-----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, HPvth4Hbwnc4NZnbxFhGcp/AQUkvN7i0oVK3PSAdaeomIGRgYtdxf795a+NaVKd0 b9rKwx21lbuf8CtBgMRG/g== 0000950146-96-000575.txt : 19960425 0000950146-96-000575.hdr.sgml : 19960425 ACCESSION NUMBER: 0000950146-96-000575 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960127 FILED AS OF DATE: 19960424 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WABAN 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10259 FILM NUMBER: 96549924 BUSINESS ADDRESS: STREET 1: ONE MERCER ROAD CITY: NATICK STATE: MA ZIP: 01760 BUSINESS PHONE: 5086516500 10-K405 1 FORM 10-K ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended January 27, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 1-10259 WABAN INC. (Exact name of registrant as specified in its charter) Delaware 33-0109661 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) One Mercer Road 01760 Natick, Massachusetts (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (508) 651-6500 ------------- 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 6-1/2% Convertible Subordinated Debentures due July 1, 2002 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, 15, 1996 was $847,473,000. There were 32,980,007 shares of the Registrant's Common Stock, $.01 par value, outstanding as of March 15, 1996. ---------------------- Documents Incorporated by Reference Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on June 11, 1996 (Part III). PART I Item 1. Business The Company operates two warehouse merchandising businesses: BJ's Wholesale Club ("BJ's") and HomeBase. BJ's introduced the warehouse club concept to New England in 1984 and is the third largest membership warehouse chain nationwide. BJ's sells a narrow assortment of brand name food and general merchandise within a wide range of product categories. HomeBase is the second largest operator of home improvement warehouse stores in the western United States and offers a very broad assortment of home improvement and building supply products. As of January 27, 1996, the Company operated 71 BJ's warehouse clubs and 79 HomeBase warehouse stores. Both BJ's and HomeBase utilize the efficiencies provided by the warehouse merchandising format to offer their customers first-quality, brand name merchandise at prices substantially below those available through traditional channels of distribution. BJ's and HomeBase both emphasize productivity, efficiency, and disciplined inventory management in order to minimize the cost of carrying and handling merchandise. Each employs sophisticated management information systems to facilitate efficient purchasing, distribution and pricing of inventory. Both chains purchase most of their merchandise directly from manufacturers and operate cross-docking facilities where truckload shipments received from vendors are separated and reassembled for immediate delivery to individual warehouse stores. The Company was formed in 1989, when Zayre Corp. (now The TJX Companies, Inc. ("TJX")), as part of its restructuring, combined its BJ's Wholesale Club and HomeBase divisions to form "Waban Inc." In June 1989, TJX distributed all of the Company's outstanding common stock to its shareholders on a pro rata basis. BJ's Wholesale Club General BJ's Wholesale Club introduced the warehouse club concept to New England in 1984 and has since expanded in the New England and Mid-Atlantic states, as well as in southern Florida. BJ's operates 71 warehouse clubs in twelve states and has over 3.5 million members. The table below shows BJ's locations by state. Number of State Locations - ----- ---------- New York 17 Massachusetts 12 New Jersey 9 Maryland 6 Pennsylvania 6 Virginia 6 Connecticut 4 Florida 4 New Hampshire 3 Maine 2 Delaware 1 Rhode Island 1 -- Total 71 == Industry Overview Warehouse clubs typically sell a narrow assortment of food and general merchandise within a wide range of product categories. In order to achieve high sales volumes and rapid inventory turnover, merchandise selections are generally limited to items that are brand name leaders in their categories. Since warehouse clubs sell a diversified selection of product categories, they attract customers from a wide range of other traditional wholesale and retail distribution channels, such as supermarkets, discount stores, office supply stores, consumer electronics stores, automotive stores and wholesale distributors and jobbers. The Company believes that it is difficult for these higher cost channels of distribution to effectively compete with the low prices offered by warehouse clubs. Warehouse clubs eliminate many of the merchandise handling costs associated with traditional multiple-step distribution channels by purchasing directly from manufacturers and by storing merchandise on the sales floor rather than in central warehouses. By operating no-frills, self-service warehouse facilities, warehouse clubs have fixturing 1 and operating costs substantially below those of traditional retailers. Two broad groups of customers, individual households and small businesses, have been attracted to the savings on brand name merchandise made possible by the high sales volumes and low operating costs achieved by warehouse clubs. The customers at warehouse clubs are generally limited to members who pay an annual fee. The warehouse club industry has grown from sales of approximately $14 billion in 1988 to approximately $41 billion in 1995, rapidly gaining market share of both food and general merchandise sales. The Company believes that continued growth in the industry's market share will come from the addition of new clubs as well as from sales growth of existing clubs, primarily at the expense of more traditional channels of distribution. Expansion Over the last five years BJ's increased the number of its warehouse clubs from 27 to 71. Warehouse Warehouse Warehouse Warehouse Clubs Clubs Clubs Clubs in Operation Opened Closed in Operation Fiscal Year at Beginning During During at End Ended January of Year the Year the Year of Year - -------------- -------------- ----------- ----------- -------------- 1992 27 6 4 29 1993 29 10 -- 39 1994 39 13 -- 52 1995 52 11 1 62 1996 62 9 -- 71 BJ's currently plans to open approximately nine new warehouse clubs in 1996 (the fiscal year ending January 25, 1997). BJ's store opening strategy for 1996 is focused on filling in existing markets, with expansion in future years planned for both existing and contiguous market areas. Although expansion within existing markets may initially affect sales at existing warehouse clubs adversely, the Company believes that this strategy increases market penetration by increasing the frequency of shopping by current members. In addition, BJ's anticipates improving operational efficiencies in distribution costs and management supervision by concentrating its warehouse clubs geographically. Store Profile The average size of 65 of the 71 BJ's warehouse clubs in operation at January 27, 1996 was approximately 112,000 square feet. BJ's also operated six smaller format clubs with an average size of approximately 69,000 square feet. Including space for parking, a typical BJ's warehouse club requires eight to ten acres of land. BJ's warehouse clubs are located in both free-standing locations and "strip malls." In some locations, BJ's warehouse clubs are combined with other large store retailers in shopping centers known as power centers. Construction and site development costs for a new BJ's warehouse club average approximately $5.0 million. Land acquisition costs for a warehouse club generally range from $2.5 million to $5.5 million, but can be significantly higher in some locations. Opening a traditional-sized BJ's warehouse club entails an initial capital investment of approximately $2.0 million for fixtures and equipment, as well as approximately $2.0 million for inventory (net of accounts payable) and pre-opening expenses. Since November 1994 the Company has opened one 74,000 square foot and five 68,000 square foot warehouse clubs in smaller market areas. The Company will continue to evaluate the effectiveness of this format for less densely populated markets during 1996. Of the nine new BJ's units planned to be opened in 1996, three are expected to be in the smaller format. Merchandising BJ's merchandising strategy is to provide its members with a broad range of high quality, brand name merchandise at everyday prices consistently lower than the prices available through traditional wholesalers, discount retailers or supermarkets. BJ's limits specific items in each product line to fast selling styles, sizes and colors and, therefore, carries an average of approximately 4,000 active stock-keeping units ("SKUs"). By contrast, supermarkets typically stock approximately 25,000 SKUs, and discount stores typically stock approximately 60,000 SKUs. BJ's works closely with manufacturers to develop packaging and sizes which are best suited to selling through the warehouse club format in order to minimize handling costs and to provide increased value to its members. 2 In recent years, food has accounted for an increasing percentage of BJ's sales mix and currently represents approximately 61% of sales. The remaining 39% consists of a wide variety of general merchandise items. Food categories at BJ's include frozen foods, meat and dairy products, dry grocery items, fresh produce, canned goods, and household paper products and cleaning supplies. BJ's offers fresh meat and bakery departments in nearly all its clubs. General merchandise includes office supplies, office equipment, televisions, stereos, small appliances, auto accessories, tires, jewelry, housewares and apparel. Other products and services offered by BJ's include cellular phones, greeting cards, optical centers, lottery ticket counters, an auto buying service and a travel service. To ensure that its merchandise selection is closely attuned to the tastes of its members, BJ's employs regional buyers, each of whom is responsible for tailoring the product selection in individual warehouse clubs to the regional and ethnic tastes of the local market. Membership Paid membership is an integral part of the warehouse club concept. In addition to providing a source of revenue which permits the Company to offer low prices, membership also reinforces customer loyalty and acts as a screening device, allowing BJ's to concentrate on serving high volume repeat customers. BJ's internal demographic studies indicate that its customers are more likely to be home owners and tend to have incomes, ages and family sizes which are above the average for its trading areas. BJ's has two primary types of members: business members and Inner Circle (household) members. At January 27, 1996, the Company had over 3.5 million members (including supplemental cardholders). BJ's charges an annual membership fee for individuals and qualified businesses of $30 for the primary membership card and provides one free supplemental card to each primary member. Additional supplemental cards for business members cost $15 each. BJ's membership policy is less restrictive than certain of its competitors, who require individual members to belong to certain qualifying groups. The Company believes that its more liberal membership policy has attracted incremental sales without adversely affecting its costs. Advertising BJ's increases customer awareness of its warehouse clubs primarily through public relations efforts, new store marketing programs and direct mail solicitations. BJ's employs a team of dedicated marketing personnel who solicit potential business members and who contact selected community groups to increase the number of members. From time to time, BJ's runs free trial membership promotions to attract new members with the objective of converting them to paid membership status and also uses one-day passes to introduce non-members to its warehouse clubs. BJ's policy is generally to limit advertising and promotional expenses to new warehouse club openings and to utilize print and electronic media advertising sparingly. The Company uses limited vendor-funded television and radio advertising during the holiday season. These policies result in very low marketing expenses as compared to typical discount retailers and supermarkets. Warehouse Club Operations The Company's ability to achieve profitable operations while offering high quality merchandise at low prices depends upon the efficient operation of its warehouse clubs and high sales volumes. BJ's buys virtually all of its merchandise at volume discounts from manufacturers for shipment either to a BJ's cross-docking facility or directly to BJ's warehouse clubs. This eliminates many of the costs associated with traditional multiple-step distribution channels, including distributors' commissions and the costs of storing merchandise in central distribution facilities. BJ's routes a significant percentage of its general merchandise as well as an increasing percentage of food purchases through cross-docking facilities which break down truckload quantity shipments from manufacturers and re-allocate these goods for shipment, generally on a same-day basis, to individual warehouse clubs. This permits BJ's to negotiate better volume discounts and reduces freight expense, the number of trucks received at each warehouse club and related receiving costs. BJ's works closely with manufacturers to minimize the amount of handling required once merchandise is received at a warehouse club. Most merchandise is pre-marked by the manufacturer with the universal product code (UPC) so that it does not require ticketing at the warehouse club. In addition, BJ's minimizes labor costs because its warehouse clubs are self-serve. Merchandise for sale is displayed on pallets containing large quantities of each item, thereby reducing labor required for handling, stocking and restocking. Back-up merchandise is generally stored on racks above the sales floor. BJ's goal is to keep at least one day's supply of each item on the selling floor. BJ's has been able to limit inventory losses to levels well below those typical of discount retailers by strictly controlling the exits of its warehouse clubs, by generally limiting customers to members and by using state-of-the- 3 art electronic article surveillance. Problems associated with payments by check have also been insignificant, since the memberships of customers who issue dishonored checks are terminated. Also, bank information from business members is verified prior to the establishment of check purchase limits. In October 1995, BJ's began accepting MasterCard in all its clubs. At the same time, BJ's introduced a co- branded MasterCard. Purchases made at BJ's with the card earn a 2% rebate. All other purchases with the BJ's MasterCard earn a 1% rebate. Rebates are issued in the form of "BJ's Bucks," which can be redeemed by members only at BJ's clubs. In addition to MasterCard, BJ's permits members to pay for their purchases by cash, check, Discover card, or a BJ's credit card, which is provided by a major financial institution on a non-recourse basis. Management Information Systems Over the past several years, BJ's has made a significant investment in enhancing the efficiency with which it handles purchases and captures sales information. BJ's was the first warehouse club to introduce scanning devices which work in conjunction with its electronic point of sale (EPOS) terminals. Sales data from the EPOS terminals is continually transmitted to a minicomputer in the warehouse club and transmitted daily to a mainframe computer which provides detailed sales information to the Company's management and merchants. BJ's utilizes a sophisticated merchandise replenishment algorithm to suggest quantities to be re-ordered, which are then monitored daily by BJ's buying staff. BJ's fully integrated system also maintains detailed purchasing data on individual members, permitting BJ's merchants and store managers to track changes in members' buying behavior. Competition BJ's competes with a wide range of national, regional and local retailers and wholesalers selling food or general merchandise in its markets, including supermarkets, general merchandise chains, specialty chains and other warehouse clubs, some of which have significantly greater financial and marketing resources than the Company. Major competitors that operate warehouse clubs include Price-Costco Inc. and Sam's Clubs (a division of Wal-Mart Stores, Inc.). A large number of competitive membership warehouse clubs have opened in the Northeast in recent years. Sixty-two of BJ's 71 warehouse clubs have at least one competitive membership warehouse club in their trading areas at an average distance of approximately 7 miles. The Company believes price is the major competitive factor in the markets in which BJ's competes. Other competitive factors include store