-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PGi3p23w3k23cH341QaTO8STKfuPOTDNwzJJk7tFciPzRW76YBdwZUz9J02DBeNP Wc61S2lxfhjFQQeJfIo3dQ== 0000850316-98-000002.txt : 19980410 0000850316-98-000002.hdr.sgml : 19980410 ACCESSION NUMBER: 0000850316-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980409 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMEBASE INC CENTRAL INDEX KEY: 0000850316 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 330109661 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10259 FILM NUMBER: 98590772 BUSINESS ADDRESS: STREET 1: 3345 MICHELSON DR CITY: IRVINE STATE: CA ZIP: 92715 BUSINESS PHONE: 7144425000 MAIL ADDRESS: STREET 1: ONE MERCER ROAD CITY: NATICK STATE: MA ZIP: 01760 FORMER COMPANY: FORMER CONFORMED NAME: WABAN INC DATE OF NAME CHANGE: 19920703 10-K 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 ------------- Commission File Number 1-10259 HOMEBASE, INC. (Formerly Waban Inc.) (Exact name of Registrant as specified in its charter) DELAWARE 33-0109661 (State or other jurisdiction of incorporation or (I.R.S. Employer organization) Identification No.) 3345 Michelson Drive Irvine, CA 92612 (Address of principal executive offices) (Zip Code) (714) 442-5000 (Registrant's telephone number, including area code) ------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ----------------------------- Common Stock, par value $.01 New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 16, 1998 was $321,143,746. There were 37,788,135 shares of the Registrant's Common Stock, $.01 par value, outstanding as of March 16, 1998. Documents Incorporated by Reference Portions of the Proxy Statement for the Annual Meeting of Stockholders (Part III). ------------------------ Exhibits to Form 10-K have been included only in copies of the Form 10-K filed with the Securities and Exchange Commission. - -------------------------------------------------------------------------------- PART 1 Item 1. Business General HomeBase, Inc. (the "Company"), formerly Waban Inc., was formed in 1989, when Zayre Corp. (now The TJX Companies, Inc. ("TJX")) combined its BJ's Wholesale Club division ("BJ's") and HomeBase division to form Waban Inc., and distributed all of the Company's outstanding common stock to TJX shareholders on a pro-rata basis. On July 26, 1997, the Company transferred all of the net assets of 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"). In connection with the Distribution, the Company changed its name from Waban Inc. to HomeBase, Inc. The Company and BJI are now independent public companies separately traded on the New York Stock Exchange. The Company is the second largest operator of home improvement warehouse stores in the western United States with 83 stores in 10 states. The Company's stores average approximately 102,000 square feet of indoor space, typically with an additional outdoor garden center area. The Company offers a broad assortment of brand name home improvement and building supply products at competitive prices to both Do-It-Yourself ("DIY") and professional customers. In certain categories, the Company supplements its brand name offerings with high quality private label products. The Company's objective is to be the first choice destination for home improvement shoppers by combining product selection at competitive prices with superior customer service. In order to achieve this objective, the Company is completing the roll-out of its prototype store format, which features a reconfigured layout that is designed to be more attractive to DIY shoppers and is designed to segregate merchandise of primary interest to contractors and other professional customers for easier access. In addition, the reconfigured layout facilitates shopping for all products needed to complete a project, and highlights high-end product lines. Management believes this prototype has proven successful in attracting more DIY customers while better meeting the needs of professional customers. The Company operates within a conventional 52 or 53 week accounting fiscal year that ends on the last Saturday in January. The 53 weeks ended January 31, 1998 is referred to herein as "fiscal 1997". The 52 weeks ended January 25, 1997 and January 27, 1996 are referred to herein as "fiscal 1996" and "fiscal 1995", respectively. Significant Business Developments In October 1997, the Board of Directors approved an accelerated growth strategy that included the remodeling of the remaining 17 stores in the Company's remodel program over the following six months and increasing the rate of new store openings. The Company expects that the remodeling of 16 stores will be completed in the first quarter of fiscal 1998, with the remodeling of the final store being completed in the third quarter of fiscal 1998. The Company expects to open two new stores in fiscal 1998 and to open between eight and 10 new stores in each of the following two fiscal years. In connection with the accelerated growth strategy, the Board of Directors also approved the closure of three under-performing stores, and the Company recorded a pre-tax charge of $27.0 million for store closures and other charges in the third quarter of fiscal 1997. On November 17, 1997, the Company completed the private placement of $100 million, 5.25% convertible subordinated notes due November 1, 2004 through a Rule 144A/Regulation S offering, and received approximately $96 million, net of debt issue costs. The Company expects to use the proceeds to finance its accelerated growth strategy and for general corporate purposes. The Company subsequently filed a registration statement on Form S-3, which was declared effective on February 10, 1998, registering the notes and the common stock into which the notes are convertible. Industry Overview The Company believes that demographic and lifestyle factors such as the maturing of baby boomers, the increase in home-centered activities and the aging housing stock will create growing demand for home improvement products and services. Based on industry sources, the overall market for home improvement products in the United States is estimated to exceed $148 billion in calendar 1998. Since the mid 1980's, warehouse-format home improvement retailers have gained significant market share in the United States by offering lower prices, greater product selection and more in-stock merchandise than traditional home center, hardware and lumber yard operators. In addition, warehouse store operators have been able to take advantage of economies of scale created by large sales volumes. Although the home improvement industry remains fragmented, it has experienced increasing consolidation during recent years, with the sales of the five largest operators representing approximately 31% of the estimated overall market in calendar 1997 as compared to 12% of the estimated overall market in calendar 1989. The Company believes that this trend will continue, and that opportunities exist for service-oriented home improvement retailers to benefit from this continuing consolidation. Store Base The Company is one of the two largest home improvement operators in most of the markets which it serves. The Company's new store opening plan is oriented towards reinforcing its position in its existing markets and expanding selectively into contiguous markets. On October 28, 1997, the Company announced plans to increase the pace of scheduled store openings over the next three years. The Company expects that, after the scheduled opening of two new stores in fiscal 1998, the pace of expansion will increase to opening between eight and 10 stores in each of fiscal 1999 and fiscal 2000. The following table shows the number of Company stores opened and closed during the last five fiscal years:
- ----------------------------------------------------------------------------------------------------------- Stores in Stores Stores Stores Operation at Opened Closed in Operation Beginning of During the During the at End of Fiscal Year Period Period Period Period - ----------------------------------------------------------------------------------------------------------- 1993 86 5 9 82 1994 82 3 8 77 1995 77 4 2 79 1996 79 5 - 84 1997 84 2 3 83 - -----------------------------------------------------------------------------------------------------------
Between 1993 and January 31, 1998, the Company has remodeled or relocated 44 of its stores and opened 16 new stores incorporating the prototype store design. The Company expects to complete 16 of the 17 remaining stores in its remodeling program in the first quarter of fiscal 1998, rather than over the next two years, as previously planned. Thus, nearly all of the Company's stores will be operating in the prototype format in the spring of 1998, in time for the Company's peak selling season. The Company expects that the final store in its remodel program will be completed in the third quarter of fiscal 1998. Customer Service The Company is committed to providing superior service to its two targeted customer groups. At each store, carefully selected home improvement specialists, many of whom have extensive experience in their respective fields, are available throughout the store to assist DIY and professional customers. The Company's project and kitchen design centers feature computer assisted design tools that allow customers to work with design coordinators to conceptualize and plan virtually any home improvement project. Nearly all of the Company's stores also offer the services of professional interior decorators who provide free design consultations in customers' homes. The Company believes that it is important to expand its DIY business by encouraging new DIY customers and upgrading the skills and confidence levels of existing DIY customers. Accordingly, the Company provides assistance and training to DIY customers, including regularly scheduled customer clinics on a wide range of home improvement projects. Delivery and installation services are also available to DIY customers. The Company's stores also offer services that specifically address the needs of professional customers. Nearly all of the Company's stores have Contractor Desks, with staff dedicated to handling contractors' special needs, including the ability to receive faxed orders and pre-assemble them for pick-up, and to quickly obtain special items and sizes. Bulk purchases can be delivered to job sites for a nominal fee. The Company's stores offer extended hours, opening early in the morning to serve professional customers. The Company strives to develop the skills of its store personnel to ensure that customers consistently receive knowledgeable and courteous assistance. The Company provides extensive training for its store personnel through a comprehensive in-house training program that combines on-the-job training with formal seminars and meetings to emphasize the importance of customer service and help to improve store employees' selling skills. In-house training includes periodic sessions conducted by the Company's training staff or by manufacturers' representatives, as well as frequent meetings with store managers who provide sales, product and other information. The Company's satellite television system permits it to simultaneously broadcast training sessions from its Irvine, California headquarters to every individual store location. The Company offers its own private label credit card to DIY and professional customers under a non-recourse program operated by a major financial institution. The Company also accepts MasterCard, Visa, Discover and American Express. Merchandising The Company's stores offer a broad selection of brand name merchandise to both DIY customers and professional contractors, offering between 32,000 and 42,000 SKUs regularly in stock, depending upon the season, plus thousands of additional SKUs available through special order. The Company believes that the operating efficiencies of the warehouse store format provide substantial savings over other channels of home improvement and building supply product distribution. In order to achieve greater operational efficiencies, reduce freight and handling costs, and improve the manner in which it purchases products, the Company has centralized its merchandise replenishment operations and improved its logistics of distribution. This program also permits the Company to redeploy more store personnel to customer service activities. Merchandise sold by the Company's stores includes lumber, building materials, plumbing supplies and fixtures, electrical materials and fixtures, kitchen cabinets, hand and power tools, hardware, paint, garden supplies, nursery items, home decorative items and related seasonal and household merchandise. The Company's brand name orientation allows customers to compare the Company's prices to the same items offered by competitors. In selected categories, the Company supplements these brand name offerings with high quality private label products, such as its Infinity(R) line of paint. Most of the Company's merchandise is purchased from manufacturers for shipment either directly to the individual store or to cross-docking facilities where large shipments are broken down and separated for transfer to individual stores, generally on a same-day basis. More than 55% of the Company's merchandise is distributed to individual stores through its consolidation and distribution center in Rancho Cucamonga, California. Seasonality Sales and earnings for the Company 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. Marketing and Advertising The Company addresses its primary target customers through a mix of newspaper, direct mail, radio and television advertising. The primary advertising medium is newspaper advertisements, including both freestanding inserts and run-of-press ads. Television and radio advertising is used to reinforce the Company's image of providing superior customer service and a broad assortment of merchandise at competitive prices. Additionally, the Company participates in or hosts a variety of home shows, customer hospitality events and contractor product shows. The Company solicits vendor participation in many of its advertising programs. Management Information Systems The Company uses a fully integrated management information system to monitor sales, track inventory and provide rapid feedback on the performance of its business. Each store operates point-of-sale terminals which capture information on each item sold via UPC scanning. Minicomputers at each store process and consolidate this information during the selling day and transmit it each night to the Company's information center via satellite, where it is processed daily to support merchandising, inventory replenishment and promotional decisions. The Company introduced scanning to the home improvement industry and is a leader in implementing electronic data interchange ("EDI"). EDI permits both the Company and its vendors to save money and reduce errors by electronically transmitting advance shipment notices and purchase order and invoicing information. The Company now uses EDI with more than 1,200 vendors and continues to expand its use of this technology. 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 60% 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. Competition The Company competes with other home improvement warehouse stores and a wide range of businesses engaged in the wholesale or retail sale of home improvement and building supply merchandise, including home centers, hardware stores, lumber yards and discount stores. The Company believes that the major competitive factors in the markets in which it competes are customer service, product selection, location, price and name recognition. The Company believes that its level of customer service, the value offered by its competitive prices and the one-stop shopping available through its full range of home improvement products give it an advantage over many of its traditional home center competitors. The major competitor in the Company's market areas that also uses the warehouse store format is The Home Depot, Inc., which has significantly greater financial and marketing resources than the Company. Approximately 90% of the Company's stores compete with Home Depot stores. The Company also competes with Builders Square (a division of Hechinger Company) and a number of smaller regional operators such as Eagle Hardware & Garden, Inc. and Orchard Supply & Hardware (a division of Sears, Roebuck, and Co.). Approximately 95% of the Company's stores have at least one home improvement warehouse retailer in their trading areas within an average distance of approximately three miles. Employees As of January 31, 1998, the Company had approximately 9,100 employees ("team members"), of whom approximately 2,800 were considered part-time (working less than 33 hours per week). Approximately 500 team members were employed in corporate management and office support functions; the balance worked in the Company's stores. None of the Company's team members is represented by a union. The Company considers its relations with its team members to be excellent. The number of team members employed fluctuates depending on the selling season, and is typically higher during the second and third quarters, which include the most active seasons for home improvement sales. Item 2. Properties The Company operated 83 stores as of January 31, 1998, of which 65 are leased under long-term leases and 18 are owned. The unexpired terms of the leases range from approximately four to 20 years, and average approximately 13 years. The Company has options to renew all of its leases for periods that range from approximately five to 25 years and average approximately 18 years. These leases require fixed monthly rental payments which are subject to various adjustments. In addition, certain leases require payment of a percentage of the store's gross sales in excess of certain amounts. The Company also remains obligated under leases for five additional stores that have been closed. Most leases require that the Company pay all property taxes, insurance, utilities and other operating costs of the store. The following table sets forth the number and location of the Company's stores:
- -------------------------------------------------------------------------------- Number of State Stores - -------------------------------------------------------------------------------- California 47 Washington 8 Colorado 7 Arizona 5 Oregon 4 Nevada 3 New Mexico 3 Utah 3 Texas 2 Idaho 1 - -------------------------------------------------------------------------------- Total 83 ================================================================================
The average size of the Company's 83 stores in operation at January 31, 1998 was approximately 102,000 square feet. Most of the Company's stores utilize outside selling space for nursery and garden centers. The Company's stores are located in both free-standing locations and shopping centers. In some locations, a HomeBase store shares a center with a membership warehouse club or another large retailer. Including space for parking, a typical new HomeBase store requires eight to ten acres of land. Construction and site development costs for a new HomeBase store average approximately $5.0 million, land acquisition costs generally range from $2.0 million to $6.0 million, and the initial capital investment for fixtures and equipment averages approximately $1.7 million. In addition to capital expenditures, each new store requires an investment of approximately $2.8 million for inventory (net of accounts payable) and pre-opening expenses. The Company's home office in Irvine, California occupies 164,000 square feet under a lease expiring July 24, 2004, with options to extend the lease through July 24, 2019. The Company's consolidation and distribution center in Rancho Cucamonga, California occupies 410,000 square feet under a lease expiring March 31, 1999, with options to extend the lease through March 31, 2009. Item 3. Legal Proceedings The Company is involved in various legal proceedings incident to the nature of its business. Although it is not possible to predict the outcome of these proceedings, or any claims against the Company related thereto, the Company believes that such proceedings will not, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations. 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 fourth quarter of fiscal 1997. Item 4A. Executive Officers of the Registrant The following persons are the executive officers of the Company as of the date hereof:
- ---------------------------- ------ ------------------------------------------------------------------------ Office and Employment Name Age During Last Five Years - ---------------------------- ------ ------------------------------------------------------------------------ Herbert J. Zarkin 59 Chairman of the Board of the Company since July 1997 and Director of the Company since May 1993; President, Chief Executive Officer of the Company (May 1993 - July 1997); President of BJ's (1990 - May 1993); Executive Vice President of the Company (1989 - 1993). Allan P. Sherman 53 President, Chief Executive Officer and Director of the Company since July 1997; Executive Vice President of the Company (May 1993 - July 1997); President of the HomeBase division (September 1993 - July 1997); President of BJ's (May 1993 - September 1993); Senior Vice President and General Merchandise Manager--Non-Food of BJ's (1991 - 1993). Thomas F. Gallagher 46 Executive Vice President, Store Operations since July 1997; Executive Vice President, Store Operations of the HomeBase division (1996 - 1997); Vice President, Sales Operations of BJ's (1993 - 1996); Assistant Vice President, Regional Manager of BJ's (1991 - 1993). William B. Langsdorf 41 Executive Vice President and Chief Financial Officer since July 1997; Senior Vice President, Finance of the HomeBase division (1993 - 1997); Assistant Vice President, Finance of the HomeBase division (1991 - 1993). Scott L. Richards 40 Executive Vice President, Merchandising since July 1997; Executive Vice President, Merchandising of the HomeBase division (1996 - 1997); Vice President, Merchandising of the HomeBase division (1993 - 1996); Buyer for the HomeBase division (1991 - 1993). John L. Price 47 Vice President, General Counsel and Secretary since July 1997; Assistant General Counsel of 20th Century Industries (1995 - 1997); private legal practice (1991 - 1995). - ---------------------------- ------ ------------------------------------------------------------------------
All officers hold office until the next annual meeting of the Board of Directors in May 1998 and until their successors are elected and qualified. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters The common stock of HomeBase, Inc. (the "Company"), formerly Waban Inc., is listed on the New York Stock Exchange (symbol HBI). The following are the quarterly high and low stock prices for the fiscal years ending January 31, 1998 and January 25, 1997:
- --------------------------------------- --------------------------------- ---------------------------------- Fiscal Year Ended Fiscal Year Ended Quarters January 31, 1998 January 25, 1997 - --------------------------------------- --------------------------------- ---------------------------------- High Low High Low First 29 1/2 26 5/8 27 1/8 18 3/4 Second 35 5/16 26 3/8 28 17 7/8 Third (1) 35 15/16 7 11/16 27 5/8 18 3/8 Fourth (1) 10 1/16 6 3/4 28 3/8 25 - --------------------------------------- ---------------- ---------------- ---------------- -----------------
(1) 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"). In connection with the Distribution, the Company changed its name from Waban Inc. to HomeBase, Inc. The Company and BJI are now independent public companies separately traded on the New York Stock Exchange. Stock prices on or before July 28, 1997 have not been restated to reflect the Distribution. The number of stockholders of record at March 16, 1998 was 3,411. The Company has never paid or declared a cash dividend and the Company does not intend to pay or declare any cash dividends on the Common Stock in the future. The Senior Bank Facility does not permit the Company to pay cash dividends. The declaration of and payment of dividends by the Company will be at the discretion of the Board of Directors. Item 6. Selected Financial Data SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following selected consolidated financial and operating data of the Company for each of the four fiscal years in the period ended January 31, 1998 are extracted or derived from the audited Consolidated Financial Statements, and the notes thereto, of the Company, which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected consolidated financial and operating data of the Company for the fiscal year ended January 29, 1994 is extracted or derived from the unaudited Consolidated Financial Statements of the Company, which in the opinion of management, reflect all material adjustments, consisting of only normal recurring adjustments necessary for a fair presentation of such data. The selected consolidated financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations--The Company" and the Consolidated Financial Statements and the notes thereto.
Fiscal Year Ended - --------------------------------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, January 28, January 29, (Dollars in thousands, except per share data) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- (53 Weeks) Income Statement Data: Net sales $1,477,442 $1,452,696 $1,448,776 $1,357,190 $1,585,956 Cost of sales, including buying and occupancy costs 1,159,253 1,136,997 1,124,460 1,056,620 1,279,084 - --------------------------------------------------------------------------------------------------------------------------------- Gross profit 318,189 315,699 324,316 300,570 306,872 Selling, general and administrative expenses 287,181 277,841 275,655 248,112 272,256 Store closures, restructuring, and other charges 27,000 - - - 101,133 - --------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) 4,008 37,858 48,661 52,458 (66,517) Interest on debt and capital leases (net) 5,136 10,506 8,790 9,125 7,661 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and extraordinary loss and accounting change (1,128) 27,352 39,871 43,333 (74,178) Provision (benefit) for income taxes (445) 11,005 15,386 16,395 (30,733) - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before extraordinary loss and accounting change (683) 16,347 24,485 26,938 (43,445) Income from discontinued operations, net of income taxes 20,575 60,313 48,492 38,052 26,865 Extraordinary loss on early extinquishment of debt, net of income taxes (8,663) - - - - Cumulative effect of change in accounting principle, net of income taxes - - - - (1,202) - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 11,229 $ 76,660 $ 72,977 $ 64,990 $ (17,782) ================================================================================================================================= Basic net income (loss) per share (1): Income (loss) from continuing operations before extraordinary $ (0.02) $ 0.50 $ 0.74 $ 0.81 $ (1.31) loss and accounting change Income from discontinued operations 0.57 1.83 1.47 1.15 0.81 Extraordinary loss (0.24) - - - - Cumulative effect of change in accounting principle - - - - (0.04) - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.31 $ 2.33 $ 2.21 $ 1.96 $ (0.54) ================================================================================================================================= Diluted net income (loss) per share (1): Income (loss) from continuing operations before extraordinary $ (0.02) $ 0.49 $ 0.74 $ 0.81 $ (1.31) loss and accounting change Income from discontinued operations 0.57 1.82 1.46 1.14 0.81 Extraordinary loss (0.24) - - - - Cumulative effect of change in accounting principle - - - - (0.04) - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 0.31 $ 2.31 $ 2.20 $ 1.95 $ (0.54) ================================================================================================================================= Shares used in computation of net income (loss) per share: (In thousands) Basic 35,770 32,839 33,014 33,143 33,082 Diluted 35,770 33,205 33,220 33,405 33,082 Balance Sheet Data: Working capital $ 240,828 $ 275,842 $ 265,450 $ 308,749 $ 213,315 Net assets of discontinued operations (2) - 423,688 403,713 322,945 301,958 Total assets 715,608 1,077,059 1,066,188 1,011,705 873,478 Long-term debt and obligations under capital leases 115,963 242,548 255,803 269,223 185,566 Stockholders' equity 359,667 631,925 555,120 488,089 420,492 Stores open at end of period 83 84 79 77 82 - ---------------------------------------------------------------------------------------------------------------------------------
(1) The Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share" ("SFAS 128") in fiscal 1997. All net income (loss) per share amounts for all periods presented have been restated to conform to SFAS 128 requirements (2) On July 26, 1997, the Company transferred all of the net assets of BJ's to BJI and on July 28, 1997, the Company completed the Distribution. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Organization and Presentation On July 26, 1997, HomeBase, Inc. (the "Company"), formerly known as Waban Inc., transferred all of the net assets of its BJ's Wholesale Club division ("BJ's") to BJ's Wholesale Club, Inc. ("BJI"). On July 28, 1997, the Company distributed to its stockholders, on a pro-rata basis, all of the outstanding common stock of BJI (the "Distribution"). The financial statements for the periods presented have been restated to present BJ's as a discontinued operation. Income from discontinued operations for the fiscal year ended January 31, 1998 includes transaction costs of $5.0 million (net of tax) incurred in connection with the Distribution. The discussion which follows pertains to the continuing operations of the Company, unless otherwise noted. The Company operates within a conventional 52 or 53 week accounting fiscal year which ends on the last Saturday in January. The 53 weeks ended January 31, 1998 is referred to herein as "fiscal 1997". The 52 weeks ended January 25, 1997 and January 27, 1996 are referred to herein as "fiscal 1996" and "fiscal 1995", respectively. The following table presents the results of operations for the periods indicated as a percentage of net sales.
