax benefit of $0, - (8,663) - (8,663)
$5,896, $0 and $5,896
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Net income $ 14,693 $ 14,598 $ 14,784 $ 25,401
============================================== ================= ================= ================ =================
Basic net income per share:
Income from continuing operations before
extraordinary loss $ 0.39 $ 0.32 $ 0.39 $ 0.40
Income from discontinued operations - 0.34 - 0.61
Extraordinary loss - (0.24) - (0.26)
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Net income $ 0.39 $ 0.42 $ 0.39 $ 0.75
============================================== ================= ================= ================ =================
Diluted net income per share:
Income from continuing operations before
extraordinary loss $ 0.32 $ 0.31 $ 0.35 $ 0.39
Income from discontinued operations - 0.34 - 0.60
Extraordinary loss - (0.24) - (0.25)
- ---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Net income $ 0.32 $ 0.41 $ 0.35 $ 0.74
============================================== ================= ================= ================ =================
Shares used in computation of net income per share:
Basic 37,860 35,135 37,812 33,964
Diluted 48,111 35,660 47,999 34,477
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HOMEBASE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------- ---------------- ----------------- ---------------
August 1, January 31, July 26,
1998 1998 1997
- ----------------------------------------------------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 89,150 $ 44,603 $ 13,070
Marketable securities 13,993 5,515 -
Accounts receivable (net of allowance for doubtful
accounts of $333, $293 and $627) 29,099 27,781 34,050
Merchandise inventories 317,946 314,188 305,295
Current deferred income taxes 12,349 11,973 11,463
Prepaid expenses and other current assets 15,293 9,857 5,090
Prepaid and refundable income taxes - 10,265 1,096
- ----------------------------------------------------------------- ---------------- ----------------- ---------------
Total current assets 477,830 424,182 370,064
Property, net 255,097 258,697 244,128
Property under capital leases, net 5,417 5,637 5,856
Deferred income taxes 13,539 13,965 8,882
Other assets 6,353 13,127 10,140
- ----------------------------------------------------------------- ---------------- ----------------- ---------------
Total assets $ 758,236 $ 715,608 $ 639,070
================================================================= ================ ================= ===============
LIABILITIES
Current liabilities:
Accounts payable $ 126,928 $ 96,122 $ 113,663
Restructuring reserve 6,467 6,151 2,932
Accrued expenses and other current liabilities 77,499 80,783 62,134
Accrued income taxes 2,397 - -
Current installments of long-term debt 6,713 72 69
Obligations under capital leases due within one year 265 226 181
- ----------------------------------------------------------------- ---------------- ----------------- ---------------
Total current liabilities 220,269 183,354 178,979
Long-term debt 100,333 107,015 31,052
Obligations under capital leases, less portion due
within one year 8,513 8,650 8,778
Noncurrent restructuring reserve 4,868 6,537 9,135
Other noncurrent liabilities 49,787 50,385 37,579
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized
190,000,000 shares; issued and outstanding 37,879,622,
37,707,372 and 37,484,937 shares 379 377 375
Additional paid-in capital 373,476 373,456 373,172
Unrealized holding gain (loss) (1) 6 -
Retained earnings (deficit) 612 (14,172) -
- ----------------------------------------------------------------- ---------------- ----------------- ---------------
Total stockholders' equity 374,466 359,667 373,547
Total liabilities and stockholders' equity $ 758,236 $ 715,608 $ 639,070
================================================================= ================ ================= ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
26 Weeks Ended
- --------------------------------------------------------------------------------- ----------------------------------
August 1, July 26,
1998 1997
- --------------------------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,784 $ 25,401
Adjustments to reconcile net income to net cash provided by operating
activities:
Net income from discontinued operations - (20,575)
Depreciation and amortization 13,523 12,023
Extraordinary loss - 8,663
(Gain) loss on property disposals 149 (116)
Amortization of discount on marketable securities (42) -
Other non-cash items 314 663
Deferred income taxes 50 831
Increase (decrease) in cash due to changes in:
Accounts receivable (3,702) (8,789)
Merchandise inventories (3,758) 11,243
Prepaid expenses and other current assets 1,877 (115)
Other assets (1,113) (2,306)
Accounts payable 30,806 28,760
Restructuring reserve (1,353) (1,530)
Accrued expenses and other current liabilities 8,276 (9,408)
Accrued income taxes 13,077 15,762
Other noncurrent liabilities (598) 2,491
- --------------------------------------------------------------------------------- ---------------- -----------------
Net cash provided by operating activities of:
Continuing operations 72,290 62,998
Discontinued operations - 7,455
- --------------------------------------------------------------------------------- ---------------- -----------------
Net cash provided by operating activities 72,290 70,453
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (12,447) (7,694)
Sale of marketable securities 1,504 -
Maturity of marketable securities 2,865 -
Property additions (20,200) (8,555)
Property disposals 282 309
- --------------------------------------------------------------------------------- ---------------- -----------------
Net cash used in investing activities of:
Continuing operations (27,996) (15,940)
Discontinued operations - (23,269)
- --------------------------------------------------------------------------------- ---------------- -----------------
Net cash used in investing activities (27,996) (39,209)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short term debt, net - 24,000
Repayment of long-term debt (41) (130,712)
Repayment of capital lease obligations (98) (97)
Debt issuance costs (250) (986)
Proceeds from sale and issuance of common stock 642 5,790
Cash paid to BJ's Wholesale Club, Inc. in spin-off - (5,000)
- --------------------------------------------------------------------------------- ---------------- -----------------
Net cash provided by (used in) financing activities of:
Continuing operations 253 (107,005)
Discontinued operations - 71,935
- --------------------------------------------------------------------------------- ---------------- -----------------
Net cash provided by (used in) financing activities 253 (35,070)
Net increase (decrease) in cash and cash equivalents 44,547 (3,826)
Cash and cash equivalents at beginning of year 44,603 16,896
- --------------------------------------------------------------------------------- ---------------- -----------------
Cash and cash equivalents at end of period $ 89,150 $ 13,070
================================================================================= ================ =================
Supplemental cash flow information (prior year includes discontinued
operations):
Interest paid $ 970 $ 9,251
Income taxes paid (refunds received) (4,135) 29,550
Non-cash financing and investing activities:
Tax benefit of employee stock options $ 415 $ 2,194
Conversion of long-term debt to stock, net - 107,061
================================================================================= ================ =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HOMEBASE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Additional Holding Retained Total
Paid-In Gains Earnings Stockholders'
Common Stock Capital (Losses) (Deficit) Treasury Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 25, 1997 33,270 $ 333 $ 329,719 $ - $ 311,873 (529) $ (10,000) $ 631,925
Net income - - - - 25,401 - - 25,401