location, merchandise selection and name recognition. The Company believes that its efficient, low cost form of distribution gives it a significant competitive advantage compared to more traditional channels of wholesale and retail distribution. As a regional chain, BJ's strives to differentiate itself from other membership warehouse club operators by its attention to local buying preferences and seasonality. HomeBase General HomeBase opened its first warehouse store in California in October 1983 and as of January 27, 1996, operated 79 warehouse stores in 10 states (including two stores identified for closing as part of HomeBase's restructuring; see "Strategic Initiatives and Restructuring"). HomeBase's warehouse stores are located in the western United States. The table below shows HomeBase's locations by state as of January 27, 1996. Number of State Locations - ----- ---------- California 46 Washington 9 Colorado 6 Arizona 4 New Mexico 3 Oregon 3 Utah 3 Nevada 2 Texas 2 Idaho 1 -- Total 79 == 4 Industry Overview Warehouse-format home centers typically provide lower prices than traditional channels of home improvement and building supply product distribution. The warehouse format also generally offers a very broad assortment of home improvement products, combined with a high level of service from knowledgeable, well trained warehouse staff. These factors are communicated to customers through ongoing, aggressive advertising. The warehouse format generally serves two broad customer groups within the home improvement industry. The first group consists of individuals and families that are making purchases and completing projects generally for their own homes on a Do-It-Yourself basis. These DIY customers range from casual to serious, and require varying levels of support in planning and selecting their purchases. The second customer group consists of professional contractors and facility managers who use home improvement and building supply products on a daily basis in their businesses. The Company believes that demographic and lifestyle factors such as the aging of baby boomers, the increase in home-centered activities and the aging housing stock will create growing demand for home improvement products and services. The Company believes that the overall market for home improvement products was approximately $134 billion in 1995. Over the last ten years, warehouse-format home center 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 stores have been able to take advantage of economies created by large sales volumes. Strategic Initiatives and Restructuring In 1993 HomeBase introduced a series of strategic initiatives designed to strengthen its market position in the western United States and improve its profitability. These initiatives included (i) a significant increase in the level of customer service offered at HomeBase stores, through an increase in the number of salespeople, including hiring experienced tradespeople and others with specialized product knowledge in home improvement fields, and enhanced sales and service training for both new and existing store employees, (ii) improvement in gross margin through buying efficiencies created by centralization of the merchandise replenishment function, improved distribution of merchandise to reduce freight costs, and selective price increases, and (iii) an aggressive marketing program to communicate to customers the benefits of shopping at HomeBase and its improved levels of customer service. In the third quarter of 1993 a new management team, led by a senior executive from BJ's, was installed at HomeBase to implement these strategic initiatives. The Company recorded a pre-tax restructuring charge of $101.1 million in the fourth quarter of 1993 primarily to cover expenses related to the repositioning of HomeBase. The restructuring has enabled HomeBase to focus its management efforts and financial resources on strengthening its competitive position in the western United States. This charge reflects (i) the closing of all eight of the Company's stores in midwestern markets (Chicago and Toledo), which were outside HomeBase's primary market area, (ii) the planned closing of 12 additional stores, 10 of which were closed by January 27, 1996, and (iii) liquidating certain discontinued merchandise during 1994. The Company is actively seeking to assign or sublease six closed stores, as well as the other two stores identified for closing which were still in operation at January 27, 1996. Expansion HomeBase is currently the largest or second largest home improvement operator in most of the metropolitan markets which it serves. HomeBase's current expansion strategy is oriented towards reinforcing its position in these existing markets and expanding selectively to contiguous markets. The following table shows the number of HomeBase stores opened and closed during the last five years: Warehouse Warehouse Warehouse Warehouse Stores Stores Stores Stores in Operation Opened Closed in Operation Fiscal Year at Beginning During During at End Ended January of Year the Year the Year of Year - -------------- -------------- ----------- ----------- -------------- 1992 66 7 -- 73 1993 73 13 -- 86 1994 86 5 9 82 1995 82 3 8 77 1996 77 4 2 79 5 HomeBase plans to open approximately six warehouse stores (including the relocation of one store) in 1996, which will be located in existing market areas. Over the past two years, HomeBase has completed the remodeling of 23 older warehouse stores and will continue this program in 1996. By spring of 1996, over 50% of the HomeBase chain, including 13 new stores opened since September 1993, will reflect its new prototype design. Store Profile The average size of the 79 HomeBase warehouse stores in operation at January 27, 1996 was 102,000 square feet. Most HomeBase warehouse stores also utilize additional outside selling space for nursery and garden centers. HomeBase's warehouse stores are located in both free-standing locations and "strip malls." In some locations, HomeBase warehouse stores are combined with membership warehouse clubs or other large store retailers in shopping centers known as power centers. Including space for parking, a typical new HomeBase warehouse store requires eight to ten acres of land. Construction and site development costs for a new HomeBase warehouse store average $5.0 million. Land acquisition costs for a new warehouse store generally range from $2.0 million to $6.0 million. A new HomeBase warehouse store entails an initial capital investment of approximately $1.6 million for fixtures and equipment. In addition to capital expenditures, each new warehouse store requires an investment of approximately $2.5 million for inventory (net of accounts payable) and pre-opening expenses. Merchandising HomeBase's large product offering provides a broad selection of brand name merchandise to both DIY customers and professional contractors. The Company believes that its 28,000 SKU selection is broader than the selection offered by traditional home center competitors. HomeBase believes that the operating efficiencies of the warehouse format provide substantial savings over other channels of home improvement and building supply product distribution. In order to achieve greater operational efficiencies and reduce freight and handling costs, as well as improve the manner in which it acquires products, HomeBase 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 HomeBase includes lumber, building materials, plumbing supplies and fixtures, electrical materials and fixtures, kitchen cabinets, hand and power tools, hardware, paints, garden supplies, nursery items, home decorative items and related seasonal and household merchandise. HomeBase's brand name orientation allows customers to compare HomeBase's prices to the same items offered by competitors. In selected categories, HomeBase supplements these brand name offerings with high quality private label products at lower prices. Marketing and Advertising HomeBase 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 HomeBase's image of providing superior customer service and a broad assortment of merchandise at everyday low prices. Additionally, the Company participates in or hosts a variety of home shows, customer hospitality events and contractor product shows. HomeBase solicits vendor participation in many of its advertising programs. Warehouse Operations HomeBase is committed to providing superior service to every customer. Carefully selected home improvement specialists, many of whom have extensive experience in their respective fields, are available throughout the store to assist DIY customers and professional contractors. HomeBase's project design centers and kitchen design centers feature computer assisted design tools where customers can work with design coordinators to conceptualize and plan virtually any home improvement project. HomeBase believes that it is important to expand the DIY marketplace by encouraging new DIY customers and upgrading the skills and confidence levels of existing DIY customers. HomeBase provides assistance and training to DIY customers, including regularly scheduled customer clinics on a wide range of home improvement projects. Delivery and installation are also available as services to DIY customers. A series of programs has been designed by HomeBase to specifically address the needs of contractors. A majority of HomeBase warehouse stores have Contractor Desks, with staff dedicated to handling contractors' 6 special needs, including the ability to receive faxed orders and pre-assemble them for pick-up, and quickly obtaining special items and sizes. HomeBase will also deliver bulk purchases to job sites for a nominal fee. HomeBase warehouse stores offer extended hours, opening early in the morning to serve professional contractors. HomeBase strives to develop the skills of its store personnel to ensure that customers consistently receive knowledgeable and courteous assistance. HomeBase's training programs emphasize the importance of customer service and improve store employees' selling skills. HomeBase provides extensive training for its entry level warehouse store personnel through a comprehensive in-house training program that combines on-the-job training with formal seminars and meetings. On an ongoing basis, warehouse store personnel attend frequent in-house training sessions conducted by HomeBase's training staff or by manufacturers' representatives, and they receive sales, product and other information in frequent meetings with their managers. HomeBase's satellite television system (HBTV) permits it to simultaneously broadcast training sessions from its Irvine, California headquarters to every individual warehouse store location. Most of HomeBase's merchandise is purchased from manufacturers for shipment either directly to the selling warehouse store or to cross-docking facilities where large shipments are broken down and separated for transfer to individual warehouse stores, generally on a same-day basis. By operating no-frills warehouse stores, HomeBase's fixturing and operating costs are kept substantially below those of traditional home improvement retailers. HomeBase offers its own private label credit card to customers under a non-recourse program operated by a major financial institution and also accepts MasterCard, Visa, Discover and American Express. Management Information Systems HomeBase uses a fully integrated management information system to monitor sales, track inventory and provide rapid feedback on the performance of its business. Each HomeBase warehouse store operates point-of-sale terminals which capture information on each item sold via UPC scanning. Minicomputers at each warehouse store process and consolidate this information during the selling day and transmit it each night to HomeBase's information center via satellite, where it is processed daily to support merchandising, inventory replenishment and promotional decisions. HomeBase introduced scanning to the home improvement industry and is a leader in implementing electronic data interchange ("EDI"). EDI permits both HomeBase and its vendors to save money and reduce errors by electronically transmitting purchase order information. HomeBase now uses EDI with over 1,200 vendors and continues to expand its use of this technology. Competition HomeBase 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 the major competitive factors in the markets in which HomeBase competes are customer service, price, product selection, location and name recognition. The Company believes that its improved level of customer service, the value offered by HomeBase's low 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 HomeBase's market areas that also uses the warehouse merchandising format is The Home Depot, Inc., which has significantly greater financial and marketing resources than the Company. Approximately 85% of HomeBase's warehouse stores compete with Home Depot units. HomeBase also competes with Builders Square (a division of Kmart Corp.), and a number of smaller regional operators such as Eagle Hardware & Garden, Inc., Orchard Supply Hardware Corporation, and Contractor's Warehouse (a division of Grossman's Inc.). Approximately 95% of HomeBase's warehouse stores have at least one warehouse home improvement retailer in their trading areas at an average distance of approximately 3 miles. Employees As of January 27, 1996, the Company had approximately 19,000 employees, of whom approximately 3,000 were part-time employees. Approximately 1,300 employees were corporate and divisional management and office support employees; the balance were warehouse personnel. None of the Company's employees is represented by unions. The Company considers its relations with its employees to be excellent. 7 Item 2. Properties The Company operated 150 warehouse locations as of January 27, 1996, of which 105 are leased under long- term leases and 36 are owned. The Company owns the buildings at the remaining nine locations, which are subject to long-term ground leases. The unexpired terms of warehouse location leases range from 4.0 years to 37.9 years, and average approximately 13.9 years. The Company has options to renew all of its leases for periods that range from approximately 5 to 50 years and average approximately 18.9 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 warehouse's gross sales in excess of certain amounts. Most leases require that the Company pay all property taxes, insurance, utilities and other operating costs. The Company's principal executive offices in Natick, Massachusetts, which include the home office of its BJ's division, occupy approximately 125,000 square feet under a lease expiring January 31, 1999, with an option to extend this lease through January 31, 2001. The Company also maintains a home office for its HomeBase division in Irvine, California, occupying approximately 164,000 square feet under a lease expiring July 24, 2004, with options to extend this lease through July 24, 2019. See Note D of Notes to the Consolidated Financial Statements included elsewhere in this report for additional information with respect to the Company's leases. Certain of the Company's locations are financed through long-term secured financings. See Note C of Notes to the Consolidated Financial Statements for additional information with respect to such financings. Listings of BJ's and HomeBase locations within each state are shown on pages 1 and 4, respectively. Item 3. Legal Proceedings 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. 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 the fiscal year ended January 27, 1996. 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 - ---- --- ---------------------- Sumner L. Feldberg 71 Chairman of the Board of the Company since February 1989; Chairman of the Board of The TJX Companies, Inc. from 1989 to 1995. Herbert J. Zarkin 57 President, Chief Executive Officer and Director of the Company since May 1993; Executive Vice President of the Company (1989-1993); President of BJ's Wholesale Club (1990-1993). John J. Nugent 49 Executive Vice President of the Company and President of BJ's Wholesale Club since September 1993; Senior Vice President of BJ's Wholesale Club (1991-1993); Director of Sales Operations of BJ's Wholesale Club (1989-1993). Allan P. Sherman 51 Executive Vice President of the Company since May 1993 and President of HomeBase since September 1993; President of BJ's Wholesale Club (May 1993 to September 1993); Senior Vice President and General Merchandise Manager--Non-Food of BJ's Wholesale Club (1991-1993). Sarah M. Gallivan 53 Vice President, General Counsel and Secretary of the Company since December 1989. 8 Edward J. Weisberger 54 Senior Vice President and Chief Financial Officer since September 1994; Vice President--Finance of the Company (April 1989 to September 1994).