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales, including buying and occupancy costs 78.5 78.3 77.6 - ----------------------------------------------------------------------------------------------------------- Gross profit 21.5 21.7 22.4 Selling, general and administrative expenses 19.4 19.1 19.0 Store closures and other charges 1.8 - - - ----------------------------------------------------------------------------------------------------------- Operating income 0.3 2.6 3.4 Interest on debt and capital leases (net) 0.3 0.7 0.6 - ----------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and extraordinary loss - 1.9 2.8 Provision (benefit) for income taxes - 0.8 1.1 - ----------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before extraordinary loss - 1.1 1.7 Income from discontinued operations, net of income taxes 1.4 4.2 3.3 - ----------------------------------------------------------------------------------------------------------- Income before extraordinary loss 1.4 5.3 5.0 Extraordinary loss on early extinguishment of debt, net of income taxes (0.6) - - - ----------------------------------------------------------------------------------------------------------- Net income 0.8% 5.3% 5.0% ===========================================================================================================
Fiscal Year Ended January 31, 1998 Compared to Fiscal Years Ended January 25, 1997 and January 27, 1996 Net Sales Fiscal 1997 consisted of 53 weeks compared to 52 weeks in each of fiscal 1996 and fiscal 1995. Net sales for fiscal 1997 increased 1.7% to $1,477.4 million from $1,452.7 million in fiscal 1996, and increased 2.0% from $1,448.8 million in fiscal 1995. The increase in net sales over these periods was primarily attributable to new store openings plus the additional week of sales in fiscal 1997, partially offset by declines in comparable store sales and by store closures. During fiscal 1997, 1996 and 1995, two, five and four stores were opened, respectively, and three, zero and two stores were closed, respectively. Comparable store sales declined 1.7% and 5.2% in fiscal 1997 and 1996, respectively. The declines were primarily attributable to increased competition in many of the markets in which the Company operates. The comparable store sales decline in fiscal 1997 was also attributable to extensive remodel construction, especially in the fourth quarter. The comparable store sales decline in fiscal 1996 was also attributable to the relative weakness in the Southern California housing market. Cost of Sales Cost of sales, which includes buying and occupancy costs, was 78.5% of net sales in fiscal 1997, compared to 78.3% in fiscal 1996 and 77.6% in fiscal 1995. The increase as a percent of net sales is primarily due to a combination of slightly lower average selling margins, which were impacted by competitive conditions, and somewhat higher buying and occupancy costs as a percentage of sales, due to comparable store sales declines. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") was 19.4% of net sales in fiscal 1997, compared to 19.1.% in fiscal 1996 and 19.0% in fiscal 1995. The increase as a percent of net sales is primarily attributable to higher remodel related costs in fiscal 1997, primarily incurred in the fourth quarter, partially offset by lower preopening costs due to fewer stores being opened in fiscal 1997. In October 1997, the Board of Directors approved an accelerated growth strategy that included the remodeling of the remaining 17 stores in the Company's remodel program over the following six months and increasing the rate of new store openings. The Company expects that the remodeling of 16 of the remaining 17 stores will be completed in the first quarter of fiscal 1998, with the remodeling of the final store being completed in the third quarter of fiscal 1998. As a result of the acceleration of remodels, the Company incurred remodel related costs of approximately $4 million in the fourth quarter of fiscal 1997, and expects to incur a similar amount in the first quarter of fiscal 1998. Store Closures and Other Charges In connection with the accelerated growth strategy, the Board of Directors also approved the closure of three under-performing stores. In the third quarter of fiscal 1997, the Company recorded store closures and other charges of $27.0 million, consisting of $22.3 million for store closures and other related settlement costs, a $3.0 million increase in the fiscal 1993 restructuring reserve and $1.7 million in asset impairment charges. Costs included in the reserve for store closures primarily include lease obligations on closed facilities, write-downs of fixed assets and other related settlement costs. The Company closed two stores in the fourth quarter of fiscal 1997 and expects to close a third store by the end of fiscal 1999. The Company increased the fiscal 1993 restructuring reserve by $3.0 million for additional lease obligations due to delays in obtaining subleases at terms acceptable to the Company. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of the individual stores. The Company's quarterly SFAS 121 analysis performed in the third quarter of fiscal 1997 indicated that the long-lived assets at two stores were impaired. Accordingly, the Company estimated the fair value of these assets based on their estimated salvage value and recorded an impairment charge of $1.7 million, which is included in store closures and other charges. Interest on Debt and Capital Leases, Net Interest on debt and capital leases, net, was $5.1 million in fiscal 1997 compared to $10.5 million in fiscal 1996 and $8.8 million in fiscal 1995. Interest on debt and capital leases is presented net of interest and investment income of $2.6 million, $1.8 million and $5.9 million in fiscal 1997, 1996 and 1995, respectively. Net interest expense excludes capitalized interest of $0, $0.9 million and $1.6 million in fiscal 1997, 1996 and 1995, respectively. Interest expense was allocated to discontinued operations based on the ratio of BJ's net assets to the sum of consolidated net assets plus consolidated debt. The decline in net interest expense in fiscal 1997 from fiscal 1996 is primarily attributed to lower average outstanding debt balances in fiscal 1997. In July 1997, $106.7 million of the Company's 6.5% convertible subordinated debentures was converted into common stock and the remaining $0.2 million was redeemed for cash. Also in July 1997, the Company repaid all of its 9.58% senior notes due May 31, 1998, totaling $12.0 million, and pursuant to a tender offer, repaid $93.4 million of its 11% senior subordinated notes due May 15, 2004, replacing this debt with short-term bank borrowings. BJI assumed $72 million of the bank borrowings at the time of the Distribution. The increase in net interest expense in fiscal 1996 from fiscal 1995 is primarily attributed to lower investment income due to decreased investments in marketable securities. Partially offsetting the increase in net interest expense was a lower amount of interest capitalized in fiscal 1996 compared to fiscal 1995, and lower average outstanding debt balances in fiscal 1996. Income Tax Provision (Benefit) The income tax rate for income from continuing operations was 39.5% in fiscal 1997 compared to 40.2% in fiscal 1996 and 38.6% in fiscal 1995. The lower effective rate in fiscal 1997 is primarily attributed to a decrease in the effective tax rate in the state of California, where most of the Company's stores are located. The increase in the effective rate in fiscal 1996 from fiscal 1995 is primarily attributed to a lower level of tax-exempt investments in fiscal 1996 than in fiscal 1995. Income (Loss) From Continuing Operations Before Extraordinary Loss Income (loss) from continuing operations before extraordinary loss for fiscal 1997 was $(0.7) million, or $(0.02) per share, diluted, compared to $16.3 million, or $0.49 per share, diluted, and $24.5 million, or $0.74 per share, diluted, in fiscal 1996 and 1995, respectively. Excluding store closures and other charges, income from continuing operations for fiscal 1997 was $15.6 million, or $0.44 per share, diluted. Excluding store closures and other charges, income (loss) from continuing operations for fiscal 1997 as a percentage of net sales was 1.1%, compared to 1.1% in fiscal 1996 and 1.7% in fiscal 1995. The fiscal 1997 percentage, when compared to fiscal 1996, reflects a slightly lower gross profit percentage, slightly higher SG&A and lower interest expense, as described above. The decline in fiscal 1996 from fiscal 1995 is primarily attributed to a lower gross profit percentage, slightly higher SG&A and interest expense and a slightly higher tax provision rate. Income from continuing operations 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. Net Income Net income in fiscal 1997 was $11.2 million, or $0.31 per share, diluted, compared to $76.7 million, or $2.31 per share, diluted, in fiscal 1996 and $73.0 million, or $2.20 per share, diluted, in fiscal 1995. These amounts include income from discontinued operations for periods prior to the Distribution. Income from discontinued operations in fiscal 1997, which includes the net income of BJ's for the first six months, reduced by $5.0 million of transaction costs, net of tax, incurred in connection with the Distribution, was $20.6 million, or $0.57 per share, diluted, compared to $60.3 million, or $1.82 per share, diluted, in fiscal 1996 and $48.5 million, or $1.46 per share, diluted, in fiscal 1995. The results for fiscal 1997 include an extraordinary loss of $8.7 million, net of tax, recorded in July 1997, associated with the early extinguishment of the Company's 9.58% senior notes due May 31, 1998 and of $93.4 million of its 11% senior subordinated notes due May 15, 2004. Restructuring Reserves As of January 25, 1997, $13.5 million of the Company's fiscal 1993 restructuring charge remained accrued on the Company's consolidated balance sheet. During fiscal 1997, the Company incurred cash expenditures of $3.5 million, primarily for lease obligations on closed facilities, and non-cash charges of $0.3 million for write-downs of fixed assets. As of January 31, 1998, $12.7 million remained accrued on the Company's consolidated balance sheet (including $3.0 million in fiscal 1997 additions to the reserve), consisting primarily of lease obligations on closed facilities, which extend through 2007. 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 60% 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. 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. Recent Accounting Standards Preopening costs consist of direct incremental costs of opening a facility and are charged to operations within the fiscal year that a new store opens. The American Institute of Certified Public Accountants recently approved the Statement of Position ("SOP") entitled "Reporting on the Cost of Start-Up Activities." The SOP, which will require entities to expense as incurred start-up and preopening costs that are not otherwise capitalizable as long-lived assets, is expected to be effective for fiscal years beginning after December 15, 1998. The Company plans to adopt this SOP in the first quarter of fiscal 1998, which will not have a material impact on the Company's results of operations. No amounts were deferred at January 31, 1998. The Company adopted SFAS 128 in fiscal 1997. All prior period net income per share figures have been restated to conform to the requirements of SFAS 128. In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. The Company currently does not have items of a material nature that would require presentation in a separate statement of comprehensive income. In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was issued. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. The provisions of SFAS 131 are effective for fiscal years beginning after December 15, 1997. The Company does not currently have any reportable segments as defined in SFAS 131. Pro forma Financial Information (Unaudited) Presented below are tables that recast income from continuing operations on a pro forma basis to reflect the estimated effects of the Distribution, which include reductions in administrative expenses and interest costs. On this pro forma basis, income from continuing operations for fiscal 1997 (which includes the actual results for the six months ended January 31, 1998 after the Distribution) was $1.5 million, compared to $21.8 million for fiscal 1996. Excluding store closures and other charges, pro forma income from continuing operations in fiscal 1997 was $17.8 million, or $0.47 per share, diluted. The following unaudited pro forma financial information for the six quarters ended July 26, 1997 is based on management's good faith estimate of what the Company's operating performance would have been as a stand-alone corporation, and is provided for comparative analytical purposes only. Also shown are the actual results for the quarters ended October 25, 1997 and January 31, 1998, after the Distribution. Selling, general, and administrative expenses reflect a pro forma estimate of costs that the Company would have incurred related to corporate overhead activities performed by the Company's corporate staff prior to the Distribution. These costs, estimated at $5.8 million in fiscal 1997 and 1996, have been allocated evenly between quarters. Pro forma interest expense for all periods assumes that the capital structure that was established immediately after the Distribution had been in place for all periods presented. The components of interest expense are capital lease interest, mortgage interest, and credit agreement costs, all of which have been spread evenly by quarter, and bank borrowing interest expense, which has been spread to reflect the typical seasonal requirements of the business. The average estimated draw under the revolving credit facility is assumed to be $23 million. These unaudited financial data do not purport to represent the actual changes in the historical cash/borrowing position. The provision for income taxes is estimated at 39.8%. The number of shares used in the calculation of pro forma diluted net income (loss) per share is 37.9 million for all periods shown, except for the quarters ended October 25, 1997 and January 31, 1998, and the year ended January 31, 1998, which reflect the actual weighted average shares outstanding of 37.6 million. Common stock equivalents are considered antidilutive and are excluded from this calculation. All pro forma adjustments are based upon available information and assumptions that management believes are reasonable under the circumstances. This information does not purport to represent what the results of operations of the Company would have actually been if the Distribution had in fact been consummated in prior periods or at any future date or what the results of operations of the Company will be for any future period. The pro forma results for the Company are as follows: Fiscal Year Ended January 31, 1998
Quarter Ended - -------------------------------- --------------- -------------- ------------- ------------ ------------------ April 26, July 26, October 25, January 31, (In thousands, except per share 1997 1997 1997 1998 Full Year amounts) (Pro forma) (Pro forma) (Actual) (Actual) (Pro forma) - -------------------------------- --------------- -------------- ------------- ------------ ------------------ (14 Weeks) (53 Weeks) Net Sales $ 360,204 $ 420,404 $ 368,432 $ 328,402 $ 1,477,442 Cost of sales, including buying and occupancy costs 282,259 327,049 289,527 260,409 1,159,244 Selling, general and administrative expenses 70,642 72,768 68,635 73,835 285,880 Store closures and other charges - - 27,000 - 27,000 - -------------------------------- --------------- ------------- -------------- ------------ ------------------ Operating income (loss) 7,303 20,587 (16,730) (5,842) 5,318 Interest on debt and capital leases, net 1,012 853 355 608 2,828 Provision (benefit) for income taxes 2,504 7,854 (6,797) (2,566) 995 ================================ =============== ============= ============== ============ ================== Income (loss) from continuing operations $ 3,787 $ 11,880 $ (10,288) $ (3,884) $ 1,495 ================================ =============== ============= ============== ============ ================== Diluted net income (loss) per share from continuing operations $ 0.10 $ 0.31 $ (0.27) $ (0.10) $ 0.04 ================================ =============== ============= ============== ============ ==================
Fiscal Year Ended January 25, 1997
Quarter Ended - ------------------------------- -------------- ------------- -------------- ------------- ------------------- April 27, July 27, October 26, January 25, (In thousands, except per 1996 1996 1996 1996 Full Year share amounts) (Pro forma) (Pro forma) (Pro forma) (Pro forma) (Pro forma) - ------------------------------- -------------- ------------- -------------- ------------- ------------------- Net sales $ 352,242 $ 424,271 $ 366,410 $ 309,773 $ 1,452,696 Cost of sales, including buying and occupancy costs 272,484 328,602 287,973 247,938 1,136,997 Selling, general and administrative expenses 72,953 74,181 67,878 61,363 276,375 - ------------------------------- -------------- ------------- -------------- ------------- ------------------- Operating income 6,805 21,488 10,559 472 39,234 Interest on debt and capital leases, net 1,012 853 771 1,153 3,789 Provision (benefit) for income taxes 2,306 8,213 3,896 (272) 14,143 - ------------------------------- -------------- ------------- -------------- ------------- ------------------- Income (loss) from continuing operations $ 3,487 $ 12,422 $ 5,892 $ (409) $ 21,392 =============================== ============== ============= ============== ============= =================== Diluted net income (loss) per share from continuing operations $ 0.09 $ 0.33 $ 0.16 $ (0.01) $ 0.56 =============================== ============== ============= ============== ============= ===================
Liquidity and Capital Resources Cash and cash equivalents and marketable securities classified as available for sale totaled $50.1 million as of January 31, 1998. Cash flow from operations and amounts available under the Company's revolving credit facility are the Company's principal sources of liquidity. In July 1997, the Company entered into a new $125 million credit agreement ("New Credit Agreement") with a group of banks which expires July 9, 2000. This agreement replaced the Company's $150 million credit facility which was scheduled to expire March 30, 1999, but was terminated immediately following the Distribution. In October 1997, the New Credit Agreement was amended and the total facility was reduced to $90 million. The New Credit Agreement includes a $40 million sub-facility for letters of credit and is collateralized by inventory and accounts receivable. The Company is required to pay an annual facility fee which is currently 0.35% of the total commitment. Interest on borrowings is payable at the Company's option either at (a) the Eurodollar rate plus a margin, which is currently 1.45%, or (b) the agent bank's prime rate plus a margin, which is currently 0.2%. The facility fee and borrowing margins are subject to adjustment based upon the Company's fixed-charge coverage ratio. The credit facility is subject to certain covenants which include minimum tangible net worth and fixed-charge coverage requirements, a maximum funded debt-to-capital limitation, and a prohibition on the payment of cash dividends. At January 31, 1998, the Company had no borrowings under its revolving facility, and had $20.9 million of letters of credit outstanding. At April 2, 1998, the Company had $71.8 million available for borrowing under the revolving facility. During fiscal 1997, net cash provided by operating activities of continuing operations was $51.2 million compared to net cash used of $17.7 million in fiscal 1996. The increase in fiscal 1997 was primarily attributable to a higher accounts payable-to-inventory ratio and higher accrued expenses at the end of fiscal 1997 relative to fiscal 1996. Net cash used in investing activities of continuing operations was $38.8 million in fiscal 1997 compared to net cash used of $23.8 million in fiscal 1996. Investing activities primarily consist of capital expenditures and investments in marketable securities. Fiscal 1997 capital expenditures for continuing operations were $26.4 million compared to $48.4 million in fiscal 1996. During fiscal 1997, the Company opened two new stores and closed three stores. In fiscal 1996, the Company opened five new stores. Capital expenditures for fiscal 1997 also include the remodeling of 25 stores (eight of which had been completed before year end), compared to capital expenditures for the remodeling of 16 stores (14 of which had been completed before year end) in fiscal 1996. The Company's capital expenditures are expected to total approximately $45 million to $55 million in fiscal 1998. The timing of actual store openings and renovations and the amount of related expenditures could vary from these estimates due, among other things, to the complexity of the real estate development process. As a result of the Company's accelerated growth strategy, the Company incurred remodel related costs of approximately $4 million in the fourth quarter of fiscal 1997 and expects to incur a similar amount in the first quarter of fiscal 1998. During fiscal 1997, the Company had net purchases of $12.8 million of marketable securities, compared to net proceeds of $20.2 million in fiscal 1996. Fiscal 1997 purchases of marketable securities includes $7.7 million of US Treasury securities, which the Company deposited in escrow with the trustee of its 11% senior subordinated notes to cover interest and principal payments for the outstanding notes balance of $6.6 million at January 31, 1998. Net cash used in financing activities of continuing operations was $35.0 million for fiscal 1997, compared to net cash used of $15.6 million in fiscal 1996. Fiscal 1997 activities primarily consisted of repayment of $130.7 million in long-term debt, including approximately $12.7 million of call premiums, and cash paid to BJ's of $5.0 million in connection with the Distribution. Partially offsetting these payments were proceeds from the sale and issuance of common stock of $5.8 million, and net proceeds of approximately $96 million from the private placement of a $100 million 5.25% convertible debt offering. During the second quarter of fiscal 1997, the Company repaid its 9.58% senior notes totaling $24.0 million (including $12.0 million then currently due and $12.0 million due May 15, 1998), and repaid $93.4 million of its 11% senior subordinated notes, replacing this debt with $96 million of short-term bank borrowings. BJI assumed $72 million of the bank borrowings at the time of the Distribution. A total of $6.6 million of the Company's 11% senior subordinated notes remains outstanding, which the Company intends to call and repay on May 15, 1999, with the maturities of the US Treasury Securities deposited with the trustee of the notes. During the quarter ended July 26, 1997, $106.7 million of the Company's 6.5% convertible subordinated debentures was converted into common stock and the remaining $0.2 million was redeemed for cash. On November 17, 1997, the Company completed the private placement of $100 million, 5.25% convertible subordinated notes due November 1, 2004 through a Rule 144A/Regulation S offering, and received approximately $96 million, net of debt issue costs. The Company subsequently filed a registration statement on Form S-3, which was declared effective on February 10, 1998, registering the notes and the common stock into which the notes are convertible. The notes are convertible, subject to adjustment in certain events, into approximately 9.8 million shares of the Company's common stock at a conversion price of $10.22 per share at any time after February 15, 1998 and prior to maturity unless earlier redeemed or repurchased. Subsequent to November 1, 2000, the notes are redeemable at the option of the Company, in whole or in part, initially at 103.15% of principal and thereafter at prices declining to 100% on or after November 1, 2003, together with accrued interest. Interest is payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 1998. The Company intends to use the proceeds to finance its accelerated growth strategy and for general corporate purposes. The Company expects that its current resources, including the revolving 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-K contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report, the words "believe," "estimate," "expect," "anticipate," "plans," and similar expressions are intended to identify forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from those expected. Although the Company believes that comments reflected in such forward-looking statements are reasonable, they are based on information existing at the time made. Important factors that could cause actual results to differ materially from expectations include, but are not limited to, the successful implementation of the Company's accelerated growth strategy, general economic conditions prevailing in the Company's markets, competition and other factors included below. Risk Factors Risks Associated with Accelerated Growth Strategy. The Company is implementing a strategy designed to strengthen its market position in the western United States and improve its profitability. Specifically, the Company completed the remodeling of eight stores during fiscal 1997, and expects to complete the remodeling of 16 stores in the first quarter of fiscal 1998 and one store in the third quarter of fiscal 1998. The Company may continue to experience a negative impact on sales and margins at stores being remodeled during the remodel period. In addition, the Company intends to increase the pace of new store openings. There can be no assurance that the Company will be able to complete this remodeling program on schedule or within budget or that remodeled stores will realize an improvement in net sales. The Company opened two new stores in fiscal 1997 and intends to open two new stores during fiscal 1998. The Company expects to open between eight and 10 stores in each of fiscal 1999 and fiscal 2000. The Company estimates that it will cost approximately $4.5 million to open each of these new stores (excluding land acquisition and building development costs). The Company's ability to open new stores on a timely and profitable basis is subject to various contingencies, some of which are beyond the Company's control. These contingencies include the Company's ability to (i) find suitable new warehouse store locations of sufficient size and at acceptable prices, (ii) acquire the necessary governmental and regulatory permits and approvals, including zoning and development permits, (iii) construct the warehouse stores at budgeted cost and in a timely manner, (iv) hire and train sufficient numbers of qualified store managers and staff for new stores, and (v) integrate these new warehouse stores into the Company's operations. There can be no assurance that the Company will achieve its planned expansion or that the Company's new or remodeled stores will achieve sales, gross profit or operating income comparable to existing stores. Although the Company's management carefully selects new store