Exercise of stock options 153 2 1,757 - - 213 4,031 5,790
Income tax benefit of stock options - - 2,194 - - - - 2,194
Amortization of restricted stock grants - - 214 - - - - 214
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, July 26, 1997 37,485 $ 375 $ 373,172 $ - $ - - $ - $ 373,547
====================================== ========== ========== ============ =========== ============ ======== =========== ============
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Additional Holding Retained Total
Paid-In Gains Earnings Stockholders'
Common Stock Capital (Losses) (Deficit) Treasury Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1998 37,707 $ 377 $ 373,456 $ 6 $ (14,172) - $ - $ 359,667
Net income - - - - 14,784 - - 14,784
Unrealized holding gains (losses) - - - (7) - - - (7)
Exercise of stock options 181 2 640 - - - - 642
Income tax benefit of stock options - - 415 - - - - 415
Amortization of restricted stock grants - - 314 - - - - 314
Cancellation of restricted stock grants (8) - - - - - - -
Equity transfer adjustment related to
spin-off of BJ's Wholesale Club, Inc. - - (1,349) - - - - (1,349)
- -------------------------------------- ---------- ---------- ------------ ----------- ------------ -------- ----------- ------------
Balance, August 1, 1998 37,880 $ 379 $ 373,476 $ (1) $ 612 - $ - $ 374,466
====================================== ========== ========== ============ =========== ============ ======== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying interim 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
31, 1998. The January 31, 1998 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 31, 1998.
The results for the interim periods 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
sales.
The fiscal years ending January 30, 1999 and January 31, 1998 are referred to
herein as "fiscal 1998" and "fiscal 1997", respectively. The 13 weeks ended
August 1, 1998 and July 26, 1997 are referred to herein as the "second quarter
of fiscal 1998" and the "second quarter of fiscal 1997", respectively.
The consolidated financial statements of the Company include the financial
statements of the Company's subsidiaries, all of which are wholly owned.
2. 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.
3. Reclassifications
Certain prior period amounts have been reclassified to conform to the current
year presentation.
4. New Accounting Standards
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. It is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company currently does not have any
derivative financial instruments and does not currently employ any hedging
activities.
5. Discontinued Operations
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").
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The financial statements as of and for the 13 and 26 weeks ended July 26, 1997
have been restated to present BJ's as a discontinued operation. Corporate
interest expense for the 13 and 26 weeks ended July 26, 1997 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 at the time of the
distribution.
Net sales from discontinued operations were $1,464.4 million for the 26 weeks
ended July 26, 1997.
6. Change in Accounting Principle
In the first quarter of fiscal 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), Accounting for the
Costs of Start-Up Activities, which requires entities to expense as incurred
start-up and pre-opening costs that may not otherwise be capitalized as
long-lived assets. The Company adopted SOP 98-5 in the first quarter of fiscal
1998, which did not have an effect on net income or net income per share.
In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") was issued. SOP
98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use. It is effective for fiscal years
beginning after December 15, 1998. The Company adopted SOP 98-1 in the second
quarter of fiscal 1998, which did not have an effect on net income or net income
per share.
7. 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 $1.3 million and $1.0 million
in the second quarter of fiscal 1998 and fiscal 1997, respectively, and is
reported net of interest and investment income of $2.1 million and $1.3 million
in the 26 weeks ended August 1, 1998 and July 26, 1997, respectively.
8. Net Income Per Share
The following is a reconciliation of the numerator and the denominator used in
the calculation of net income per share:
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
- --------------------------------------------------- ------------- ------------- ------------- -------------
August 1, July 26, August 1, July 26,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations before
extraordinary loss $ 14,693 $ 11,218 $ 14,784 $ 13,489
Income from discontinued operations - 12,043 - 20,575
Extraordinary loss - (8,663) - (8,663)
- --------------------------------------------------- ------------- ------------- ------------- -------------
Numerator for basic net income per share 14,693 14,598 14,784 25,401
Effect of dilutive securities:
5.25% convertible subordinated notes 896 - 1,787 -
- --------------------------------------------------- ------------- ------------- ------------- -------------
Numerator for diluted net income per share $ 15,589 $ 14,598 $ 16,571 $ 25,401
=================================================== ============= ============= ============= =============
</TABLE>
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
- --------------------------------------------------- --------------------------- ---------------------------
August 1, July 26, August 1, July 26,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic net income per share--
weighted average shares 37,860 35,135 37,812 33,964
Effect of dilutive securities:
Employee stock options 464 525 400 513
Assumed conversion of 5.25% convertible
notes 9,787 - 9,787 -
- --------------------------------------------------- ------------- ------------- ------------- -------------
Denominator for diluted net income per share 48,111 35,660 47,999 34,477
=================================================== ============= ============= ============= =============
</TABLE>
9. Supplemental Balance Sheet Information
Property and equipment consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------- ----------------- ---------------- -----------------
August 1, January 31, July 26,
(In thousands) 1998 1998 1997
- ----------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Land and buildings $ 157,626 $ 157,488 $ 157,019
Leasehold improvements 65,875 62,310 55,907
Furniture, fixtures and equipment 142,834 144,662 135,846
- ----------------------------------------------------- ----------------- ---------------- -----------------
366,335 364,460 348,772
Accumulated depreciation (111,238) (105,763) (104,644)
- ----------------------------------------------------- ----------------- ---------------- -----------------
Total $ 255,097 $ 258,697 $ 244,128
===================================================== ================= ================ =================
</TABLE>
Property under capital leases consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------- ----------------- ---------------- -----------------
August 1, January 31, July 26,
(In thousands) 1998 1998 1997
- ----------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
Property under capital leases $ 9,696 $ 9,696 $ 9,695
Accumulated depreciation (4,279) (4,059) (3,839)
- ----------------------------------------------------- ----------------- ---------------- -----------------
Total $ 5,417 $ 5,637 $ 5,856
===================================================== ================= ================ =================
</TABLE>
10. Pension Plan
In the first quarter of fiscal 1998, the Company completed the settlement of the
Waban Inc. Retirement Plan (the "Plan"), which was terminated effective July 26,
1997. Net income for the 26 weeks ended August 1, 1998 includes a charge of
approximately $0.7 million, net of taxes, related to the settlement of the Plan.