All officers hold office until the next annual meeting of the Board of Directors in 1996 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 the Company is listed on the New York Stock Exchange (symbol WBN). The quarterly high and low stock prices for the fiscal years ended January 27, 1996 and January 28, 1995 were: Fiscal Year Ended Fiscal Year Ended January 27, 1996 January 28, 1995 ----------------- ------------------ Quarter High Low High Low - ------- ------- ------ ------- -------- First 20-3/8 15-7/8 20-1/8 14-1/8 Second 16-3/4 13-1/2 19 14-1/2 Third 19-1/4 15-1/2 20 16-3/4 Fourth 19-5/8 15-1/4 19-3/4 14-7/8 The approximate number of stockholders of record at March 30, 1996 was 4,100. The Company has not paid any dividends. For restrictions on the payment of dividends, see Note C of Notes to the Consolidated Financial Statements. 9 Item 6. Selected Financial Data
Fiscal Year Ended ------------------------------------------------------------------------- Jan. 27, Jan. 28, Jan. 29, Jan. 30, Jan. 25, 1996 1995 1994 1993 1992 ----------- ------------ ------------ ------------ ------------ (53 weeks) (Dollars in Thousands Except Per Share Data) Income Statement Data: Net sales $ 3,978,384 $ 3,650,281 $ 3,589,341 $ 3,357,794 $ 2,783,585 --------- ---------- ---------- ---------- ---------- Cost of sales, including buying and occupancy costs 3,387,992 3,110,787 3,086,670 2,881,334 2,399,765 Selling, general and administrative expenses 455,523 418,404 423,026 401,905 322,705 Restructuring charge -- -- 101,133 -- -- Cost of closing BJ's warehouse clubs in Chicago -- -- -- -- 5,500 Discontinuation of HomeClub name -- -- -- -- 3,400 Interest on debt and capital leases (net) 15,431 14,898 12,489 6,280 3,292 --------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of accounting principle changes 119,438 106,192 (33,977) 68,275 48,923 Provision (benefit) for income taxes 46,461 41,202 (15,290) 24,033 18,914 --------- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of accounting principle changes 72,977 64,990 (18,687) 44,242 30,009 Cumulative effect of accounting principle changes -- -- 905 -- -- --------- ---------- ---------- ---------- ---------- Net income (loss) $ 72,977 $ 64,990 $ (17,782) $ 44,242 $ 30,009 ========= ========== ========== ========== ========== Income (loss) per common share: Primary earnings per share: Income (loss) before cumulative effect of accounting principle changes $ 2.20 $ 1.95 $ (0.56) $ 1.33 $ 1.01 Cumulative effect of accounting principle changes -- -- 0.02 -- -- --------- ---------- ---------- ---------- ---------- Net income (loss) $ 2.20 $ 1.95 $ (0.54) $ 1.33 $ 1.01 ========= ========== ========== ========== ========== Fully diluted earnings per share: Income (loss) before cumulative effect of accounting principle changes $ 2.05 $ 1.83 $ (0.56) $ 1.31 $ 1.01 Cumulative effect of accounting principle changes -- -- 0.02 -- -- --------- ---------- ---------- ---------- ---------- Net income (loss) $ 2.05 $ 1.83 $ (0.54) $ 1.31 $ 1.01 ========= ========== ========== ========== ========== Number of common shares for earnings per share computations: Primary 33,220,445 33,405,014 33,082,362 33,191,497 29,807,255 Fully diluted 37,784,238 37,792,893 33,082,362 35,706,763 29,810,348 Balance Sheet Data: Working capital $ 265,450 $ 308,749 $ 213,315 $ 286,313 $ 268,559 Total assets 1,332,451 1,237,521 1,072,994 1,006,663 786,405 Long-term debt and obligations under capital leases 245,313 258,763 174,054 192,630 86,774 Stockholders' equity 555,120 488,089 420,492 436,610 388,645 Warehouses open at end of year: BJ's Wholesale Club 71 62 52 39 29 HomeBase 79 77 82 86 73
10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's fiscal year ends on the last Saturday in January. The fiscal year ended January 27, 1996 is referred to as "1995" or "fiscal 1995" below. The fiscal years ended January 28, 1995 and January 29, 1994 are referred to as "1994" or "fiscal 1994" and "1993" or "fiscal 1993," respectively. Results of Operations The following table presents selected income statement and segment data for the last three fiscal years:
Fiscal Year Ended ---------------------------------------------------------------------- January 27, 1996 January 28, 1995 January 29, 1994 --------------------- -------------------- --------------------- % of % of % of $ Net Sales $ Net Sales $ Net Sales -------- --------- ------- --------- ------- ---------- (Dollars in Millions Except Per Share Amounts) Income Statement Data: Net sales $3,978.4 100.0% $3,650.3 100.0% $3,589.3 100.0% Cost of sales, including buying and occupancy costs 3,388.0 85.2 3,110.8 85.2 3,086.7 86.0 Selling, general and administrative expenses 455.5 11.4 418.4 11.5 423.0 11.8 Restructuring charge -- -- -- -- 101.1 2.8 Interest on debt and capital leases (net) 15.4 .4 14.9 .4 12.5 .3 ------- -------- ----- -------- ----- -------- Income (loss) before income taxes and cumulative effect of accounting principle changes 119.5 3.0 106.2 2.9 (34.0) (.9) Provision (benefit) for income taxes 46.5 1.2 41.2 1.1 (15.3) (.4) ------- -------- ----- -------- ----- -------- Income (loss) before cumulative effect of accounting principle changes 73.0 1.8 65.0 1.8 (18.7) (.5) Cumulative effect of accounting principle changes -- -- -- -- .9 -- ------- -------- ----- -------- ----- -------- Net income (loss) $ 73.0 1.8% $ 65.0 1.8% $ (17.8) (.5)% ======= ======== ===== ======== ===== ======== Fully diluted net income (loss) per common share $ 2.05 $ 1.83 $ (.54) ======= ===== ===== Selected Segment Data: BJ's Wholesale Club: Net sales $2,529.6 100.0% $2,293.1 100.0 % $2,003.4 100.0 % Operating income $ 86.5 3.4% $ 68.8 3.0% $ 45.2 2.3% HomeBase: Net sales $1,448.8 100.0% $1,357.2 100.0% $1,586.0 100.0% Operating income (loss) $ 55.8 3.8% $ 60.7 4.5% $ (55.8) (3.5)%
In the fourth quarter of 1993, the Company recorded a $101.1 million pre-tax restructuring charge, primarily related to repositioning its HomeBase division. Results for 1993 excluded sales and operating income or losses from October 31, 1993 to January 29, 1994 for the eight midwestern HomeBase warehouse stores that closed in that quarter, and from November 28, 1993 to January 29, 1994 for the other 16 HomeBase warehouse stores planned to be closed. The Company's results for 1994 also excluded the sales and operating losses of those 16 stores, eight of which were closed during 1994. Sales from all 24 warehouse stores were excluded from the computation of comparable store sales growth from 1993 to 1994. 11 HomeBase's reported sales and operating income for 1995 included all stores in operation. Sales from the eight warehouse stores which closed in 1994 and the two warehouse stores which closed in 1995 were excluded from the computation of comparable store sales growth from 1994 to 1995. Sales Total sales of the Company increased by 9.0% from 1994 to 1995 and by 1.7% from 1993 to 1994. The increases in both years were due to the opening of new warehouse stores. Adjusting 1993 and 1994 sales for HomeBase stores whose sales and operating income were charged to the reserve in 1994, total sales for the Company increased by 6.4% from 1994 to 1995 and by 10.0% from 1993 to 1994. Comparable store sales increases (decreases) for the last two fiscal years were as follows:
1995 vs. 1994 vs. 1994 1993 -------- ---------- BJ's Wholesale Club 0.4% (2.5)% HomeBase (5.0)% (1.1)% Total (1.8)% (1.9)%
Comparable store sales at BJ's over the last two years were affected by increased competition and the opening of new BJ's clubs in the same markets as existing BJ's clubs, especially in 1994. BJ's had comparable store sales increases in each of the last nine months of fiscal 1995. HomeBase's comparable store sales in the last two years were affected by increased competition, as well as weak economic conditions in California, where HomeBase has its largest concentration of stores. Sales in 1995 also were impacted by significant deflation in lumber prices, a general slowdown in housing turnover, and severe weather in the western United States in the first quarter of 1995. Cost of Sales Cost of sales (including buying and occupancy costs) as a percentage of sales was 85.2% in both 1995 and 1994, and 86.0% in 1993. Although BJ's, which has lower gross margins than HomeBase, contributed an increasing proportion of sales throughout the period from 1993 to 1995, the cost of sales percentage was flat in 1995 and decreased by .8% in 1994, primarily because the cost of sales ratio at HomeBase declined in both years. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses as a percentage of sales were 11.4% in 1995, 11.5% in 1994, and 11.8% in 1993. The ratio of SG&A expenses to sales declined in both 1995 and 1994 because of BJ's increased proportion of consolidated sales and its improved SG&A ratios in both years. SG&A expenses as a percentage of sales are lower at BJ's than at HomeBase, which offers a higher level of customer service. HomeBase's SG&A expense ratio rose in 1994 and 1995, due primarily to increased store payroll to provide improved customer service. Restructuring The Company's $101.1 million pre-tax restructuring charge in 1993 related principally to store closings and the write-down of discontinued inventory at HomeBase. The charge, which was recorded in the fourth quarter of fiscal 1993, anticipated the closing of 24 HomeBase warehouse stores. As of January 27, 1996, eighteen of these stores have been closed. Two additional stores are expected to close in the future, which will bring the number of HomeBase stores closed in connection with the restructuring to twenty. Four stores that were originally included in the restructuring are no longer designated for closing, due to their improved performance. The discontinued merchandise has been liquidated. The Company is still obligated under leases for six closed stores which had not been subleased as of January 27, 1996. In the fourth quarter of 1995, the Company increased its restructuring reserves by $6.0 million pre-tax ($3.6 million net of tax benefits), primarily to adjust estimated lease obligations related to these six stores. This addition to the reserves was offset by a corresponding adjustment in the Company's income tax liabilities (see "Income Taxes" below). The balance remaining in the restructuring reserves at January 27, 1996 totalled $30.7 million. Approximately $24 million was reserved for lease obligations (net of sublease income), $4 million for store closing costs and $3 million (which is netted against property held for sale) for losses on the disposal of owned property. These reserves are based on a number of estimates, and actual future costs could vary from these estimates, depending on certain factors, principally the Company's ability to sublease, assign or sell closed HomeBase locations on anticipated terms. 12 Operating Income BJ's operating income was $86.5 million in 1995, $68.8 million in 1994, and $45.2 million in 1993. Operating income in 1993 included a pre-tax charge of $2.2 million related to the relocation of BJ's Syracuse, NY club. BJ's improvement in operating income over the three-year period reflects a more favorable merchandising mix, with a shift from high-ticket, lower margin categories, to higher margin categories, efficiencies in merchandise acquisition and distribution (cross-docking facilities are now operated by BJ's instead of by third parties), tight expense control, and expense leverage from operating additional warehouse clubs. HomeBase's operating income was $55.8 million in 1995, compared with $60.7 million in 1994 and an operating loss of $55.8 million in 1993, which included a pre-tax restructuring charge of $98.5 million and operating losses of $7.6 million for stores in the restructuring reserve. The improvement in operating income from 1993 ($50.3 million before restructuring related items) to 1994 was due to higher gross margins which more than offset higher store payrolls, reflecting HomeBase's strategic initiative to improve customer service and achieve higher margins through a better mix of sales, efficiencies in merchandise distribution and selective price increases. Operating income decreased from 1994 to 1995 primarily because of the impact of lower-than-expected sales volumes. Interest The components of net interest expense in the last three years were as follows (in millions):
Fiscal Year Ended --------------------------------------------------- Jan. 27, 1996 Jan. 28, 1995 Jan. 29, 1994 -------------- -------------- ---------------- Interest expense on debt $19.8 $19.1 $11.4 Interest and investment income (6.0) (6.0) (1.5) ------------ ------------ -------------- Interest on debt (net) 13.8 13.1 9.9 Interest on capital leases 1.6 1.8 2.6 ------------ ------------ -------------- Interest on debt and capital leases (net) $15.4 $14.9 $12.5 ============ ============ ==============
The increases in interest expense on debt and in interest and investment income from 1993 to 1994 were due primarily to the issuance of $100 million of 11% Senior Subordinated Notes in May 1994 and the investment of the net proceeds of $97.3 million. Interest expense on debt in 1995 included a full year's interest on the Senior Subordinated Notes versus a partial year in 1994. This was mostly offset by a reduction in interest on the Company's 9.58% Senior Notes (average balance reduced by $12 million) and an increase in capitalized interest of approximately $1.0 million. Income Taxes The Company's income tax provision was 38.9% of pre-tax income in 1995 and 38.8% in 1994, compared to an income tax benefit of 45.0% in 1993. The Company's provision for income taxes in 1993 included 38.2% of pre-tax income before the restructuring charge and a 40.5% tax benefit from the restructuring charge. During 1995 the statute of limitations expired for certain taxable years. As a result, previously accrued tax liabilities of approximately $3.6 million related to these years were no longer required. This excess amount was reclassified to the Company's restructuring reserve liabilities with no impact on the Company's provision for income taxes (see "Restructuring" above). Accounting Changes In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of these accounting principle changes increased (decreased) after-tax income by the following amounts (in millions):
SFAS No. 109, "Accounting for Income Taxes" $1.6 SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," net of tax benefit (.2) SFAS No. 112, "Employers' Accounting for Postemployment Benefits," net of tax benefit (.5) ----- $ .9 =====