locations, there can be no assurance that the opening of additional HomeBase stores in existing markets will not negatively impact sales at existing HomeBase locations. The accelerated growth strategy will require an increase in Company personnel, particularly store managers and sales associates, who possess the training and experience necessary to meet the Company's customer service standards. The Company may find it difficult to attract, develop and retain the personnel necessary to pursue its growth strategy successfully. The Company will also need to continually evaluate the adequacy of its management information systems, including its inventory control and distribution systems, and in the future may need to upgrade or reconfigure its management information systems to support its planned expansion. Moreover, as the Company grows, it will need to continually analyze the sufficiency of its warehouse and distribution space and may require additional facilities to support such growth. The inability of the Company to attract and retain the necessary personnel, to expand and enhance its management information systems, or to increase its warehouse and distribution space could have a material adverse effect on the Company's results of operations and financial condition. The Company's operating results and financial condition could be materially adversely affected if it encounters difficulties in implementing any part of its accelerated growth strategy. There can be no assurance that the Company will be able to successfully implement its accelerated growth strategy or that such strategy, if successfully implemented, will result in an improvement of the Company's operating results. Competition. The home improvement, hardware and garden businesses are highly competitive. The Company competes with a large number and variety of wholesalers and retailers, including several large national chains in the home improvement warehouse merchandising business, some of which have significantly greater financial and marketing resources than the Company. Major competitors of the Company that use the warehouse store format include The Home Depot, Inc., Eagle Hardware & Garden, Inc. and Builder's Square (a division of Hechinger Company). Competition exists primarily in the areas of price, product selection, location, service and name recognition. Competitive factors could require price reductions or cause an increase in operating costs, including increases in expenditures for marketing and customer service, that would adversely affect the Company's operating results. The Company will also experience competition for qualified personnel and for suitable new store locations of sufficient size at acceptable prices. Some markets in which the Company currently operates or might operate in the future may already be at or near the saturation point in terms of home improvement stores. Certain of the Company's principal competitors appear to have a strategy of clustering stores within or saturating markets in which they operate, or of placing their warehouse stores so close to the Company's stores as to directly challenge the Company's competitive position in such markets. Such strategies could have a material adverse effect on the Company's current operations and upon the profitability of the Company's accelerated growth strategy. Approximately 95% of the Company's stores have at least one home improvement warehouse retailer within their trading area at an average distance of approximately three miles. The Company expects that its existing competitors, some of whom either have expansion plans in place or may seek to imitate the Company's strategy, will open additional stores in the Company's current market areas, which could adversely affect the Company's competitive position. Absence of Operating History as a Separate Company. Prior to the Distribution, the business of the Company was operated as a division of a much larger company, and therefore, the Company does not have a significant operating history as a separate stand-alone company. Prior to the Distribution, BJ's and the HomeBase division each had access to the cash flow generated by the other and to the Company's combined credit, which was based on the combined assets and operating results of BJ's and the HomeBase division. The ability of the Company to access credit facilities and capital markets in the future will depend on its financial performance as a separate stand-alone company. To the extent the Company experiences reduced access to capital or higher capital costs, the Company may have difficulty financing its growth strategy, which could have a material adverse effect on the Company's results of operations and financial condition. Reliance on Certain Markets. The Company's home improvement stores are located in the western United States, with more than half of them in California. The Company has been adversely affected from time to time by economic downturns experienced in its geographic markets, and future economic downturns in such regions could adversely affect the Company. In particular, the performance of the Company's stores in recent years has been affected by the downturn in the Southern California housing market. Although the Company believes that the Southern California housing market is experiencing a recovery, there is no assurance that such recovery will continue or that such recovery, if sustained, would improve the Company's operating results. In addition, the Company is subject to other regional risks, including those related to or arising out of weather conditions, natural disasters, and state and local government regulation. The occurrence of any of the events described above may have a material adverse effect on the Company's results of operations and financial condition, and on its store expansion program. Declines in Comparable Store Sales. A variety of factors affects the Company's same store sales, including, among others, the timing and concentration of new store openings, actions of competitors (including the opening of additional stores in the Company's markets), the retail sales environment, general economic conditions, weather conditions and the Company's ability to execute its business strategy effectively. In recent years, the Company's comparable stores sales have been negatively affected by increased competition and the depressed economic conditions in its major markets, particularly Southern California. There can be no assurance that these and other factors will not result in further declines or fluctuations in comparable store sales, which could have a material adverse effect on the Company's results of operations and financial condition. Environmental Risks and Regulations. The Company is subject to a variety of federal, state and local governmental laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law, which could adversely affect operations. The Company does not have environmental liability insurance to cover such events. The Company has engaged and may continue to engage in real estate development projects and owns 18 parcels of real estate on which its stores are located. While the Company is unaware of any significant environmental hazard on properties it owns or has owned, or operates or has operated. In the event of any discovery of such hazard, severe penalties, including the costs of remediation, could be sought against the Company, which could have a material adverse effect on the Company's results of operations and financial condition. Negative Consequence of Failure to Qualify as Tax Free Spin-Off. Prior to the Distribution, the Company received a letter ruling (the "Letter Ruling") from the Internal Revenue Service ("IRS") to the effect that, for Federal income tax purposes, the Distribution and certain related asset transfers would qualify as a spin-off under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code") that would be tax-free to the Company and to the holders of the Company's Common Stock at the time of the Distribution. The Letter Ruling is based on and subject to certain assumptions, facts, representations and advice provided by the Company, BJI, holders of 5% or more of the Company's Common Stock and the Company's financial advisor at the time of the Distribution. Although the Company is not aware of any facts or circumstances that would make such assumptions, facts, representations and advice unobtainable or untrue, certain future events not within the control of the Company and BJI, including, for example, an IRS challenge to the Distribution in the event that BJI or the Company is acquired before the end of fiscal 1998, could cause the Distribution not to qualify for tax-free treatment, resulting in adverse consequences to the Company and to its stockholders. Potential Conflicts of Interest; Management Overlap. The interests of BJI and the Company may conflict due to the ongoing relationships between the companies. Such sources of conflict include the fact that the Company remains liable for certain contractual obligations of BJI, including BJI leases, and the other arrangements between the parties regarding lease liabilities. In addition, Herbert J. Zarkin currently holds the executive offices of Chairman of the Company's Board of Directors and Chairman of BJI's Board of Directors; Lorne R. Waxlax serves as a member of the board of directors of both the Company and BJI; and Edward J. Weisberger serves as an officer and director of both the Company and BJI. Appropriate procedures are being followed by the Company's Board of Directors to limit the involvement of Messrs. Zarkin, Weisberger and Waxlax in conflict situations, including requiring them to abstain from voting as directors of the Company on certain matters. Repurchase of Notes at the Option of Holders Upon a Change of Control; Non-availability of Funds. In the event of a Change of Control, as defined, each holder of the Company's $100 million 5.25% Senior Subordinated Notes (the "Notes") has the right to require the Company to repurchase the Notes in whole or in part at a redemption price of 100% of the principal amount thereof, plus accrued interest to the repurchase date. If a Change of Control were to occur, there can be no assurance that the Company would have the financial resources or be able to arrange financing on acceptable terms to pay the repurchase price for all the Notes as to which the purchase right is exercised. Further, any repurchase in connection with a Change of Control could, depending on the circumstances and absent a waiver from the holders of Senior Debt, be blocked due to the subordination provisions of the Notes. Failure by the Company to repurchase the Notes when required may result in an Event of Default with respect to the Notes (and with respect to Senior Debt) whether or not such repurchase is permitted by the subordination provisions. Continuing Obligations of the Company for Certain Lease Liabilities After the Distribution. Pursuant to the Distribution, BJI assumed all liabilities to third-party lessors with respect to leases entered into by the Company with respect to BJ's. While the Company will continue to be liable, by law, with respect to such lease liabilities, BJI has agreed to indemnify the Company for such liabilities. However, there is no assurance that BJI will be able to make payments under the indemnity. Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Accountants........................................................................................25 Report of Management.....................................................................................................25 Consolidated Statements of Income for the fiscal years ended January 31, 1998, January 25, 1997 and January 27, 1996....................................................................................26 Consolidated Balance Sheets as of January 31, 1998 and January 25, 1997..................................................27 Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, January 25, 1997 and January 27, 1996....................................................................................28 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 31, 1998, January 25, 1997 and January 27, 1996....................................................................................29 Notes to Consolidated Financial Statements...............................................................................30
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of HomeBase, Inc.: We have audited the accompanying consolidated balance sheets of HomeBase, Inc. (formerly Waban Inc.) and subsidiaries as of January 31, 1998 and January 25, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of HomeBase, Inc. (formerly Waban Inc.) and subsidiaries as of January 31, 1998 and January 25, 1997, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND, L.L.P. Los Angeles, California March 2, 1998 REPORT OF MANAGEMENT The consolidated financial statements and related financial information in this annual report have been prepared by and are the responsibility of management. The consolidated financial statements were prepared in accordance with generally accepted accounting principles and necessarily include amounts which are based upon judgments and estimates made by management. The company maintains a system of internal controls designed to provide, at appropriate cost, reasonable assurance that the assets are safeguarded, transactions are executed in accordance with management's authorization and the accounting records may be relied upon for the preparation of the consolidated financial statements. The accounting and control systems are continually reviewed by management and modified as necessary in response to changing business conditions and the recommendations of the Company's internal auditors and independent accountants. The Audit Committee, which is comprised of members of the Board of Directors who are neither officers nor employees, meets periodically with management, the internal auditors and the independent accountants to review matters relating to the Company's financial reporting, the adequacy of internal accounting control and the scope and results of audit work. The internal auditors and the independent accountants have free access to the Committee. The consolidated financial statements have been audited by Coopers & Lybrand L.L.P., whose opinion as to their fair presentation in accordance with generally accepted accounting principles appears above. /s/ ALLAN P. SHERMAN /s/ WILLIAM B. LANGSDORF Allan P. Sherman William B. Langsdorf President and Executive Vice President and Chief Executive Officer Chief Financial Officer HOMEBASE, INC. (Formerly Waban Inc.) CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Fiscal Year Ended - ------------------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- (53 Weeks) Net sales $ 1,477,442 $ 1,452,696 $ 1,448,776 Cost of sales, including buying and occupancy costs 1,159,253 1,136,997 1,124,460 - ------------------------------------------------------------------------------------------------------------------- Gross profit 318,189 315,699 324,316 Selling, general and administrative expenses 287,181 277,841 275,655 Store closures and other charges 27,000 - - - ------------------------------------------------------------------------------------------------------------------- Operating income 4,008 37,858 48,661 Interest on debt and capital leases (net) 5,136 10,506 8,790 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and extraordinary loss (1,128) 27,352 39,871 Provision (benefit) for income taxes (445) 11,005 15,386 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before extraordinary loss (683) 16,347 24,485 Income from discontinued operations, net of income taxes of $16,496, $38,661, and $31,075 20,575 60,313 48,492 - ------------------------------------------------------------------------------------------------------------------- Income before extraordinary loss 19,892 76,660 72,977 Extraordinary loss on early extinguishment of debt, net of income tax benefit of $5,896 (8,663) - - - ------------------------------------------------------------------------------------------------------------------- Net income $ 11,229 $ 76,660 $ 72,977 =================================================================================================================== Basic net income per share: Income (loss) from continuing operations before extraordinary loss $ (0.02) $ 0.50 $ 0.74 Income from discontinued operations 0.57 1.83 1.47 Extraordinary loss (0.24) - - - ------------------------------------------------------------------------------------------------------------------- Net income $ 0.31 $ 2.33 $ 2.21 =================================================================================================================== Diluted net income per share: Income (loss) from continuing operations before extraordinary loss $ (0.02) $ 0.49 $ 0.74 Income from discontinued operations 0.57 1.82 1.46 Extraordinary loss (0.24) - - - ------------------------------------------------------------------------------------------------------------------- Net income $ 0.31 $ 2.31 $ 2.20 =================================================================================================================== Shares used in computation of net income per share: Basic 35,770 32,839 33,014 Diluted 35,770 33,205 33,220
The accompanying notes are an integral part of the consolidated financial statements. HOMEBASE, INC. (Formerly Waban Inc.) CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
- --------------------------------------------------------------------------------------------------------------------------------- January 31, January 25, 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 44,603 $ 16,896 Marketable securities 5,515 - Accounts receivable, net of allowance for doubtful accounts of $293 and $227 27,781 25,261 Merchandise inventories 314,188 316,538 Current deferred income taxes 11,973 9,876 Prepaid expenses and other current assets 9,857 4,975 Prepaid federal and state income taxes 10,265 8,768 Net current assets of discontinued operations - 62,942 - --------------------------------------------------------------------------------------------------------------------------------- Total current assets 424,182 445,256 Property and equipment, net 258,697 249,035 Property under capital leases, net 5,637 6,090 Deferred income taxes 13,965 11,300 Other assets 13,127 4,632 Net noncurrent assets of discontinued operations - 360,746 ================================================================================================================================= Total assets $ 715,608 $ 1,077,059 ================================================================================================================================= LIABILITIES Current liabilities: Accounts payable $ 96,122 $ 84,903 Restructuring reserve 6,151 2,799 Accrued expenses and other current liabilities 80,783 69,058 Current installments of long-term debt 72 12,474 Obligations under capital leases due within one year 226 180 - --------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 183,354 169,414 Long-term debt 107,015 221,018 Obligations under capital leases, less portion due within one year 8,650 8,876 Noncurrent restructuring reserve 6,537 10,738 Other noncurrent liabilities 50,385 35,088 Commitments and contingencies STOCKHOLDERS' EQUITY Common stock, par value $.01 per share, authorized 190,000,000 shares, issued 37,707,372 and 33,269,537 shares 377 333 Additional paid-in capital 373,456 329,719 Unrealized holding gains 6 - Retained net income (deficit) (14,172) 311,873 Treasury stock, at cost, 0 and 528,596 shares - (10,000) - --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 359,667 631,925 Total liabilities and stockholders' equity $ 715,608 $ 1,077,059 =================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. HOMEBASE, INC. (Formerly Waban Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- (53 Weeks) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,229 $ 76,660 $ 72,977 Adjustments to reconcile net income to net cash provided by operating activities: Net income from discontinued operations (20,575) (60,313) (48,492) Depreciation and amortization 25,409 23,620 20,118 Extraordinary loss 8,663 - - Loss on property disposals 620 1,037 671 Amortization of premium on marketable securities - 122 752 Other noncash items (net) 1,755 375 643 Deferred income taxes (4,762) 7,384 4,044 Increase (decrease) in cash due to changes in: Accounts receivable (136) 3,018 394 Merchandise inventories 2,350 (17,740) (20,036) Prepaid expenses and other current assets (4,882) (952) (724) Other assets (74) (488) (154) Accounts payable 11,219 (21,945) 7,210 Restructuring reserve (1,135) (14,591) (14,460) Accrued expenses and other current liabilities (345) (6,988) 5,188 Prepaid federal and state income taxes 6,601 (5,315) 10,466 Other noncurrent liabilities 15,297 (1,572) 6,358 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities of: Continuing operations 51,234 (17,688) 44,955 Discontinued operations 1,559 111,851 57,543 - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 52,793 94,163 102,498 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (13,203) (29,903) (146,778) Sale of marketable securities - 46,957 131,632 Maturity of marketable securities 365 3,140 58,352 Property additions (26,431) (48,393) (73,300) Property disposals 489 4,438 8,461 - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities of: Continuing operations (38,780) (23,761) (21,633) Discontinued operations (23,269) (71,282) (90,114) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (62,049) (95,043) (111,747) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt 100,000 - - Repayment of long-term debt (130,746) (12,828) (12,763) Debt issue costs (4,861) - - Repayment of capital lease obligations (180) (395) (657) Purchase of treasury stock - (11,392) (9,906) Proceeds from sale and issuance of common stock 5,815 9,016 2,044 Cash paid to BJ's Wholesale Club, Inc. in spin-off (5,000) - - - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities of: Continuing operations (34,972) (15,599) (21,282) Discontinued operations 71,935 (231) (304) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 36,963 (15,830) (21,586) Net increase (decrease) in cash and cash equivalents 27,707 (16,710) (30,835) Cash and cash equivalents at beginning of year 16,896 33,606 64,441 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 44,603 $ 16,896 $ 33,606 ================================================================================================================= Supplemental cash flow information: Interest paid (including discontinued operations) $ 9,480 $ 21,229 $ 21,038 Income taxes paid (including discontinued operations) 35,713 45,937 37,222 Noncash financing and investing activities: Conversion of long-term debt to stock (net) $ 107,061 $ 24 $ - Tax benefit of employee stock options 2,202 2,122 955 - -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. HOMEBASE, INC. (Formerly Waban Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------ Unrealized Additional Holding Retained Total Paid-In Gains Earnings Stockholders' Common Stock Capital (Losses) (Deficit) Treasury Stock Equity - ------------------------------------------------------------------------------------------------------------------------------------ Shares Amount Shares Amount --------- --------- --------- -------- Balance, January 28, 1995 33,186 $332 $325,565 $ (44) $162,236 - $ - $ 488,089 Net income - - - - 72,977 - - 72,977 Unrealized holding gains (losses) - - - 66 - - - 66 Purchase of treasury stock - - - - - (622) (9,906) (9,906) Exercise of stock options 126 1 1,204 - - 54 839 2,044 Income tax benefit of stock options 3 - 955 - - - - 955 Amortization of restricted stock grants - - 895 - - - - 895 Cancellation of restricted stock (18) - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 27, 1996 33,297 333 328,619 22 235,213 (568) (9,067) 555,120 Net income - - - - 76,660 - - 76,660 Unrealized holding gains (losses) - - - (22) - - - (22) Purchase of treasury stock - - - - - (570) (11,392) (11,392) Exercise of stock options - - (715) - - 567 9,731 9,016 Income tax benefit of stock options - - 2,122 - - - - 2,122 Issuance of restricted stock - - (704) - - 41 704 - Amortization of restricted stock grants - - 397 - - - - 397 Cancellation of restricted stock (27) - - - - - - - Conversion of 6.5% debentures - - - - - 1 24 24 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 25, 1997 33,270 333 329,719 - 311,873 (529) (10,000) 631,925 Net income - - - - 11,229 - - 11,229 Unrealized holding gains (losses) - - - 6 - - - 6 Exercise of stock options 158 2 1,780 - - 213 4,031 5,813 Income tax benefit of stock options - - 2,202 - - - - 2,202 Issuance of restricted stock 263 2 - - - - - 2 Amortization of restricted stock grants - - 467 - - - - 467 Cancellation of restricted stock (46) - - - - - - - Conversion of 6.5% debentures 4,062 40 101,052 - - 316 5,969 107,061 Equity transfer in spin-off of BJ's Wholesale Club, Inc. - - (61,764) - (337,274) - - (399,038) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 31, 1998 37,707 $ 377 $373,456 $ 6 $(14,172) - $ - $ 359,667 ====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization HomeBase, Inc. (the "Company"), formerly known as Waban Inc., operates home improvement warehouse stores in 10 western states. On July 26, 1997, the Company transferred all of the net assets of its BJ's Wholesale Club division ("BJ's") to BJ's Wholesale Club, Inc. ("BJI"). On July 28, 1997, the Company distributed to its stockholders on a pro-rata basis all of the outstanding common stock of BJI (the "Distribution"). The financial statements for the periods presented have been restated to present BJ's as a discontinued operation. Income from discontinued operations for the fiscal year ended January 31, 1998 includes transaction costs of $5.0 million (net of tax) incurred in connection with the Distribution. 2. Summary of Accounting Policies Basis of Presentation The consolidated financial statements of the Company include the financial statements of the Company's subsidiaries, all of which are wholly owned. Fiscal Year The Company operates within a conventional 52 or 53 week accounting fiscal year that ends on the last Saturday in January. The 53 weeks ended January 31, 1998 is referred to herein as "fiscal 1997". The 52 weeks ended January 25, 1997 and January 27, 1996 are referred to herein as "fiscal 1996" and "fiscal 1995", respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents The Company considers highly liquid investments with an original maturity of three months or less at time of purchase to be cash equivalents. Investments with maturities exceeding three months are classified as marketable securities. Marketable Securities Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. Merchandise Inventories Inventories are stated at the lower of cost, determined under the weighted average cost method, or market. The Company recognizes the write-down of slow-moving or obsolete inventory in cost of sales when such write-downs are probable and estimable. Property and Equipment Property and equipment are stated at cost. Depreciation expense includes amortization of property under capital leases. Depreciation and amortization is provided using the straight-line method using the following estimated useful lives.