11. Debt
In July 1998, the Company increased its revolving credit facility to $105
million from $90 million, and extended the expiration date to July 9, 2001. All
other terms remained unchanged.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12. Restructuring Reserve
As of January 31, 1998, $12.7 million of the Company's fiscal 1993 restructuring
charge remained accrued on the Company's consolidated balance sheet. During the
26 weeks ended August 1, 1998, the Company incurred cash expenditures of $1.4
million, primarily for lease obligations on closed facilities. As of August 1,
1998, $11.3 million remained accrued on the Company's balance sheet consisting
primarily of lease obligations on closed facilities, which extend through 2007.
<PAGE>
ITEM 2. 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 13 and 26 weeks ended
July 26, 1997 have been restated to present BJ's as a discontinued operation.
The discussion which follows pertains to the continuing operations of the
Company unless otherwise noted.
The fiscal year ending January 30, 1999 and the fiscal year ended January 31,
1998 are referred to herein as "fiscal 1998" and "fiscal 1997", respectively.
The 13 weeks ended August 1, 1998 and July 26, 1997 are referred to herein as
the "second quarter of fiscal 1998" and the "second quarter of fiscal 1997",
respectively.
The following table presents the results of operations for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
- ----------------------------------------------------- --------------------------- ---------------------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
- ----------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales, including buying and occupancy
costs 77.1 77.8 77.5 78.1
- ----------------------------------------------------- ------------- ------------- ------------- -------------
Gross profit 22.9 22.2 22.5 21.9
Selling, general and administrative expenses 17.2 17.4 19.2 18.5
- ----------------------------------------------------- ------------- ------------- ------------- -------------
Operating income 5.7 4.8 3.3 3.4
Interest on debt and capital leases, net 0.1 0.3 0.2 0.5
- ----------------------------------------------------- ------------- ------------- ------------- -------------
Income from continuing operations before
income taxes and extraordinary loss 5.6 4.5 3.1 2.9
Provision for income taxes 2.1 1.8 1.2 1.1
- ----------------------------------------------------- ------------- ------------- ------------- -------------
Income from continuing operations before
extraordinary loss 3.5 2.7 1.9 1.8
Income from discontinued operations, net of
income tax - 2.9 - 2.6
- ----------------------------------------------------- ------------- ------------- ------------- -------------
Income before extraordinary loss 3.5 5.6 1.9 4.4
Extraordinary loss on early extinguishment of
debt, net of income taxes - (2.1) - (1.1)
- ----------------------------------------------------- ------------- ------------- ------------- -------------
Net income 3.5 % 3.5 % 1.9 % 3.3 %
===================================================== ============= ============= ============= =============
</TABLE>
Net Sales
Net sales for the second quarter of fiscal 1998 increased 1.0% to $424.6 million
from $420.4 million in the second quarter of fiscal 1997 primarily due to an
increase in same store sales of 1.5%. Same store sales increased primarily due
to strong sales at its recently remodeled stores and a stronger housing market
in the Western United States.
Net sales for the 26 weeks ended August 1, 1998 decreased 0.9% to $773.5 million
from $780.6 million in the comparable prior-year period. The decrease in net
sales was primarily due to declines in same store sales of 0.6% and net store
closures. Same store sales declined primarily due to the disruption
caused by store remodel construction during the first quarter of fiscal 1998,
abnormal weather patterns during much of the first half of the year and
increased competition in many of the markets in which the Company operates.
During the 26 weeks ended August 1, 1998, 17 stores were remodeled, compared to
six stores in the 26 weeks ended July 26, 1997. Since the beginning of fiscal
1997, two new stores were opened and three stores were closed.
Cost of Sales
Cost of sales, which includes buying and occupancy costs, was 77.1% of net sales
for the second quarter of fiscal 1998, compared to 77.8% in the second quarter
of fiscal 1997. The decrease as a percentage of net sales was primarily due to
higher average selling margins caused by a change in the mix of product sold, as
well as lower buying and occupancy costs as a percentage of sales in the second
quarter. The decrease in buying and occupancy costs as a percentage of sales was
due primarily to the overall increase in sales and the fixed nature of certain
buying and occupancy costs.
Cost of sales for the 26 weeks ended August 1, 1998 was 77.5% of sales compared
to 78.1% for the 26 weeks ended July 26, 1997. The decrease as a percentage of
net sales was primarily due to higher average selling margins caused by a change
in the mix of product sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased to 17.2% of net
sales for the second quarter of fiscal 1998, from 17.4% of net sales for the
second quarter of fiscal 1997 primarily due to the overall increase in sales in
the second quarter of fiscal 1998 and the fixed nature of certain expenses in
SG&A.
SG&A was 19.2% of sales for the 26 weeks ended August 1, 1998 compared to 18.5%
for the 26 weeks ended July 26, 1997. The increase as a percentage of net sales
was primarily attributable to higher remodel related costs, increased
advertising expenses, the overall decline in net sales year over year and
pre-tax settlement costs of approximately $1.1 million associated with the
termination of the Waban Inc. Retirement Plan. In the 26 weeks ended August 1,
1998, the Company incurred remodel related costs of approximately $4.2 million,
compared to $0.4 million in the 26 weeks ended July 26, 1997.
