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
May 2, 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 such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
At June 5, 1998, there were 37,868,099 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
- -----------------------------------------------------------------------------------------------------------------
May 2, April 26,
1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 348,897 $ 360,204
Cost of sales, including buying and occupancy costs 271,960 282,268
- ---------------------------------------------------------------------------------- --------------- ---------------
Gross profit 76,937 77,936
Selling, general and administrative expenses 75,667 71,435
- ---------------------------------------------------------------------------------- --------------- ---------------
Operating income 1,270 6,501
Interest on debt and capital leases, net 1,118 2,764
- ---------------------------------------------------------------------------------- --------------- ---------------
Income from continuing operations before income taxes 152 3,737
Provision for income taxes 61 1,466
- ---------------------------------------------------------------------------------- --------------- ---------------
Income from continuing operations 91 2,271
Income from discontinued operations, net of income taxes of $0
and $5,441 - 8,532
- ---------------------------------------------------------------------------------- --------------- ---------------
Net income $ 91 $ 10,803
================================================================================== =============== ===============
Basic net income per share:
Income from continuing operations $ - $ 0.07
Income from discontinued operations - 0.26
- ---------------------------------------------------------------------------------- --------------- ---------------
Net income $ - $ 0.33
================================================================================== =============== ===============
Diluted net income per share:
Income from continuing operations $ - $ 0.07
Income from discontinued operations - 0.25
- ---------------------------------------------------------------------------------- --------------- ---------------
Net income $ - $ 0.32
================================================================================== =============== ===============
Shares used in computation of net income per share:
Basic 37,764 32,793
Diluted 38,068 33,286
</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>
- -----------------------------------------------------------------------------------------------------------------
May 2, January 31, April 26,
1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 50,707 $ 44,603 $ 41,960
Marketable securities 9,382 5,515 -
Accounts receivable (net of allowance for doubtful
accounts of $283, $293 and $272) 26,755 27,781 27,489
Merchandise inventories 346,468 314,188 336,434
Current deferred income taxes 12,185 11,973 10,753
Prepaid expenses 9,478 9,857 6,059
Prepaid and refundable income taxes 10,281 10,265 230
Net current assets of discontinued operations - - 95,298
- ------------------------------------------------------------------- --------------- ----------------- ----------------
Total current assets 465,256 424,182 518,223
Property, net 257,120 258,697 245,384
Property under capital leases, net 5,527 5,637 5,965
Deferred income taxes 13,762 13,965 11,011
Other assets 12,962 13,127 4,386
Net noncurrent assets of discontinued operations - - 359,155
- ------------------------------------------------------------------- --------------- ----------------- ----------------
Total assets $ 754,627 $ 715,608 $ 1,144,124
=================================================================== =============== ================= ================
LIABILITIES
Current liabilities:
Accounts payable $ 134,727 $ 96,122 $ 129,606
Restructuring reserve 6,356 6,151 2,840
Accrued expenses and other current liabilities 82,803 80,783 78,675
Current installments of long-term debt 74 72 12,067
Obligations under capital leases due within one year 247 226 168
- ------------------------------------------------------------------- --------------- ----------------- ----------------
Total current liabilities 224,207 183,354 223,356
Long-term debt 106,996 107,015 219,382
Obligations under capital leases, less portion due
within one year 8,583 8,650 8,830
Noncurrent restructuring reserve 5,714 6,537 9,964
Other noncurrent liabilities 50,049 50,385 36,871
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized
190,000,000 shares; issued and outstanding 37,807,610,
37,707,372 and 33,269,537 shares 378 377 333
Additional paid-in capital 372,788 373,456 330,227
Unrealized holding gain (loss) (7) 6 -
Retained earnings (deficit) (14,081) (14,172) 322,676
Treasury stock, at cost, 0, 0 and 397,293 shares - - (7,515)
- ------------------------------------------------------------------- --------------- ----------------- ----------------
Total stockholders' equity 359,078 359,667 645,721
- ------------------------------------------------------------------- --------------- ----------------- ----------------