- -------------------------------------------------------------------------------------------------------------- Buildings 33 years Property under capital leases and leasehold improvements Shorter of lease term or useful life Furniture, fixtures, and equipment 3-10 years - --------------------------------------------------------------------------------------------------------------
Preopening Costs Preopening costs consist of direct incremental costs of opening a facility and are charged to operations within the fiscal year that a new store opens. The American Institute of Certified Public Accountants recently approved the Statement of Position ("SOP") entitled "Reporting on the Cost of Start-Up Activities." The SOP, which will require entities to expense as incurred start-up and preopening costs that are not otherwise capitalizable as long-lived assets, is expected to be effective for fiscal years beginning after December 15, 1998. The Company plans to adopt this SOP in the first quarter of fiscal 1998, which will not have a material impact on the Company's results of operations. No amounts were deferred at January 31, 1998. 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 $2.6 million, $1.8 million, and $5.9 million in fiscal 1997, 1996, and 1995, respectively. Capitalized Interest The Company capitalizes interest related to the development of owned facilities. No interest was capitalized in fiscal 1997. Interest in the amount of $0.9 million and $1.6 million was capitalized in fiscal 1996 and 1995, respectively. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-Lived Assets In fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). The adoption of SFAS 121 had no impact on the Company's financial position or on its results of operations. In accordance with SFAS 121, long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of the individual stores and consolidated undiscounted net cash flows for long-lived assets not identifiable to individual stores. Impairment losses are calculated based on the estimated salvage value of the impaired assets. Advertising Costs Advertising costs are expensed as incurred. Net advertising expense was $19.5 million, $18.9 million and $18.1 million for fiscal years 1997, 1996 and 1995, respectively. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than proposed changes in the tax law or rates. Discontinued Operations Net sales from discontinued operations were $1,464.4 million, $2,922.8 million and $2,529.6 million for fiscal years 1997, 1996 and 1995, respectively. Interest expense was allocated to discontinued operations based on the ratio of BJ's net assets to the sum of consolidated net assets plus consolidated debt. Stock-Based Compensation The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related Interpretations in accounting for its stock-based compensation. Reclassifications Certain prior period amounts have been reclassified to conform to the current year presentation. New Accounting Standards In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") was issued. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. The Company currently does not have items of a material nature that would require presentation in a separate statement of comprehensive income. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") was issued. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. The provisions of SFAS 131 are effective for fiscal years beginning after December 15, 1997. The Company does not currently have any reportable segments as defined in SFAS 131. 3. Supplemental Balance Sheet Information Property and Equipment Property and equipment consists of the following:
- ----------------------------------------------------------------------------------------------------------- January 31, January 25, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Land and buildings $ 157,488 $ 156,862 Leasehold improvements 62,310 58,762 Furniture, fixtures and equipment 144,662 132,409 - ----------------------------------------------------------------------------------------------------------- 364,460 348,033 Accumulated depreciation (105,763) (98,998) - ----------------------------------------------------------------------------------------------------------- Property and equipment, net $ 258,697 $ 249,035 ===========================================================================================================
Property under Capital Leases Property under capital leases consists of the following:
- ----------------------------------------------------------------------------------------------------------- January 31, January 25, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Property under capital leases $ 9,696 $ 10,213 Accumulated depreciation (4,059) (4,123) - ----------------------------------------------------------------------------------------------------------- Property under capital leases, net $ 5,637 $ 6,090 ===========================================================================================================
Accrued Expenses and Other Current Liabilities The major components of accrued expenses and other current liabilities are as follows:
- ----------------------------------------------------------------------------------------------------------- January 31, January 25, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Self-insurance reserves $ 16,818 $ 14,497 Employee compensation 16,471 12,856 Sales and use taxes 7,241 11,691 Rent, utilities, advertising and other 40,253 30,014 - ----------------------------------------------------------------------------------------------------------- Total accrued expenses and other current liabilities $ 80,783 $ 69,058 ===========================================================================================================
HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Net income Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") in fiscal 1997. SFAS 128 replaced the calculation of primary and fully diluted net income per share with basic and diluted net income per share. Unlike primary net income per share, basic net income per share excludes any dilutive effects of stock options and convertible securities. Diluted net income per share is similar to the previously reported fully diluted net income per share. All net income per share amounts for all periods presented have been restated to conform to SFAS 128 requirements. The following table sets forth the computation of net income per share:
Fiscal Year Ended - ------------------------------------------------------- --------------------------------------------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ------------------------------------------------------- ----------------- ---------------- ---------------- Numerator: Income (loss) from continuing operations before extraordinary loss $ (683) $ 16,347 $ 24,485 Income from discontinued operations 20,575 60,313 48,492 Extraordinary loss (8,663) - - - ------------------------------------------------------- ----------------- ---------------- ---------------- Numerator for basic net income per share $ 11,229 $ 76,660 $ 72,977 Effect of dilutive securities: 6.5% convertible debentures (1) - - - 5.25% convertible subordinated notes (1) - - - - ------------------------------------------------------- ----------------- ---------------- ---------------- Numerator for diluted net income per share $ 11,229 $ 76,660 $ 72,977 ======================================================= ================= ================ ================
Fiscal Year Ended - ------------------------------------------------------- ----------------- ---------------- ---------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ------------------------------------------------------- ----------------- ---------------- ---------------- Denominator: Denominator for basic net income per share- weighted average shares 35,770 32,839 33,014 Effect of dilutive securities: Employee stock options (2) - 366 206 Assumed conversion of 6.5% convertible debentures (1) - - - Assumed conversion of 5.25% convertible subordinated notes (1) - - - - ------------------------------------------------------- ----------------- ---------------- ---------------- Denominator for diluted net income per share 35,770 33,205 33,220 ======================================================= ================= ================ ================
(1) The effect of the conversion of the convertible securities has been excluded from the computation of diluted net income per share because it was antidilutive in fiscal 1997, 1996 and 1995. (2) The effect of stock options was antidilutive in fiscal 1997 because the Company reported a netloss from continuing operations. These shares have been excluded from the computation of diluted net income per share in fiscal 1997. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Debt At January 31, 1998 and January 25, 1997, long-term debt consisted of the following:
- ----------------------------------------------------------------------------------------------------------- January 31, January 25, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Real estate debt, interest at 9.25%, maturing through March 1, 2003 $ 450 $ 924 Senior notes, interest at 9.58%, maturing May 31, 1997 through May 31, 1998 - 24,000 Senior subordinated notes, interest at 11%, maturing May 15, 2004 (1) 6,637 100,000 Convertible Subordinated Debt: Convertible debentures, interest at 6.5%, maturing July 1, 2002 - 108,568 Convertible subordinated notes, interest at 5.25%, maturing November 1, 2004 100,000 - - ----------------------------------------------------------------------------------------------------------- 107,087 233,492 Less current installments (72) (12,474) - ----------------------------------------------------------------------------------------------------------- Total long term debt $ 107,015 $ 221,018 ===========================================================================================================
The aggregate maturities of long-term debt outstanding at January 31, 1998 were as follows:
- ----------------------------------------------------------------------------------------------------------- Real Senior Convertible Estate Subordinated Subordinated (In thousands) Debt Debt Debt Total - ----------------------------------------------------------------------------------------------------------- Fiscal years ending January: 1999 $ 72 $ - $ - $ 72 2000 78 - - 78 2001 86 - - 86 2002 95 - - 95 2003 104 - - 104 Later years (1) 15 6,637 100,000 106,652 - ----------------------------------------------------------------------------------------------------------- Total $ 450 $ 6,637 $ 100,000 $ 107,087 ===========================================================================================================
(1) The company intends to call and repay the $6.6 million 11% senior subordinated notes on May 15, 1999. In July 1997, the Company purchased US Treasury securities and deposited them in escrow with the trustee of the notes, to be used to retire the debt and pay interest through May 1999. As of January 31, 1998, long-term real estate debt was collateralized by land and buildings with a net book value of $8.6 million. In July 1997, $106.7 million of the Company's 6.5% convertible subordinated debentures was converted into common stock and the remaining $0.2 million was redeemed for cash. In July 1997, the Company repaid all of its 9.58% senior notes due May 31, 1998, totaling $12.0 million, and pursuant to a tender offer, $93.4 million of its 11% senior subordinated notes due May 15, 2004, replacing this debt with $96 million in short-term bank borrowings. BJI assumed $72 million of the bank borrowings at the time of the Distribution. Results of operations for fiscal 1997 included an extraordinary loss of $8.7 million, net HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) of tax, related to the early extinguishment of Company debt, primarily consisting of call premiums and the write-off of debt issue costs. A total of $6.6 million of the Company's 11% senior subordinated notes remains outstanding, which the Company intends to call and repay on May 15, 1999. In July 1997, the Company purchased US Treasury securities and deposited them in escrow with the trustee of the notes, to be used to retire the debt and pay interest through May 1999. In July 1997, the Company entered into a new $125 million credit agreement ("New Credit Agreement") with a group of banks which expires July 9, 2000. This agreement replaced the Company's $150 million credit facility, which was scheduled to expire March 30, 1999, but was terminated immediately following the Distribution. In October 1997, the New Credit Agreement was amended and the total facility was reduced to $90 million. The New Credit Agreement includes a $40 million sub-facility for letters of credit and is collateralized by inventory and accounts receivable. The Company is required to pay an annual facility fee which is currently 0.35% of the total commitment. Interest on borrowings is payable at the Company's option either at (a) the Eurodollar rate plus a margin, which is currently 1.45%, or (b) the agent bank's prime rate plus a margin, which is currently 0.2%. The facility fee and borrowing margins are subject to adjustment based upon the Company's fixed-charge coverage ratio. The credit facility is subject to certain covenants which include minimum tangible net worth and fixed-charge coverage requirements, a maximum funded debt-to-capital limitation, and a prohibition on the payment of cash dividends. At January 31, 1998, the Company had letters of credit outstanding of approximately $20.9 million primarily to support the purchase of inventories. On November 17, 1997, the Company completed the private placement of $100 million, 5.25% convertible subordinated notes due November 1, 2004 through a Rule 144A/Regulation S offering, and received approximately $96 million, net of debt issue costs. The Company subsequently filed a registration statement on Form S-3, which was declared effective on February 10, 1998, registering the notes and the common stock into which the notes are convertible. The notes are convertible, subject to adjustment in certain events, into approximately 9.8 million shares of the Company's common stock at a conversion price of $10.22 per share at any time after February 15, 1998 and prior to maturity unless earlier redeemed or repurchased. Subsequent to November 1, 2000, the notes are redeemable at the option of the Company, in whole or in part, initially at 103.15% of principal and thereafter at prices declining to 100% on or after November 1, 2003, together with accrued interest. Interest is payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 1998. 6. Commitments and Contingencies The Company is obligated under long-term leases for the rental of real estate and fixtures and equipment, some of which are classified as capital leases pursuant to Statement on Financial Accounting Standards No. 13, "Accounting for Leases". In addition, the Company is generally required to pay insurance, real estate taxes and other operating expenses and, in some cases, additional rentals based on a percentage of sales or increases in the Consumer Price Index. The real estate leases range up to 25 years and have varying renewal options. The fixture and equipment leases range up to 10 years. Future minimum lease payments as of January 31, 1998 were:
- --------------------------------------------------------------------------------------- ------------------- Capital Operating (In thousands) Leases Leases - --------------------------------------------------------------------------------------- ------------------- Fiscal years ending January: 1999 $ 1,432 $ 65,695 2000 1,455 62,723 2001 1,455 61,949 2002 1,455 61,416 2003 1,455 54,936 Later years 11,766 352,059 - --------------------------------------------------------------------------------------- ------------------- Total minimum lease payments 19,018 $ 658,778 =================== Less amount representing interest (10,142) ======================================================================================= Present value of net minimum capital lease payments $ 8,876 =======================================================================================
Rental expense under operating leases amounted to $64.8 million, $65.1 million and $62.4 million in fiscal 1997, 1996 and 1995, respectively. These amounts exclude rent of $2.4 million, $3.5 million and $5.2 million in fiscal 1997, 1996 and 1995, respectively, which was charged to the restructuring or closed store reserves. The table of future minimum lease payments above includes lease commitments for three stores that were closed in connection with the Company's fiscal 1993 restructuring and two stores that were closed in fiscal 1997, but which were not subleased or assigned at January 31, 1998. The Company is involved in various legal proceedings incident to the character of its business. Although it is not possible to predict the outcome of these proceedings, or any claims against the Company related thereto, the Company believes that such proceedings will not, individually or in the aggregate, have a material adverse effect on its financial condition or results of operations. 7. Income Taxes Income (loss) before income taxes and the related provision (benefit) for income taxes are as follows:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Income (loss) before income taxes: Continuing operations $ (1,128) $ 27,352 $ 39,871 Discontinued operations 37,071 98,974 79,567 Extraordinary loss (14,559) - - - ----------------------------------------------------------------------------------------------------------- Total $ 21,384 $ 126,326 $ 119,438 ===========================================================================================================
HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes attributable to income from continuing operations $ (445) $ 11,005 $ 15,386 Provision for income taxes attributable to income from discontinued operations 16,496 38,661 31,075 Benefit for income taxes attributable to extraordinary loss (5,896) - - - ----------------------------------------------------------------------------------------------------------- Total provision (benefit) for income taxes $ 10,155 $ 49,666 $ 46,461 ===========================================================================================================
The significant components of the provision (benefit) for income taxes attributable to continuing operations are as follows:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Current: Federal $ 3,475 $ 3,710 $ 15,380 State 842 (73) 1,916 - ----------------------------------------------------------------------------------------------------------- Total current $ 4,317 $ 3,637 $ 17,296 - ----------------------------------------------------------------------------------------------------------- Deferred: Federal $ (3,847) $ 5,822 $ (2,143) State (915) 1,546 233 - ----------------------------------------------------------------------------------------------------------- Total deferred $ (4,762) $ 7,368 $ (1,910) - ----------------------------------------------------------------------------------------------------------- Total provision (benefit) for income taxes attributable to income from continuing operations $ (445) $ 11,005 $ 15,386 ===========================================================================================================
The following is a reconciliation of the statutory federal income tax rate and the effective income tax rate for income from continuing operations:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Statutory federal income tax rate 35% 35% 35% State income taxes, net of federal tax benefit 4 4 4 Other 1 1 - - ----------------------------------------------------------------------------------------------------------- Effective income tax rate 40% 40% 39% ===========================================================================================================
HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Significant components of the Company's deferred tax assets and liabilities as of January 31, 1998 and January 25, 1997 are as follows:
- ----------------------------------------------------------------------------------------------------------- January 31, January 25, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Deferred tax assets: Self-insurance reserves $ 16,754 $ 14,539 Rental step liabilities 4,940 5,008 Restructuring reserve 5,748 5,869 Closed store reserve 7,866 - Capital leases 1,399 1,201 Compensation and benefits 2,255 2,765 Other 4,416 2,530 - ----------------------------------------------------------------------------------------------------------- Total deferred tax assets $ 43,378 $ 31,912 Deferred tax liabilities: Accelerated depreciation-property $ 10,225 $ 8,551 Other 7,215 2,185 - ----------------------------------------------------------------------------------------------------------- Total deferred tax liabilities $ 17,440 $ 10,736 Net deferred tax assets $ 25,938 $ 21,176 ===========================================================================================================
The Company has not established a valuation allowance because its deferred tax assets can be realized by offsetting taxable income mainly in the carryback period, and also against deferred tax liabilities and future taxable income, which management believes will more likely than not be earned, based on the Company's historical earnings record. 8. Investments In Marketable Securities Available-for-sale securities at January 31, 1998 and January 25, 1997 included the following:
- ------------------------------------------------------------------------ ---------------- ----------------- January 31, January 25, (In thousands) 1998 1997 - ------------------------------------------------------------------------ ---------------- ----------------- Debt securities issued by states and political subdivisions: Cost $ 5,509 $ - Unrealized holdings gains 7 - Unrealized holding losses (1) - - ------------------------------------------------------------------------ ---------------- ----------------- Estimated fair value $ 5,515 $ - ======================================================================== ================ =================
The contractual maturities of available-for-sale securities at January 31, 1998 were as follows:
- ----------------------------------------------------------------------------------------------------------- Estimated (In thousands) Cost Fair Value - ----------------------------------------------------------------------------------------------------------- Less than one year $ 1,502 $ 1,506 1-5 years 4,007 4,009 - ----------------------------------------------------------------------------------------------------------- $ 5,509 $ 5,515 ===========================================================================================================
HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Other information on available-for-sale securities was as follows:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Sales proceeds $ - $ 46,957 $ 131,632 Gross realized gains - 13 257 Increase in unrealized holding gains (losses), net of taxes 6 (22) 66 - -----------------------------------------------------------------------------------------------------------
The specific identification method is used to compute realized gains or losses on the sale of marketable securities. As of January 31, 1998, marketable securities classified as held-to-maturity consisted of US Treasury securities, which are included in other assets on the consolidated balance sheet at their amortized cost of $7.5 million. These securities were purchased and deposited in escrow with the trustee of the Company's senior subordinated notes to be used to retire the debt and pay interest through May 1999. The contractual maturities of held-to-maturity securities as of January 31, 1998 are as follows (in thousands):
- ----------------------------------------------------------------------------------------------------------- Less than one year $ 730 1-5 years 7,367 - ----------------------------------------------------------------------------------------------------------- Total $ 8,097 ===========================================================================================================
9. Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of these instruments. Marketable Securities The fair value of the Company's marketable securities is based on quoted values provided by an independent pricing service utilized by broker dealers and mutual fund companies. Real Estate Debt and General Corporate Debt The fair value of the Company's real estate debt and general corporate debt is estimated based on the current rates for similar issues or on the current rates offered to the Company for debt of the same remaining maturities. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Subordinated Debt The fair value of the Company's subordinated debt is based on quoted market prices. The estimated fair values of the Company's financial instruments are as follows:
January 31, 1998 January 25, 1997 - ----------------------------------------------------------------------------------------------------------- Carrying Carrying (In thousands) Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 44,603 $ 44,603 $ 16,896 $ 16,896 Marketable securities 5,515 5,515 - - Real estate debt (450) (479) (924) (944) General corporate debt - - (24,000) (24,771) Senior subordinated debt (1) (6,637) (7,538) (100,000) (111,750) Convertible subordinated debt (100,000) (92,500) (108,568) (120,510) - -----------------------------------------------------------------------------------------------------------