Interest Expense
Net interest expense from continuing operations for the second quarter of fiscal
1998 was $0.6 million compared to $1.4 million for the second quarter of fiscal
1997. Net interest expense from continuing operations was $1.8 million for the
26 weeks ended August 1, 1998 compared to $4.2 million for the 26 weeks ended
July 26, 1997. Corporate interest expense for the 13 and 26 weeks ended July 26,
1997 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 the second
quarter and first half of fiscal 1998 was primarily attributable to a lower
average interest rate and lower average debt balances plus higher interest and
investment income compared to the respective prior-year periods. Interest and
investment income was $1.3 million for the second quarter of fiscal 1998
compared to $1.0 million for the second quarter of fiscal 1997 and was $2.1
million for the first half of fiscal 1998 compared to $1.3 million for the
first half of fiscal 1997.
<PAGE>
Income Tax Provision
The income tax provision rate for the 26 weeks ended August 1, 1998 was 38.1%
compared to 39.8% for the 26 weeks ended July 26, 1997. The decrease in the tax
provision rate was primarily attributable to the realization of certain
state tax credits during fiscal 1998. For fiscal 1999, the Company
expects the tax provision rate to range between 39% and 40%.
Income From Continuing Operations Before Extraordinary Loss
Income from continuing operations before extraordinary loss for the second
quarter of fiscal 1998 was $14.7 million, or $0.32 per share, diluted, compared
to $11.2 million, or $0.31 per share, diluted, in the second quarter of fiscal
1997. Income from continuing operations before extraordinary loss for the first
half of fiscal 1998 was $14.8 million, or $0.35 per share, diluted, compared to
$13.5 million, or $0.39 per share, diluted, in the first half of fiscal 1997.
Income from continuing operations before extraordinary loss as a percentage of
net sales was 3.5% for the 13 weeks ended August 1, 1998 compared to 2.7% in the
second quarter of fiscal 1997. The increase was primarily due to a higher gross
profit percentage, lower SG&A, lower net interest expense and a lower tax
provision rate.
Income from continuing operations before extraordinary loss as a percentage of
net sales was 1.9% for the 26 weeks ended August 1, 1998 compared to 1.8% for
the 26 weeks ended July 26, 1997. The increase was primarily due to a higher
gross profit percentage, lower net interest expense and a lower tax provision,
partially offset by higher SG&A.
Income from continuing operations for the first and second quarter of fiscal
1997 include all of the corporate overhead expenses incurred by the Company
prior to the Distribution and an allocation of the Company's interest expense
prior to the Distribution. As a result of the Distribution, the conversion of
the convertible subordinated debt into common stock and the refinancing of $112
million of other indebtedness, income from continuing operations for periods
preceding the Distribution is not comparable to the Company's income from
continuing operations after the Distribution. Refer to Pro Forma Financial
Information below.
Net Income
Net income for the second quarter of fiscal 1998 was $14.7 million, or $0.32 per
share, diluted, compared to $14.6 million, or $0.41 per share, diluted, for the
second quarter of fiscal 1997. Net income for the 26 weeks ended August 1, 1998
was $14.8 million, or $0.35 per share, diluted, compared to $25.4 million, or
$0.74 per share, diluted, for the 26 weeks ended July 26, 1997. The second
quarter of fiscal 1997 and the 26 weeks ended July 26, 1997 include income from
discontinued operations of $12.0 million, or $0.34 per share, diluted and $20.6
million, or $0.60 per share, diluted, respectively, and an extraordinary loss of
$8.7 million, net of tax, recorded in July 1997, associated with the early
extinguishment of debt.
Net income for the 26 weeks ended August 1, 1998 includes a pension termination
charge of $0.7 million, net of tax.
Restructuring Reserve
As of January 31, 1998, $12.7 million of the Company's fiscal 1993 restructuring
charge remained accrued on the Company's consolidated balance sheet. During the
second quarter of fiscal 1998, the Company incurred cash expenditures of $1.4
million, primarily for lease obligations on closed facilities. As of August 1,
1998, $11.3 million remained accrued on the Company's balance sheet consisting
primarily of lease obligations on closed facilities, which extend through 2007.
<PAGE>
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 sales.
Change in Accounting Principle
In the first quarter of fiscal 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), Accounting for the
Costs of Start-Up Activities, which requires entities to expense as incurred
start-up and pre-opening costs that may not otherwise be capitalized as
long-lived assets. The Company adopted SOP 98-5 in the first quarter of fiscal
1998, which did not have an effect on net income or net income per share.
In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") was issued. SOP
98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use. It is effective for fiscal years
beginning after December 15, 1998. The Company adopted SOP 98-1 in the second
quarter of fiscal 1998, which did not have an effect on net income or net income
per share.
Pro Forma Financial Information (Unaudited)
The table below presents income from continuing operations for the first and
second quarters of fiscal 1997 and the 26 weeks ended July 26, 1997 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 was $11.9 million for the second
quarter of fiscal 1997 and $15.7 million for the 26 weeks ended July 26, 1997.
The following unaudited pro forma financial information for the first and second
quarter of fiscal 1997 and the 26 weeks 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. 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 Company's corporate staff prior
to the Distribution. These costs, estimated at an annualized $5.8 million in
fiscal 1997, were allocated evenly between quarters. Pro forma interest expense
assumes that the capital structure that was established immediately after the
Distribution had been in place for the quarters ended April 26, 1997 and July
26, 1997. The components of interest expense include capital lease interest,
mortgage interest, and credit agreement costs, all of which were allocated
evenly by quarter, and bank borrowing interest expense, which was allocated to
reflect the typical seasonal requirements of the business. The average estimated
draw under the revolving credit facility was assumed to be $23 million. This pro
forma financial data does not purport to represent the actual changes in the
historical cash/borrowing position. The provision for income taxes was estimated
at 39.8%. The number of shares used in the calculation of pro forma diluted net
income per share was 37.9 million, which excludes common stock equivalents that
were antidilutive. All pro forma adjustments were based upon available
information and assumptions that management believes were 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.