13 Net Income Net income for 1995 was $73.0 million, or $2.05 per share, fully diluted, compared to net income of $65.0 million, or $1.83 per share, in 1994 and a net loss of $17.8 million, or $.54 per share, in 1993. Net income in 1993 would have been $47.3 million, or $1.37 per share, fully diluted, excluding the restructuring charge, the cost of relocating BJ's Syracuse, NY club, operating losses of the HomeBase stores that were subsequently included in the restructuring reserve and the net cumulative effect of accounting changes. Liquidity and Capital Resources Net cash provided by operating activities was $99.5 million in 1995 versus $123.1 million in 1994. Excluding cash flow generated by the Company's restructuring, net cash provided by operating activities was $103.3 million in 1995 and $95.6 million in 1994. Cash expended for property additions was $163.5 million in 1995 and $111.7 million in 1994. The Company opened nine new BJ's clubs and four new HomeBase warehouse stores, including the relocation of one store, in 1995. In the previous year, the Company opened a total of 14 new stores. Eleven of the stores opened in each year were owned. The Company also remodeled 12 HomeBase warehouse stores during 1995 and 11 HomeBase warehouse stores during 1994. The increase in cash expended for property additions from 1994 to 1995 was due in part to a higher level of expenditures in 1995 for future store openings and for renovations. The Company's capital expenditures are expected to total approximately $135 million in 1996, based on opening nine new BJ's clubs and six new HomeBase warehouse stores, including the relocation of one HomeBase store. The Company also plans to renovate approximately 12 HomeBase warehouse stores during the year. The timing of actual store openings and the amount of related expenditures could vary from these estimates due to the complexity of the real estate development process. As of January 27, 1996, the Company had closed 18 HomeBase warehouse stores in connection with its restructuring and was still obligated under leases for six of these stores. The Company expects to close two additional HomeBase stores that are currently in operation. The Company's restructuring has generated approximately $68 million of cash flow through January 27, 1996 (net of tax benefits), including approximately $4 million in fiscal 1995. The net cash outflow in connection with the disposition of the remaining warehouse locations, including long-term lease obligations, is estimated to be approximately $5 million to $10 million (net of tax benefits). The remaining terms of the leases expire at various dates through 2011. In some cases, the Company has made lump sum cash payments to settle lease obligations, and it may settle other future lease obligations in the same manner. The actual remaining cash flows could vary from the estimates above, depending on certain factors, principally the Company's ability to dispose of closed HomeBase locations on anticipated terms. During the second quarter of fiscal 1995, the Company's Board of Directors authorized the repurchase of up to $50,000,000 of Waban's common stock in open market transactions. Repurchased shares may be used for the Company's Stock Incentive Plan or may be reissued at such time as the Company's convertible subordinated debentures are presented for conversion into common stock, or for other corporate purposes. As of January 27, 1996, the Company had repurchased 622,300 shares at a total cost of $9.9 million. A total of 54,729 of these shares have been reissued in connection with the Company's Stock Incentive Plans. In April 1995, the Company entered into an agreement with a group of banks which provides a $150 million line of credit through March 30, 1998. The agreement includes a $20 million sub-facility for standby letters of credit. As of January 27, 1996, the Company is required to pay an annual facility fee of $300,000 (subject to adjustment based upon the Company's fixed charge coverage ratio). Borrowings can be made at prime rate, at LIBOR plus a surcharge (currently 0.45%) that depends on fixed charge coverage, or on a competitive bid basis. No compensating balances are required by the agreement. At January 27, 1996, $9.9 million of standby letters of credit were outstanding under the line's sub-facility. The remainder of the line of credit was available for use at the end of the fiscal year. The Company has not borrowed against this line of credit. Cash, cash equivalents and marketable securities totalled $52.5 million as of January 27, 1996. The Company expects that its current resources, together with anticipated cash flow from operations, will be sufficient to finance its operations through January 25, 1997. However, the Company may from time to time seek to obtain additional financing. The Company's cash requirements may vary, based on, among other things, the rate at which it disposes of HomeBase stores closed in connection with the restructuring. 14 Seasonality BJ's sales and operating income have been strongest in the Christmas holiday season and lowest in the first quarter of each fiscal year. HomeBase's sales and earnings are typically lower in the first and fourth quarters than they are in the second and third quarters, which correspond to the most active season for home construction. Statements of Financial Accounting Standards Nos. 121 and 123 Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and SFAS No. 123, "Accounting for Stock-Based Compensation," become effective for the Company's fiscal year ending January 25, 1997. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. It also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The Company does not expect SFAS No. 121 to have a material effect on its financial statements in the fiscal year ending January 25, 1997. SFAS No. 123 provides a choice of adopting its fair value based method of expense recognition for stock-based awards granted to employees or applying the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." The Company expects to continue to apply the accounting provisions of APB No. 25 and adopt the disclosure-only provisions of SFAS No. 123 in 1996; consequently, SFAS No. 123 is expected to have no effect on the Company's financial position or results of operations in the fiscal year ending January 25, 1997. Forward-Looking Statements This Annual Report on Form 10-K contains "forward-looking statements," including certain information with respect to the Company's plans and strategy for its business. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause actual events or the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below, as well as other factors noted elsewhere in this Annual Report on Form 10-K. Regional Economic Conditions. BJ's warehouse clubs are located primarily in the northeastern United States and HomeBase's warehouse stores are located primarily in the western United States, particularly California. Both BJ's and HomeBase have been adversely affected from time to time by economic downturns experienced in their respective geographic markets and future economic downturns in such regions could adversely affect the Company's results of operations. Competition. The Company's businesses compete with a large number and variety of wholesalers and retailers, including several large national chains in the warehouse merchandising business, some of which have significantly greater financial and marketing resources than the Company. Competition exists primarily in the areas of price, product selection and service. Competitive factors could require price reductions or increased operational costs, including increased expenditures for marketing and customer service that could adversely affect the Company's operating results. The Company also experiences competition for qualified personnel and suitable new warehouse locations. See "Business--BJ's Wholesale Club--Competition" and "Business--HomeBase--Competition." 15 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page Consolidated Statements of Income for the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994 17 Consolidated Balance Sheets as of January 27, 1996 and January 28, 1995 18 Consolidated Statements of Cash Flows for the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994 19 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994 20 Notes to Consolidated Financial Statements 21 Selected Quarterly Financial Data 31 Report of Independent Accountants 32 Report of Management 32 Schedule: II Valuation and Qualifying Accounts 33 Consent and Report of Independent Accountants 34
16 WABAN INC. CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended ------------------------------------------ January 27, January 28, January 29, 1996 1995 1994 ----------- ----------- ------------- (In Thousands Except Per Share Amounts) Net sales $3,978,384 $3,650,281 $3,589,341 --------- --------- ----------- Cost of sales, including buying and occupancy costs 3,387,992 3,110,787 3,086,670 Selling, general and administrative expenses 455,523 418,404 423,026 Restructuring charge -- -- 101,133 Interest on debt and capital leases (net) 15,431 14,898 12,489 --------- --------- ----------- Total expenses 3,858,946 3,544,089 3,623,318 --------- --------- ----------- Income (loss) before income taxes and cumulative effect of accounting principle changes 119,438 106,192 (33,977) Provision (benefit) for income taxes 46,461 41,202 (15,290) --------- --------- ----------- Income (loss) before cumulative effect of accounting principle changes 72,977 64,990 (18,687) Cumulative effect of accounting principle changes -- -- 905 --------- --------- ----------- Net income (loss) $ 72,977 $ 64,990 $ (17,782) ========= ========= =========== Income (loss) per common share: Primary earnings per share: Income (loss) before cumulative effect of accounting principle changes $ 2.20 $ 1.95 $ (0.56) Cumulative effect of accounting principle changes -- -- 0.02 --------- --------- ----------- Net income (loss) $ 2.20 $ 1.95 $ (0.54) ========= ========= =========== Fully diluted earnings per share: Income (loss) before cumulative effect of accounting principle changes $ 2.05 $ 1.83 $ (0.56) Cumulative effect of accounting principle changes -- -- 0.02 --------- --------- ----------- Net income (loss) $ 2.05 $ 1.83 $ (0.54) ========= ========= =========== Number of common shares for earnings per share computations: Primary 33,220 33,405 33,082 Fully diluted 37,784 37,793 33,082
The accompanying notes are an integral part of the financial statements. 17 WABAN INC. CONSOLIDATED BALANCE SHEETS
January 27, January 28, 1996 1995 ----------- ------------- (Dollars in Thousands) ASSETS Current assets: Cash and cash equivalents $ 32,155 $ 65,040 Marketable securities 20,339 63,933 Accounts receivable 59,221 51,875 Merchandise inventories 570,236 512,619 Current deferred income taxes 21,445 22,900 Prepaid expenses 10,755 8,992 --------- ----------- Total current assets 714,151 725,359 --------- ----------- Property at cost: Land and buildings 376,930 289,781 Leasehold costs and improvements 84,052 72,874 Furniture, fixtures and equipment 288,929 237,373 --------- ----------- 749,911 600,028 Less accumulated depreciation and amortization 169,711 130,245 --------- ----------- 580,200 469,783 --------- ----------- Property under capital leases 15,640 17,129 Less accumulated amortization 6,904 7,150 --------- ----------- 8,736 9,979 --------- ----------- Property held for sale (net) 4,603 12,251 Deferred income taxes 11,557 7,150 Other assets 13,204 12,999 --------- ----------- Total assets $1,332,451 $1,237,521 ========= =========== LIABILITIES Current liabilities: Current installments of long-term debt $ 12,828 $ 12,763 Accounts payable 275,963 249,842 Restructuring reserve 7,175 14,079 Accrued expenses and other current liabilities 143,316 136,403 Accrued federal and state income taxes 8,771 2,536 Obligations under capital leases due within one year 648 987 --------- ----------- Total current liabilities 448,701 416,610 --------- ----------- Real estate debt 924 1,752 General corporate debt 24,000 36,000 Senior subordinated debt 100,000 100,000 Convertible subordinated debt 108,600 108,600 Obligations under capital leases, less portion due within one year 11,789 12,411 Noncurrent restructuring reserve 20,623 22,900 Other noncurrent liabilities 62,694 51,159 STOCKHOLDERS' EQUITY Common stock, par value $.01, authorized 190,000,000 shares, issued 33,296,935 and 33,186,418 shares 333 332 Additional paid-in capital 328,619 325,565 Unrealized holding gains (losses) 22 (44) Retained earnings 235,213 162,236 Treasury stock, at cost, 567,571 shares (9,067) -- --------- ----------- Total stockholders' equity 555,120 488,089 --------- ----------- Total liabilities and stockholders' equity $1,332,451 $1,237,521 ========= ===========
The accompanying notes are an integral part of the financial statements. 18 WABAN INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------------------ January 27, January 28, January 29, 1996 1995 1994 ----------- ----------- ------------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 72,977 $ 64,990 $ (17,782) Adjustments to reconcile net income to net cash provided by operating activities: Restructuring charge -- -- 101,133 Depreciation and amortization of property 46,654 40,425 37,039 Loss on property disposals 813 2,016 790 Amortization of premium on marketable securities 752 388 9 Other noncash items (net) 1,292 1,963 3,102 Deferred income taxes 3,004 11,942 (41,518) Increase (decrease) in cash due to changes in: Accounts receivable (7,346) 10,572 (21,042) Merchandise inventories (57,617) (7,431) 10,048 Prepaid expenses (1,763) 670 (1,121) Other assets (854) (318) (1,042) Accounts payable 26,121 (3,390) 14,215 Restructuring reserves (14,460) (25,769) (15,850) Accrued expenses 12,152 11,754 5,302 Accrued income taxes 6,235 (434) (953) Other noncurrent liabilities 11,535 15,738 18,698 --------- --------- ----------- Net cash provided by operating activities 99,495 123,116 91,028 --------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (146,778) (120,944) -- Sale of marketable securities 131,632 37,303 11,839 Maturity of marketable securities 58,352 19,082 5,066 Property additions (163,512) (111,704) (131,974) Property disposals 8,559 16,140 14,839 --------- --------- ----------- Net cash used in investing activities (111,747) (160,123) (100,230) --------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt, net of issuance costs of $2,747 in FYE 1/95 -- 97,253 -- Repayment of long-term debt (12,763) (15,374) (2,222) Repayment of capital lease obligations (961) (1,227) (5,024) Purchase of treasury stock (9,906) -- -- Proceeds from sale and issuance of common stock 2,997 1,518 681 --------- --------- ----------- Net cash provided by (used in) financing activities (20,633) 82,170 (6,565) --------- --------- ----------- Net increase (decrease) in cash and cash equivalents (32,885) 45,163 (15,767) Cash and cash equivalents at beginning of year 65,040 19,877 35,644 --------- --------- ----------- Cash and cash equivalents at end of year $ 32,155 $ 65,040 $ 19,877 ========= ========= =========== Supplemental cash flow information: Interest paid $ 21,038 $ 18,280 $ 13,682 Income taxes paid 37,222 29,723 25,099 Noncash financing and investing activities: Capital lease obligations -- -- 329 Treasury stock issued for compensation plans 839 -- --