(1) A total of $6.6 million of the Company's 11% senior subordinated notes remains outstanding, which the Company intends to call and repay on May 15, 1999. In July 1997, the Company purchased US Treasury securities and deposited them in escrow with the trustee of the notes, to be used to retire the debt and pay interest through May 1999. Therefore, the fair value of the senior subordinated debt at January 31, 1998 is deemed to be the amortized cost of the treasury securities. 10. Capital Stock, Stock Options and Stock Purchase Plans At January 31, 1998, the Company had three stock-based compensation plans: two employee plans and one non-employee director plan. Under its 1989 Stock Incentive Plan ("1989 Plan"), the Company has granted options to certain key employees, which expire 10 years from the grant date, to purchase common stock at prices equal to 100% of the market price on the grant date. Options outstanding are exercisable over various periods generally starting one year after the grant date. The Company has also issued restricted stock awards to certain key employees at no cost under the 1989 Plan. The restrictions on the transferability of those shares tied to Company performance lapse over periods that range up to eight years; for other awards, restrictions on the sale of shares range up to four years. The 1989 Plan expired in January 1998, except as to options and restricted shares then outstanding. At January 31, 1998, 2,328,671 options issued under the 1989 Plan remained outstanding at prices ranging from $2.20 to $6.45 per share. Under its 1995 Director Stock Option Plan, the Company has granted its non-employee directors options to purchase common stock at prices equal to 100% of the market price on the grant date. These options, which expire 10 years from the grant date, are exercisable over periods starting one year after they are granted. A maximum of 150,000 shares may be issued under the 1995 Director Stock Option Plan. Under its 1997 Stock Incentive Plan, the Company has granted certain key employees options, which expire 10 years from the grant date, to purchase common stock at prices equal to 100% of the market price on the grant date. Options outstanding are exercisable over various periods generally starting one year after the grant date. The Company has also issued restricted stock awards to certain key employees at no cost under its 1997 Stock Incentive Plan. The restrictions on the transferability of those shares lapse over periods that range up to four years. A maximum of 3,500,000 shares may be issued under the 1997 Stock Incentive Plan. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) In connection with the Distribution, all outstanding options of directors and employees who transferred to BJI were canceled. All outstanding options held by the remaining directors and employees of the Company were replaced; the number of options was proportionately adjusted and the exercise prices were decreased using a ratio of the average closing price of the Company's common stock for the 10 days immediately following the Distribution to the market price of the Company's common stock before the Distribution. The adjustment preserved the economic value of the options that existed prior to the Distribution date. In July 1997, the number of options issuable under the 1989 Plan was increased by 1.5 million shares in connection with the proportionate option adjustment. The Company applies APB 25 in accounting for its stock-based compensation. During fiscal 1997 and 1996, 263,391 and 41,000 shares of restricted stock were issued at a weighted-average grant-date fair value of $7.45 and $22.92, respectively. Total pre-tax compensation cost recognized in income for stock-based employee compensation awards in fiscal 1997 and 1996 was $0.5 and $0.4 million, respectively, and consisted entirely of compensation expense related to restricted stock, which is charged to income ratably over the period during which the restrictions lapse. No compensation cost was recognized for the Company's stock options under APB 25 because the exercise price equaled the market price of the underlying stock on the date of the grant. Pro forma information regarding net income and net income per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and has been determined as if the Company had accounted for its stock options under the fair value method of that statement. The fair value for these options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 5.64%, 6.47%, and 5.80% in fiscal 1997, 1996 and 1995, respectively; volatility factor of the expected market price of the Company's common stock of .36, .37, and .37 in fiscal 1997, 1996 and 1995, respectively, and expected option life of 4.5 years for fiscal 1997, 1996 and 1995. No dividends were expected. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models may not provide a reliable single measure of the fair value of its stock options. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, (In thousands, except per share amounts) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Pro forma income (loss) from continuing operations $ (1,772) $ 15,246 $ 23,894 Pro forma net income $ 10,140 $ 75,559 $ 72,386 Pro forma income (loss) per share--income (loss) from continuing operations: Basic $ (0.05) $ 0.46 $ 0.72 Diluted $ (0.05) $ 0.46 $ 0.72 Pro forma net income per share--net income: Basic $ 0.28 $ 2.30 $ 2.19 Diluted $ 0.28 $ 2.28 $ 2.18 - -----------------------------------------------------------------------------------------------------------
The effects of applying the provisions of SFAS 123 for pro forma disclosure are not necessarily representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year. In accordance with the transition requirements of SFAS 123, the pro forma disclosures above only include stock options awarded after January 28, 1995. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Below is a summary of the Company's stock option activity and related information:
- ----------------------------------------------------------------------------------------------------------- Number Of Weighted-Average Options Exercise Price - ----------------------------------------------------------------------------------------------------------- Fiscal Year Ended January 27, 1996: Outstanding at beginning of year 2,542,729 $ 16.25 Granted 270,500 15.74 Exercised (189,126) 11.30 Forfeited (144,553) 16.40 Expired - - - ----------------------------------------------------------------------------------------------------------- Outstanding at January 27, 1996 2,479,550 $ 16.56 =========================================================================================================== Fiscal Year Ended January 25, 1997: Granted 789,625 $ 24.13 Exercised (566,923) 15.96 Forfeited (162,628) 19.22 Expired - - - ----------------------------------------------------------------------------------------------------------- Outstanding at January 25, 1997 2,539,624 $ 18.88 =========================================================================================================== Fiscal Year Ended January 31, 1998: Granted 817,650 $ 9.26 BJ's spin-off adjustments 1,213,988 - Exercised (422,337) 17.35 Forfeited (1,040,860) 17.82 Expired - - - ----------------------------------------------------------------------------------------------------------- Outstanding at January 31, 1998 3,108,065 $ 5.30 =========================================================================================================== Exercisable at: January 27, 1996 953,031 $ 16.66 January 25, 1997 1,064,190 16.67 January 31, 1998 1,100,056 3.82 - ----------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year: Fiscal 1995 $ 6.60 Fiscal 1996 10.40 Fiscal 1997 3.55 - -----------------------------------------------------------------------------------------------------------
Additional information related to stock options outstanding at January 31, 1998 is presented below:
Options Outstanding Options Exercisable - ----------------------------------------------------------------------- ----------------------------------- Weighted- Weighted- Average Weighted- Average Remaining Average Range Of Number Exercise Contractual Number Exercise Exercise Prices Outstanding Price Life (Years) Exercisable Price - ----------------------------------------------------------------------- ----------------------------------- $ 2.20 to $ 3.23 435,454 $ 2.75 6.1 378,454 $ 2.70 3.24 to 4.64 1,238,763 4.13 6.9 594,881 4.07 4.65 to 6.45 668,525 5.99 8.1 126,721 6.02 6.46 to 8.44 765,323 8.04 9.6 - - ---------------- ----------------- $ 2.20 to $ 8.44 3,108,065 $ 5.30 7.7 1,100,056 $ 3.82 ================ =================
HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As of January 31, 1998, January 25, 1997 and January 27, 1996, respectively, 2,723,306, 1,687,373 and 2,327,972 shares were reserved for future stock awards under the Company's stock option plans. In 1989 the Company adopted a stockholder rights plan designed to discourage attempts to acquire the Company on terms not approved by the Board of Directors. Under the plan, stockholders were issued one Right for each share of common stock owned, which entitles them to purchase 1/100 share of Series A Junior Participating Preferred Stock (Series A Preferred Stock) at an exercise price of $75. The Company has designated 1,900,000 shares of Series A Preferred Stock for use under the rights plan; none has been issued. Generally, the terms of the Series A Preferred Stock are designed so that 1/100 share of Series A Preferred Stock is the economic equivalent of one share of the Company's common stock. In the event any person acquires 15% or more of the Company's outstanding stock, the Rights become exercisable for the number of common shares which, at the time, would have a market value of two times the exercise price of the Right. The Company has authorized 10,000,000 shares of preferred stock, $.01 par value, of which no shares have been issued. 11. Pensions The Waban Inc. Retirement Plan (the "Plan") is a non-contributory defined benefit retirement plan covering full-time employees who have attained 21 years of age and have completed one year of service. Benefits are based on compensation earned in each year of service. No benefits have accrued under this plan since July 4, 1992, when it was frozen. In June 1995, the Company terminated its non-contributory retirement plan covering directors who were not employees or officers of the Company. The net income effect of the termination and settlement of this plan was not material. The Company's Board of Directors approved the termination of the Plan effective July 26, 1997. However, in accordance with generally accepted accounting principles, the additional cost to terminate the Plan is not recognized until the Plan termination is settled. Prior to the Distribution, the Company contributed to the Plan amounts sufficient to make the Plan's assets equal to its estimated termination liabilities, based on actuarial projections at that time. The Company's share of these amounts is included in prepaid expenses on its consolidated balance sheet. The Company expects to record an expense of approximately $0.8 million, net of taxes, when the Plan is settled in fiscal 1998. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net periodic pension cost under the Company's plans, presented in accordance with Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions", ("SFAS 87") includes the following components (in thousands):
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Service cost $ 62 $ 89 $ 94 Interest cost on projected benefit obligation 203 226 223 Actual return on assets (260) (466) (646) Net amortization and deferrals 18 278 463 - ----------------------------------------------------------------------------------------------------------- Net pension cost $ 23 $ 127 $ 134 ===========================================================================================================
The following table sets forth the funded status of the Company's defined benefit pension plan for full-time employees as of January 31, 1998 and January 25, 1997 in accordance with SFAS 87:
- ----------------------------------------------------------------------------------------------------------- January 31, January 25, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligation: Vested benefits $ (3,331) $ (3,204) - ----------------------------------------------------------------------------------------------------------- Projected benefit obligation (3,331) (3,204) Plan assets at fair market value 3,450 3,206 - ----------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 119 2 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 676 436 - ----------------------------------------------------------------------------------------------------------- Prepaid pension cost $ 795 $ 438 ===========================================================================================================
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 6.75% in fiscal 1997 and 7.25% in fiscal 1996. The expected long-term rate of return on assets used was 9.0% in fiscal 1997, fiscal 1996 and fiscal 1995. The Company's funding policy is to contribute annually an amount allowable for federal income tax purposes. Pension plan assets consist solely of fixed income securities at January 31, 1998. Under the Company's 401(k) Savings Plans, participating employees may make pre-tax contributions up to 15% of covered compensation. The Company matches employee contributions at 100% of the first one percent of covered compensation and 50% of the next four percent and is payable as of the end of each calendar quarter. The Company's expense under these plans was $1.8 million, $2.1 million and $2.1 million in fiscal years 1997, 1996 and 1995, respectively. In 1994, the Company established a non-contributory defined contribution retirement plan for certain key employees. Under the plan, the Company funds annual retirement contributions for the designated participants on an after-tax basis. For fiscal years 1997, 1996 and 1995, the Company's contribution equaled 5% of the participants' base salary. Participants become fully vested in their contribution accounts at the end of the fiscal year in which they complete four years of service. The Company's expense under this plan was $0.5 million, $0.4 million, and $0.5 million in fiscal years 1997, 1996 and 1995, respectively. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 12. Postretirement Medical Benefits The Company sponsors a defined benefit postretirement medical plan that covers employees and their spouses who retire after age 55 with at least 10 years of service, who are not eligible for Medicare, and who participated in a Company-sponsored medical plan. Amounts contributed by retired employees under this plan are based on years of service prior to retirement. The plan is not funded. Net periodic postretirement medical benefit cost presented in accordance with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions" ("SFAS 106"), includes the following components:
Fiscal Year Ended - ----------------------------------------------------------------------------------------------------------- January 31, January 25, January 27, (In thousands) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- Service cost $ 102 $ 69 $ 63 Interest cost 32 24 23 Net amortization and deferrals (2) (8) (5) - ----------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 132 $ 85 $ 81 ===========================================================================================================
The following table sets forth the status of the Company's postretirement medical plan and the amount recognized in the Company's consolidated balance sheet at January 31, 1998 and January 25, 1997 in accordance with SFAS 106:
- ----------------------------------------------------------------------------------------------------------- January 31, January 25, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retired participants $ - $ - Fully eligible active participants - 35 Other active participants 595 358 - ----------------------------------------------------------------------------------------------------------- Unfunded accumulated postretirement benefit obligation 595 393 Unrecognized net gain 41 115 - ----------------------------------------------------------------------------------------------------------- Accrued postretirement benefit cost $ 636 $ 508 ===========================================================================================================
For measurement purposes, an annual rate of increase in the per capita cost of medical coverage of 7.5% in 1997 grading down to 4.5% after seven years was assumed as of January 25, 1997. Increasing the assumed health care cost trend rate one percentage point would increase the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by $17,000 and would increase the accumulated postretirement benefit obligation as of January 31, 1998 by $72,000. The weighted average discount rate used in determining the accumulated postretirement benefit obligation as of January 31, 1998 and January 25, 1997 was 6.75% and 7.25%, respectively. 13. Store Closures and Other Charges In October 1997, the Board of Directors approved an accelerated growth strategy that included remodeling the remaining 17 stores in the Company's remodel program over the following six months and increasing the rate of new store openings. In connection with this strategy, the Board of Directors also approved the closure of three under-performing stores. In the third quarter of fiscal HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1997, the Company recorded store closures and other charges of $27.0 million consisting of $22.3 million for store closures and other related settlement costs, a $3.0 million increase in the fiscal 1993 restructuring reserve and $1.7 million in asset impairment charges. Costs included in the reserve for store closures primarily include lease obligations on closed facilities, write-downs of fixed assets and other related settlement costs. The Company closed two stores in the fourth quarter of fiscal 1997 and expects to close a third store by the end of fiscal 1999. During fiscal 1997, the Company increased the fiscal 1993 restructuring reserve by $3.0 million for additional lease obligations due to delays in obtaining subleases on terms acceptable to the Company. In accordance with SFAS 121, long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of the individual stores. The Company's quarterly SFAS 121 analysis performed in the third quarter of fiscal 1997 indicated that the long-lived assets at two stores were impaired. Accordingly, the Company estimated the fair value of these assets based on their estimated salvage value and recorded an impairment charge of $1.7 million, which is included in store closures and other charges. 14. Restructuring Reserves As of January 25, 1997, $13.5 million of the Company's fiscal 1993 restructuring charge remained accrued on the Company's consolidated balance sheet. During fiscal 1997, the Company incurred cash expenditures of $3.5 million, primarily for lease obligations on closed facilities, and non-cash charges of $0.3 million for write-downs of fixed assets. As of January 31, 1998, $12.7 million remained accrued on the Company's consolidated balance sheet (including $3.0 million in fiscal 1997 additions to the reserve), consisting primarily of lease obligations on closed facilities, which extend through 2007. HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 15. Selected Quarterly Financial Data (Unaudited) Fiscal Year ended January 31, 1998:
Quarter Ended - --------------------------------------------- --------------- -------------- -------------- -------------- April 26, July 26, October 25, January 31, (In thousands, except per share data) 1997 1997 1997 1998 - --------------------------------------------- --------------- -------------- -------------- -------------- (14 Weeks) Net sales $ 360,204 $ 420,404 $ 368,432 $ 328,402 Gross profit 77,936 93,355 78,905 67,993 Income (loss) from continuing operations 2,271 11,218 (10,288) (3,884) Income from discontinued operations 8,532 12,043 - - Net income (loss) 10,803 14,598 (10,288) (3,884) Basic net income per share: Income (loss) from continuing operations $ 0.07 $ 0.32 $ (0.27) $ (0.10) Income from discontinued operations 0.25 0.34 - - Net income (loss) 0.32 0.42 (0.27) (0.10) Diluted net income per share: Income (loss) from continuing operations $ 0.07 $ 0.31 $ (0.27) $ (0.10) Income from discontinued operations 0.25 0.34 - - Net income (loss) 0.32 0.41 (0.27) (0.10) - --------------------------------------------- --------------- -------------- -------------- --------------
Fiscal Year ended January 25, 1997:
Quarter Ended - --------------------------------------------- --------------- -------------- -------------- -------------- April 27, July 27, October 26, January 25, (In thousands, except per share data) 1996 1996 1996 1997 - --------------------------------------------- --------------- -------------- -------------- -------------- Net sales $ 352,242 $ 424,271 $ 366,410 $ 309,773 Gross profit 79,758 95,669 78,437 61,835 Income (loss) from continuing operations 2,465 11,229 4,406 (1,753) Income from discontinued operations 7,050 14,383 11,620 27,260 Net income 9,515 25,612 16,026 25,507 Basic net income per share: Income (loss) from continuing operations $ 0.08 $ 0.34 $ 0.13 $ (0.05) Income from discontinued operations 0.21 0.44 0.36 0.83 Net income 0.29 0.78 0.49 0.78 Diluted net income per share: Income (loss) from continuing operations $ 0.07 $ 0.33 $ 0.13 $ (0.05) Income from discontinued operations 0.21 0.38 0.36 0.83 Net income 0.28 0.71 0.49 0.78 - --------------------------------------------- --------------- -------------- -------------- --------------
HOMEBASE, INC. (Formerly Waban Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net income for the second quarter of fiscal 1997 included an extraordinary loss of $8.7 million, net of tax, related to the early extinguishment of Company debt, primarily consisting of call premiums and the write-off of debt issue costs. Net income for the third quarter of fiscal 1997 includes $27.0 million ($16.3 million, net of tax) in store closures and other charges. In fiscal 1997 and 1996, the quarterly per share amounts do not sum to the per share amounts for the respective year-to-date periods due to differences in the weighted average number of shares outstanding in each quarterly reporting period versus the weighted average number of shares outstanding for the respective year-to-date periods. The quarterly per share amounts for all periods presented have been restated in accordance with SFAS 128. PART III Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None Item 10. Directors and Executive Officers of the Registrant The Company will file with the Securities and Exchange Commission a definitive Proxy Statement no later than 120 days after the close of its fiscal year ended January 31, 1998 (the "Proxy Statement"). The information required by this Item that is not set forth below or under the heading "Executive Officers of the Registrant" in Part I of this report is incorporated herein by reference to the Proxy Statement. Item 11. Executive Compensation The information required by this Item is incorporated herein by reference to the Proxy Statement. However, information under "Executive Compensation Committee Report" and "Performance Graph" in the Proxy Statement is not so incorporated. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated herein by reference to the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated herein by reference to the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on 8-K A. The Financial Statements and Financial Statement Schedules filed as part of this report are listed and indexed on page 24. Schedules other than those listed in the index have been omitted because they are not included elsewhere in this report. B. Listed below are all exhibits filed as part of this report. Certain exhibits are incorporated by reference to documents previously filed by the Registrant with the Securities and Exchange Commission pursuant to Rule 12b-32 under the Securities Exchange Act of 1934, as amended.
Exhibit No. Exhibit - ------ --------------------------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to the Registrant's Form S-8 (#333-32473), dated July 30, 1997). 3.2 By-Laws, as Amended, of the Company (incorporated herein by reference to the Registrant's Form S-8 (#333-32473), dated July 30, 1997). 4.0 Instruments Defining Rights of Security Holders (See Exhibits 3.1, 3.2, 4.7 and 10.13). 4.1 Specimen Common Stock Certificate (incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). 4.2 5.25% Convertible Subordinated Note (Rule 144A)(incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). 4.3 5.25% Convertible Subordinated Note (Regulation S) (incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). 4.4 Indenture, dated as of November 10, 1997, between the Company and State Street Bank and Trust Company of California, N.A. (incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). 4.5 Registration Rights Agreement, dated as of November 10, 1997, by and between the Company and Prudential Securities Incorporated (incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). 4.6 Purchase Agreement, dated as of December 10, 1997, between the Company and Prudential Securities Incorporated (incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). 4.7 Rights Agreement dated as of May 23, 1989 between the Company and First Chicago Trust Company of New York, formerly Morgan Shareholder Services Trust Company, as Rights Agent (incorporated herein by reference to the Registrant's Form 10, filed with the SEC, dated May 12, 1989). 4.8 5.25% Convertible Subordinated Note(Registered) (incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). Exhibit No. Exhibit - ------- --------------------------------------------------------------------------------------- 10.0 * Change of Control Severance Benefit Plan for Key Employees, dated January 28, 1998 (incorporated herein by reference to the Registrant's Form S-3 (Registration No. 333-43789), dated February 10, 1998). 10.1 * HomeBase, Inc. 1989 Stock Incentive Plan, as amended (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.2 * Waban Inc. Executive Retirement Plan (incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 29, 1994). 10.3 * Waban Inc. Retirement Plan for Directors, as amended September 17, 1990 (incorporated herein by reference to the Registrant's Form 10-Q for the fiscal quarter ended October 27, 1990). 10.4 * Waban Inc. General Deferred Compensation Plan (incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 27, 1990). 10.5 * Waban Inc. Growth Incentive Plan, as amended (incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 27, 1990). 10.6 * Amendment dated as of January 29, 1994 between the Company and The TJX Companies, Inc. to Executives Services Agreement with respect to Arthur F. Loewy (incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 29, 1994). 10.7 * Employment Agreement dated as of July 28, 1997 with Herbert J. Zarkin (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.8 * Employment Agreement dated as of July 28, 1997 with Edward J. Weisberger (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.9 * Employment Agreement dated as of July 28, 1997 with Allan P. Sherman (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated October 25, 1997). 10.9.1 * Loan Agreement dated as of January 19, 1994 with Allan P. Sherman (incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 29, 1994). 10.9.2 * Promissory Note dated as of January 19, 1994 with Allan P. Sherman to the Company (incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 29, 1994). 10.10 * Employment Agreement, dated as of July 28, 1997 with Thomas F. Gallagher (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.11 * Employment Agreement, dated as of July 28, 1997 with Scott Richards (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.12 * Employment Agreement, dated as of July 28, 1997 with William B. Langsdorf (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.13 * Form of Indemnification Agreement between the Company and its officers and directors (incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 27, 1990). Exhibit No. Exhibit - ------ --------------------------------------------------------------------------------------- 10.14 * Form of Change of Control Severance Agreement between the Company and officers of the Company (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.15 Credit Agreement dated as of July 9, 1997 among the Company and certain banks (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 10.15.1 # First Amendment to Credit Agreement, dated October 28, 1997 among the Company and certain banks. 10.15.2 # Second Amendment to Credit Agreement, dated November 7, 1997 among the Company and certain banks. 10.15.3 # Third Amendment to Credit Agreement, dated December 24, 1997 among the Company and certain banks. 10.16 * Waban Inc. 1995 Director Stock Option Plan (incorporated herein by reference to the Registrant's definitive Proxy Statement on Schedule 14A (File No. 1-10259) for the Registrant's 1995 Annual Meeting of Stockholders). 10.17 Separation and Distribution Agreement, dated as of July 10, 1997, between the Company and BJ's Wholesale Club, Inc. (incorporated herein by reference to the Registrant's Form 8-K (File No. 1-10259), dated July 28, 1997). 10.18 Services Agreement, dated as of July 28, 1997, between the Company and BJ's Wholesale Club, Inc. (incorporated herein by reference to the Registrant's Form 8-K (File No. 1-10259), dated July 28, 1997). 10.19 Tax Sharing Agreement, dated as of July 28, 1997, between the Company and BJ's Wholesale Club, Inc. (incorporated herein by reference to the Registrant's Form 8-K (File No. 1-10259), dated July 28, 1997). 10.20 * Employee Benefits Agreement, dated as of July 28, 1997, between the Company and BJ's Wholesale Club, Inc. (incorporated herein by reference to the Registrant's Form 8-K (File No. 1-10259), dated July 28, 1997). 10.21 * HomeBase, Inc. 1997 Stock Incentive Plan (incorporated herein by reference to the Registrant's Form 10-Q (File No. 1-10259), dated July 26, 1997). 13.0 # Annual report of the Company. 21.0 # Subsidiaries of the Company. 23.0 # Consent of Independent Accountants. 27.0 # Financial Data Schedule--Fiscal 1997. 27.1 # Financial Data Schedule--Fiscal 1996.