<PAGE>
The pro forma results for the Company are as follows:
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 26 Weeks Ended
- ------------------------------------------------------ ----------------- ---------------- -----------------
April 26, July 26, July 26,
(In thousands, except per share amounts) 1997 1997 1997
- ------------------------------------------------------ ----------------- ---------------- -----------------
<S> <C> <C> <C>
Net sales $ 360,204 $ 420,404 $ 780,608
Cost of sales, including buying and occupancy
costs 282,259 327,049 609,308
Selling, general and administrative expenses 70,642 72,768 143,410
- ------------------------------------------------------ ----------------- ---------------- -----------------
Operating income 7,303 20,587 27,890
Interest on debt and capital leases, net 1,012 853 1,865
Provision for income taxes 2,504 7,854 10,358
- ------------------------------------------------------ ----------------- ---------------- -----------------
Income from continuing operations $ 3,787 $ 11,880 $ 15,667
====================================================== ================= ================ =================
Diluted net income per share from
continuing operations $ 0.10 $ 0.31 $ 0.41
====================================================== ================= ================ =================
</TABLE>
Year 2000 Compliance
Since many of the Company's older computer software programs recognize only the
last two digits of the year in any date (e.g., "98" for 1998), some software
programs may fail to operate properly in the year 2000 if they are not
reprogrammed or replaced (the "Year 2000 Problem"). This could result in errors
and miscalculations or even system failure causing disruptions in everyday
business activities and transactions. Early in fiscal 1996, the Company
commenced a program designed to timely mitigate and/or prevent the adverse
effects of the Year 2000 Problem and to pursue compliance with vendors. The
Company believes that more than 80% of its programs are now Year 2000 compliant,
and that it will be more than 90% Year 2000 compliant by the third quarter of
fiscal 1998, including all financial and accounting systems. The Company expects
that all remaining systems will be Year 2000 compliant by the end of fiscal
1998.
The Company estimates that the total cost of this compliance program to be less
than $2.0 million, including internal staff costs and the cost to write off any
unamortized existing hardware and software that may need to be replaced. The
Company has contacted its major merchandise vendors to obtain information about
their internal Year 2000 compliance efforts. If the Company's vendors are unable
to address the Year 2000 issue in a timely manner, it could have an impact on
the Company's financial position, liquidity and results of operations.
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents and marketable securities totaled $103.1 million as of
August 1, 1998. Cash flow from operations and amounts available under the
Company's $105 million revolving credit facility are the Company's principal
sources of liquidity.
In July 1998, the Company increased its revolving credit facility to $105
million from $90 million, and extended the expiration date to July 9, 2001. All
other terms remained unchanged.
At August 1, 1998, the Company had no borrowings under its revolving credit
facility, and had $14.8 million of letters of credit outstanding. At August 29,
1998, the Company had $92.8 million available for borrowing under the revolving
credit facility.
During the 26 weeks ended August 1, 1998, net cash provided by operating
activities of continuing operations was $72.3 million compared to $63.0 million
for the 26 weeks ended July 26, 1997. The increase in the current year was
primarily attributable to higher accrued expenses and other current liabilities
at the end of the second quarter of fiscal 1998 than fiscal 1997, relative to
the beginning of the respective fiscal years.
Net cash used in investing activities of continuing operations was $28.0 million
for the 26 weeks ended August 1, 1998, compared to $15.9 million for the 26
weeks ended July 26, 1997. Investing activities primarily consist of capital
expenditures and investments in marketable securities. During the 26 weeks ended
August 1, 1998, the Company had net purchases of marketable securities of $8.1
million, compared to net purchases of $7.7 million during the 26 weeks ended
July 26, 1997.
Year-to-date capital expenditures for property additions for continuing
operations were $20.2 million this year versus $8.6 million in the comparable
prior-year period. Capital expenditures for the first six months of fiscal 1998
include the remodeling of 17 stores, compared to capital expenditures for the
remodeling of six stores in the first six months of fiscal 1997. The Company's
capital expenditures in fiscal 1998 are expected to total approximately $45
million and include one planned store opening and one additional store remodel.
The timing of actual store openings and the amount of related expenditures could
vary from these estimates due to, among other things, the complexity of the real
estate development process.
Net cash provided by financing activities of continuing operations was $0.3
million for the 26 weeks ended August 1, 1998, compared to net cash used of
$107.0 million for the 26 weeks ended July 26, 1997. Current year activities
primarily consisted of proceeds from the sale and issuance of common stock of
$0.6 million, partially offset by payments of real estate debt and capital
leases of $0.1 million.
During the quarter ended July 26, 1997, the Company repaid its senior 9.58%
notes totaling $24.0 million and repaid $93.4 million of its 11% senior
subordinated notes, replacing this debt with $96 million of short-term bank
borrowings. BJI assumed $72.0 million of the bank borrowings at the time of the
Distribution. In connection with these repayments, the Company incurred a
pre-tax extraordinary loss of $14.6 million. In addition, 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 credit
facility, together with anticipated cash flow from operations, will be
sufficient to finance its operations and capital expenditures through January
29, 2000.