The accompanying notes are an integral part of the financial statements. 19 WABAN INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands Except Per Share Amounts) ----------------------------------------------------------------------------- Common Unrealized Stock Additional Holding Total Par Value Paid-In Gains Retained Treasury Stockholders' $.01 Capital (Losses) Earnings Stock Equity ----------- -------- ----------- ------- ------- ------------- Balance, January 30, 1993 $330 $321,252 $ -- $115,028 $ -- $436,610 Net loss -- -- -- (17,782) -- (17,782) Sale and issuance of common stock 1 1,663 -- -- -- 1,664 --------- ------ --------- ----- ----- -------- Balance, January 29, 1994 331 322,915 -- 97,246 -- 420,492 Net income -- -- -- 64,990 -- 64,990 Unrealized holding losses -- -- (44) -- -- (44) Sale and issuance of common stock 1 2,650 -- -- -- 2,651 --------- ------ --------- ----- ----- -------- Balance, January 28, 1995 332 325,565 (44) 162,236 -- 488,089 Net income -- -- -- 72,977 -- 72,977 Unrealized holding gains -- -- 66 -- -- 66 Purchase of treasury stock -- -- -- -- (9,906) (9,906) Sale and issuance of common stock 1 3,054 -- -- 839 3,894 --------- ------ --------- ----- ----- -------- Balance, January 27, 1996 $333 $328,619 $22 $235,213 $(9,067) $555,120 ========= ====== ========= ========= ======== ========
The accompanying notes are an integral part of the financial statements. 20 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Summary of Accounting Policies Basis of Presentation The consolidated financial statements of Waban Inc. (the "Company") include the financial statements of all of the Company's subsidiaries, all of which are wholly-owned. Fiscal Year The Company's fiscal year ends on the last Saturday in January. Cash Equivalents and Marketable Securities The Company considers highly liquid investments with a 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. See Notes K and L for further information. Merchandise Inventories Inventories are stated at the lower of cost, determined under the 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 Buildings, furniture, fixtures and equipment are depreciated by use of the straight-line method over the estimated useful lives of the assets. Leasehold costs and improvements are amortized by use of the straight-line method over the lease term or their estimated useful life, whichever is shorter. 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 warehouse store or club opens. Membership Fees Membership fees are included in revenue when received, but not before a warehouse club opens. Interest on Debt and Capital Leases Interest on debt and capital leases in the Statement of Income is presented net of interest income and investment income of $5,996,000 in 1995, $5,979,000 in 1994 and $1,507,000 in 1993. Capitalized Interest The Company capitalizes interest related to the development of owned facilities. Interest in the amount of $3,118,000, $2,134,000 and $2,773,000 was capitalized in 1995, 1994 and 1993, respectively. 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," and related Interpretations in accounting for its stock-based compensation. Net Income Per Common Share Primary and fully diluted net income per common share are based on the weighted average number of common and common equivalent shares and other dilutive securities outstanding in each year. Estimates Included in Financial Statements 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 21 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 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. Other Certain amounts in prior years' financial statements have been reclassified for comparative purposes. A. Cumulative Effect of Accounting Principle Changes Effective January 31, 1993 (the first day of fiscal 1993), the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of these accounting principle changes increased (decreased) after-tax income by the following amounts (in thousands):
SFAS No. 109, "Accounting for Income Taxes" $1,616 SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," net of tax benefit of $138 (210) SFAS No. 112, "Employers' Accounting for Postemployment Benefits," net of tax benefit of $328 (501) ----- $ 905 =====
B. Restructuring Reserve In the fourth quarter of 1993, the Company recorded a pre-tax restructuring charge of $101.1 million ($60.2 million post-tax) primarily related to repositioning its HomeBase division, which included: 1) closing all eight HomeBase warehouses in the midwestern markets of Chicago and Toledo; 2) closing or relocating an additional 16 HomeBase warehouses which had limited potential for long-term profitability. This group of warehouses consisted mostly of older units which did not have desirable locations or were not suitable for the current HomeBase prototype; 3) liquidating discontinued merchandise; and 4) related administrative expenses. As of January 27, 1996, eighteen HomeBase stores have been closed in connection with the restructuring, including the entire midwestern market. Two additional stores are expected to close in the future, which will bring the number of HomeBase stores closed in connection with the restructuring to twenty. Four stores that were originally included in the restructuring are no longer designated for closing, due to their improved performance. The discontinued merchandise has been liquidated. The majority of charges to the restructuring reserves in 1995 were related to lease obligations for closed stores. In the fourth quarter of 1995, the Company increased its restructuring reserves by $6.0 million pre-tax ($3.6 million net of tax benefits), primarily to adjust estimated lease obligations related to the six stores which have been closed, but have not been subleased as of January 27, 1996. This addition to the reserves was offset by a corresponding adjustment in the Company's income tax liabilities (see Note F). The Company believes that the balance remaining in the restructuring reserves as of January 27, 1996 is appropriate. In addition to the restructuring reserves included in current and noncurrent liabilities in the balance sheets, property held for sale was stated net of a reserve for write-down of $2,917,000 at January 27, 1996 and $2,974,000 at January 28, 1995. 22 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) C. Debt At January 27, 1996 and January 28, 1995, long-term debt, exclusive of current installments, consisted of the following:
January 27, January 28, 1996 1995 ----------- ----------- (In Thousands) Real estate debt, interest at 8.25% to 9.25%, maturing through March 1, 2003 $ 924 $ 1,752 ========= ========= General Corporate Debt: Senior notes, interest at 9.58%, maturing May 31, 1996 through May 31, 1998 $ 24,000 $ 36,000 ========= ========= Senior Subordinated Debt: Senior subordinated notes, interest at 11%, maturing May 15, 2004 $100,000 $100,000 ========= ========= Convertible Subordinated Debt: Convertible debentures, interest at 6.5%, maturing July 1, 2002 $108,600 $108,600 ========= =========
The aggregate maturities of long-term debt outstanding at January 27, 1996 were as follows:
Real General Senior Convertible Estate Corporate Subordinated Subordinated Fiscal Years Ending January Debt Debt Debt Debt Total - ------------------------------ ---- ------- ---------- ---------- -------- (In Thousands) 1998 $474 $12,000 $ -- $ -- $ 12,474 1999 72 12,000 -- -- 12,072 2000 79 -- -- -- 79 2001 86 -- -- -- 86 Later years 213 -- 100,000 108,600 208,813 -- ----- -------- -------- ------ Total $924 $24,000 $100,000 $108,600 $233,524 == ===== ======== ======== ======
As of January 27, 1996, real estate debt was collateralized by land and buildings with a net book value of $17,259,000. In May 1994, the Company issued $100 million of 11% senior subordinated notes due May 15, 2004. The Company's 9.58% unsecured senior notes are payable in five annual installments of $12 million each, which began May 31, 1994. The 6.5% convertible subordinated debentures are convertible into the Company's common stock at a conversion price of $24.75 per share. The Company's senior note, senior subordinated debt and bank credit agreements contain covenants which, among other things, include minimum working capital, net worth and fixed charge coverage requirements and a maximum funded debt-to-capital limitation, and limit the payment of cash dividends on common stock. Under the most restrictive requirement, cash dividends are limited to not more than 25% of the Company's consolidated net income for the immediately preceding fiscal year. In April 1995, the Company entered into an agreement with a group of banks which provides a $150 million line of credit through March 30, 1998. The agreement includes a $20 million sub-facility for standby letters of credit. The Company is required to pay an annual facility fee of $300,000 (subject to adjustment based upon the Company's fixed charge coverage ratio). Borrowings can be made at prime rate, at LIBOR plus a surcharge (currently 0.45%) that depends on fixed charge coverage, or on a competitive bid basis. There are no compensating balance requirements under this agreement. At January 27, 1996, $9.9 million of standby letters of credit were outstanding under the line's subfacility. The remainder of the line of credit was available for use at the end of the fiscal year. The Company has not borrowed against this line of credit. At January 27, 1996, the Company had additional letter of credit facilities of approximately $29.2 million primarily to support the purchase of inventories, of which approximately $16.6 million were outstanding. For 23 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) letters of credit under $500,000, the Company also has a $1 million standby facility, of which $97,000 was outstanding at January 27, 1996. D. 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 SFAS No. 13. 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 45 years and have varying renewal options. The fixture and equipment leases range up to 10 years. Future minimum lease payments as of January 27, 1996 were:
Capital Operating Fiscal Years Ending January Leases Leases - --------------------------- ------ ----------- (In Thousands) 1997 $ 2,181 $ 102,684 1998 1,831 106,014 1999 1,859 107,608 2000 1,882 105,188 2001 1,882 103,433 Later years 17,489 1,010,860 ------ ----------- Total minimum lease payments 27,124 $1,535,787 =========== Less amount representing interest 14,687 ------ Present value of net minimum capital lease payments $12,437 =======
Rental expense under operating leases (including contingent rentals which were not material) amounted to $99,982,000, $87,366,000 and $90,699,000 in 1995, 1994 and 1993, respectively. These amounts exclude rent of $5.2 million, $12.5 million and $3.6 million charged to the restructuring reserve in 1995, 1994 and 1993, respectively. The table of future minimum lease payments above includes lease commitments for six HomeBase stores which have closed in connection with HomeBase's restructuring as of January 27, 1996, but which were not subleased or assigned at that date. As of January 27, 1996, the Company was also contingently liable on one HomeBase warehouse store lease that was assigned to a third party; the Company believes that this contingent liability will not have a material effect on its financial condition. 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 effect on its financial condition or results of operations. E. Capital Stock, Stock Options and Stock Purchase Plans Under its 1989 Stock Incentive Plan and its 1995 Director Stock Option Plan, the Company has granted certain key employees and its non-employee directors options, which expire five to ten years from the grant date, to purchase common stock at prices equal to 100% of market price on the grant date. Options outstanding are exercisable over various periods generally starting one year after the grant date. At January 27, 1996, 953,031 shares were exercisable under these plans. 24 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Option activity during the past three years was as follows:
Number of Option Prices Options -------------- ---------- Fiscal Year Ended January 29, 1994: Options granted $12.625-$13.375 908,131 Options exercised $ 6.25-$9.125 (78,165) Cancellations $ 8.125-$25.625 (942,346) ---------- Outstanding at January 29, 1994 $ 6.25-$25.625 1,502,901 Fiscal Year Ended January 28, 1995: Options granted $ 16.625-$19.25 1,427,200 Options exercised $ 6.25-$15.875 (119,873) Cancellations $ 6.25-$25.625 (267,499) ---------- Outstanding at January 28, 1995 $ 6.25-$25.625 2,542,729 Fiscal Year Ended January 27, 1996: Options granted $15.625-$18.875 270,500 Options exercised $ 6.25-$17.75 (189,126) Cancellations $ 8.125-$25.625 (144,553) ---------- Outstanding at January 27, 1996 $12.625-$25.625 2,479,550 ==========
The Company has also issued, at no cost, restricted stock awards to certain key employees under its 1989 Stock Incentive 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 lapse over periods that range up to four years. The market price of restricted stock issued is charged to income ratably over the period during which the restrictions lapse. In 1995, 1994 and 1993 the Company issued 2,500, 5,500 and 237,250 restricted shares, respectively; 18,110, 24,500 and 229,145 restricted shares were returned to the Company and cancelled in 1995, 1994 and 1993, respectively. At the Company's Annual Meeting of Stockholders in June 1995, an amendment to increase the maximum number of shares of common stock issuable under the 1989 Stock Incentive Plan from 3,750,000 to 5,750,000 was approved. The 1995 Director Stock Option Plan was adopted at the same meeting. The maximum number of shares of common stock issuable under this plan is 150,000. As of January 27, 1996 and January 28, 1995, respectively, 2,198,972 and 309,309 shares were reserved for future stock awards under the 1989 Stock Incentive Plan. As of January 27, 1996, 129,000 shares were reserved for future stock awards under the 1995 Director Stock Option Plan. In 1989 the Company adopted a shareholder rights plan designed to discourage attempts to acquire the Company on terms not approved by the Board of Directors. Under the plan, shareholders 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 each 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. SFAS No. 123, "Accounting for Stock-Based Compensation," was issued in October 1995 and becomes effective for the Company's fiscal year ending January 25, 1997. SFAS No. 123 provides a choice of adopting its fair value based method of expense recognition for stock-based awards granted to employees or applying the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." The Company expects to continue to apply the accounting provisions of APB No. 25 and adopt the disclosure-only provisions of SFAS No. 123 in 1996; consequently, SFAS No. 123 is expected to have no effect on the Company's financial position or results of operations in the fiscal year ending January 25, 1997. 25 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) F. Income Taxes Effective January 31, 1993 (the first day of fiscal 1993), the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 changed the Company's method of accounting for income taxes from the income statement approach prescribed by Accounting Principles Board Opinion No. 11 to an assets and liabilities approach. The cumulative effect of this accounting change was to increase net income by $1,616,000 in 1993 (See Note A). The provision (benefit) for income taxes on income (loss) before the cumulative effect of accounting changes includes the following:
Fiscal Year Ended ---------------------------------------- January 27, January 28, January 29, 1996 1995 1994 ----------- ----------- ------------ (In Thousands) Federal Current $35,226 $23,979 $ 18,450 Deferred 2,407 8,957 (29,555) State Current 8,188 5,887 3,665 Deferred 640 2,379 (7,850) --------- --------- --------- Total income tax provision (benefit) $46,461 $41,202 $(15,290) ========= ========= =========
The following is a reconciliation of the statutory federal income tax rates and the effective income tax rates on income (loss) before the cumulative effect of accounting principle changes:
Fiscal Year Ended ------------------------------------------ January 27, January 28, January 29, 1996 1995 1994 ---------- ----------- ------------ Statutory federal income tax rate 35% 35% (35)% State income taxes, net of federal tax benefit 5 5 (8) Targeted jobs tax credit -- (1) (3) Other (1) -- 1 ------ ------ ------ Effective income tax rates 39% 39% (45)% ====== ====== ======
Significant components of the Company's deferred tax assets and liabilities as of January 27, 1996 and January 28, 1995 are as follows:
January 27, January 28, 1996 1995 ----------- ----------- (In Thousands) Deferred tax assets: Self-insurance reserves $25,381 $20,061 Rental step liabilities 8,534 7,625 Restructuring reserves 12,440 16,181 Capital leases 1,499 1,385 Compensation and benefits 5,644 5,370 Other 4,732 5,456 --------- ------- Total deferred tax assets 58,230 56,078 --------- ------- Deferred tax liabilities: Accelerated depreciation-property 24,254 25,608 Other 974 420 --------- ------- Total deferred tax liabilities 25,228 26,028 --------- ------- Net deferred tax assets $33,002 $30,050 ========= =======
26 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) During 1995 the statute of limitations expired for certain taxable years. As a result, previously accrued tax liabilities of approximately $3.6 million related to these years are no longer required. This excess amount has been reclassified to the Company's restructuring reserve liabilities (see Note B), with no impact on the Company's provision for income taxes. 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. G. Pensions The Company has a non-contributory defined benefit retirement plan covering full-time employees who have attained twenty-one 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 December 1993, the Company terminated its unfunded defined benefit plan which provided additional retirement benefits for certain key employees, and in June 1995, 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 these plans was not material. Net periodic pension cost under the Company's plans, presented in accordance with SFAS No. 87, includes the following components (in thousands):
Fiscal Year Ended ----------------------------------------- January 27, January 28, January 29, 1996 1995 1994 ----------- ----------- ------------ Service cost $ 182 $ 209 $ 451 Interest cost on projected benefit obligation 429 435 592 Actual return on assets (1,245) (73) (380) Net amortization and deferrals 892 (264) 21 -------- ------ ------ Net pension cost $ 258 $ 307 $ 684 ======== ====== ======
The following table sets forth the funded status of the Company's defined benefit pension plan for full-time employees as of January 27, 1996 and January 28, 1995 (amounts related to the Directors' plan at January 28, 1995 are immaterial) in accordance with SFAS No. 87 (in thousands):
January 27, 1996 January 28, 1995 ----------------- ----------------- Actuarial present value of accumulated benefit obligation: Vested benefits $ 5,991 $4,622 Nonvested benefits -- 474 ---------- ------ $ 5,991 $5,096 ========== ====== Projected benefit obligation $ 5,991 $5,096 Plan assets at fair market value 5,997 5,106 ---------- ------ Projected benefit obligation less than plan assets (6) (10) Prior service cost reduction not yet recognized -- 17 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (1,088) (891) ---------- ------ Prepaid pension cost included in balance sheets $(1,094) $ (884) ========== ======
The weighted average discount rates used in determining the actuarial present value of the projected benefit obligation were 7.25% and 8.0%, respectively, in 1995 and 1994. The expected long-term rate of return on assets used was 9.0% in 1995 and 1994. The Company's funding policy is to contribute annually an amount allowable for federal income tax purposes. Pension plan assets consist primarily of equity and fixed income securities. 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 27 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) of covered compensation and 50% of the next four percent, payable at the end of the year. Beginning in 1996, the Company's matching contribution will be payable as of the end of each calendar quarter. The Company's expense under these plans was $3,922,000 in 1995, $3,561,000 in 1994 and $3,277,000 in 1993. 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 1995 and 1994, the Company's contribution equalled 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 $963,000 in 1995 and $875,000 in 1994. H. 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. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," requires employers to recognize postretirement benefits over the periods during which employees render services rather than at the time benefits are paid. SFAS No. 106 was implemented by the Company by recognizing the transition obligation of $348,000 in the first quarter of 1993. Net periodic postretirement medical benefit cost presented in accordance with SFAS No. 106, includes the following components:
Fiscal Year Ended ------------------------------------------ January 27, January 28, January 29, 1996 1995 1994 ----------- ----------- ------------- (In Thousands) Service cost $ 120 $128 $100 Interest cost 44 42 38 Net amortization and deferrals (10) -- -- --------- --------- ----------- Net periodic postretirement benefit cost $ 154 $170 $138 ========= ========= ===========
The following table sets forth the status of the Company's postretirement medical plan and the amount recognized in the Company's balance sheets at January 27, 1996 and January 28, 1995 in accordance with SFAS No. 106:
January 27, January 28, 1996 1995 ----------- ------------- (In Thousands) Accumulated postretirement benefit obligation: Retired participants $ -- $ -- Fully eligible active participants 63 37 Other active participants 515 387 ----- ------ Unfunded accumulated postretirement benefit obligation 578 424 Unrecognized net gain 232 232 ----- ------ Accrued postretirement benefit cost included in balance sheet $810 $656 ===== ======
For measurement purposes, an annual rate of increase in the per capita cost of medical coverage of 9.5% in 1995 grading down to 5% after 9 years was assumed as of January 28, 1995, and an annual rate of increase in the per capita cost of medical coverage of 8% in 1996 grading down to 4.5% after 8 years was assumed as of January 27, 1996. 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 1995 by $30,000 and would increase the accumulated postretirement benefit obligation as of January 27, 1996 by $101,000. 28 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% as of January 27, 1996 and 8.0% as of January 28, 1995. I. Accrued Expenses and Other Current Liabilities The major components of accrued expenses and other current liabilities are as follows:
January 27, January 28, 1996 1995 ----------- ------------- (In Thousands) Employee compensation $ 23,666 $ 25,783 Self-insurance reserves 25,962 21,214 Fixed asset additions 18,468 23,674 Sales and use taxes, rent, utilities, advertising and other 75,220 65,732 ------- -------- $143,316 $136,403 ======= ========
The Company's reported expense and reserves for insurance are derived from estimated ultimate cost based upon individual claim file reserves. The Company maintains insurance coverage for individual occurrences above $250,000 for worker's compensation and general liability, and above $200,000 for group medical claims. In addition to the amounts shown above in current liabilities, noncurrent self-insurance reserves of $36.8 million and $28.5 million as of January 27, 1996 and January 28, 1995, respectively, are included in other noncurrent liabilities. J. Selected Information by Major Business Segment
Fiscal Year Ended ------------------------------------------ January 27, January 28, January 29, 1996 1995 1994 ----------- ----------- ------------- (In Thousands) Net sales: BJ's Wholesale Club $2,529,608 $2,293,091 $2,003,385 HomeBase 1,448,776 1,357,190 1,585,956 --------- --------- ----------- $3,978,384 $3,650,281 $3,589,341 ========= ========= =========== Operating income (loss): BJ's Wholesale Club $ 86,460 $ 68,804 $ 45,216 HomeBase (net of $98,533 restructuring charge in FYE 1/94) 55,762 60,706 (55,805) General corporate expense (including $2,600 restructuring charge in FYE 1/94) (7,353) (8,420) (10,899) --------- --------- ----------- 134,869 121,090 (21,488) Interest on debt and capital leases (net) (15,431) (14,898) (12,489) --------- --------- ----------- Income (loss) before income taxes and cumulative effect of accounting principle changes $ 119,438 $ 106,192 $ (33,977) ========= ========= =========== Identifiable assets: BJ's Wholesale Club $ 682,687 $ 569,122 $ 501,230 HomeBase 597,270 539,426 551,887 Corporate (cash, cash equivalents and marketable securities) 52,494 128,973 19,877 --------- --------- ----------- $1,332,451 $1,237,521 $1,072,994 ========= ========= =========== Depreciation and amortization: BJ's Wholesale Club $ 27,475 $ 22,529 $ 16,825 HomeBase 19,179 17,896 20,214 --------- --------- ----------- $ 46,654 $ 40,425 $ 37,039 ========= ========= =========== Capital expenditures: BJ's Wholesale Club $ 93,261 $ 71,017 $ 95,170 HomeBase 65,047 51,918 37,974 --------- --------- ----------- $ 158,308 $ 122,935 $ 133,144 ========= ========= ===========
29 WABAN INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) K. Investments in Marketable Securities The Company classifies all of its investments in marketable securities as available-for-sale securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Marketable securities at January 27, 1996 and January 28, 1995 included the following:
Amortized Gross Unrealized Gross Unrealized Aggregate Cost Basis Holding Gains Holding Losses Fair Value ----------- ---------------- ---------------- ------------- (In Thousands) Fiscal year ended January 27, 1996 Debt securities issued by states or their political subdivisions $20,303 $40 $ (4) $20,339 ========= ========= ========== ======== Fiscal year ended January 28, 1995 Debt securities issued by states or their political subdivisions $54,017 $35 $(108) $53,944 Corporate debt securities 9,989 -- -- 9,989 --------- --------- ---------- -------- $64,006 $35 $(108) $63,933 ========= ========= ========== ========
The contractual maturities of marketable securities at January 27, 1996 and January 28, 1995 were as follows:
Amortized Aggregate Cost Basis Fair Value ----------- ------------- (In Thousands) Fiscal year ended January 27, 1996 Less than one year $ 7,535 $ 7,552 1-5 years 12,768 12,787 --------- -------- $20,303 $20,339 ========= ======== Fiscal year ended January 28, 1995 Less than one year $47,421 $47,384 1-5 years 16,585 16,549 --------- -------- $64,006 $63,933 ========= ========
Other information on marketable securities was as follows:
Fiscal Year Ended ---------------------------- January 27, January 28, 1996 1995 ----------- ------------- (In Thousands) Sales proceeds $131,632 $37,303 Gross realized gains (losses) 257 (165) Increase in unrealized holding gains (losses), net of taxes 66 (44)
The specific identification method is used as the basis for computing realized gains or losses on the sale of marketable securities. L. 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. 30 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 (in thousands):
January 27, 1996 January 28, 1995 -------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- --------- Cash and cash equivalents $ 32,155 $ 32,155 $ 65,040 $ 65,040 Marketable securities 20,339 20,339 63,933 63,933 Real estate debt (1,752) (1,850) (2,515) (2,611) General corporate debt (36,000) (37,577) (48,000) (48,422) Senior subordinated debt (100,000) (103,250) (100,000) (97,500) Convertible subordinated debt (108,600) (108,600) (108,600) (97,740)
M. Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- --------- ------- ----------- (In Thousands Except Per Share Amounts) Fiscal year ended January 27, 1996 Net sales $884,455 $1,051,882 $965,990 $1,076,057 Gross earnings (a) 128,902 160,604 140,506 160,380 Net income 8,264 24,404 14,544 25,765 Per common share, fully diluted .25 .68 .42 .71 Fiscal year ended January 28, 1995 Net sales $820,840 $ 951,804 $905,606 $ 972,031 Gross earnings (a) 117,105 143,448 130,718 148,223 Net income 9,129 21,142 13,399 21,320 Per common share, fully diluted .27 .59 .38 .59
(a) Gross earnings equals net sales less cost of sales, including buying and occupancy costs. 31 COOPERS & LYBRAND COOPERS & LYBRAND LOGO REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Waban Inc.: We have audited the accompanying consolidated balance sheets of Waban Inc. and subsidiaries as of January 27, 1996 and January 28, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 27, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Waban Inc. and subsidiaries as of January 27, 1996 and January 28, 1995 and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 27, 1996 in conformity with generally accepted accounting principles. As discussed in Notes A, F and H to the Consolidated Financial Statements, the Company changed its methods of accounting for postretirement benefits other than pensions, for postemployment benefits and for income taxes in the fiscal year ended January 29, 1994. /s/Coopers & Lybrand L.L.P. Boston, Massachusetts February 27, 1996 REPORT OF MANAGEMENT The financial statements and related financial information in this annual report have been prepared by and are the responsibility of management. The 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 assets are safeguarded, transactions are executed in accordance with management's authorization and the accounting records may be relied upon for the preparation of 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 public 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 public 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 public accountants have free access to the Committee. The 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/ Herbert J. Zarkin /s/ Edward J. Weisberger Herbert J. Zarkin Edward J. Weisberger President and Senior Vice President and Chief Executive Officer Chief Financial Officer February 27, 1996 32 WABAN INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS For the Fiscal Years Ended January 27, 1996, January 28, 1995 and January 29, 1994 (Dollars in Thousands)