* Management contract or other compensatory plan or arrangement. # Filed herewith. Reports on Form 8-K ----------------------------------------------------------- On October 28, 1997, the Company filed a report on Form 8-K under items 5 and 7 thereof, reporting the Company's preliminary third quarter results, which included a non-recurring charge to close three stores. In addition, the Company announced plans to accelerate its store remodeling program, which would be funded by $100 million in convertible subordinated debentures. Reports on Form 8-K--Continued ----------------------------------------------------------- On November 11, 1997, the Company filed a report on Form 8-K under item 5 thereof, reporting that it entered into a purchase agreement with an investment banking firm for the sale by the Company of $100 million of seven-year, 5.25% convertible subordinated debt, due November 1, 2004. On November 17, 1997, the Company filed a report on Form 8-K under items 5 and 7 thereof, reporting that it completed the private placement of $100 million, 5.25% convertible subordinated notes, due November 1, 2004, through a Rule 144A/Regulation S offering. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HomeBase, Inc. Dated April 6, 1998 By: /s/ ALLAN P. SHERMAN ----------------------- Allan P. Sherman President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this Registration Statement has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ------------------------------------------------------------------------------------------------- /s/ HERBERT J. ZARKIN April 6, 1998 -------------------------------- Herbert J. Zarkin Chairman of the Board of Directors /s/ ALLAN P. SHERMAN April 6, 1998 -------------------------------- Allan P. Sherman President, Chief Executive Officer of the Company and Director (Principal Executive Officer) /s/ WILLIAM B. LANGSDORF April 6, 1998 ------------------------ William B. Langsdorf Executive Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ JOHN D. BARR April 6, 1998 -------------------------------- John D. Barr Director /s/ LORNE R. WAXLAX April 6, 1998 -------------------------------- Lorne R. Waxlax Director /s/ ARTHUR F. LOEWY April 6, 1998 -------------------------------- Arthur F. Loewy Director /s/ EDWARD J. WEISBERGER April 6, 1998 ------------------------ Edward J. Weisberger Director
EX-10.15.1 2 FIRST AMENDMENT TO CREDIT AGREEMENT This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of October 28, 1997 by and among HOMEBASE, INC., THE FIRST NATIONAL BANK OF CHICAGO, BANKBOSTON, N.A., WELLS FARGO BANK, N.A. and THE SUMITOMO BANK, LIMITED. RECITALS WHEREAS, 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 Date (as hereinafter defined), the Credit Agreement shall be hereby amended as follows: (i) The definition of "EBITR" set forth in Article I of the Credit Agreement is hereby amended by deleting such definition in its entirety and inserting the following in its stead: "EBITR" means, for any period, earnings before interest expense, income taxes and Rentals, all determined on a consolidated basis for the Borrower and Subsidiaries; provided, however, there shall be excluded from such calculation a special charge to earnings taken by the Borrower in the third fiscal quarter of 1998 in the aggregate amount of Twenty Seven Million Dollars ($27,000,000) incurred primarily due to the closure of three stores of the Borrower. (ii) Section 2.7 of the Credit Agreement is hereby amended by deleting the fifth sentence of such Section in its entirety and inserting the following in its stead: Notwithstanding anything to the contrary contained herein, the Borrower's Status (i) from the Execution Date until the end of the third fiscal quarter of 1998 of the Borrower shall be Level III Status and (ii) for the fourth fiscal quarter of 1998 and the first, second and third fiscal quarters of 1999 of the Borrower shall be Level IV Status. (iii) Paragraph (d) of Section 6.13 of the Credit Agreement is hereby renumbered to be paragraph (e) and a new paragraph (d) is inserted in Section 6.13 in its stead which shall read as follows: (d) the sale or other disposition of Inventory having a book value of less than Twelve Million Dollars ($12,000,000) in the aggregate, which sale or disposition was made due to the closure of up to three stores of the Borrower. 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 Lenders: (i) Amendment. This Amendment shall have been duly executed by all parties 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) Work Fee. The Borrower shall have paid to the Agent, for the ratable account of the Lenders in accordance with their Percentages, a fee in the aggregate amount of Sixty Two Thousand Five Hundred Dollars ($62,500). (v) Reaffirmation of Guaranty. Each Real Estate Subsidiary and Operating Subsidiary shall have executed the Reaffirmation of Guaranty in the form of Exhibit A hereto. The date on which all of the above events have occurred is the "Effective Date". If the Effective Date has not occurred by October 31, 1997, this Amendment shall be of no force and effect. 3. Collateralization. Notwithstanding this Amendment, and effective upon the effectiveness of the Amendment, the parties hereto agree that the Collateralization Date (as defined in the Credit Agreement) shall have occurred. The Borrower agrees, at its expense, to execute, acknowledge and deliver and take such further action, including without limitation, the delivery of opinions of counsel and establishing an appropriate reserve in the Borrowing Base, as reasonably requested by the Agent to assure, preserve, protect and perfect the first priority, perfected security interest granted by the Loan Documents and the practical ability to obtain and enforce the rights and remedies created thereby. Failure to comply with this covenant shall be considered a Default under the Credit Agreement if not remedied within 20 days after written notice from the Agent. 4. 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 a repayment or reborrowing, of such Loans. 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 of 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 remain 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. 5. 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 Date. [signature pages follow] IN WITNESS WHEREOF, this First 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 Irving, California 92715 Phone: (714) 442-5000 Fax: (714) 442-5127 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By:________________________________ Print Name: _________________________ Title: ______________________________ One First National Plaza Chicago, Illinois 60670 Phone: (312) 732-7101 Fax: (312) 732-1117 Attention: John D. Runger, Managing Director BANKBOSTON, N.A., Individually and as Syndication Agent By: _________________________ Print Name: Linda Thomas Title: Managing Director 100 Federal Street Mail Stop 01-09-05 Boston, Massachusetts 02110 Phone: (617) 434-7000 Fax: (617) 434-0816 WELLS FARGO BANK, N.A. Individually and as Documentation Agent By: Print Name: Kathleen Barnes Title: Vice President By:_______________________________ Name:_____________________________ Title:______________________________ 707 Wilshire Boulevard, 16th Floor MAC 2818-163 Los Angeles, California 90017 Phone: (213) 614-7782 Fax: (213) 614-2569 THE SUMITOMO BANK, LIMITED By: Print Name:__________________ Title: By: Print Name:__________________ Title: EXHIBIT A REAFFIRMATION OF GUARANTY Each of the undersigned acknowledges receipt of a copy of the First Amendment to the Credit Agreement (the "Amendment") dated as of October 28, 1997, 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 October 28, 1997 [GUARANTOR] By: Title: EX-10.15.2 3 SECOND AMENDMENT TO CREDIT AGREEMENT This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of November 7, 1997 by and among HOMEBASE, INC., THE FIRST NATIONAL BANK OF CHICAGO, BANKBOSTON, N.A., WELLS FARGO BANK, N.A. and THE SUMITOMO BANK, LIMITED. RECITALS WHEREAS, 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 Date (as hereinafter defined), the Credit Agreement shall be hereby amended as follows: (i) The definition of "Borrowing Base" set forth in Article I of the Credit Agreement is hereby amended by deleting such definition in its entirety and inserting the following in its stead: "Borrowing Base" means, at any time, an amount equal to (a) the sum of (i) the Advance Rate applicable to Eligible Accounts multiplied times the book value of all Eligible Accounts at such time, plus (ii) the Advance Rate applicable to Eligible Inventory multiplied times the amount of the Eligible Inventory at such time minus (b) fifty percent (50%) of the aggregate amount of Rentals for the prior twelve months. (ii) The definition of "Change in Control" set forth in Article I of the Credit Agreement is hereby amended by inserting the following at the end of such definition: or a Change in Control as defined in the Subordinated Note Indenture. (iii) The definition of "Subordinated Indebtedness" set forth in Article I of the Credit Agreement is hereby amended by deleting such definition in its entirety and inserting the following in its stead: "Subordinated Indebtedness" of a Person means any Indebtedness of such Person the payment of which is subordinated to payment of the Obligations to the written satisfaction of the Required Lenders. Subordinated Indebtedness shall include, without limitation, the Indebtedness of the Borrower in respect of the Subordinated Notes. (iv) The definitions set forth in Article I of the Credit Agreement are hereby amended by inserting the following definitions alphabetically in such Article: "Subordinated Debt Documents" means the Subordinated Notes, the Purchase Agreement dated as of the November ___, 1997 by and among the Borrower and the other parties signatory thereto and the Subordinated Note Indenture. "Subordinated Note Indenture" means that certain Indenture entered into between the Borrower and State Street Bank and Trust Company of California, N.A., as trustee, dated as of November ___, 1997, as the same may be amended or modified after the date hereof as permitted hereby. "Subordinated Notes" means those certain Convertible Subordinated Notes due 2004 issued by the Borrower pursuant to the Subordinated Note Indenture in the aggregate principal amount of up to $115,000,000. (v) Section 5.3 of the Credit Agreement is hereby amended by inserting the words "and Subordinated Debt Documents" after the words "Transaction Documents" in the third line thereof and inserting a new sentence at the end of such Section which shall read as follows: No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, any of the Subordinated Debt Documents other than a "shelf registration" of the Subordinated Notes under the Securities and Exchange Act of 1933, as amended, appropriate filings, qualifications or approvals with state securities regulators, appropriate NASD filings and approvals, appropriate filings and approvals required by the Trust Indenture Act of 1939 and appropriate filngs required by the Securities and Exchange Act of 1934. (vi) Article V of the Credit Agreement is hereby amended by inserting a new Section 5.21 which shall read as follows: 5.21 Subordinated Indebtedness. The Borrower has the corporate power and authority to incur the Indebtedness evidenced by the Subordinated Notes. The subordination provisions of the Subordinated Note Indenture and the Subordinated Notes will be enforceable against the holders of the Subordinated Notes by the holder of any Notes which has not effectively waived the benefits thereof. All Obligations, including the Obligations to pay principal of and interest on the Loans, constitute senior Indebtedness entitled to the benefits of subordination created by the Subordinated Note Indenture and the Subordinated Notes. The principal of and interest on the Notes and all other Obligations will constitute "senior debt" as that or any similar term is or may be used in any other instrument evidencing or applicable to any other Subordinated Indebtedness of the Borrower. The Borrower acknowledges that the Agent and each Lender is amending the Credit Agreement and continuing to extend the Aggregate Commitment in reliance upon the subordination provisions of the Subordinated Notes and this Section 5.21. (vii) Section 6.11 of the Credit Agreement is hereby amended by inserting an additional paragraph at the end of such Section which shall read as follows: (m) Indebtedness of the Borrower in an aggregate principal amount not to exceed $115,000,000 evidenced by the Subordinated Notes and incurred pursuant to, and having the terms, including without limitation the subordination provisions, set forth in the Subordinated Note Indenture. (viii) Section 6.20.1 of the Credit Agreement is hereby amended by deleting the last three lines of such Section and inserting the following in its stead: 01/30/1999 67% 01/29/2000 67% 01/27/2001 67%. (ix) Section 6.21 of the Credit Agreement is hereby amended by deleting such Section in its entirety and inserting the following in its stead: 6.21 Capital Expenditures. The Borrower will not, nor will it permit any Subsidiary to, expend, or be committed to expend for Capital Expenditures (including, without limitation, for the acquisition of fixed assets) during the indicated fiscal year of the Borrower on a non-cumulative basis in the aggregate for the Borrower and its Subsidiaries in excess of the aggregate amounts set forth below: Fiscal Year Ending Amount 01/31/1998 $45,000,000 01/30/1999 $65,000,000 01/29/2000 $82,000,000 01/27/2001 $82,000,000 (x) Article VI of the Credit Agreement is hereby amended by inserting a new Section 6.24 and Section 6.25 into such Article which shall read as follows: 6.24 Subordinated Indebtedness. The Borrower will not, and will not permit any Subsidiary to, make any amendment or modification to the indenture, note or other agreement evidencing or governing any Subordinated Indebtedness or any Subordinated Debt Documents (other than amendments or modifications which would extend the maturity, reduce the amount of any payment of principal thereof, reduce the rate or extend the date for payment of interest thereon), or directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any Subordinated Indebtedness prior to the date when due. 6.25 Collateral Value Report. Upon the request of the Agent, which may be made not more than once each year prior to an Event of Default, and at any time while and so long as an Event of Default should have occurred and be continuing, the Borrower will obtain and deliver to the Agent a report of an independent collateral auditor satisfactory to the Agent (which may be or be affiliated with a Lender) to perform an audit, using customary procedures and scope, of the accounts and inventory components included in the Borrowing Base, which report shall indicate whether or not, in the opinion of such auditor based on such audit, the information set forth in the Borrowing Base Certificate most recently delivered is accurate and complete in all material respects based upon a review by such auditors of the Accounts (including verification with respect to the amount, aging, identity and credit of the respective account debtors and the billing practices of the Borrower) and Inventory (including verification as to the value, location and respective types). (xi) Section 9.7 of the Credit Agreement is hereby amended by inserting the words "the Subordinated Debt Documents," after the words "Transaction Documents" where such words appear. (xii) Exhibit B to the Credit Agreement is hereby replaced by the document attached hereto as Exhibit B. 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 Requisite Lenders: (i) Amendment. This Amendment shall have been duly executed by the Requisite Lenders and the Borrower 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) Subordinated Debt. The Borrower shall have consummated the transactions contemplated by that certain Purchase Agreement dated as of November , 1997 (the "Subordinated Note Agreement") by and between the Borrower and Prudential Securities Incorporated, and have received not less than $75,000,000 and not more than $115,000,000 (in each case before deduction of discounts, commissions and offering expenses) from the issuance of the securities pursuant to the Subordinated Note Indenture which shall have terms and conditions acceptable to the Required Lenders, including, without limitation, an interest rate not exceeding five and three quarters percent (5.75%) per annum, and the Borrower shall have delivered to the Agent a copy of the Subordinated Note Agreement and the Subordinated Note Indenture. (v) Reaffirmation of Guaranty. Each Real Estate Subsidiary and Operating Subsidiary shall have executed the Reaffirmation of Guaranty in the form of Exhibit A hereto. The date on which all of the above events have occurred is the "Effective Date". If the Effective Date has not occurred by November 13, 1997, 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 a repayment or reborrowing, of such Loans. 4. 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 of 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 remain 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. 5. 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, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and that the conditions set forth in Sections 2(ii) and (iii) hereof are true, correct and complete as of the Effective Date. [signature pages follow] IN WITNESS WHEREOF, this Second 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: (714) 442-5000 Fax: (714) 442-5127 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By:________________________________ Print Name: _________________________ Title: ______________________________ One First National Plaza Chicago, Illinois 60670 Phone: (312) 732-7101 Fax: (312) 732-1117 Attention: John D. Runger, Managing Director BANKBOSTON, N.A., Individually and as Syndication Agent By: _________________________ Print Name: Linda Thomas Title: Managing Director 100 Federal Street Mail Stop 01-09-05 Boston, Massachusetts 02110 Phone: (617) 434-7000 Fax: (617) 434-0816 WELLS FARGO BANK, N.A. Individually and as Documentation Agent By: Print Name: Kathleen Barnes Title: Vice President By:_______________________________ Name:_____________________________ Title:______________________________ 707 Wilshire Boulevard, 16th Floor MAC 2818-163 Los Angeles, California 90017 Phone: (213) 614-7782 Fax: (213) 614-2569 THE SUMITOMO BANK, LIMITED By: Print Name:__________________ Title: By: Print Name:__________________ Title: EXHIBIT A REAFFIRMATION OF GUARANTY Each of the undersigned acknowledges receipt of a copy of the Second Amendment to the Credit Agreement (the "Amendment") dated as of November 7, 1997, 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 November 7, 1997 [GUARANTOR] By: Title:
EXHIBIT B FORM OF BORROWING BASE CERTIFICATE AS OF _________, ____ FOR HOMEBASE, INC. (Capitalized terms have the meaning ascribed thereto in the Credit Agreement dated as of July 9, 1997 by and among the undersigned, as Borrower, and the Agent and the Lenders defined therein) I. Accounts - ---------- -------------------------------------------------------------------------------- ------------------------ A. Gross Accounts (include only those Accounts created in the ordinary course of business arising out of the sale of goods) $----------- - ---------- -------------------------------------------------------------------------------- ------------------------ - ---------- -------------------------------------------------------------------------------- ------------------------ B. Ineligible Accounts: Each Account which fails to meet any of the following criteria [List dollar amount of accounts which do not meet these criteria]: - ---------- -------------------------------------------------------------------------------- ------------------------ - ---------- ----------------------------------------------------------------------------- --------------------- (a) Which is an "account" within the meaning of Section 9-106 of the UCC; ------------- - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- (b) Which is denominated and payable only in United States dollars in the United States; and ______________ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- (c) In which the Agent, on behalf of the Lenders, has after the Collateralization Date, a first priority fully perfected Lien, subject to no other Liens (other than Permitted Liens). ______________ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- Total Ineligible Accounts ______________ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- C. Total Eligible Accounts (A less B) ______________ ---- - ---------- ----------------------------------------------------------------------------- --------------------- II. Inventory - ---------- -------------------------------------------------------------------------------- ------------------------ A. Gross Inventory (include only that Inventory which is held for sale) $----------- - ---------- -------------------------------------------------------------------------------- ------------------------ - ---------- -------------------------------------------------------------------------------- ------------------------ B. Ineligible Inventory: All Inventory which meets any of the following criteria: - ---------- -------------------------------------------------------------------------------- ------------------------ - ---------- ----------------------------------------------------------------------------- --------------------- (a) Inventory in which the Agent, on behalf of the Lenders, does not have, subsequent to the Collateralization Date, a first priority fully perfected Lien, subject to no other Liens (other than Permitted Liens); ____________ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- (b) Inventory classified by a Borrower or Subsidiary as "obsolete" or which, in the Agents' reasonable judgment, should be so classified; ------------ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- (c) Supplies, nonsaleable goods, goods to be returned to suppliers, goods in transit to third persons (other than the Borrower's agents or warehouses); and ____________ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- (d) Any reserves required by the Agent in its reasonable discretion for special order goods, goods which are "slow-moving", goods whose market value has declined and goods on lay away sales. ------------ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- Total Ineligible Inventory ____________ - ---------- ----------------------------------------------------------------------------- --------------------- - ---------- ----------------------------------------------------------------------------- --------------------- C. Total Eligible Inventory (A less B) ____________ ---- - ---------- ----------------------------------------------------------------------------- --------------------- III. Availability - --------------- --------------------------------------------------------------------------- ------------------------ A. Total Availability: ____________ - --------------- --------------------------------------------------------------------------- ------------------------ - --------------- --------------------------------------------------------------------------- ------------------------ (a) (I.C) multiplied by 70% ____________ - --------------- --------------------------------------------------------------------------- ------------------------ - --------------- --------------------------------------------------------------------------- ------------------------ (b) (II.C) multiplied by 60% ____________ - --------------- --------------------------------------------------------------------------- ------------------------ - --------------- --------------------------------------------------------------------------- ------------------------ (c) 50% of Rentals for prior twelve months - --------------- --------------------------------------------------------------------------- ------------------------ - --------------- --------------------------------------------------------------------------- ------------------------ (d) Sum of (i) (a) plus (b) (ii) minus (c) $___________ ---- ----- - --------------- --------------------------------------------------------------------------- ------------------------ - --------------- ----------------------------------------------------------------------- -------------------- B. Total Outstanding Revolving Advances and Facility Letter of Credit $___________ Obligations - --------------- ----------------------------------------------------------------------- -------------------- - --------------- ----------------------------------------------------------------------- -------------------- C. Total Outstanding amount of letters of credit obligations (excluding $___________ amounts included in (III. B above)) - --------------- ----------------------------------------------------------------------- -------------------- - --------------- ----------------------------------------------------------------------- -------------------- D. Excess (Deficit) (III.A less III.B) $___________ - --------------- ----------------------------------------------------------------------- --------------------
HOMEBASE, INC. By:______________________________ Title:_____________________________ EX-10.15.3 4 THIRD AMENDMENT TO CREDIT AGREEMENT This THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of December 19, 1997 by and among HOMEBASE, INC., THE FIRST NATIONAL BANK OF CHICAGO, BANKBOSTON, N.A., WELLS FARGO BANK, N.A. and THE SUMITOMO BANK, LIMITED. RECITALS WHEREAS, 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 Available Commitment" in Article I of the Credit Agreement is hereby amended by deleting such definition and inserting the following in its stead: "Aggregate Available Commitment" means, at any time, (a) the lesser of (i) the Aggregate Commitment at such time and (ii) the Borrowing Base at such time, less (b) the sum of (i) the outstanding Facility Letter of Credit Obligations at such time plus (ii) the aggregate principal amount of outstanding Loans at such time. (ii) The definition of "Commitment" in Article I of the Credit Agreement is hereby amended by inserting the words "or Documentary Facility Acceptances" after the words "Facility Letters of Credit". (iii) The definition of "Facility Letter of Credit Obligations" in Article I of the Credit Agreement is hereby amended by deleting such definition and inserting the following in its stead: -18- "Facility Letter of Credit Obligations" means, as at the time of determination thereof, all liabilities, whether actual or contingent, of the Borrower with respect to Facility Letters of Credit and Documentary Facility Acceptances, including the sum of, without duplication, (a) the Reimbursement Obligations plus (b) the aggregate undrawn face amount of the then outstanding Facility Letters of Credit plus (c) the aggregate unmatured amount of Documentary Facility Acceptances. (iv) The definition of "Issuing Bank" in Article I of the Credit Agreement is hereby amended by deleting such definition and inserting the following in its stead. "Issuing Bank" means, with respect to each Facility Letter of Credit or Documentary Facility Acceptance, First Chicago or such other Lender selected by the Borrower to issue such Facility Letter of Credit or Documentary Facility Acceptance so long as such other Lender consents to act in such capacity. (v) The definition of "LC Factor" in Article I of the Credit Agreement is hereby amended by deleting such definition and inserting the following in its stead: "LC Factor" is a fraction (i) the numerator of which is (y) for the initial payment of the Facility Letter of Credit Fee for any specific Facility Letter of Credit or for any specific Documentary Facility Acceptance, the number of days subsequent to the Issuance Date of such Facility Letter of Credit or Drawing Date of such Documentary Facility Acceptance to and including the first Payment Date and (z) for subsequent payments of the Facility Letter of Credit Fee for any specific Facility Letter of Credit or for any specific Documentary Facility Acceptance, the number of days subsequent to the Payment Date on which the Facility Letter of Credit Fee was last paid for such Facility Letter of Credit or Documentary Facility Acceptance to and including the next Payment Date, the Termination Date or the expiration date of such Facility Letter of Credit or Documentary Facility Acceptance, as applicable, and (ii) the denominator of which is 360. (vi) The definition of "Permitted Investments" in Article I of the Credit Agreement is hereby amended by deleting such definition and inserting the following in its stead: "Permitted Investments" means Investments in any of the following: (a) Short-term obligations of, or fully guaranteed by, the United States of America; or its agencies; (b) Commercial paper rated A-2 or better by Standard and Poor's Corporation or P-2 or better by Moody's Investors Service, Inc. and securities commonly known as "short-term bank notes" issued by any Lender denominated in United States dollars which at the time of purchase have been rated and the ratings for which are not less than P-2 if rated by Moody's Investors Services, Inc., and not less than A-2 if rated by Standard and Poor's Corporation; (c) Demand deposit accounts maintained in the ordinary course of business; (d) Certificates of deposit issued by and time deposits with commercial banks (whether domestic or foreign) having capital and surplus in excess of $100,000,000; (e) Municipal securities rated "A" or better as rated by Standard and Poor's Corporation or Moody's Investors Service, Inc. and municipal securities mutual funds which have a weighted average life of less than two (2) years; (f) Corporate debt securities rated "A" or better as rated by Standard and Poor's Corporation or Moody's Investors Service, Inc. that mature within two (2) years from the date the Investment is made by the Borrower or any of its Subsidiaries; (g) Asset or mortgage backed securities rated "A" or better as rated by Standard and Poor's Corporation or Moody's Investors Service, Inc. with an average life less than two (2) years; provided that after giving effect to any such Investment, the aggregate cost of all such Investments does not exceed $25,000,000; (h) Auction rate securities rated "A" or better as rated by Standard and Poor's Corporation or Moody's Investors Service, Inc.; provided that after giving effect to any such Investment, the aggregate cost of all such Investments does not exceed $25,000,000; (i) Repurchase agreements relating to a security which is rated "A" or better as rated by Standard and Poor's Corporation or Moody's Investors Service, Inc. that mature within two (2) years from the date the Investment is made by the Borrower or any of its Subsidiaries; provided that after giving effect to any such Investment, the aggregate cost of all such Investments does not exceed $25,000,000; (j) Municipal securities rated "SP2" or better by Standard and Poor's Corporation or "MIG2" or better by Moody's Investors Service, Inc. with an average life of less than two (2) years; provided, that after giving effect to any such Investment, the aggregate cost of all such Investments does not exceed $25,000,000; (k) Money market mutual funds regulated by rule 2a-7 under the Investment Company Act of 1990; (l) Insurance company guaranteed investment contracts or funding agreements with insurers rated A-2 or better by Standard and Poor's Corporation; and (m) Bond mutual funds investing in securities rated "A" or better by Standard and Poor's Corporation which have a weighted average life of two (2) years or less. (vii) The definition of "Reimbursement Obligation" in Article I of the Credit Agreement is hereby amended by deleting such definition and inserting the following in its stead: "Reimbursement Obligations" means, at any time, the aggregate of the obligations of the Borrower to the Lenders, the Issuing Banks and the Agent in respect of all unreimbursed payments or disbursements made by the Lenders, the Issuing Banks and the Agent under or in respect of the Facility Letters of Credit or upon maturity of Documentary Facility Acceptances. (viii) Article I of the Credit Agreement is hereby amended by inserting the following definitions in such Article in alphabetical order. "Acceptance" shall mean a Draft that is eligible for discount pursuant to paragraph 7 of Section 13 of the Federal Reserve Act and that has been duly accepted by the Issuing Bank pursuant to Article III and is a documentary acceptance. "Draft" is defined in Section 3.4(B). "Drawing Date" is defined in Section 3.4(B). "Drawing" shall mean a drawing of one or more Drafts on any Drawing Date. "Discount Charge" is defined in Section 3.4(B). "Documentary Facility Acceptance" means an Acceptance issued by an Issuing Bank pursuant to Section 3.1(B). "Notice of Drawing" is defined in Section 3.4(B). (ix) Article III of the Credit Agreement is hereby amended by deleting such Article in its entirety and inserting the following in its stead: ARTICLE III THE LETTER OF CREDIT AND BANKER'S ACCEPTANCE SUBFACILITY 3.1. Obligation to Issue. (A) Upon the terms and subject to the conditions of this Agreement and relying upon the representations and warranties of the Borrower herein set forth, each Issuing Bank hereby agrees to issue for the account of the Borrower through such of the Issuing Bank's branches as it and the Borrower may jointly agree, one or more Facility Letters of Credit payable on a sight or time basis, in accordance with this Article III from time to time during the period, commencing on the Effective Date and ending on date five Business Day prior to the Termination Date. Upon the occurrence of the Collateralization Date, undrawn letters of credit issued by BankBoston, N.A. in an aggregate amount of $10,734,819.65 (which the Borrower represents and warrants were at such time the only letters of credit issued by any Lender and outstanding under Section 6.14(b) or (c)) each became a Facility Letter of Credit. Borrower shall give written notice to the Agent prior to using any Lender other than BankBoston, N.A. as an Issuing Bank. Each Issuing Bank shall comply with the requirements herein and any other reporting requirements reasonably requested by the Agent. (B) Upon the terms and subject to the conditions of this Agreement and relying upon the representations and warranties of the Borrower herein set forth, each Issuing Bank agrees, from time to time during the period, commencing on the Effective Date and ending on date five Business Day prior to the Termination Date, to create Acceptances under time letters of credit maturing on a Business Day not less than 30 days or more than 180 days after the creation thereof. Each Acceptance shall be created by the Issuing Bank's acceptance of beneficiaries' Drafts drawn on it in accordance with the terms of this Agreement. 