Total liabilities and stockholders' equity $ 754,627 $ 715,608 $ 1,144,124
=================================================================== =============== ================= ================
</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>
13 Weeks Ended
- -----------------------------------------------------------------------------------------------------------------
May 2, April 26,
1998 1997
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 91 $ 10,803
Adjustments to reconcile net income to net cash provided by operating
activities:
Net income from discontinued operations - (8,532)
Depreciation and amortization 6,824 6,023
(Gain) loss on property disposals 65 (105)
Amortization of discount on marketable securities (19) -
Other non-cash items 166 259
Deferred income taxes (9) (588)
Increase (decrease) in cash due to changes in:
Accounts receivable (1,358) (2,228)
Merchandise inventories (32,280) (19,896)
Prepaid expenses 379 (1,084)
Other assets (42) 63
Accounts payable 38,605 44,703
Restructuring reserve (618) (748)
Accrued expenses and other current liabilities 11,439 11,598
Prepaid federal and state income taxes 183 8,041
Other noncurrent liabilities (336) 1,783
- ---------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by (used in) operating activities of:
Continuing operations 23,090 50,092
Discontinued operations - (11,946)
- ---------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by operating activities 23,090 38,146
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (3,861) -
Property additions (13,518) (3,395)
Property disposals 157 281
- ---------------------------------------------------------------------------------- --------------- ---------------
Net cash used in investing activities of:
Continuing operations (17,222) (3,114)
Discontinued operations - (10,259)
- ---------------------------------------------------------------------------------- --------------- ---------------
Net cash used in investing activities (17,222) (13,373)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (17) (424)
Repayment of capital lease obligations (46) (58)
Debt issuance costs (18) -
Proceeds from sale and issuance of common stock 317 801
- ---------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by (used in) financing activities of:
Continuing operations 236 319
Discontinued operations - (28)
- ---------------------------------------------------------------------------------- --------------- ---------------
Net cash provided by financing activities 236 291
Net increase in cash and cash equivalents 6,104 25,064
Cash and cash equivalents at beginning of year 44,603 16,896
- ---------------------------------------------------------------------------------- --------------- ---------------
Cash and cash equivalents at end of period $ 50,707 $ 41,960
================================================================================== =============== ===============
Supplemental cash flow information (prior year includes discontinued operations)
Interest paid $ 2,591 $ 380
Income taxes paid (refunds received) (146) 1,577
Non-cash financing and investing activities:
Tax benefit of employee stock options 199 497
Conversion of long-term debt to stock, net - 1,599
================================================================================== =============== ===============
</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 - - - - 10,803 - - 10,803
Exercise of stock options - - (446) - - 66 1,247 801
Income tax benefit of stock options - - 497 - - - - 497
Amortization of restricted stock - - 96 - - - - 96
grants
Conversion of 6.5% debentures - - 361 - - 66 1,238 1,599
- -------------------------------------- ---------- ---------- ------------ ----------- ------------ ----------- ----------- ---------
Balance, April 26, 1997 33,270 $ 333 $ 330,227 $ - $ 322,676 (397) $ (7,515) $645,721
====================================== ========== ========== ============ =========== ============ =========== =========== =========
</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 - - - - 91 - - 91
Unrealized holding gains (losses) - - - (13) - - - (13)
Exercise of stock options 101 1 316 - - - - 317
Income tax benefit of stock options - - 199 - - - - 199
Amortization of restricted stock - - 166 - - - - 166
grants
Equity transfer adjustment related
to spin-off of BJ's
Wholesale Club, Inc. - - (1,349) - - - - (1,349)
- -------------------------------------- ---------- ---------- ------------ ----------- ------------ ----------- ----------- ---------
Balance, May 2, 1998 37,808 $ 378 $ 372,788 $ (7) $ (14,081) - $ - $359,078
====================================== ========== ========== ============ =========== ============ =========== =========== =========
</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 first 13 weeks 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 May
2, 1998 and April 26, 1997 are referred to herein as the "first quarter of
fiscal 1998" and the "first 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. 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").