<PAGE>
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 that could cause actual results
to differ materially from those expected. Although the Company believes that
comments reflected in such forward-looking statements are reasonable, they are
based on information existing at the time made. Important factors that could
cause actual results to differ materially from expectations include, but are not
limited to, the successful implementation of the Company's accelerated growth
strategy, general economic conditions prevailing in the Company's markets,
competition and other risk factors described in the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 1998.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART 2. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the 1998 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
held on May 21, 1998, Allan P. Sherman and Herbert J. Zarkin were elected as
directors for the ensuing three years. The votes were as follows:
Director For Withheld
Allan P. Sherman 31,223,067 610,355
Herbert J. Zarkin 31,234,545 598,877
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.27 Amendment to Credit Facility dated July 22, 1998
27 Financial Data Schedule
b) Reports on Form 8-K
None
<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: September 14, 1998 /s/ ALLAN P. SHERMAN
---------------------------- --------------------
Allan P. Sherman
President and Chief
Executive Officer
Date: September 14, 1998 /s/ WILLIAM B. LANGSDORF
---------------------------- ------------------------
William B. Langsdorf
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> Aug-01-1998
<CASH> 89,150
<SECURITIES> 13,993
<RECEIVABLES> 29,432
<ALLOWANCES> (333)
<INVENTORY> 317,946
<CURRENT-ASSETS> 477,830
<PP&E> 366,335
<DEPRECIATION> 111,238
<TOTAL-ASSETS> 758,236
<CURRENT-LIABILITIES> 220,269
<BONDS> 100,333
0
0
<COMMON> 379
<OTHER-SE> 374,087
<TOTAL-LIABILITY-AND-EQUITY> 758,236
<SALES> 773,521
<TOTAL-REVENUES> 773,521
<CGS> 599,166
<TOTAL-COSTS> 599,166
<OTHER-EXPENSES> 148,705
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,767
<INCOME-PRETAX> 23,883
<INCOME-TAX> 9,099
<INCOME-CONTINUING> 14,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,784
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.35
</TABLE>
-1-
FOURTH AMENDMENT TO CREDIT AGREEMENT
This FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is da ted
as of July 21, 1998 by and among HOMEBASE, INC., THE FIRST NATIONAL BANK OF
CHICAGO, BANKBOSTON, N.A., WELLS FARGO BANK, N.A., SANWA BANK CALIFORNIA and
FIRST UNION NATIONAL BANK.
RECITALS
WHEREAS, certain of the parties hereto are parties to that
certain Credit Agreement dated as of July 9, 1997 (as from time to time amended,
restated, supplemented or otherwise modified, the "Credit Agreement";
capitalized terms used but not otherwise defined herein having the definitions
provided therefor in the Credit Agreement); and WHEREAS, the parties hereto
desire to amend the Credit Agreement on the terms and conditions herein set
forth. NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:1. Amendment to Credit Agreement. Subject to the terms and
conditions set forth in Section 2 of this Amendment, upon the Effective Time (as
hereinafter defined), the Credit Agreement is hereby amended as follows: (i) The
definition of "Aggregate Commitment" in Article I of the Credit Agreement is
hereby amended by deleting such definition in its entirety and inserting the
following in its stead: "Aggregate Commitment" means $105,000,000, as such
amount may be reduced from time to time pursuant to the terms hereof. (ii) The
definition of "Lenders" in Article I of the Credit Agreement is hereby amended
by deleting such definition in its entirety and inserting the following in its
stead:"Lenders" means the lending institutions on Schedule 1 of this Agreement
and their respective successors and assigns. (iii) The definition of
"Termination Date" in Article I of the Credit Agreement is hereby amended by
deleting such definition in its entirety and inserting the following in its
stead: "Termination Date" means July 9, 2001, or such earlier date on which the
Agreement is terminated by the parties hereto. (iv) Section 6.1(b), Section
6.1(c) and Section 6.1(f) of the Credit Agreement are hereby amended by
inserting the words "or Treasurer" after the words "chief financial officer"
where the words "chief financial officer" appear in each of such Sections. (v)
The Credit Agreement is hereby amended by deleting Schedule 1 attached thereto
and inserting as Schedule 1, the document attached hereto as "Schedule 1." 2.
Conditions. The effectiveness of the amendments stated in this Amendment is
subject to on or prior to the date hereof, that the following conditions shall
have been satisfied in a manner, and in form and substance, as the case may be,
reasonably acceptable to the Lenders: (i) Amendment. This Amendment shall have
been duly executed by each of the parties signatory hereto and delivered to
Agent. (ii) No Default. No Default or Event of Default under the Credit
Agreement, as amended hereby, shall have occurred and be continuing. (iii)
Warranties and Representations. The warranties and representations of the
Borrower contained in this Amendment, the Credit Agreement, as amended hereby,
and the other Loan Documents shall be true and correct as of the date hereof,
with the same effect as though made on such date, except to the extent that such
warranties and representations expressly relate to an earlier date, in which
case such warranties and representations shall have been true and correct as of
such earlier date. (iv) Reaffirmation of Guaranty. Each Real Estate Subsidiary
and Operating Subsidiary shall have executed the Reaffirmation of Guaranty in
the form of Exhibit A hereto. (v) Fees. (A) The Borrower shall have paid to the
Agent (1) for the account of each of The First National Bank of Chicago,
BankBoston, N.A. and Wells Fargo Bank, National Association an amount equal to
12 1/2 basis points multiplied by the Commitment of such Lender as set forth on
Schedule 1 attached to this Amendment and (2) for the account of each of The
First Union National Bank and Sanwa Bank California an amount equal to 6 1/4
basis points multiplied by the Commitment of such Lender as set forth on
Schedule 1 attached to this Amendment and (B) each of First Union National Bank
and Sanwa Bank California shall have each received an additional $18,750 from
money remitted to the Agent pursuant to that certain Assignment and Acceptance
Agreement dated the date hereof by and between The Sumitomo Bank, Limited and
The First National Bank of Chicago.The Effective Time of this Amendment shall be
5:05 p.m. Chicago time, July 21, 1998; provided that all of the above events
shall have occurred prior to that time. If the Effective Time has not occurred
by July 24, 1998, this Amendment shall be of no force and effect.3. Continuing
Credits. Notwithstanding this Amendment, the Loans owing to Lenders by Borrower
under the Credit Agreement that remain outstanding as of the date hereof shall
constitute continuing Obligations of the Borrower under the Credit Agreement and
this Amendment shall not be deemed to evidence or result in a novation, or
repayment and reborrowing, of such Loans.4. Notes. The Borrower covenants and
agrees to provide new Notes to the applicable Lenders.5. Miscellaneous. (a)
Captions. Section captions used in this Amendment are for convenience only, and
shall not affect the construction of this Amendment. (b) Governing Law. THIS
AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
CONFLICT OF LAWS PRINCIPLES BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO
NATIONAL BANKS. Whenever possible each provision of this Amendment shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Amendment shall be prohibited by or invalid under
such law, such provision shall be ineffective to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Amendment. (c) Counterparts. This Amendment may be
executed in any number of counterparts and by the different parties on separate
counterparts, and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
(d) Successors and Assigns. This Amendment shall be binding upon, and shall
inure to the sole benefit of the Borrower, Agent and Lenders, and their
respective successors and assigns. (e) References. Any reference to the Credit
Agreement contained in any notice, request, certificate, or other document
executed concurrently with or after the execution and delivery of this Amendment
shall be deemed to include this Amendment unless the context shall otherwise
require. (f) Continued Effectiveness. Notwithstanding anything contained herein,
the terms of this Amendment are not intended to and do not serve to effect a
novation as to the Credit Agreement; instead, it is the express intention of the
parties hereto to reaffirm the Obligations created under the Credit Agreement
which is evidenced by the Notes. The Credit Agreement, as amended hereby, and
each of the other Loan Documents remains in full force and effect. (g) Costs and
Expenses. Borrower affirms and acknowledges that Section 9.7 of the Credit
Agreement applies to this Amendment and the transactions and agreements and
documents contemplated hereunder.6. Representations and Warranties. The Borrower
represents and warrants to Agent and Lenders that the execution, delivery and
performance by the Borrower of this Amendment are within the Borrower's
corporate powers, have been duly authorized by all necessary corporate action
(including, without limitation, all necessary shareholder approval) of the
Borrower, do not require any governmental approvals, consents or filings and do
not and will not contravene or conflict with any provision of law applicable to
the Borrower, the certificate of incorporation or bylaws of the Borrower or any
order, judgment or decree of any court or other agency of government or any
contractual obligation binding upon the Borrower, and this Amendment, the Credit
Agreement, as amended hereby, and each Loan Document is the legal, valid and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms and that the conditions set forth in Sections 2(ii)
and (iii) hereof are true, correct and complete as of the Effective Time.