3.2. Types and Amounts. The issuance of a Facility Letter of Credit or Documentary Facility Acceptance shall be subject to the following conditions: (a) the aggregate maximum amount then available for drawing under Facility Letters of Credit and Documentary Facility Acceptances issued by such Issuing Bank, after giving effect to the Facility Letter of Credit requested hereunder, shall not exceed any limit imposed by law or regulation upon such Issuing Bank; (b) after giving effect thereto, the sum of (i) the aggregate unpaid principal balance of the Revolving Loans plus (ii) the aggregate unpaid balance of the Swing Line Loans plus (iii) the Facility Letter of Credit Obligations does not exceed the Aggregate Available Commitment as then in effect; (c) it does not have an expiration date (if a Letter of Credit) or a maturity date (if a Documentary Facility Acceptance) later than five Business Days prior to the Termination Date; (d) if a Letter of Credit, it does not have an expiration date more than twelve (12) months after the date of its issuance; provided, that it may provide for the renewal thereof for additional twelve (12) month periods so long as no renewal shall extend beyond the date provided in Section 3.2(c); or (e) the amount of the Facility Letter of Credit Obligations, after giving effect to any Facility Letter of Credit or Documentary Facility Acceptance requested hereunder, does not exceed $40,000,000. 3.3. Conditions. In addition to being subject to the satisfaction of the conditions contained in Section 4.2, the obligation of an Issuing Bank to issue any Facility Letter of Credit or Documentary Facility Acceptance is subject to the satisfaction in full of the following conditions: (a) the Borrower shall have delivered to such Issuing Bank at such times and in such manner as such Issuing Bank may reasonably prescribe such documents and materials as may be required pursuant to the terms of the proposed Facility Letter of Credit (it being understood that if any inconsistency exists between such documents and the Loan Documents, the terms of the Loan Documents shall control) and the proposed Facility Letter of Credit and Documentary Facility Acceptance shall be reasonably satisfactory to the Issuing Bank as to form and content; (b) as of the date of issuance, no order, judgment or decree of any court, arbitrator or governmental authority shall purport by its terms to enjoin or restrain such Issuing Bank from issuing the requested Facility Letter of Credit or Documentary Facility Acceptance and no law, rule or regulation applicable to that Issuing Bank and no request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over that Issuing Bank shall prohibit or request that such Issuing Bank refrain from the issuance of Letters of Credit or Acceptances generally or the issuance of the requested Facility Letter or Credit or Documentary Facility Acceptance in particular; and (c) the Issuing Bank and the Borrower having agreed on the fee referred to in Section 3.8. 3.4. Procedure for Issuance of Facility Letters of Credit. (a) The Borrower shall give the Issuing Bank written or electronic notice of any requested issuance of a Facility Letter of Credit under this Agreement (a "Letter of Credit Request") in the format acceptable to the Issuing Bank and the Agent. Such notice shall be irrevocable. (b) Subject to the terms and conditions of this Article III and provided that the applicable conditions set forth in Section 4.2 hereof have been satisfied, such Issuing Bank shall, on the Issuance Date, issue a Facility Letter of Credit, on a sight or time basis, on behalf of the Borrower in accordance with the Issuing Bank's usual and customary business practices unless the Issuing Bank has actually received (i) written notice from the Borrower specifically revoking the Letter of Credit Request with respect to such Facility Letter of Credit, (ii) written notice from a Lender, which complies with the provisions of Section 3.6(a) or (iii) written or telephonic notice from the Agent stating that the issuance of such Facility Letter of Credit would violate Section 3.2. (c) Each Issuing Bank shall give the Agent and the Borrower written or telex notice, or telephonic notice confirmed promptly thereafter in writing, of the issuance of a Facility Letter of Credit (the "Issuance Notice"). (d) An Issuing Bank shall not extend or amend any Facility Letter of Credit or allow any Facility Letter of Credit to be automatically extended unless the requirements of this Agreement are met as though a new Facility Letter of Credit was being requested and issued. 3.4(B) Preparation of Drafts and Creation of Acceptances (a) The Borrower hereby authorizes the Issuing Bank or its designee to accept a Draft(s) drawn by a beneficiary under a time Facility Letter of Credit. Not later than 12:00 noon (Chicago time) on the proposed Drawing Date, or such later time as maybe acceptable to the Borrower and the Issuing Bank, the Issuing Bank shall, subject to the satisfaction of the applicable conditions set forth herein, duly accept and discount such Draft at a price equal to the face amount thereof less the sum of the bankers acceptance discount rate for such maturity then being generally quoted by the Issuing Bank (the "Discount Charge"), the Discount Charge being calculated on the face amount of each Draft so accepted for the actual number of days in the period from the date thereof to the date of its maturity and on the basis of a year of 360 days. Not later than 1:00 p.m. (Chicago time) on the Drawing Date, the Issuing Bank shall make the amount of the proceeds of the discount of each Draft so accepted and discounted available to the beneficiary. Notwithstanding the foregoing, in the case of a Documentary Facility Acceptance arising out of Drafts drawn by a Facility Letter of Credit beneficiary, such discounting shall be on terms acceptable to the Issuing Bank and such beneficiary (or its assignee) and the proceeds of any such discount shall be paid (after such discounting charges) to such beneficiary or its assignee. (b) Notwithstanding the foregoing, the Issuing Bank shall not be obligated to create or discount Acceptances hereunder if such Acceptance would not be eligible for discount at a Federal Reserve Bank under applicable rules or regulations, would not meet the requirements of paragraph 7 of Section 13 of the Federal Reserve Act, as amended, or any liability or the Issuing Bank that would arise from the creation of such Acceptance would constitute a deposit for which the Issuing Bank would be required to maintain reserves under Regulation D of the Federal Reserve Board as from time to time in effect or if the Issuing Bank, in its sole discretion, chooses not to discount such Acceptance. The Borrower acknowledges that the Issuing Bank's decision to accept and discount any Draft offered for acceptance and discount hereunder will be made in reliance upon the truth of the representations made by the Borrower in the related Notice of Drawing establishing the eligibility for discount of any such Acceptance. The Borrower will indemnify and save the Agent, the Issuing Bank and each Lender harmless from any loss or liability incurred by the Agent, the Issuing Bank or such Lender if any Acceptances are determined to be ineligible for discount or subject to reserves by reason of any misrepresentation made by the Borrower or to the beneficiary of any Facility Letter of Credit. (c) The Borrower hereby unconditionally agrees to pay to the Issuing Bank in immediately available funds the face amount of each Draft as to which an Acceptance was created by such Issuing Bank on the maturity date thereof, or on such earlier date as may be required pursuant to other provisions of this Agreement. (d) Acceptances may not be prepaid without the consent of the Issuing Bank. 3.5. Reimbursement Obligations; Duties of Issuing Banks. (a) (i) Each Issuing Bank shall promptly notify the Borrower and the Agent of any draw under a Facility Letter of Credit and the Borrower shall reimburse such Issuing Bank in accordance with Section 3.7; and (ii) any Reimbursement Obligation with respect to any Facility Letter of Credit or Documentary Facility Acceptance shall bear interest from the date of the relevant drawings or maturity, as applicable, under the pertinent Facility Letter of Credit or Documentary Facility Acceptance until payment in full is received by the pertinent Issuing Bank at (A) the Floating Rate until the next succeeding Business Day and (B) the default interest rate for Floating Rate Advances calculated in accordance with Section 2.12 for each day thereafter. Each Issuing Bank shall report to the Agent the average daily Facility Letter of Credit Obligations on a monthly basis no later than the fifth Business Day of the month for the preceding month. (b) Any action taken or omitted to be taken by an Issuing Bank under or in connection with any Facility Letter of Credit, if taken or omitted in the absence of willful misconduct or gross negligence, shall not put that Issuing Bank under any resulting liability to any Lender or, assuming that such Issuing Bank has complied with the procedures specified in Section 3.4, all conditions to the issuance of a Facility Letter of Credit have been satisfied and such Lender has not given a notice contemplated by Section 3.6(a) that continues in full force and effect, relieve that Lender of its obligations hereunder to that Issuing Bank. In determining whether to pay under any Facility Letter of Credit, an Issuing Bank shall have no obligation relative to the Lenders other than to confirm that any documents required to be delivered under such Facility Letter of Credit appears to have been delivered in compliance, and that they appear to comply on their face, with the requirements of such Facility Letter of Credit. 3.6. Participation. (A) (a) Immediately upon (i) the Effective Date for those Facility Letters of Credit issued prior to such date and (ii) issuance by an Issuing Bank of any Facility Letter of Credit in accordance with the procedures set forth in Section 3.4, each Lender shall be deemed to have irrevocably and unconditionally purchased and received from that Issuing Bank, without recourse, representation or warranty, an undivided interest and participation equal to its Percentage in such Facility Letter of Credit (including, without limitation, all obligations of the Borrower with respect thereto) and any security therefor or guaranty pertaining thereto; provided, that a Letter of Credit issued by any Issuing Bank shall not be deemed to be a Facility Letter of Credit for purposes of this Section 3.6 if (A) such Letter of Credit has an expiration date which is later than five Business Days prior to the Termination Date or (B) such Issuing Bank shall have received written notice from any Lender on or before the Business Day prior to the date of its issuance of such Letter of Credit that one or more of the conditions to the issuance of a Facility Letter of Credit is not then satisfied, and, in the event an Issuing Bank receives such a notice, it shall have no further obligation to issue any Facility Letter of Credit until such notice is withdrawn by that Lender or it receives a notice from the Agent that such condition has been satisfied or effectively waived in accordance with the provisions of this Agreement. (b) In the event that any Issuing Bank makes any payment under any Facility Letter of Credit and the Borrower shall not have repaid such amount to such Issuing Bank pursuant to Section 3.7 hereof, such Issuing Bank shall promptly notify the Agent, which shall promptly notify each Lender, of such failure, and each Lender shall promptly and unconditionally pay to the Agent for the account of such Issuing Bank the amount of such Lender's Percentage of the unreimbursed amount of such payment, and the Agent shall promptly pay such amount to the Issuing Bank. The failure of any Lender to make available to the Agent for the account of any Issuing Bank its Percentage of the unreimbursed amount of any such payment shall not relieve any other Lender of its obligation hereunder to make available to the Agent for the account of such Issuing Bank its Percentage of the unreimbursed amount of any payment on the date such payment is to be made, but no Lender shall be responsible for the failure of any other Lender to make available to the Agent its Percentage of the unreimbursed amount of any payment on the date such payment is to be made. (c) Whenever an Issuing Bank receives a payment on account of a Reimbursement Obligation, including any interest thereon, it shall promptly pay to the Agent and the Agent shall promptly pay to each Lender which has funded its participating interest therein, in immediately available funds, an amount equal to such Lender's Percentage thereof. (d) Upon the request of the Agent or any Lender, an Issuing Bank shall furnish to such Agent or Lender copies of any Facility Letter of Credit to which that Issuing Bank is party and such other documentation as may reasonably be requested by the Agent or Lender. (e) The obligations of a Lender to make payments to the Agent for the account of each Issuing Bank with respect to a Facility Letter of Credit shall be absolute, unconditional and irrevocable, not subject to any counterclaim, set-off, qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances. (B) (a) Immediately upon the Drawing Date of any Documentary Facility Acceptance issued in accordance with the procedures set forth in Section 3.4(B), each Lender shall be deemed to have irrevocably and unconditionally purchased and received from that Issuing Bank, without recourse, representation or warranty, an undivided interest and participation equal to its Percentage in such Documentary Facility Acceptance (including, without limitation, all obligations of the Borrower with respect thereto) and any security therefor or guaranty pertaining thereto; provided, that an Acceptance issued by any Issuing Bank shall not be deemed to be a Documentary Facility Acceptance for purposes of this Section 3.6 if (A) such Acceptance has an expiration date which is later than five Business Days prior to the Termination Date or (B) such Issuing Bank shall have received written notice from any Lender on or before the Business Day prior to the Drawing Date of such Acceptance that one or more of the conditions to the issuance of a Documentary Facility Acceptance is not then satisfied, and, in the event an Issuing Bank receives such a notice, it shall have no further obligation to issue any Documentary Facility Acceptance until such notice is withdrawn by that Lender or it receives a notice from the Agent that such condition has been satisfied or effectively waived in accordance with the provisions of this Agreement. (b) In the event that any Issuing Bank makes any payment under any Documentary Facility Acceptance and the Borrower shall not have repaid such amount to such Issuing Bank pursuant hereto on the maturity date specified in the relevant Notice of Drawing, such Issuing Bank shall promptly notify the Agent, which shall promptly notify each Lender, of such failure, and each Lender shall promptly and unconditionally pay to the Agent for the account of such Issuing Bank the amount of such Lender's Percentage of the unreimbursed amount of such payment, and the Agent shall promptly pay such amount to the Issuing Bank. The failure of any Lender to make available to the Agent for the account of any Issuing Bank its Percentage of the unreimbursed amount of any such payment shall not relieve any other Lender of its obligation hereunder to make available to the Agent for the account of such Issuing Bank its Percentage of the unreimbursed amount of any payment on the date such payment is to be made, but no Lender shall be responsible for the failure of any other Lender to make available to the Agent its Percentage of the unreimbursed amount of any payment on the date such payment is to be made. (c) Whenever an Issuing Bank receives a payment on account of a Reimbursement Obligation, including any interest thereon, it shall promptly pay to the Agent and the Agent shall promptly pay to each Lender which has funded its participating interest therein, in immediately available funds, an amount equal to such Lender's Percentage thereof. (d) Upon the request of the Agent or any Lender, an Issuing Bank shall furnish to such Agent or Lender copies of any Documentary Facility Acceptance to which that Issuing Bank is party and such other documentation as may reasonably be requested by the Agent or Lender. (e) The obligations of a Lender to make payments to the Agent for the account of each Issuing Bank with respect to a Documentary Facility Acceptance shall be absolute, unconditional and irrevocable, not subject to any counterclaim, set-off, qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances. 3.7. Payment of Reimbursement Obligations. (a) The Borrower agrees to pay to each Issuing Bank the amount of all Reimbursement Obligations, interest and other amounts payable to such Issuing Bank under or in connection with any Facility Letter of Credit or Documentary Facility Acceptance immediately when due (and in any event shall reimburse an Issuing Bank for drawings under a Facility Letter of Credit issued by it no later than the next succeeding Business Day after the payment by that Issuing Bank), irrespective of any claim, set-off, defense or other right which the Borrower or any Subsidiary may have at any time against any Issuing Bank or any other Person, under all circumstances, including without limitation any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against a beneficiary named in a Facility Letter of Credit or any transferee of any Facility Letter of Credit or Documentary Facility Acceptance (or any Person for whom any such transferee may be acting), the Agent, the Issuing Bank, any Lender, or any other Person, whether in connection with this Agreement, any Facility Letter of Credit or Documentary Facility Acceptance, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between the Borrower or any Subsidiary and the beneficiary named in any Facility Letter of Credit or Documentary Facility Acceptance); (iii) any draft, certificate or any other document presented under the Facility Letter of Credit or Documentary Facility Acceptance proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (v) the occurrence of any Default or Unmatured Default. (b) In the event any payment by the Borrower or any Subsidiary received by an Issuing Bank with respect to a Facility Letter of Credit or Documentary Facility Acceptance and distributed by the Agent to the Lenders on account of their participation is thereafter set aside, avoided or recovered from that Issuing Bank in connection with any receivership, liquidation, reorganization or bankruptcy proceeding, each Lender which received such distribution shall, upon demand by that Issuing Bank, contribute such Lender's Percentage of the amount set aside, avoided or recovered together with interest at the rate required to be paid by that Issuing Bank upon the amount required to be repaid by it. 3.8. Compensation. (a) The Borrower shall pay to the Agent, for the ratable account of the Lenders, based upon the Lenders' respective Percentages, a fee (the "Facility Letter of Credit Fee") (i) with respect to each Standby Letter of Credit and each Documentary Facility Acceptance, in an amount equal to the product of the average daily undrawn amount of such Facility Letter of Credit or unmatured amount of each Documentary Facility Acceptance times the percentage indicated as the Applicable Margin for the Facility Letter of Credit Fee times the LC Factor, for the period from the Issuance Date or Drawing Date thereof; as applicable, to but including the final expiration date thereof and (ii) with respect to each Commercial Letter of Credit, 50% of an amount equal to the product of the average daily undrawn amount of such Facility Letter of Credit times the percentage indicated as the Applicable Margin for the Facility Letter of Credit Fee times the LC Factor, for the period from the Issuance Date or Drawing Date thereof, as applicable, to but including the final expiration date thereof. The Facility Letter of Credit Fee shall be due and payable in arrears on each Payment Date and, to the extent any such fees are then due and unpaid, on the Termination Date. The Agent shall promptly remit such Facility Letter of Credit Fees, when paid, to the other Lenders in accordance with their Percentages thereof. (b) Each Issuing Bank shall have the right to receive solely for its own account such amounts as it and the Borrower may agree, in writing, to pay to such Issuing Bank with respect to issuance fees for any Facility Letter of Credit. In addition, each Issuing Bank shall be entitled to receive its usual and customary costs and fees of issuing, fronting and servicing Facility Letters of Credit. (c) Each Issuing Bank shall have the right to receive solely for its own account such amounts as it and the Borrower may agree, in writing, to pay to such Issuing Bank with respect to issuance fees for any Documentary Facility Acceptance. In addition, each Issuing Bank shall be entitled to receive its usual and customary costs and fees of issuing, fronting and servicing Documentary Facility Acceptance. (x) The first paragraph of Section 4.2 of the Credit Agreement is hereby amended by inserting the words "or Documentary Facility Acceptance" after the words "Facility Letter of Credit" where such words appear in such paragraph. (xi) The second paragraph of Section 4.2 is hereby amended by deleting such paragraph in its entirety and inserting the following in its stead: Each Borrowing Notice with respect to each such Advance, each Letter of Credit Request with respect to each Facility Letter of Credit and each Notice of Drawing with respect to each request for a Documentary Facility Acceptance shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2(a) and (b) have been satisfied. Any Lender or Issuing Bank may require a duly completed compliance certificate in substantially the form of Exhibit "C" hereto as a condition to making an Advance, issuing a Letter of Credit or discounting an Acceptance. (xii) Sections 2.20.1, 2.20.2, 6.2, 7.1, 8.1, 8.3, 9.1, 9.7, 12.2.1, 12.2.2, and 12.3.2 of the Credit Agreement are hereby amended by inserting the words "and Documentary Facility Acceptances" after the words "Facility Letters of Credit" where such words appear throughout each such Section. (xiii) The Credit Agreement is hereby amended by inserting as Exhibits H and I thereto, the documents attached hereto as Exhibit H and Exhibit I. 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 Requisite Lenders: (i) Amendment. This Amendment shall have been duly executed by the Requisite Lenders and the Borrower 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. The date on which all of the above events have occurred is the "Effective Time". If the Effective Time has not occurred by December 31, 1997, 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. 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 remain 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. 5. 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] IN WITNESS WHEREOF, this Third 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 Irving, California 92715 Phone: (714) 442-7000 Fax: (508) 442-5127 THE FIRST NATIONAL BANK OF CHICAGO, Individually and as Agent By:________________________________ Print Name: _________________________ Title: ______________________________ One First National Plaza Chicago, Illinois 60670 Phone: (312) 732-7101 Fax: (312) 732-1117 Attention: John D. Runger, Managing Director 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 0210 Phone: (617) 434-7000 Fax: (617) 434-7980 WELLS FARGO BANK, N.A. Individually and as Documentation Agent By: Print Name: Kathleen Barnes Title: Vice President By:_________________________________ Print Name:__________________________ Title:_______________________________ 707 Wilshire Boulevard, 16th Floor MAC 2818-163 Los Angeles, California 90017 Phone: (213) 614-7782 Fax: (213) 614-2569 THE SUMITOMO BANK, LIMITED By: Print Name:__________________ Title: By: Print Name:__________________ Title: EXHIBIT A REAFFIRMATION OF GUARANTY Each of the undersigned acknowledges receipt of a copy of the Third Amendment to the Credit Agreement (the "Amendment") dated as of December 19, 1997, 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 December 19, 1997 [GUARANTOR] By: Title: EXHIBIT H [FORM OF NOTICE OF DRAWING] NOTICE OF DRAWING Dated___________________________ TO: ________________________________(the "Issuing Bank") FROM: HomeBase, Inc. (the "Borrower") RE: Credit Agreement (the "Credit Agreement") dated as of July 9, 1997 by and among HOMEBASE, INC., THE FIRST NATIONAL BANK OF CHICAGO, BANKBOSTON, N.A., WELLS FARGO BANK, N.A., FLEET NATIONAL BANK, SUMITOMO BANK, LTD. and UNION BANK OF CALIFORNIA, N.A. We hereby give you notice pursuant to Section 3.4(B) of the Credit Agreement of the Borrower's request that the Issuing Bank create Acceptances on _________________________ (the "Drawing Date") by accepting and discounting in accordance with Section 3.4(B) of the Credit Agreement our Drafts (or Drafts drawn by a beneficiary under Facility Letter of Credit No. _________) in the aggregate face amount of $____________ payable _____________ days after the Drawing Date. The Drafts to be accepted by the Issuing Bank shall be duly completed by the Issuing Bank in accordance with the information provided in this Notice of Drawing and otherwise in accordance with the provision of Section 3.4(B) of the Credit Agreement: We hereby certify to you and each Lender as follows: 1. No other financing for the transaction underlying the Drafts is outstanding, the goods which are the subject of the transaction underlying the Drafts are free of any lien and are not being used as collateral for any other form of financing, and the transaction will produce payments to us exceeding the face amount of all drafts (including the Drafts which are the subject to this certificate) accepted by you arising out of said transaction. 2. |_| The transaction which gives rise to the Draft is the importation/exportation/domestic shipment of ________________________________ from (name of commodity) ________________ to __________________________ (point of shipment) (place of destination) pursuant to an existing contract; |_| the Drafts were secured at the time of acceptance by independent warehouse, terminal, or other similar receipt conveying security title to ------------------------------------------ (name of readily marketable staple) stored in _______________________________. (country where stored) 3. The transaction underlying the Draft has a remaining term of term of 180 days or less, and will be concluded no later than, and at approximately the same time as, the maturity date of the Draft. 4. The acceptance requested complies with the applicable regulations of the Board of Governors of the Federal Reserve System of the United States governing bankers acceptances and shall be eligible under such regulations for rediscount by a Federal Reserve Bank. Proceeds of the Issuing Bank's discount of Acceptance arising out of Drafts drawn by a Facility Letter of Credit beneficiary shall be paid (after discounting charges) to such beneficiary or its assignee. We confirm that on the date hereof the applicable conditions precedent set forth in Article III and Section 4.2 of the Credit Agreement relating to, or to be satisfied by, the Borrower are satisfied as of the date hereof. Unless otherwise defined herein, capitalized terms used herein have the meanings assigned to them in the Agreement. HomeBase, Inc. By_________________________________ Authorized Signature EXHIBIT I [FORM OF DRAFT] CUSTOMER DRAFT No-.___________________ Date __________________ Location: ______________ $--------------------- On ____________________________ pay to the order of [Issuing Bank] ___________________________________________________________________ Dollars Value Received and Charge to Account of To: __________________________ -------------------------- HomeBase, Inc. By:_______________________ Authorized Signature EX-13 5 HomeBase, Inc. 1997 Annual Report Title: Building Relationships Inside Front Cover HomeBase is one of the leading home improvement chains in the western United States. Since the first HomeBase store opened in California in October 1983, the company has grown to 83 warehouse stores in 10 western states. Averaging over 100,000 square feet, each HomeBase store offers a full assortment of quality home improvement and building supply products, plus an expansive nursery and garden center. "The Base," as it has become known, distinguishes itself from other "big box" home improvement stores in three important ways: HomeBase services do-it-yourselfers and professional contractors by providing everyday low prices; our stores maintain an extensive merchandise selection that includes thousands of name brand and private label items; and our highly trained staff provides exceptional and timely customer service. Spot Photos Team Members Customers Vendors Stockholders Building relationships is what HomeBase is all about. It starts with our team members, the people who staff our stores everyday. Specially skilled tradespeople and support team members undergo constant training programs to better serve our customers, who range from the first time do-it-yourselfer to the seasoned contractor. HomeBase depends on strong relationships with vendors to maximize our product selection and maintain competitive pricing. Together, these relationships form HomeBase - a company focused on positive growth and committed to building long-term value for our stockholders. Financial Highlights On July 10, 1997, stockholders approved Waban Inc.'s spin-off of the BJ's Wholesale Club division, along with the corporate name change from Waban Inc. to HomeBase, Inc. The BJ's spin-off transaction was effected as a tax-free distribution in the form of a special dividend to Waban's stockholders, on a one-for-one basis, of all of the outstanding shares of common stock of BJ's Wholesale Club, Inc. on July 28, 1997. HomeBase, Inc. has traded on the New York Stock Exchange since July 29, 1997 under the symbol "HBI".