The financial statements as of and for the 13 weeks ended April 26, 1997 have
been restated to present BJ's as a discontinued operation. Corporate interest
expense for the 13 weeks ended April 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 assets and liabilities of BJ's have been
reclassified in the balance sheets at April 26, 1997 as net current and
noncurrent assets of discontinued operations, and consist primarily of
merchandise inventories, property and equipment, accounts payable and accrued
expenses. 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 $678.9 million for the 13 weeks
ended April 26, 1997.
5. 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.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. 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 $0.8 million and $0.3 million
in the first quarter of fiscal 1998 and fiscal 1997, respectively.
7. 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
- ----------------------------------------------------------------------------------------------------------
May 2, April 26,
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
Numerator:
<S> <C> <C>
Income from continuing operations $ 91 $ 2,271
Income from discontinued operations - 8,532
- ------------------------------------------------------------------------- --------------- ---------------
Numerator for basic net income per share $ 91 $ 10,803
Effect of dilutive securities:
6.5% convertible debentures (1) $ - $ -
5.25% convertible subordinated notes (1) - -
- ------------------------------------------------------------------------- --------------- ---------------
Numerator for diluted net income per share $ 91 $ 10,803
========================================================================= =============== ===============
</TABLE>
<TABLE>
<CAPTION>
13 Weeks Ended
- ----------------------------------------------------------------------------------------------------------
May 2, April 26,
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------
Denominator:
<S> <C> <C>
Denominator for basic net income per share--weighted average shares 37,764 32,793
Effect of dilutive securities:
Employee stock options 304 493
Assumed conversion of 6.5% convertible
debentures (1) - -
Assumed conversion of 5.25% convertible notes (1) - -
- ------------------------------------------------------------------------- --------------- ---------------
Denominator for diluted net income per share 38,068 33,286
========================================================================= =============== ===============
</TABLE>
(1) The effect of the convertible securities has been excluded from the
computation of diluted net income per share because it was antidilutive in
the first quarter of fiscal 1998 and fiscal 1997.
<PAGE>
HOMEBASE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Supplemental Balance Sheet Information
Property and equipment consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
May 2, January 31, April 26,
(In thousands) 1998 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and buildings $ 157,589 $ 157,488 $ 156,827
Leasehold improvements 65,023 62,310 59,272
Furniture, fixtures and equipment 141,273 144,662 134,022
- ----------------------------------------------------- ----------------- ---------------- -----------------
363,885 364,460 350,121
Accumulated depreciation (106,765) (105,763) (104,737)
- ----------------------------------------------------- ----------------- ---------------- -----------------
Total $ 257,120 $ 258,697 $ 245,384
===================================================== ================= ================ =================
</TABLE>
Property under capital leases consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
May 2, January 31, April 26,
(In thousands) 1998 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property under capital leases $ 9,696 $ 9,696 $ 10,213
Accumulated depreciation (4,169) (4,059) (4,248)
- ----------------------------------------------------- ----------------- ---------------- -----------------
Total $ 5,527 $ 5,637 $ 5,965
===================================================== ================= ================ =================
</TABLE>
9. 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 13 weeks ended May 2, 1998 includes a charge of
approximately $0.7 million, net of taxes, related to the settlement of the Plan.
10. 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
first quarter of fiscal 1998, the Company incurred cash expenditures of $0.6
million, primarily for lease obligations on closed facilities. As of May 2,
1998, $12.1 million remained accrued on the Company's balance sheet consisting
primarily of lease obligations on closed facilities, which extend through 2007.