Column A Column B Column C Column D Column E Additions -------------------------- (1) (2) Charged to Balance at Charged to Other Balance at Beginning Costs and Accounts-- Deductions-- End of Description of Period Expenses Describe Describe Period - ----------------------------- ---------- ---------- ------------ ----------- ------------ Year ended January 27, 1996: Reserve for write-down of property held for sale $ 2,974 $ -- $ 721 $ 778(a) $ 2,917 Restructuring reserve 14,079 -- -- 6,904(b) 7,175 Noncurrent restructuring reserve 22,900 -- 5,279 7,556(b) 20,623 ------ -------- ---------- --------- ---------- $39,953 $ -- $ 6,000(d) $15,238 $30,715 ====== ======== ========== ========= ========== Year ended January 28, 1995: Reserve for write-down of discontinued inventories $ 9,653 $ -- $ -- $ 9,653(a) $ -- Reserve for write-down of property held for sale 17,479 -- (4,662)(c) 9,843(a) 2,974 Restructuring reserve 29,444 -- 1,955(c) 17,320(b) 14,079 Noncurrent restructuring reserve 28,642 -- 2,707(c) 8,449(b) 22,900 ------ -------- ---------- --------- ---------- $85,218 $ -- $ -- $45,265 $39,953 ====== ======== ========== ========= ========== Year ended January 29, 1994: Reserve for write-down of discontinued inventories $ -- $ 9,766 $ -- $ 113(a) $ 9,653 Reserve for write-down of property held for sale -- 17,431 -- (48)(a) 17,479 Restructuring reserve -- 45,294 -- 15,850(b) 29,444 Noncurrent restructuring reserve -- 28,642 -- -- 28,642 ------ -------- ---------- --------- ---------- $ -- $101,133 $ -- $15,915 $85,218 ====== ======== ========== ========= ==========
(a) Net loss on sale or disposal of discontinued inventory and property held for sale in connection with the Company's restructuring. (b) Other costs and expenses incurred in connection with the Company's restructuring, mainly operating losses, closing costs and settlement of lease obligations in HomeBase warehouse stores closed or to be closed. No operating losses were charged to the restructuring reserve after January 28, 1995. (c) Reclassification of components of restructuring reserve. (d) Increase in reserves primarily to adjust estimated lease obligations related to six stores closed in connection with the restructuring, but not subleased as of January 27, 1996. Addition to reserves was offset by a corresponding adjustment in the Company's income tax liabilities. 33 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Waban Inc. on Form S-8 (File Nos. 33-29473 and 33-40155) of our reports dated February 27, 1996 on our audits of the consolidated financial statements and financial statement schedule of Waban Inc. as of January 27, 1996 and January 28, 1995, and for the three years ended January 27, 1996, January 28, 1995 and January 29, 1994, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts April 22, 1996 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Waban Inc.: Our report on the consolidated financial statements of Waban Inc. and Subsidiaries is included in this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed herein. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts February 27, 1996 34 ITEM 9. Disagreements on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The Company will file with the Securities and Exchange Commission a definitive Proxy Statement no later than 120 days after the close of its fiscal year ended January 27, 1996 (the "Proxy Statement"). The information required by this Item and not given in Item 4A, Executive Officers of the Registrant, is incorporated by reference from the Proxy Statement. Item 11. Executive Compensation The information required by this Item is incorporated by reference from the Proxy Statement. However, information under "Executive Compensation Committee Report" and "Performance Graph" in this Proxy Statement is not so incorporated. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference from the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated by reference from the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K A. The Financial Statements and Financial Statement Schedules filed as part of this report are listed and indexed on page 16. Schedules other than those listed in the index have been omitted because they are not applicable or the required information has been 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 Restated Certificate of Incorporation of the Company (1) 3.2 By-laws, as amended, of the Company (2) 4.1 Instruments Defining Rights of Security Holders (See Exhibits 3.1, 3.2, 4.2, 4.3 and 10.12) 4.2 Rights Agreement dated as of May 23, 1989 between the Company and Morgan Shareholder Services Trust Company, as Rights Agent (1) 4.3 Indenture dated as of July 1, 1992 between the Company and Continental Bank, National Association, as Trustee, with respect to 6-1/2% Convertible Subordinated Debentures due July 1, 2002 (6) 10.1 Distribution Agreement dated as of May 1, 1989 between the Company and Zayre Corp. (1) 10.2 Waban Inc. 1989 Stock Incentive Plan, as amended* (12) 10.3 Waban Inc. Executive Retirement Plan* (7) 10.4 Waban Inc. Retirement Plan for Directors, as amended September 17, 1990* (3) 10.5 Waban Inc. General Deferred Compensation Plan* (2) 10.6 Waban Inc. Growth Incentive Plan, as amended* 10.7 Executive Services Agreement dated as of June 1, 1989 between the Company and Zayre Corp. with respect to Arthur F. Loewy* (2) 10.7a 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 referred to in Exhibit 10.7* (7) 10.8 Employment Agreement dated as of May 25, 1993 with Herbert J Zarkin* (7) 10.8a Change of Control Severance Agreement dated as of May 25, 1993 with Herbert J Zarkin* (7) 35 10.9 Employment Agreement dated as of February 1, 1994 with John J. Nugent* (8) 10.10 Employment Agreement dated as of September 29, 1994 with Edward J. Weisberger* (10) 10.11 Employment Agreement dated as of September 29, 1993 with Allan P. Sherman* (7) 10.11a Change of Control Severance Agreement dated as of September 29, 1993 with Allan P. Sherman* (7) 10.11b Loan Agreement dated as of January 19, 1994 with Allan P. Sherman* (7) 10.11c Promissory Note dated as of January 19, 1994 from Allan P. Sherman to the Company* (7) 10.12 Form of Indemnification Agreement between the Company and its officers and directors* (2) 10.13 Form of Change of Control Severance Agreement between the Company and officers of the Company* (8) 10.14 Note Purchase Agreement dated as of June 15, 1991 with respect to 9.58% Senior Notes due May 31, 1998 (4) 10.14a Amendment dated as of December 16, 1991 to Note Purchase Agreement dated as of June 15, 1991 referred to in Exhibit 10.14 (5) 10.14b Second Amendment and Waiver dated as of March 28, 1994 to Note Purchase Agreement dated as of June 15, 1991 (8) 10.14c Third Amendment and Waiver dated as of September 29, 1994 to Note Purchase Agreement dated as of June 15, 1991 (10) 10.15 Indenture dated as of May 15, 1994 between the Company and The First National Bank of Boston, as Trustee, with respect to 11% Senior Subordinated Notes due May 15, 2004 (9) 10.16 Credit Agreement dated as of April 4, 1995 among the Company and certain banks (11) 10.17 Waban Inc. 1995 Director Stock Option Plan* (12) 11.0 Statement regarding computation of per share earnings 21.0 Subsidiaries of the Company
*Management contract or other compensatory plan or arrangement. (1) Incorporated herein by reference to the Registrant's Form 10 (#1-10259) (2) Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 27, 1990 (3) Incorporated herein by reference to the Registrant's Form 10-Q for the fiscal quarter ended October 27, 1990 (4) Incorporated herein by reference to the Registrant's Form 10-Q for the fiscal quarter ended July 27, 1991 (5) Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 25, 1992 (6) Incorporated herein by reference to the Registrant's Form S-3 (#33-48423) (7) Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 29, 1994 (8) Incorporated herein by reference to the Registrant's Form 10-Q for the fiscal quarter ended April 30, 1994 (9) Incorporated herein by reference to the Registrant's Form S-3 (#33-52665) (10) Incorporated herein by reference to the Registrant's Form 10-Q for the fiscal quarter ended October 29, 1994 (11) Incorporated herein by reference to the Registrant's Form 10-K for the fiscal year ended January 28, 1995 (12) 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 C. The Registrant has not filed any reports on Form 8-K during the last quarter of the period covered by this Report. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WABAN INC. Dated: April 23, 1996 /s/ HERBERT J. ZARKIN ----------------------- Herbert J. Zarkin President and Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ HERBERT J. ZARKIN /s/ SUMNER L. FELDBERG - -------------------------------------------- ----------------------------- Herbert J. Zarkin, President Sumner L. Feldberg, Chairman Principal Executive Officer and Director of the Board and Director /s/ EDWARD J. WEISBERGER /s/ S. JAMES COPPERSMITH - -------------------------------------------- ----------------------------- Edward J. Weisberger, Senior Vice President S. James Coppersmith, Director and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ STANLEY H. FELDBERG /s/ KERRY L. HAMILTON - -------------------------------------------- ------------------------------ Stanley H. Feldberg, Director Kerry L. Hamilton, Director /s/ ALLYN L. LEVY /s/ ARTHUR F. LOEWY - -------------------------------------------- ------------------------------ Allyn L. Levy, Director Arthur F. Loewy, Director /s/ THOMAS J. SHIELDS /s/ LORNE R. WAXLAX - -------------------------------------------- ------------------------------ Thomas J. Shields, Director Lorne R. Waxlax, Director Dated: April 23, 1996 37 EX-10.6 2 GROWTH INCENTIVE PLAN Exhibit 10.6 WABAN INC. GROWTH INCENTIVE PLAN ------------------ Effective as of January 30, 1994 (as amended through March 30, 1994) 1 WABAN INC. GROWTH INCENTIVE PLAN ----------------- TABLE OF CONTENTS ----------------- ARTICLE PAGE - ------------------------------------------------------ ------- ARTICLE 1. DEFINITIONS 1 ARTICLE 2. BENEFITS UNDER THIS PLAN 1 ARTICLE 3. DESIGNATION OF BENEFICIARY 3 ARTICLE 4. PLAN ADMINISTRATION AND INDEMNIFICATION 3 ARTICLE 5. EFFECT ON EMPLOYMENT RIGHTS 3 ARTICLE 6. CHANGE OF CONTROL 3 ARTICLE 7. AMENDMENT OR TERMINATION OF PLAN 4 ARTICLE 8. NON-ASSIGNMENT 4 ARTICLE 9. CONSTRUCTION 4 ARTICLE 10. RELEVANT LAW 4 WABAN INC. GROWTH INCENTIVE PLAN ------------------ Waban Inc. hereby establishes the Waban Inc. Growth Incentive Plan (the "Plan"), effective as of January 30, 1994. W I T N E S S E T H: WHEREAS, the Participants are in high-level management positions in Waban Inc. or its subsidiaries and are key to the long-term success of the Company; WHEREAS, the Company desires to provide an incentive to focus the Participants' attention and efforts on long-term growth and profitability; NOW THEREFORE, the Company hereby adopts the Plan, as hereinafter set forth, effective as of January 30, 1994. * * * * * * ARTICLE 1. DEFINITIONS. The following terms as used in this Plan shall have the following meanings: 1.1 "Award Period" shall mean a period of a certain number of consecutive fiscal years, as determined by the Committee in its discretion. Award Periods may overlap and employees may participate simultaneously with respect to more than one Award Period. 1.2 "Committee" shall mean the Executive Compensation Committee of the Board of Directors of Waban Inc. 1.3 "Company" shall mean Waban Inc. and its subsidiaries. 1.4 "Effective Date" shall mean January 30, 1994. 1.5 "Incentive Unit" shall mean an incentive unit granted to each Participant, the value of which equals a certain percentage of the growth in the Incentive Measurement achieved over the Award Period, as determined by the Committee. 1.6 "Incentive Measurement" shall mean any one or combination of the following objective measures of performance or growth, as the Committee shall determine: operating income, pre-tax income, net income, costs, any of the preceding measures as a percent of sales, earnings per share, sales, return on equity, and return on investment. 1.7 "Participant" shall mean an employee in a high-level management position in the Company who is selected by the Committee, in its discretion, to be a Participant in the Plan. 1.8 "Plan" shall mean the Waban Inc. Growth Incentive Plan, as herein set forth, including any and all amendments hereto and restatements hereof. ARTICLE 2. BENEFITS UNDER THIS PLAN. 2.1 Granting of Awards. (a) The Grant. On or before the commencement of each Award Period, the Committee shall determine (i) which employees shall be Participants in the Plan, (ii) the amount of Incentive Units to be granted to each Participant, and (iii) the method or formula for determining the value of each Incentive Unit, based on the Incentive Measurement. (b) Payment Dates. On or before the commencement of each Award Period, the Committee shall determine (i) the date or dates on or about which payment in respect of Incentive Units shall be made, and (ii) the amount of each Participant's Incentive Units which may be redeemed on such payment dates. One such payment date shall occur at some time within three (3) months after the end of the Award Period and other date(s) may occur one (1) or more years after such date (the "Deferred Payment Date"). 2.2 Value of Incentive Units. On or before the commencement of each Award Period, the Committee shall determine (i) the factor(s) comprising the Incentive Measurement, and (ii) the Incentive Measurement's base value, i.e., the value against which growth shall be measured. Notwithstanding the prior sentence, the Incentive Measurement's base value may be appropriately adjusted by the Committee, pursuant to Section 2.5(i) hereof, after the certification of the Company's financial statements by the Company's independent public accountant for the fiscal year immediately preceding the commencement of the Award Period. In the Committee's discretion, Incentive Measurements may vary with respect to Incentive Unit grants made to individual Participants or groups of Participants. 