Fiscal Year Ended Income Statement Data ($000, except per share data) Jan-98 Jan-97 Jan-96 (53 weeks) Net sales $1,477,442 $1,452,696 $1,448,776 Operating income 4,008 (a) 37,858 48,661 Income (loss) from continuing operations before extraordinary loss(b) (683)(a) 16,347 24,485 Net income 11,229 (a) 76,660 72,977 Basic earnings per share $0.31 $2.33 $2.21 Diluted earnings per share $0.31 $2.31 $2.20 Selected Pro Forma Financial Data(c) ($000, except per share data) Net sales $1,477,442 $1,452,696 $1,448,776 Operating income 5,318 (a) 39,324 50,262 Income from continuing operations before extraordinary loss(b) 1,495 (a) 21,392 27,977 Diluted earnings per share- continuing operations $0.04 $0.56 $0.74 Warehouse Locations and Other Data Number of stores at year end 83 84 79 Number of stores leased 65 66 65 Number of stores owned 18 18 14 Proportion of stores in new format (new or remodeled) 72% 61% 37% Depreciation and amortization ($000) 25,409 23,620 20,118 Capital expenditures ($000) 26,431 48,393 73,300 Comparable store sales (%) (1.7)% (5.2)% (5.0)%
(a)Includes a charge of $27.0 million ($16.3 million net of tax) for store closures and other charges. (b)Income (loss) from continuing operations for the fiscal year ended January 1998 is not comparable to the prior years' results due to differences in corporate overhead following the spin-off of BJ's Wholesale Club, Inc. on July 28, 1997, the conversion of the company's prior convertible subordinated debt to common stock and the refinancing of $112 million of other corporate debt. (c)The pro forma amounts reflect management's good faith estimate of operating performance had HomeBase been a stand-alone company prior to the spin-off of BJ's Wholesale Club, Inc. and reflect reductions in administrative expenses and interest costs. The number of shares used in the calculation of pro forma diluted earnings per share -D continuing operations is 37.9 million for all the years shown. Page 1 side Bar The HomeBase Design Center To fully leverage the rapidly expanding demand for do-it-yourself remodel products, particularly among female customers, HomeBase developed its innovative Design Center. Today, HomeBase stores feature a centralized full-service Design Center complete with fashionable products, computer-based design imaging, design consultants, and delivery and installation services. The improved store layout enhances our customers' shopping experience and increases add-on sales opportunities. Page 2&3 To Our Stockholders HomeBase had an eventful year in 1997. We started the year as a division of Waban Inc. and ended it as an independent publicly traded company. In July, Waban spun off its BJ's Wholesale Club division and changed its name to HomeBase, Inc. The company has since been trading on the New York Stock Exchange under the symbol "HBI". HomeBase also made a significant change to its corporate growth strategy. Once we saw improving real estate prices in Southern California, our largest market, we accelerated our store remodeling program, which gives us a competitive edge by improving our product presentation, selection and shopping convenience. Historically, remodeled HomeBase stores have achieved average first-year sales trend improvements of 10% and a 100 basis point improvement in selling margins. Most of the 17 stores remaining to be remodeled are in Southern California. By the end of April 1998, nearly every store in our chain will be converted to the new remodeled format. This gives us a new opportunity to build brand awareness by focusing advertising on the strengths of the remodeled format, including the improved ambiance and customer-friendly layout of our stores. Once the remodels are completed, our focus will shift to the expansion phase of our corporate strategy. Our current plan is to increase the number of new store openings from two stores in both 1997 and 1998 to eight to 10 stores per year beginning in 1999. Financial Results For fiscal 1997, which includes the 53-week period ended January 31, 1998, sales totaled $1.48 billion, compared with $1.45 billion for the prior year's 52-week fiscal year. Comparable store sales were down 1.7% versus the prior year. During the year we closed three stores and opened new stores in Henderson, Nevada and Brea, California. Our net income for fiscal 1997 of $11.2 million, or $0.31 per diluted share, included six months of discontinued operations of BJ's Wholesale Club and non-recurring expenses related to the July 1997 spin-off transaction, which are not related to the ongoing operations of HomeBase, Inc. Net income is not directly comparable to the prior year's results due to the differences in corporate overhead following the spin-off of BJ's Wholesale Club, Inc., the conversion of Waban's convertible subordinated debt to common stock and the refinancing of $112 million of other corporate debt. On a pro forma basis, giving effect to the spin-off of BJ's Wholesale Club, Inc., net income for fiscal 1997 would have been $17.8 million, or $0.47 per diluted share, before a third quarter store-closing charge of $27.0 million, or $16.3 million net of tax. After the charge, HomeBase pro forma net income totaled $1.5 million, or $0.04 per diluted share, compared with pro forma net income of $21.4 million, or $0.56 per diluted share, in the previous fiscal year. The pro forma amounts are based on management's good faith estimate of operating performance had HomeBase been a stand-alone company prior to the spin-off of BJ's Wholesale Club, Inc., and reflect reductions in administrative expenses and interest costs for periods prior to the spin-off. The company ended the year with a strong balance sheet that included $50.1 million in cash and marketable securities, debt of $116.0 million and stockholders' equity of $359.7 million. Strategic Direction Convenience, superior customer service and a wide variety of home improvement products at competitive prices are all very important to our customers. Our remodel format delivers just that. A centrally located design area makes our remodeled HomeBase stores more inviting to casual do-it-yourselfers. At the same time we provide our professional customers easy access to lumber and building materials through a separate contractor's entrance. We have seen the remodel formula work quite well by improving sales and store selling margins. We are on schedule to complete 16 of the 17 remaining stores in the remodel program by April and should begin to realize the benefits in the second quarter of 1998, as we enter the company's peak spring and summer selling season. To help finance our new strategic initiatives, the company sold $100 million, 5.25% convertible subordinated seven-year notes in November 1997, through a rule 144A/regulation S offering. The notes are non-callable for three years and convertible into shares of HomeBase, Inc. common stock at $10.22 per share. The notes have subsequently been registered with the Securities and Exchange Commission and are rated B- by Standard and Poor's, which gave the company a corporate rating of B+. Looking Ahead In 1997, we took significant steps to lay the groundwork for the future of HomeBase and we continue to focus our efforts on building relationships with customers, team members, vendors and stockholders in 1998. In addition to providing extensive and ongoing training for our team members, we are implementing a new point-of-sale system to improve efficiency and customer service. With virtually all stores in the same format, a new brand-identity advertising campaign is being launched in tandem with innovative new techniques in direct and database marketing. Beyond our internal efforts, several favorable external factors bode well for HomeBase. Demographic and lifestyle changes such as maturing baby boomers, the increase in home-centered activities and aging housing stock are creating demand for home improvement products and services. Industry sources estimate that the overall market for home improvement products in the United States will exceed $148 billion in 1998, with particularly strong population and industry growth expected in the western United States. HomeBase is the most competitively impacted warehouse-style home improvement retailer in the industry. Approximately 95% of our stores have at least one "big box" home improvement store nearby. At the same time new competition was entering our markets, Southern California was in a deep recession and, until 1997, endured six continuous years of housing price declines. While these factors impeded our ability to achieve growth in sales and operating income, we successfully met these challenges and maintained HomeBase as a profitable business. Recently, we acted swiftly and strategically to pursue a more aggressive growth track and ensure HomeBase is competitively positioned to take full advantage of the opportunities that lie ahead. With interest rates holding at modest levels, a strong economy and an improving real estate market in Southern California, HomeBase has the opportunity to build lasting value for its stockholders. We offer our personal thanks to all of our hardworking team members, and to our vendors, customers and investors whose confidence and support continue to be the driving force behind the success of HomeBase. Sincerely, Allan Sherman President and Chief Executive Officer Herbert J. Zarkin Chairman of the Board April 3, 1998 The forward-looking statements in this annual report involve risks and uncertainties that could cause results to differ materially from those expressed. Such risks and uncertainties include, but are not limited to, the company's ability to execute its accelerated store-opening plan, the competitive marketplace and the factors set forth under the heading "Risk Factors" in the company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, and in the company's other filings with the Securities and Exchange Commission. Call Out under President's Picture "... HomeBase is competitively positioned to take full advantage of the opportunities that lie ahead." -D Allan Sherman - - Herbert J. Zarkin Page 4&5 Building Relationships With Team Members HomeBase's ability to satisfy customers stems directly from our greatest asset: our team members. HomeBase University provides our team members with an extensive ongoing training curriculum. Many are skilled tradespeople combining extensive career experience with our educational programs to help every HomeBase store put the best staff on the sales floor each day. In fact, it is our policy to have team members spend as much time as possible on the sales floor to help our customers. At HomeBase, our relationships with our team members are dedicated to mutual success. This goodwill creates a positive workplace with a strong team, and in turn, enhances the shopping experience for our customers. Page 4 SideBars Contractors - Professional contractors account for nearly 30% of HomeBase sales. To accommodate these important customers we provide a separate entrance and full-service contractor desks staffed with highly trained team members. Customers - From helping customers find exactly what they're looking for, to explaining all the available choices and providing "how to" installation instructions - HomeBase team members are eager to help with any do-it-yourself project. Building Relationships With Customers HomeBase is dedicated to satisfying our customers - our success depends on it. Whether we are serving a do-it-yourselfer or a contractor, our focus is always on customer service. Currently, the strong economy in the western United States presents HomeBase with an excellent opportunity for growth, particularly in Southern California, where the new and remodel housing markets are both projected to grow significantly. We are leveraging these opportunities by building the HomeBase brand and promoting the benefits of our remodeled store format through innovative advertising and direct marketing campaigns. Professional contractors and other commercial customers continue to be a major focus of our business. We provide these customers with ease of shopping through full-service contractor desks, fax and phone ordering, order assembly for pick-up or job-site delivery, special entrances, and early morning hours, as well as competitive pricing. Our services help make these customers a major revenue source for HomeBase, representing approximately 30% of our business. Page 5 Side Bar The HomeBase Paint Center In addition to the wall and floor covering areas of the Design Center, each HomeBase includes a Paint Center. This area features a wide variety of painting products for both interior and exterior projects. A computerized color matching system allows customers to choose from an infinite variety of colors. Customers can try different combinations in the store to find the perfect match for their project. Our team members provide interior design consulting, product samples, paint mixing, "how-to" instructions, delivery and installation services. Page 6&7 Building Relationships With Vendors At HomeBase, vendors are essential partners in our success. We work closely with them to provide the best products at competitive prices. Ongoing efforts have helped create innovative product merchandising in every aisle of our remodeled stores. The Design Centers feature the latest fashionable products - - from cabinetry and counter tops to window and floor coverings. This attracts customer add-on sales, benefiting HomeBase and its suppliers. Our process of working with vendors is streamlined to maximize efficiencies. Electronic Data Interchange (EDI) permits the company and its vendors to save money and minimize errors by electronically transmitting advance shipment notices, purchase orders and invoicing information. This enables our team members to minimize administrative tasks and spend more time helping customers. Vendors support HomeBase and its team members with special training programs, competitive volume purchasing, innovative product offerings and co-operative advertising and merchandising programs. Page 6 Side Bar The HomeBase Lighting Center Centrally located to attract customer interest the Lighting Center is used as a backdrop to the Design Center. Presentation is visually appealing with the latest products featured, including light fixtures, free-standing lamps, ceiling fans, and stylish accessories. Customers use the Lighting Center in conjunction with the Design Center as a resource for their remodeling, new home and contractor projects. Page 7 Building Relationships With Stockholders HomeBase is effectively competing in our markets by providing improved customer service, a wide selection of product solutions and a more complete shopping experience through our remodeled store format. In 1998, with -Dnearly all stores in the remodeled format, HomeBase will be revitalizing its brand by promoting the new look of the stores through advertising and marketing. In addition, the company plans to increase the pace of new store growth in order to strengthen our market position in the western United States. Store growth in existing and contiguous markets will leverage distribution and overhead expenses and position HomeBase for improved profitability. Solid relationships with our team members, vendors and customers enable us to build upon our successful business model and help create long-term value for HomeBase stockholders. Page 7 Side Bar At HomeBase, we have improved special order and add-on sales by providing excellent customer service and a pleasant shopping experience. Our customers can utilize in-store computer aided design and interior design consulting services. Our design team members are even available for in-home consultations. Page 8 Officers and Directors Company Officers Herbert J. Zarkin Chairman of the Board Allan P. Sherman President and Chief Executive Officer Thomas F. Gallagher Executive Vice President, Store Operations William B. Langsdorf Executive Vice President and Chief Financial Officer Scott L. Richards Executive Vice President, Merchandising David R. Kenshol Senior Vice President, Marketing/Advertising Edward J. Weisberger Senior Vice President, Finance Michael K. Ace Vice President, Merchandising Richard C. Campagna Vice President, Operations - Region 1 Stephen E. Capasso Vice President, Merchandising Richard J. Dickenson Vice President, Operations William R. Hagen Vice President, Finance William H. Huser Vice President, Operations - Region 3 Peter A. Hutt Vice President, Treasurer James A. Orr Vice President, Management Information Systems John L. Price Vice President, General Counsel and Secretary Henry G. Ragin Vice President, Merchandising Randy L. Sargent Vice President, Operations -D Region 2 David A. Swanberg Vice President, Finance Constance J. Tolleson Vice President, Human Resources Dave L. Weigel Vice President, Real Estate Development Patrick T. Young Vice President, Merchandising Board of Directors Herbert J. Zarkin Chairman of the Board, HomeBase, Inc. John D. Barr President and Chief Operating Officer, Quaker State Corporation Arthur F. Loewy Former Chief Financial Officer and Executive Vice President of Zayre Corp. Allan P. Sherman President and Chief Executive Officer, HomeBase, Inc. Lorne R. Waxlax Former Chairman of the Board of Waban Inc. and Former Executive Vice President of The Gillette Company Edward J. Weisberger Senior Vice President, Finance, HomeBase, Inc. Inside Back Cover Annual Meeting The Annual Meeting of Stockholders will be held on Thursday, May 21, 1998 at 10 a.m. in the offices of Gibson Dunn & Crutcher LLP, 4 Park Plaza, Irvine, California. The Board of Directors extends a cordial invitation to all stockholders to attend. Registrar and Stock Transfer Agent First Chicago Trust Company of New York PO Box 2500 Jersey City, New Jersey 07303-2532 Phone: (201) 324-1644 Auditors Coopers & Lybrand L.L.P. Los Angeles, California Outside Counsel Gibson Dunn & Crutcher LLP Los Angeles, California Form 10-K This annual report is designed to be read in conjunction with the enclosed copy of the company's Annual Report on Form 10-K, which has been filed with the Securities and Exchange Commission. If the company's Form 10-K is not enclosed, a copy is available at no charge through the investor relations department at HomeBase's corporate headquarters. Common Stock Listing The common stock is traded on the New York Stock Exchange under the symbol of "HBI". Investor Inquiries For additional information on the company please contact: Suki Shattuck Director of Investor Relations 3345 Michelson Drive Irvine, California 92612 Phone: (949) 442-5448 Fax: (949) 442-5779 Email: sshattuc@homebase.com EX-21 6 EXHIBIT 21 Name of Subsidiary Jurisdiction of Incorporation HomeClub, Inc. Nevada HomeClub, Inc. of Texas Delaware Fullerton Corporation Delaware HCI Development Corp. California HomeClub First Realty Corp. Colorado HCWA Realty Corp. Washington HCCA Realty Corp. California HBNM Realty Corp. New Mexico HBCA 1993 Realty Corp. California HBOR Realty Corp. Oregon HBUT Realty Corp. Utah HCWA 1993 Realty Corp. Washington HBCO Realty Corp. Colorado HBNM 1994 Realty Corp. New Mexico New Mexico HBCO 1994 Realty Corp. Colorado HBCA Pomona Realty Corp. California HBCA Vacaville Realty Corp. California HBI Holdings Nevada EX-23 7 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of HomeBase, Inc. (formerly Waban Inc.) on Form S-8 (File Nos. 33-29473, 33-40155, 33-60335, 33-60337 and 333-32473) and on Form S-3 (File No. 333-43789) of our report dated March 2, 1998, on our audits of the consolidated financial statements of HomeBase, Inc. as of January 31, 1998 and January 25, 1997, and for the three years ended January 31, 1998, January 25, 1997 and January 27, 1996, which reports are included in the Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Los Angeles, California April 7, 1998 EX-27 8
5 1,000 3-Mos 6-Mos 9-Mos 12-Mos Jan-31-1998 Jan-31-1998 Jan-31-1998 Jan-31-1998 Apr-26-1997 Jul-26-1997 Oct-25-1997 Jan-31-1998 41,690 13,070 3,714 44,603 0 0 0 5,515 27,760 34,677 35,853 28,074 271 627 725 293 336,434 305,295 326,715 314,188 517,993 368,968 387,157 424,182 360,334 358,467 359,015 374,156 108,985 108,483 107,728 109,822 1,143,894 637,974 663,110 715,608 223,126 177,883 233,619 183,354 228,212 39,830 15,750 115,665 0 0 0 0 0 0 0 0 333 375 376 377 645,388 373,172 362,943 359,290 1,143,894 637,974 663,110 715,608 360,204 780,608 1,149,040 1,477,442 360,204 780,608 1,149,040 1,477,442 282,268 609,308 898,835 1,159,253 282,268 609,308 898,835 1,159,253 71,444 144,720 240,355 314,181 0 0 0 0 2,764 4,173 4,528 5,136 3,737 22,407 5,322 (1,128) 1,466 8,918 2,121 (445) 2,271 13,489 3,201 (683) 8,532 20,575 20,575 20,575 0 (8,663) (8,663) (8,663) 0 0 0 0 10,803 25,401 15,113 11,229 0.33 0.75 0.43 0.31 0.32 0.70 0.42 0.31
EX-27.1 9
5 1,000 3-Mos 6-Mos 9-Mos 12-Mos Jan-25-1997 Jan-25-1997 Jan-25-1997 Jan-25-1997 Apr-27-1996 Jul-27-1997 Oct-26-1996 Jan-25-1997 11,540 5,571 15,860 16,896 22,704 14,223 0 0 26,034 29,278 33,944 25,488 159 173 297 227 351,941 316,466 334,139 316,538 522,941 478,018 518,581 445,256 335,674 346,294 351,886 358,246 94,626 98,339 98,872 103,121 1,117,192 1,085,231 1,144,872 1,077,059 247,493 210,750 261,287 169,414 242,100 230,043 229,985 229,894 0 0 0 0 0 0 0 0 333 333 333 377 568,859 589,032 605,378 631,592 1,117,192 1,085,231 1,144,872 1,077,059 352,242 776,513 1,142,923 1,452,696 352,242 776,513 1,142,923 1,452,696 272,484 601,086 889,059 1,136,997 272,484 601,086 889,059 1,136,997 73,314 147,980 216,261 277,841 0 0 0 0 2,456 4,949 7,660 10,506 3,988 22,498 29,943 27,352 1,523 8,804 11,843 1,105 2,465 13,694 18,100 16,347 7,050 21,433 33,053 6,013 0 0 0 0 0 0 0 0 9,515 35,127 51,153 76,660 0.29 1.07 1.56 2.33 0.28 0.99 1.54 2.31
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