<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 13 weeks ended April
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 January 31, 1998 are referred to
herein as "fiscal 1998" and "fiscal 1997", respectively. The 13 weeks ended May
2, 1998 and April 26, 1997 are referred to herein as the "first quarter of
fiscal 1998" and the "first 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
- ----------------------------------------------------------------------------------------------------------
May 2, April 26,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales, including buying and occupancy costs 78.0 78.4
- -------------------------------------------------------------------------- --------------- ---------------
Gross profit 22.0 21.6
Selling, general and administrative expenses 21.7 19.8
- -------------------------------------------------------------------------- --------------- ---------------
Operating income 0.3 1.8
Interest on debt and capital leases, net 0.3 0.8
- -------------------------------------------------------------------------- --------------- ---------------
Income from continuing operations before income taxes - 1.0
Provision for income taxes 0.4
- -------------------------------------------------------------------------- --------------- ---------------
Income from continuing operations - 0.6
Income from discontinued operations, net of income tax - 2.4
- -------------------------------------------------------------------------- --------------- ---------------
Net income -% 3.0%
========================================================================== ================ ==============
</TABLE>
Net Sales
Net sales for the first quarter of fiscal 1998 decreased 3.1% to $348.9 million
from $360.2 million in the first quarter of fiscal 1997. The decrease in net
sales was primarily due to declines in same store sales and net store closures.
Net sales for the same 81 stores open in the first quarter of both years
declined 3.0% primarily due to the disruption caused by store remodel
construction, abnormal weather patterns and increased competition in many of the
markets in which the Company operates.
During the first quarter of fiscal 1998, 17 stores were remodeled, compared to
two stores in the comparable prior-year period.
Since the beginning of fiscal 1997, two new stores were opened and three stores
were closed.
<PAGE>
Cost of Sales
Cost of sales, which includes buying and occupancy costs, was 78.0% of net sales
for the first quarter of fiscal 1998, compared to 78.4% in the first quarter of
fiscal 1997. The decrease as a percentage of net sales was primarily due to
higher average selling margins due to a change in the mix of product sold. The
increase in selling margins was partially offset by slightly higher buying and
occupancy costs as a percentage of sales in the first quarter of fiscal 1998
compared to the first quarter of fiscal 1997, due primarily to the overall
decline in sales and the fixed nature of certain buying and occupancy costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were 21.7% of net sales
for the first quarter of fiscal 1998, compared to 19.8% of net sales for the
first quarter of fiscal 1997. The increase as a percentage of net sales is
primarily attributable to higher remodel related costs, the overall decline in
net sales quarter over quarter and pre-tax settlement costs of approximately
$1.1 million associated with the termination of the Waban Inc. Retirement Plan.
In the first quarter of fiscal 1998, the Company incurred remodel related costs
of approximately $4.0 million, compared to $0.3 million in the first quarter of
fiscal 1997.
Interest Expense
Net interest expense from continuing operations for the first quarter of fiscal
1998 was $1.1 million compared to $2.8 million for the comparable prior-year
period. Corporate interest expense for the first quarter of fiscal 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 is primarily
attributable to lower average outstanding debt balances and higher interest
income earned on investments in the first quarter of fiscal 1998 compared to the
comparable prior-year period. Interest income on investments was $0.8 million
for the first quarter of fiscal 1998 compared to approximately $0.3 million in
the comparable prior-year period.
Income Tax Provision
The income tax provision rate for the first quarter of fiscal 1998 was 39.8%
compared to 39.2% in the comparable prior-year period.
Income From Continuing Operations
Income from continuing operations for the first quarter of fiscal 1998 was $0.1
million, or $0.0 per share, diluted, compared to $2.3 million, or $0.07 per
share, diluted, in the comparable prior-year period.
Income from continuing operations as a percentage of net sales was 0.0% for the
first quarter of fiscal 1998, compared to 0.6% in the comparable prior year
period. The decline is primarily due to a higher SG&A percentage, partially
offset by a higher gross profit percentage and lower interest expense.
Income from continuing operations for the first quarter of fiscal 1997 includes
all of the corporate overhead expenses incurred by the Company prior to the
Distribution and an allocation of the Company's interest expense prior to the
Distribution. As a result of the Distribution, the conversion of the convertible
subordinated debt into common stock and the refinancing of $112 million of other
indebtedness, income from continuing operations for periods preceding the
Distribution is not comparable to the Company's income from continuing
operations after the Distribution. Refer to Pro Forma Financial Information
below.