[signature pages follow]
<PAGE>
IN WITNESS WHEREOF, this Fourth Amendment to Credit Agreement has been
duly executed and delivered as of the day and year first above written. FOURTH
AMENDMENT TO CREDIT AGREEMENT This FOURTH AMENDMENT TO CREDIT AGREEMENT (this
"Amendment") is dated as of July 21, 1998 by and among HOMEBASE, INC., THE FIRST
NATIONAL BANK OF CHICAGO, BANKBOSTON, N.A., WELLS FARGO BANK, N.A., SANWA BANK
CALIFORNIA and FIRST UNION NATIONAL BANK.RECITALS WHEREAS, certain of the
parties hereto are parties to that certain Credit Agreement dated as of July 9,
1997 (as from time to time amended, restated, supplemented or otherwise
modified, the "Credit Agreement"; capitalized terms used but not otherwise
defined herein having the definitions provided therefor in the Credit
Agreement); and WHEREAS, the parties hereto desire to amend the Credit Agreement
on the terms and conditions herein set forth. NOW, THEREFORE, in consideration
of the premises and the mutual covenants hereinafter contained, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:1. Amendment to Credit
Agreement. Subject to the terms and conditions set forth in Section 2 of this
Amendment, upon the Effective Time (as hereinafter defined), the Credit
Agreement is hereby amended as follows: (i) The definition of "Aggregate
Commitment" in Article I of the Credit Agreement is hereby amended by deleting
such definition in its entirety and inserting the following in its stead:
"Aggregate Commitment" means $105,000,000, as such amount may be reduced from
time to time pursuant to the terms hereof. (ii) The definition of "Lenders" in
Article I of the Credit Agreement is hereby amended by deleting such definition
in its entirety and inserting the following in its stead:Lenders means the
lending institutions on Schedule 1 of this Agreement and their respective
successors and assigns. (iii) The definition of "Termination Date" in Article I
of the Credit Agreement is hereby amended by deleting such definition in its
entirety and inserting the following in its stead: "Termination Date means July
9,2001, or such earlier date on which the Agreement is terminated by the partie
hereto.
<PAGE>
(iv)Section6.1 (b), Section 6.1(c) and Section 6.1(f of the Credit Agreement are
hereby amended by inserting the words or Treasurer after th words chief
financial officer where the word chief financial
officer appear in each of such Sections.(v) The Credit Agreement is hereby
amended by deleting Schedule 1 attached thereto and inserting as Schedule 1,the
document attached hereto as Schedule 1.2. Conditions. The effectiveness of the
amendments stated in this Amendment is subject to on or prior to the date
hereof, that the following conditions shall have been satisfied in a manner, and
in form and substance, as the case maybe, reasonably acceptable to the
Lenders:(i)Amendment. This Amendment shall have been duly executed by each of
the parties signatory hereto and delivered to Agent.(ii) NoDefault. No Default
or Event of Default under the Credit Agreement, as amended hereby, shall have
occurred and be continuing.(iii) Warranties and Representations . The warranties
and representations of the Borrower contained in this Amendment, the Credit
Agreement, as amended hereby, and the other Loan Documents shall be true and
correct as of the date hereof, with the same effect as though made on such date,
except to the extent that such warranties and representations expressly relate
to an earlier date, in which case such warranties and representations shall have
been true and correct as of such earlier date.(iv)Reaffirmation of Guaranty.