2.3 Award Opportunity. Upon the completion of each Award Period and the certification of the Company's financial statements by the Company's independent public accountant for the last fiscal year in said Award Period, the Committee shall cause to be re-valued the Incentive Measurement in order to determine the growth over the Incentive Measurement's base value and, thus, the value of each Incentive Unit. Notwithstanding anything to the contrary herein contained or implied, the Committee may make appropriate adjustments to the value of the Incentive Measurement to avoid undue windfalls or hardships due to external conditions outside the control of management, nonrecurring or abnormal items, changes in accounting practices, or such other matters as the Committee, in its discretion, shall determine; however, the Committee shall make no adjustments to the performance criteria whose effect is to increase the growth incentive payment to the Chief Executive Officer or to other executive officers as of the end of the year who are named in the proxy statement, except as provided in Section 2.5 hereof. 2.4 Payment of Awards. (a) Employees on Last Day of Award Period or Deferred Payment Date. Participants employed by the Company on the last day of the Award Period shall be entitled to receive payment (to the extent not deferred) as soon as practicable thereafter; Participants employed on the Deferred Payment Date shall be entitled to receive payment of deferred amounts, if applicable, as soon as practicable thereafter. Notwithstanding anything to the contrary herein contained or implied, in no event shall a Participant's incentive payment for an Award Period exceed 300% of such Participant's annualized base salary at the beginning of the Award Period. (b) Termination of Employment in the Event of Death, Disability or Retirement. If the termination of employment occurs before the end of the Award Period due to: (i) death, (ii) disability (as defined under the Company's long-term disability plan), or (iii) retirement on or after the attainment of age fifty-five (55), the Participant shall be entitled to pro rated payment in respect of Incentive Units, determined as of the end of the fiscal year in which occurs the Participant's death, disability or retirement. Payment shall be made as soon as practicable following the end of the fiscal year in which death, disability or retirement has occurred. In the event of termination of employment due to death, disability or retirement after the end of the Award Period and prior to a Deferred Payment Date, payment with respect to any outstanding deferred payment amount shall be made as soon as practicable after such termination. (c) Termination of Employment for any Reason Other than Death, Disability or Retirement. In the event of the Participant's termination of employment for any reason other than death, disability or retirement prior to the end of the Award Period, the Participant shall have no rights under the Plan and shall not be entitled to receive payment with respect to any Incentive Unit. In the event of the Participant's termination of employment for any reason other than death, disability or retirement prior to a Deferred Payment Date, the Participant shall not be entitled to receive payment with respect to any outstanding deferred payment amount. In the event of termination of employment for cause, as determined by the Committee in its discretion, no payment shall be made with respect to any Incentive Unit. 2.5 Restrictions on Adjustments to Performance Criteria. The Committee shall make no adjustments to the performance criteria whose effect is to increase the growth incentive payment to the Chief Executive Officer or to other executive officers as of the end of the year who are named in the proxy statement, except for the following: (a) Events classified as extraordinary items or discontinued operations or presented as special nonrecurring charges (or income) in accordance with generally accepted accounting principles. (b) Disposal of a business segment or a group of two or more warehouse stores, a major administrative unit, or major assets, if quantified and disclosed in Management's Discussion and Analysis of Financial Condition and Results or Operations of the Company's Annual Report on Form 10-K. (c) Conversion of convertible bonds or convertible preferred stock into common stock; a repurchase by the Company of a large number of outstanding shares of stock, if it has material impact on the performance that is being measured; or an increase in the number of common shares for earnings per share calculation purposes due to a new equity or convertible debenture offering, but not by stock options, restricted stock or other stock-based awards under the Company's 1989 Stock Incentive Plan. 2 (d) Balance sheet recapitalization or restructuring that materially alters the allocation between debt and equity for a division. (e) Changes in accounting practice to comply with new legislation or with rules promulgated by the S.E.C. or the F.A.S.B. and changes in tax laws that affect tax rates, credits, or the definition of taxable income, if material. (f) Unusual and material losses beyond the Company's control, such as acts of God (e.g., earthquake or widespread hurricane damage). (g) Reserves for future period events which will not occur until after the performance measurement period. (h) Adjustments attributable to prior periods in the case of a newly acquired business. (i) Adjustments of the Incentive Measurement's base value made immediately after completion of the audit of the fiscal year immediately preceding the performance period, made solely to "true-up" amounts that were based on estimated results for said preceding year. (j) Gains and losses from sales of a minority interest in a subsidiary. (k) Net incremental expense incurred by a division as a result of opening new warehouse stores in excess of the number incorporated in the performance criteria. The amount of the adjustment shall be equal to the average operating loss incurred by new warehouse stores opened by the same division in the same fiscal year. In no event, however, shall the Committee make any adjustment which would cause incentive awards not to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code. ARTICLE 3. DESIGNATION OF BENEFICIARY. Each Participant shall have the right to file with the Committee a written designation of one or more persons as beneficiary(ies) who shall be entitled to receive the amount, if any, payable under the Plan upon the Participant's death. A Participant may modify the beneficiary designation by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling, provided, however, that no designation or modification thereof shall be effective unless received by the Committee prior to the Participant's death. If no such beneficiary designation is in effect at the time of a Participant's death, or if no designated beneficiary survives the Participant, the amount payable under the Plan upon the Participant's death shall be made to the Participant's surviving spouse; if there is no surviving spouse, payment shall be made to the Participant's estate. ARTICLE 4. PLAN ADMINISTRATION AND INDEMNIFICATION. 4.1 Plan Administration. This Plan shall be administered by the Committee. The Committee shall have full authority to interpret the Plan; to establish, amend, and rescind rules for carrying out the Plan; to interpret the terms and provisions of the Plan; and to make all other determinations necessary or advisable for its administration. The Committee's determination shall be final and binding on all parties. 4.2 Indemnification. The Company shall indemnify and save harmless each member of the Committee against all expenses and liabilities arising out of membership on such Committee, excepting only expenses and liabilities arising from such member's own gross negligence or willful misconduct, as determined by the Board of Directors or outside counsel designated by the Board of Directors. ARTICLE 5. EFFECT ON EMPLOYMENT RIGHTS. This Plan shall not constitute an employment contract and nothing contained in this Plan shall confer upon the Participant the right to be retained in the service of the Company nor limit the right of the Company to discharge or otherwise deal with the Participant without regard to the existence of this Plan. ARTICLE 6. CHANGE OF CONTROL. In the event of the merger, sale, consolidation, dissolution, liquidation, or Change of Control of the Company (as defined in the Change of Control Severance Benefit Plan for Key Employees), the Committee shall thereupon cause to be re-valued the Incentive Measurement, in the manner described herein, and shall provide that Incentive Units be redeemed as soon as practicable thereafter in lieu of payments that would otherwise be made under Article 2 hereof, regardless of when the end of the Award Period or Deferred Payment Date is scheduled to occur. Such re-valuation of the Incentive Measurement shall be determined based on (i) the Company's actual performance or growth with respect to those fiscal years within the Award Period which have ended prior to the merger, sale, consolidation, dissolution, liquidation, or Change of Control, plus (ii) for the fiscal year in which occurs the merger, sale, consolidation, dissolution, liquidation, or Change of Control, the Company's projected performance or growth as provided in the fiscal year's financial plan 4 (as presented to the Company's Board of Directors at the beginning of the fiscal year) pro rated based on the number of days in said fiscal year preceding the merger, sale, consolidation, dissolution, liquidation, or Change of Control. ARTICLE 7. AMENDMENT OR TERMINATION OF PLAN. The Plan may be amended, suspended or terminated in whole or in part at any time and from time to time by the Committee. No such amendment, suspension or termination shall retroactively impair or otherwise adversely affect the rights of any Participant to benefits under this Plan if the end of the Award Period has occurred prior to the date of such amendment, suspension or termination. ARTICLE 8. NONASSIGNMENT. The right to benefits hereunder shall not be assignable, and the Participant shall not be entitled to have such payments commuted or made otherwise than in accordance with the provisions of the Plan. ARTICLE 9. CONSTRUCTION. 9.1 Heading and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 9.2 Singular Includes Plural. Except where otherwise clearly indicated by context, the singular shall include the plural, and vice-versa. ARTICLE 10. RELEVANT LAW. This Plan shall be construed and enforced in accordance with the laws of the Commonwealth of Massachusetts to the extent such laws are not preempted by federal law. 5 EX-11 3 COMPUTATION OF PER SHARE EARNINGS Exhibit 11 WABAN INC. AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF NET INCOME PER COMMON SHARE
Fiscal Year Ended ------------------------------------------------ January 27, January 28, January 29, 1996 1995 1994 ------------- ------------- -------------- The computation of net income available and adjusted shares outstanding follows: Net income as reported $72,977,000 $64,990,000 $(17,782,000) =========== =========== ============ Net income used for primary computation $72,977,000 $64,990,000 $(17,782,000) Add (where dilutive): Tax effected interest and amortization of debt expense on convertible debt 4,341,000 4,347,000 -- ----------- ----------- ------------ Net income used for fully diluted computation $77,318,000 $69,337,000 $(17,782,000) =========== =========== ============ Weighted average number of common shares outstanding 33,014,364 33,142,641 33,082,362 Add (where dilutive): Assumed exercise of those options that are common stock equivalents net of treasury shares deemed to have been repurchased 206,081 262,373 -- ----------- ----------- ------------ Weighted average number of common and common equivalent shares outstanding, used for primary computation 33,220,445 33,405,014 33,082,362 Add (where dilutive): Shares applicable to stock options in addition to those used in primary computation due to the use of period-end market price when higher than average price 175,914 -- -- Assumed exercise of convertible securities 4,387,879 4,387,879 -- ----------- ----------- ------------ Adjusted shares outstanding used for fully diluted computation 37,784,238 37,792,893 33,082,362 =========== =========== ============
EX-21 4 SUBSIDIARIES Exhibit 21 Subsidiaries The following is a list of Subsidiaries of Waban Inc. as of April 1, 1996: State of Incorporation - ------------------------------------ ------------------------- HomeClub, Inc. Nevada HomeClub, Inc. of Texas Delaware Fullerton Corporation Delaware Natick Security Corp. Massachusetts Natick Corporation Delaware HCI Development Corp. California HomeClub First Realty Corp. Colorado Natick First Realty Corp. Connecticut Natick Second Realty Corp. Massachusetts Natick Third Realty Corp. New Jersey Natick Fourth Realty Corp. New Jersey Natick Fifth Realty Corp. Maryland Natick Sixth Realty Corp. Connecticut Natick MA Realty Corp. Massachusetts Natick NH Realty Corp. New Hampshire Natick NY Realty Corp. New York HCWA Realty Corp. Washington HCCA Realty Corp. California Natick NY 1992 Realty Corp. New York Natick PA Realty Corp. Pennsylvania Natick VA Realty Corp. Virginia HBNM Realty Corp. New Mexico Natick Portsmouth Realty Corp. New Hampshire HBCA 1993 Realty Corp. California HBOR Realty Corp. Oregon HBUT Realty Corp. Utah HCWA 1993 Realty Corp. Washington Natick NJ Realty Corp. New Jersey Natick NJ 1993 Realty Corp. New Jersey BJ's PA Distribution Center, Inc. Pennsylvania BJ's MA Distribution Center, Inc. Massachusetts Natick CT Realty Corp. Connecticut HBCO Realty Corp. Colorado HBNM 1994 Realty Corp. New Mexico HBCO 1994 Realty Corp. Colorado Natick ME 1995 Realty Corp. Maine Natick NY 1995 Realty Corp. New York Natick MA 1995 Realty Corp. Massachusetts Natick NH 1994 Realty Corp. New Hampshire Natick PA 1995 Realty Corp. Pennsylvania CWC Beverages Corp. Connecticut FWC Beverages Corp. Florida JWC Beverages Corp. New Jersey Mormax Beverages Corp. Delaware Mormax Corporation Massachusetts RWC Beverages Corp. Rhode Island YWC Beverages Corp. New York HBCA Pomona Realty Corp. California HBCA Vacaville Realty Corp. California Natick Lancaster Realty Corp. Pennsylvania Natick Yorktown Realty Corp. New York Natick Waterford Realty Corp. Connecticut Natick Sennett Realty Corp. New York EX-27 5 ART. 5 FDS FOR 10-K WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains summary financial information extracted from the Waban Inc. consolidated statements of income and consolidated balance sheets filed with the Form 10-K for the year ended January 27, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS JAN-27-1996 JAN-27-1996 32,155 20,339 59,221 0 570,236 714,151 765,551 176,615 1,332,451 448,701 245,313 333 0 0 554,787 [TOTAL-LIABILITIES-AND-EQUITY] 1,332,451 3,978,384 3,978,384 3,387,992 3,387,992 455,523 0 15,431 119,438 46,461 72,977 0 0 0 72,977 2.20 2.05
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