Net Income
Net income for the first quarter of fiscal 1998 was $0.1 million, or $0.00 per
share, diluted, compared to $10.8 million, or $0.32 per share, diluted, in the
comparable prior-year period. Net income for the first quarter of fiscal 1998
includes a pension termination charge of $0.7 million, net of tax. The first
quarter of fiscal 1997 included income from discontinued operations of $8.5
million, or $0.25 per share, diluted.
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
first quarter of fiscal 1998, the Company incurred cash expenditures of $0.6
million, primarily for lease obligations on closed facilities. As of May 2,
1998, $12.1 million remained accrued on the Company's balance sheet 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 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.
Pro Forma Financial Information (Unaudited)
The table below presents income from continuing operations for the first quarter
of fiscal 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 for the first
quarter of fiscal 1997 was $3.8 million.
The following unaudited pro forma financial information for the quarter ended
April 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 quarter
ended April 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 unaudited 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.
The pro forma results for the Company are as follows:
<TABLE>
<CAPTION>
13 Weeks Ended
- ----------------------------------------------------------------------------------------------------------
April 26,
(In thousands, except per share amounts) 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Net sales $ 360,204
Cost of sales, including buying and occupancy costs 282,259
Selling, general and administrative expenses 70,642
- -------------------------------------------------------------------------------- -------------------------
Operating income (loss) 7,303
Interest on debt and capital leases, net 1,012
- -------------------------------------------------------------------------------- -------------------------
Provision (benefit) for income taxes 2,504
- -------------------------------------------------------------------------------- -------------------------
Income (loss) from continuing operations $ 3,787
================================================================================ =========================
Diluted net income (loss) per share from continuing operations $ 0.10
================================================================================ =========================
</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 70% of its programs are now Year 2000 compliant,
and that it will be more than 80% Year 2000 compliant by the second 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. This program is primarily being completed with internal resources. As a
result, the Company does not believe that achieving Year 2000 compliance will
have a material impact on the Company's financial position, liquidity or results
of operations.
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents and marketable securities totaled $60.1 million as of
May 2, 1998. Cash flow from operations and amounts available under the Company's
$90 million revolving credit facility are the Company's principal sources of
additional liquidity.
At May 2, 1998, the Company had no borrowings under its revolving credit
facility, and had $13.5 million of letters of credit outstanding. At June 5,
1998, the Company had $76.2 million available for borrowing under the revolving
credit facility.
During the 13 weeks ended May 2, 1998, net cash provided by operating activities
of continuing operations was $23.1 million compared to $50.1 million in the
comparable prior-year period. The decrease in the current year was primarily
attributable to a lower accounts payable-to-inventory ratio at the beginning of
fiscal 1997 compared to the beginning of fiscal 1998 and higher prepaid federal
and state income taxes in the current year compared to the prior year.
Net cash used in investing activities of continuing operations was $17.2 million
for the three months ended May 2, 1998, compared to net cash used of $3.1
million in the comparable 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 $13.5 million this year versus $3.4 million in the comparable
prior-year period. Capital expenditures for the first three months of fiscal
1998 include the remodeling of 17 stores, compared to capital expenditures for
the remodeling of two stores in the comparable prior-year period. The Company's
capital expenditures in fiscal 1998 are expected to total approximately $45
million to $55 million and include two planned store openings and 1 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.
During the 13 weeks ended May 2, 1998, the Company purchased $3.9 million of
marketable securities, compared to no purchases in the first quarter of fiscal
1997.
Net cash provided by financing activities of continuing operations was $0.2
million for the three months ended May 2, 1998, compared to $0.3 million in the
comparable prior-year period. Current year activities primarily consisted of
proceeds from the sale and issuance of common stock of $.3 million, partially
offset by payments of real estate debt and capital leases of $0.1 million.
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
30, 1999.
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.
<PAGE>
Part 2. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the
first quarter of fiscal 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
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: June 9, 1998 /s/ ALLAN P. SHERMAN
Allan P. Sherman
President and Chief Executive Officer
Date: June 9, 1998 /s/ WILLIAM B. LANGSDORF
William B. Langsdorf
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
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