Each Real Estate Subsidiary and Operating Subsidiary shall have executed the
Reaffirmation of Guaranty in Exhibit A hereto.(v)Fees.(A)The Borrower shall have
paid to the Agent(1)for the account of each of The First National Bank of
Chicago, Bank Boston,N.A. and Wells Fargo Bank, National Association an amount
equal to 12 1/2 basis points multiplied by the Commitment of such Lender asset
forth on Schedule 1 attached to this Amendment and (2) for the account of each
of The First Union National Bank and Sanwa Bank California an amount equal to 6
1/4 basis points multiplied by the Commitment of such Lender asset forth on
Schedule 1 attached to this Amendment and (B)each of First Union National Bank
and Sanwa Bank California shall have each received an additional $18,750 from
money remitted to the Agent pursuant to that certain Assignment and Acceptance
Agreement dated the date hereof by and between The Sumitomo Bank, Limited and
The First National Bank of Chicago. The Effective Time of this Amendment shall
be 5:05p.m. Chicago time, July 21, 1998; provided that all of the above events
shall have occurred prior to that time. If the Effective Time has occurred by
July 24, 1998, this Amendment shall be of no force and effect.3. Continuing
Credits. Not withstanding this Amendment, the Loans owing to Lenders by Borrower
under the Credit Agreement that remain outstanding as of the date hereof shall
constitute continuing Obligations of the Borrower under the Credit Agreement and
this Amendment shall not be deemed to evidence or result in an ovation,or
repayment and reborrowing, of such Loans. 4. Notes. The Borrower covenants and
agrees to provide new Notes to the applicable Lenders. 5. Miscellaneous.(a)
Captions. Section captions used in this Amendment are for convenience only, and
shall not affect the construction of this Amendment.(b)GoverningLaw. THIS
AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
CONFLICT OF LAWS PRINCIPLES BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO
NATIONA BANKS. When ever possible each provision of this Amendment shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Amendment shall be prohibited by or invalid under
such law, such provision shall be ineffective to the extent of suc prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Amendment.(c) Counterparts. This Amendment may be
executed in any number of counterparts and by the different parties on separate
counterparts, and each such counterpart shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same
instrument.(d)Successors and Assigns. This Amendment shall be binding upon, and
shall inure to the sole benefit of the Borrower, Agen and Lenders, and their
respective successors and assigns. (e)References. Any reference to the Credit
Agreement contained in any notice, request, certificate, or other document
executed concurrently with or after the execution and delivery of this Amendment
shall be deemed to include this Amendment unless the context shall otherwise
require. (f)Continued Effectiveness. Notwithstanding anything contained herein,
the terms of this Amendment are not intended to and do not serve to effect an
ovation as to the Credit Agreement; instead, it is the express intention of the
parties hereto to reaffirm the Obligations created under the Credit Agreement
which is evidence Notes. The Credit Agreement, as amended hereby, and each of
the other Loan Documents remains in full force and effect.(g) Costs and
Expenses. Borrower affirms and acknowledges that Section9.7 of the Credit
Agreement applies to this Amendment and the transactions and agreements and
documents contemplated here under.6. Representations and Warranties. The
Borrower represents and warrants to Agent and Lenders that the execution,
delivery and performance by the Borrower of this Amendment are within the
Borrower's corporate powers, have been duly authorized by all necessary
corporate action (including, without limitation, all necessary shareholder
approval) of the Borrower, do not require any governmental approvals, consents
or filings and do not and will not contravene or conflict with any provision of
law applicable to the Borrower, the certificate of incorporation or by laws of
the Borrower or any order,judgment or decree of any court oragency of government
or any contractual obligation binding upon the Borrower,and this Amendment,
the Credit Agreement, as amended hereby, and each LoanDocument is th legal,
valid and binding obligation of the Borrower enforceable against the Borrower
in accordance with its terms and that the conditions set forth in Sections 2
(ii) and (iii) hereof are true, correct and complete as of the Effective Time.
[signature pages follow]
<PAGE>
IN WITNESS WHEREOF, this Fourth Amendment to Credit Agreement has been duly
executed and delivered as of the day and year first above written.
HOMEBASE, INC.
By: __________________________________
Print Name: ___________________________
Title: ________________________________
3345 Michelson Drive
Irvine, California 92612
Phone: (949) 442-5000
Fax: (949) 442-5779
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By: __________________________________
Print Name: John Runger
Title: Managing Director
One First National Plaza
Chicago, Illinois 60670
Phone: (312) 732-7101
Fax: (312) 732-1117
BANKBOSTON, N.A.,
Individually and as Syndication Agent
By: _________________________________
Print Name: Linda Thomas
Title: Managing Director
100 Federal Street
Mail Stop 01-09-04
Boston, Massachusetts 02106
Phone: (617) 434-7000
Fax: (617) 434-7980
WELLS FARGO BANK, N.A.
Individually and as Documentation Agent
By: __________________________________
Print Name: Catherine Wallace
Title: Vice President
707 Wilshire Boulevard, 16th Floor
Los Angeles, California 90017
Phone: (213) 614-4763
Fax: (213) 614-2305
SANWA BANK CALIFORNIA
By: __________________________________
Print Name: Mary E. King
Title: Vice President
Newport Beach Commercial Banking Center
4400 MacArthur Boulevard, Suite 200
Newport Beach, CA 92660
Phone: (714) 476-7795
Fax: (714) 476-7799
FIRST UNION NATIONAL BANK
By: __________________________________
Print Name: Jack Ginter
Title: Assistant Vice President
Retailer and Apparel Group
1345 Chestnut Street
Philadelphia, PA 19101-7618
Phone: (215) 973-2253
Fax: (215) 973-7671
<PAGE>
SCHEDULE 1
(HOMEBASE, INC.)
<TABLE>
<CAPTION>
- ----------------------------------------------------- ----------------------------------- ----------------------------------
Lender Percentages Commitment
- ----------------------------------------------------- ----------------------------------- ----------------------------------
<S> <C> <C>
The First National Bank of Chicago 23.809524 $25,000,000
- ----------------------------------------------------- ----------------------------------- ----------------------------------
BankBoston, N.A. 23.809524 $25,000,000
- ----------------------------------------------------- ----------------------------------- ----------------------------------
Wells Fargo Bank, National Association 23.809524 $25,000,000
- ----------------------------------------------------- ----------------------------------- ----------------------------------
Sanwa Bank California 14.285714 $15,000,000
- ----------------------------------------------------- ----------------------------------- ----------------------------------
First Union National Bank 14.285714 $15,000,000
- ----------------------------------------------------- ----------------------------------- ----------------------------------
</TABLE>
<PAGE>
EXHIBIT A
REAFFIRMATION OF GUARANTY
Each of the undersigned acknowledges receipt of a copy of the
Fourth Amendment to the Credit Agreement (the "Amendment") dated as of July 22,
1998, consents to such amendment, and each of the transactions referenced
therein and hereby reaffirms its obligations under the Subsidiary Guaranty dated
as of July 9, 1997 in favor of The First National Bank of Chicago, as Agent, and
the Lenders (as defined in the Amendment).
Dated as of _______________, 1998
[GUARANTOR]
By: __________________________________
Title: _________________________________
